<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1998
REGISTRATION NO. 333-49269
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LEXFORD RESIDENTIAL TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND 31-4427382
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
41 SOUTH HIGH STREET, 24TH FLOOR
COLUMBUS, OHIO 43215
(614) 242-3850
</TABLE>
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MARK D. THOMPSON
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
LEXFORD RESIDENTIAL TRUST
41 SOUTH HIGH STREET, 24TH FLOOR
COLUMBUS, OHIO 43215
(614) 242-3850
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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ROBERT S. SCHWARTZ, ESQ. JI HOON HONG, ESQ.
BENESCH, FRIEDLANDER, COPLAN & ARONOFF LLP SHEARMAN & STERLING
88 EAST BROAD STREET, SUITE 900 599 LEXINGTON AVENUE
COLUMBUS, OHIO 43215-3506 NEW YORK, NEW YORK 10022
(614) 223-9300 (212) 848-4000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Issued , 1998
11,000,000 Shares
Lexford Residential Trust
COMMON SHARES OF BENEFICIAL INTEREST
------------------------
OF THE COMMON SHARES BEING OFFERED HEREBY, 8,800,000 ARE BEING OFFERED INITIALLY
IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND 2,200,000 ARE
BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." ALL OF THE COMMON
SHARES OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. THE COMMON
SHARES ARE LISTED ON THE NYSE UNDER THE SYMBOL "LFT." ON MAY 18,
1998, THE LAST REPORTED SALE PRICE OF THE COMMON SHARES ON THE
NYSE WAS $23 3/16.
------------------------
THE COMPANY IS SELF-ADMINISTERED AND EXPECTS TO QUALIFY AS A REIT FOR FEDERAL
INCOME TAX PURPOSES. IN ORDER TO MAINTAIN ITS REIT STATUS, THE COMPANY HAS
PLACED RESTRICTIONS ON THE ACCUMULATION OF COMMON SHARES, WHICH
RESTRICTIONS MAY AFFECT THE TRANSFERABILITY OF A SHAREHOLDER'S
COMMON SHARES TO CERTAIN POTENTIAL PURCHASERS. SEE "DESCRIPTION
OF COMMON SHARES -- RESTRICTIONS ON TRANSFER."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
RELATING TO AN INVESTMENT IN THE COMMON SHARES, INCLUDING:
- Risks associated with the Company's business and the apartment industry in
general, including operating risks, the illiquidity of real estate
investments, acquisition risks, financing risks, the risk of uninsured and
underinsured losses, the application of various Federal, state and local
laws, renovation and capital improvement requirements and the risk of
environmental liability.
- The risks relating to investment in a single industry since the Federal
income tax laws and Maryland law limit the types of assets that a REIT may
own and risks associated with the Company's focus on a single segment within
the apartment industry.
- The risk that the price of the Common Shares will decrease due to an
increase in interest rates or a downturn in general market conditions, the
Company's operating performance or the market liquidity of the Common
Shares.
- The anti-takeover effect of the Company's ability to limit ownership of the
Common Shares to 9.2% of the outstanding Common Shares, the Company's
ability to issue Preferred Shares and provisions in the Company's
Declaration of Trust as well as Maryland laws inhibiting certain business
combinations and control share acquisitions.
- The possibility that third parties may attempt to rescind or challenge the
Company's acquisition of certain Properties previously partially owned by
the Company or third party equity interests in the entities which own such
Properties or to assert liability against the Company for an alleged breach
of the Company's fiduciary duties in connection with its acquisition of such
Properties or interests.
- Taxation of the Company as a corporation if it fails to qualify as a REIT
for Federal income tax purposes and the resulting potential decrease in Cash
Available for Distribution.
- The requirement to distribute 95% of REIT taxable income which will limit
the ability of the Company to rely on cash from operations to finance
acquisitions or other growth opportunities, remodeling and renovation of the
Company's Properties, or operating activities in the event of future
operating losses, and which may cause the Company to rely on third party
sources of capital.
- The ability of the Company's Board to amend or revise the Company's
investment, debt capitalization and distribution policies and to issue
Common and Preferred Shares without approval of its Shareholders.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
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Per Share................................ $ $ $
Total(3)................................. $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
1,650,000 additional Common Shares at the price to public less underwriting
discounts and commissions for the purpose of covering over-allotments, if
any. If the U.S. Underwriters exercise such option in full, the total price
to public, underwriting discounts and commissions and proceeds to Company
will be $ , $ and $ , respectively. See "Underwriters."
The Common Shares are offered, subject to prior sale, when, as and if
accepted by the Underwriters, and subject to approval of certain legal matters
by Shearman & Sterling, counsel for the Underwriters. It is expected that
delivery of the Common Shares will be made on or about , 1998 at the
office of Morgan Stanley & Co. Incorporated, New York, New York against payment
therefor in immediately available funds.
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
SALOMON SMITH BARNEY
J.C. BRADFORD & CO.
WHEAT FIRST UNION
, 1998
<PAGE> 3
[INTERIOR AND EXTERIOR PICTURES OF CERTAIN PROPERTIES AND MAP OF PROPERTY
LOCATIONS]
<PAGE> 4
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
SHARES. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE
OFFERING, AND MAY BID FOR, AND PURCHASE COMMON SHARES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITERS."
<PAGE> 5
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON SHARES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE COMMON SHARES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
For investors outside of the United States: No action has been or will be
taken in any jurisdiction by the Company or any Underwriter that would permit a
public offering of the Common Shares or possession or distribution of this
Prospectus in any jurisdiction where action for this purpose is required, other
than in the United States. Persons into whose possession this Prospectus comes
are required by the Company and the Underwriters to inform themselves about and
to observe any restrictions as to the offering of the Common Shares and the
distribution of this Prospectus.
------------------------
TABLE OF CONTENTS
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PAGE
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FORWARD-LOOKING STATEMENTS................. iii
SOURCES OF INFORMATION..................... iii
PROSPECTUS SUMMARY......................... 1
The Company.............................. 1
Risk Factors............................. 6
Distribution Policy...................... 6
Federal Income Tax Considerations........ 7
The Offering............................. 7
SUMMARY PRO FORMA FINANCIAL AND OTHER
DATA..................................... 8
RISK FACTORS............................... 12
Company Business Risks................... 12
Apartment Industry Risks................. 13
Market Risks of Common Share Ownership... 15
Risks Related to the Declaration of Trust
and Bylaws of the Company and Maryland
Law................................... 15
Risks Related to REIT Conversion and REIT
Status................................ 17
Tax Risks of REIT Status................. 19
USE OF PROCEEDS............................ 20
PRICE RANGE OF COMMON SHARES............... 20
DISTRIBUTION POLICY........................ 21
CAPITALIZATION............................. 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
COMBINED PROPERTY OPERATING RESULTS AND
THE COMPANY'S FINANCIAL CONDITION........ 25
Introduction............................. 25
Overview................................. 25
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PAGE
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Property Operating Results............... 26
Company Liquidity and Capital
Resources............................. 27
THE COMPANY................................ 30
Focus on Value-Conscious Renters......... 30
Recent Initiatives....................... 30
Growth Strategy.......................... 31
BUSINESS AND PROPERTIES.................... 34
Market Overview.......................... 34
Company Properties....................... 38
Property Management and Related Services
to Syndicated Properties.............. 41
Operating Partnership.................... 41
Competition.............................. 41
Environmental Matters.................... 41
Employees................................ 41
Insurance................................ 41
COMPANY HISTORY............................ 42
Background............................... 42
REIT Conversion.......................... 42
Consolidation Plan....................... 44
POLICIES AND OBJECTIVES WITH RESPECT TO
CERTAIN ACTIVITIES....................... 44
Investment Policies...................... 45
Debt Policy.............................. 46
Conflicts of Interest Policy............. 46
Other Policies........................... 47
Lending Policies......................... 47
MANAGEMENT................................. 48
PRINCIPAL SHAREHOLDERS..................... 51
CERTAIN TRANSACTIONS....................... 53
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i
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DESCRIPTION OF COMMON SHARES............... 54
General.................................. 54
Common Shares............................ 54
Preferred Shares......................... 55
Excess Shares............................ 55
Restrictions on Transfer................. 56
Anti-Takeover Effects of Certain Charter
Provisions and Laws................... 57
Certain Other Provisions of Maryland Law
and the Declaration of Trust.......... 59
OPERATING PARTNERSHIP AGREEMENT............ 62
Management............................... 62
Transferability of Interests............. 63
Capital Contributions.................... 63
Exchange Rights.......................... 63
Tax Matters; Profits and Losses.......... 63
Operations............................... 64
Distributions............................ 64
FEDERAL INCOME TAX CONSIDERATIONS.......... 64
General.................................. 64
Taxation of the Company as a REIT........ 65
Requirements for Qualification as a
REIT.................................. 66
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Tax Aspects of the Company's Investment
in the Properties..................... 71
Taxation of Taxable Domestic
Shareholders.......................... 73
Taxation of Tax-Exempt Shareholders...... 74
Taxation of Foreign Shareholders......... 75
Other Tax Considerations................. 76
ERISA CONSIDERATIONS....................... 76
UNDERWRITERS............................... 78
EXPERTS.................................... 81
LEGAL MATTERS.............................. 81
AVAILABLE INFORMATION...................... 81
DOCUMENTS INCORPORATED BY REFERENCE........ 82
GLOSSARY................................... 83
APPENDIX A -- INDIVIDUAL PROPERTY
INFORMATION.............................. A-1
INDEX TO FINANCIAL STATEMENTS.............. F-1
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ii
<PAGE> 7
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus or incorporated herein by
reference, are "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Those
forward-looking statements include, without limitation, statements regarding the
intent, belief or current expectation of the Company with respect to (i) the
declaration or payment of dividends or cash distributions; (ii) the management
or operation of its apartment communities and of real estate that could be
acquired in the future; (iii) the Company's current intention to seek to acquire
equity interests in certain apartment communities following the Offering; (iv)
the adequacy of reserves for renovation and refurbishment; (v) its financing
plans; (vi) its policies regarding investments, financings, conflicts of
interest and other matters; (vii) the Company's qualification and continued
qualification as a REIT for Federal income tax purposes; (viii) the structure
and form of certain transactions which the Company may effect in order to
qualify or continue to qualify as a REIT under the Code; (ix) trends affecting
the Company's financial condition or results of operations; and (x) the ability
of the Company to successfully increase rents and occupancy rates. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, and have formed them in good faith, assumed facts or
bases almost always vary from actual results and the differences between assumed
facts or bases and actual results can be material depending on the
circumstances. Prospective investors are cautioned that such forward-looking
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors that could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. Important factors that could cause actual results to differ
materially from the results expressed or implied by any forward-looking
statements include, among other things, the factors disclosed under "Risk
Factors" (collectively, the "Cautionary Statements"). All subsequent written and
oral forward-looking statements relating to the matters described in this
Prospectus and attributable to the Company, the Underwriters or to persons
acting on behalf of either are expressly qualified in their entirety by the
Cautionary Statements.
SOURCES OF INFORMATION
Certain statistical information and other residential real estate market
and demographic data presented in this Prospectus have been obtained from M/PF
Research, Inc., The REIS Reports, 1997 (the "REIS Reports"), National Multi
Housing Council "Research Notes," Regional Financial Associates, E-Comps,
DataComp, CB Commercial National Investor Survey and the National Real Estate
Index -- Market Monitor (a CB Commercial publication), all of which are sources
management of the Company believes are reliable but has not independently
verified. While the Company contracted with M/PF Research, Inc. for market
research services, none of M/PF Research, Inc., The REIS Reports, National Multi
Housing Council, Regional Financial Associates, E-Comps, DataComp or CB
Commercial provided any form of consultation, advice or counsel regarding any
aspect of the Offering, or are in any way associated with the Offering.
------------------------------------
The Company's principal executive offices are located at 41 South High
Street, Suite 2410, Columbus, Ohio 43215 and its telephone number is (614)
242-3850.
iii
<PAGE> 8
PROSPECTUS SUMMARY
The following is qualified in its entirety by the more detailed information
and financial statements and notes thereto appearing elsewhere in this
Prospectus. As used herein, the terms "Company" and "Lexford" refer to Lexford
Residential Trust, a Maryland real estate investment trust, and include the
Company's predecessor by merger, Lexford, Inc., an Ohio corporation ("Old
Lexford"). Unless the context otherwise requires and where appropriate,
references to the Company or Lexford also include the Company's wholly-owned
subsidiaries and other legal entities affiliated with, and controlled by, the
Company. As used herein, the term "Properties" refers to properties in which the
Company has or had a whole or partial equity ownership or other economic
interest at the time or during the periods specified, as the context may
require. Unless otherwise indicated, all pro forma financial information in this
Prospectus is presented after giving effect to (i) the REIT Conversion
(including the Reincorporation Merger and the sale of the third party management
business), and (ii) the consummation of the Consolidation Plan. The pro forma as
adjusted financial information gives further effect to the Offering and the use
of proceeds therefrom. Unless indicated otherwise, the information contained in
this Prospectus assumes no exercise of the Underwriters' over-allotment option
and gives effect to the exchange of two Common Shares for each share of Old
Lexford common stock pursuant to the Reincorporation Merger. See "Company
History" and "Use of Proceeds." See the Glossary beginning on page 83 for
references to defined terms.
THE COMPANY
The Company is a fully integrated REIT which owns, manages and
opportunistically acquires apartment communities, with whole or partial equity
ownership or other economic interests in 516 Properties representing a total of
36,405 residential units at 402 sites throughout the midwestern and southeastern
United States. 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. The
Company generated pro forma revenues of $150.4 million in 1997, with an average
physical occupancy of 92.7% during the year. The Company increased pro forma
Funds from Operations from $21.2 million in 1996 to $28.4 million in 1997, an
increase of 33.8%. As adjusted for the Offering and the use of proceeds
therefrom, pro forma Funds from Operations was $46.1 million in 1997.
FOCUS ON VALUE-CONSCIOUS RENTERS
The Company's primary mission is to become the leading multifamily REIT
operating in the value-conscious segment. The value-conscious segment consists
of renters 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
rents which currently range from $350 to $550 per apartment unit. The Company
believes such rates are generally 20% to 25% below the average multifamily
rental rates in its markets.
The Company believes it can continue to achieve attractive financial
returns in the value-conscious segment by capitalizing on the following Company
strengths:
Attractive Residential Alternative. The Company believes the Properties
provide a superior residential alternative to most other comparably priced
apartments and an attractive residential feel through their mature, park-like
landscaping, well maintained lawns and gardens and their multiple building,
single story layouts. The Properties present an attractive alternative to high
density apartment complexes, averaging only 14 apartment units per acre of land.
Most of the Company's units were constructed on land which at the time was
located in outer suburbs of its Core Markets and other medium sized cities, as
well as rural and other lower cost areas. The Company believes that the growth
and expansion of several such cities and suburbs toward and around Property
sites has resulted in many Properties now being located in more attractive areas
and desirable neighborhoods compared to similarly priced apartments.
Low Cost Structure. The Properties are comprised almost entirely of
apartments made of solid, durable modular components that were pre-manufactured
off-site in a quality controlled environment. The Company believes that the
durability, strength and uniformity of the Properties provide for economies and
efficiencies in operating and maintenance costs. As a result of these low
operating and maintenance costs, the Properties can
<PAGE> 9
offer very competitive rents for clean, attractive units while maintaining
relatively high operating margins. The Company maintained property-level
operating margins of approximately 60% in 1997.
Operating and Management Experience. The Company has unique experience in
owning and managing apartment communities appealing to the value-conscious
market segment as well as apartment communities with relatively smaller numbers
of units located in secondary and tertiary markets. The Company has actively
operated and managed all but 15 of the Properties since their initial
development during the 1970s and 1980s. The Company's property management
personnel include 14 property management executives who have Certified Property
Management certification. The Company's property management executives have an
average of 14.5 years of professional property management experience.
RECENT INITIATIVES
Over the last two years, the Company has completely replaced its senior
management team in an effort to turn around the Company's operating performance
and enhance long term Shareholder value. The Company hired a talented group of
seasoned senior executives with significant experience in real estate,
multifamily operations, finance and capital markets. As a result of their
efforts, the performance of the Properties improved significantly, resulting in
the Company's pro forma FFO increasing by 33.8%, from $21.2 million in 1996 to
$28.4 million in 1997. This new senior management team has taken several steps
to continue to improve operating performance and enable the Company to take
advantage of its strong position in the value-conscious segment:
- First Mortgage Loan Refinancings. Since 1994, the Company has refinanced
non-recourse first mortgage loans on the Properties in an aggregate
principal amount of $532.6 million, resulting in increased cash flows at
the Properties and funds for capital improvements. The Company's pro forma
debt to total market capitalization ratio has decreased from 80.9% at
December 31, 1995 to 64.8% at December 31, 1997. After giving effect to
the Offering and the use of proceeds therefrom, the Company's debt to
total market capitalization ratio will be approximately 43.3% (assuming a
Common Share offering price of $22). See "Use of Proceeds."
- Use of Refinancing Proceeds to Effect Capital Improvements. Beginning in
1994, the Company was able to apply excess proceeds made available in many
of the mortgage loan refinancings referred to above to fund capital
improvements at the related Properties, thereby facilitating monthly
rental increases. For example, the performance of 183 Properties where
improvements were effected in connection with two mortgage pool
refinancings has improved significantly with revenues from such Properties
increasing 16.3% from 1994 to 1997.
- Lexford Properties Acquisition. To bolster property operating
capabilities, in August 1996 the Company acquired Lexford Properties, Inc.
("LPI"), a widely respected national third party property management firm
that provides the Company with significant property management talent and
efficient operating practices. At the time of its acquisition, LPI, which
was formed by a group of former Trammell Crow Residential executives,
managed over 21,000 apartment units. Following the sale of the third party
management business, LPI now focuses solely on managing the Company's
Properties.
- The Consolidation Plan. The Company completed the Consolidation Plan by
acquiring all the third party equity interests in 326 Properties formerly
owned in part by approximately 7,000 limited partners. These acquisitions
have significantly simplified the Company's organizational structure,
creating improved operating efficiencies and enhancing the Company's
ability to maximize financial returns from the Consolidating Properties.
See "Company History -- Consolidation Plan."
- Decision to Elect REIT Status. The Company has decided to elect REIT
status to take advantage of favorable Federal and state income tax
treatment available to REITs and has engaged in a number of transactions
to facilitate REIT qualification. The Company believes market valuations
and access to capital markets are more favorable to REITs as compared to
traditional "C" corporation real estate operating companies such as Old
Lexford and, therefore, the Company believes its REIT status will enhance
its ability to pursue its growth strategy. See "Company History -- REIT
Conversion."
2
<PAGE> 10
GROWTH STRATEGY
As a result of these recent initiatives, the Company is well-positioned to
take advantage of substantial opportunities to realize sustainable increases in
Funds from Operations and Shareholder value through the following growth
strategies:
Increase Revenues at Existing Properties. The Company will continue to
seek to increase rental rates by embarking on a capital expenditure program over
the next five years. The Company historically has been able to effectuate
meaningful rental rate increases following expenditures on deferred maintenance
and capital improvements. For example, the performance of 183 Properties where
improvements were effected in connection with two mortgage pool refinancings has
improved significantly, with revenues from such Properties increasing 16.3% from
1994 to 1997. Following thorough analysis of the Properties and the
sensitivities to rent increases in their respective locales, management has
identified 224 Properties (approximately 15,000 units) for which it believes
disciplined capital spending will yield substantial revenue increases and
attractive returns on investments. The Company expects to invest approximately
$36.0 million in excess of its targeted $400 per wholly-owned unit annual
maintenance spending level for various revenue enhancing projects at such
Properties over the next five years.
The Company believes that it is uniquely positioned to identify required
improvements and achieve favorable pricing on these improvements, because of the
homogeneous nature of the Properties and the Company's extensive database of
historical capital improvements. The homogeneity of the Company's apartments
enables the Company to accurately assess useful lives of all major components
(i.e. roofs, appliances, painting, asphalt, etc.) and the Company's database of
historical capital expenditures by Property, component and year of replacement
provides the Company with a useful tool to accurately forecast capital
expenditures, and thus budget appropriate reserves.
Leverage Operating Efficiencies. The Company emphasizes on-site property
management and believes there are significant opportunities to improve the
profitability of individual Properties. Particular attention is paid to
opportunities to increase rents, raise occupancy rates and control costs, with
property managers being rewarded for monitoring and reacting to market trends.
Since the Company's acquisition of LPI in August 1996, LPI personnel have
assumed responsibility for managing all Properties under the Company's
management, and in doing so have brought to the Company their collective
experience and high standards for personnel, training and management systems.
The Company believes that the durability and uniformity of its Properties
provide for economies and efficiencies in operating and maintenance costs. The
Company seeks to manage expenses through a system of detailed management
reporting and accountability. The Company also expects to realize significant
expense reductions as a result of the Consolidation Plan, which eliminates the
costly and cumbersome reporting (both tax and financial), communication and in
many instances, cash segregation required to administer 326 Properties formerly
owned in part by approximately 7,000 limited partners. The Company may further
seek to control expenses through investment in cost saving initiatives such as
national contracting, implementation of improved technology, and the
installation of individual apartment unit water and utility meters in certain
locations. With relatively low operating and maintenance costs, the Properties
can offer very competitive rents and still maintain attractive operating
margins.
Increase FFO Through Deleveraging. The Company intends to prepay mortgage
indebtedness secured by the Wholly-Owned Properties. The Company expects that
these actions will significantly increase FFO and Cash Available for
Distribution, reduce the Company's consolidated debt to total market
capitalization ratio to a level more consistent with other comparable publicly
traded REITs, lower the Company's aggregate cost of capital (by eliminating
higher cost mortgage indebtedness) and enhance borrowing capacity to fund future
acquisitions and capital expenditures. The Company will use $173.2 million of
the net proceeds from the Offering to repay in full mortgage indebtedness
secured by 135 Wholly-Owned Properties and other mortgage indebtedness secured
by certain other Wholly-Owned Properties, all of which by their terms are
prepayable without substantial penalty or premium (collectively the "Prepayable
Debt"). Following such payment, the Company's ratio of debt to total market
capitalization (assuming a Common Share offering price of $22) will be 43.3%.
Following the payment of the Prepayable Debt, the Company will have $341.1
million of mortgage indebtedness remaining on the Wholly-Owned Properties of
which $101.0 million becomes prepayable in the third and fourth quarters of
1998,
3
<PAGE> 11
$106.8 million in 1999, $101.9 million in 2000 and $17.3 million in 2001, with
weighted average interest rates of 8.89%, 8.62%, 8.90% and 8.54% per annum,
respectively. The Company intends to further reduce its interest expense and
therefore increase FFO and Cash Available for Distribution by retiring such
indebtedness as it becomes prepayable, subject to the availability of capital at
pricing which makes prepayment desirable. See "Use of Proceeds."
Acquisitions. The Company expects to grow by acquiring individual
apartment properties or portfolios of properties where such acquisitions yield
improved economies of scale and increased cash flow and profitability. The
Company believes the following factors support its acquisition strategy:
- Relatively little consolidation activity has occurred within the
value-conscious segment of the apartment industry unlike the high middle
and upper income segments.
- Less competition exists among REITs for properties within the
value-conscious segment and properties containing less than 150 units.
- In contrast to the Company, many owners and operators of these types of
properties are inadequately capitalized or lack professional property
management expertise.
- The Company has the experience and resources to manage properties with
smaller numbers of units at a low cost and high operating margins.
- The Company generally is able to achieve attractive operating margins at
rents below market averages.
- The Company's management experience and industry relationships help it
identify attractive acquisition targets within the value-conscious
segment.
As a result, the Company believes that properties catering to the
value-conscious segment and properties with less than 150 units can be acquired
at attractive prices. The Company further believes that it will be able to
improve the profitability of such properties through revenue enhancement and
cost reduction.
Following the Offering, the Company may make acquisitions of additional
apartment properties by issuing partner interests ("OP Units") in the Operating
Partnership (which may be exchangeable for Common Shares) in exchange for equity
interests in such apartment properties. Such exchanges may provide the former
owners of the acquired properties with advantageous tax deferral opportunities.
In addition, the Company's use of a portion of the proceeds from the Offering to
pay Prepayable Debt should improve the Company's ability to raise capital for
future acquisitions of apartment properties through new borrowings. The Company
has obtained a commitment letter for an unsecured revolving line of credit of
approximately $150.0 million to further facilitate acquisitions. The Company
also has the option of issuing Common Shares or other securities to finance
future acquisitions.
The Company owns interests in 64 Properties comprised of 4,041 units (the
"Syndicated Properties"), which continue to have third party equity interest
holders. In 1997, these 64 Syndicated Properties generated an aggregate net
operating income of approximately $12.1 million, and as of the date of this
Prospectus have, collectively, approximately $20.8 million of mortgage
indebtedness which by its terms is prepayable without substantial penalty or
premium. In addition, in December 1997, the Company entered into a strategic
alliance with Meridian Capital Corp. of Dallas, Texas, and invested
approximately $5.1 million to acquire the management contracts for 15
properties, comprising a total of more than 3,400 units located in the
southeastern United States (the "Guilford/Hidden Pointe Properties," and
together with the Syndicated Properties, the "Non-Consolidating Properties").
The Company intends to pursue the acquisition of third party equity interests in
such Syndicated Properties and some or all of the Guilford/Hidden Pointe
Properties (possibly through the issuance of OP Units) as part of its growth
strategy. Other acquisition opportunities may exist with respect to apartment
properties consisting of the same prefabricated modules as the Properties. The
Company's predecessor developed approximately 359 apartment communities in
addition to those included among the Properties, including some apartment
communities which are located on sites contiguous to the Properties. Because of
its expertise and economies of scale, the Company believes that it may be an
advantaged acquiror of such apartment communities if and when they become
available for acquisition.
4
<PAGE> 12
VALUE-CONSCIOUS SEGMENT OUTLOOK
The Company believes the value-conscious segment benefits from the
following favorable market characteristics:
Largest and Deepest Rental Segment. From a demographic perspective, the
Company believes that its apartment communities are positioned to appeal to the
largest and deepest base of renters. According to the National Multi Housing
Council, the median household income of U.S. apartment renters living in
privately owned housing in 1997 was $24,000, and 68% had household income of
less than $35,000. Lexford targets this segment by seeking to price its monthly
rents at an attractive rental rate relative to average multifamily rental rates
in its markets. The Company's typical monthly rents currently range from $350 to
$550 per apartment unit. Value-conscious residents constitute the deepest
segment of apartment renters, with approximately 42% of all apartment residents
paying monthly rents in this range in 1995. In addition, the Company believes
that the value-conscious segment is less susceptible to fluctuations in the
economy, experiencing less volatility during recessionary economic cycles, which
contributes to revenue stability.
Barriers to Entry in the Value-Conscious Rental Segment. The cost of new
apartment construction generally requires rents considerably in excess of the
Company's current rent levels to make such new construction economically
feasible. The national average cost for newly-constructed apartments in the
third quarter of 1997 was more than $78 per square foot, and such apartments are
typically larger than the Company's average unit. As a result, the Company
believes that average rents for newly-constructed apartments are well above the
Company's typical monthly rents which currently range from $350 to $550. The
Company believes the lack of supply of new apartments in the value-conscious
segment, combined with expected increases in demand for such units, results in a
favorable outlook for the Properties.
Higher Investment Returns. The Company believes that apartment properties
catering to the value-conscious resident can be acquired at higher
capitalization rates (projected net operating income divided by purchase price)
and thus provide the opportunity for higher financial returns. Information
compiled by the Company indicates an average capitalization rate of 8.9% for
properties built after 1985 with 150 units or more. Properties built before 1986
or that have fewer than 150 apartment units sold at an average capitalization
rate of slightly over 11.0%. This information was compiled from appraisers and
other vendors such as E-Comps and DataComp. The difference in capitalization
rates is also evident in the CB Commercial National Investor Survey (third
quarter 1997) which indicates capitalization rates of 8.5% for class "A"
properties and 10.8% for class "C" properties.
CORE MARKETS
The Company's Properties are located in the following fourteen states:
Alabama, Florida, Georgia, Illinois, Indiana, Kentucky, Maryland, Michigan,
Ohio, Pennsylvania, South Carolina, Tennessee, Texas and West Virginia. During
1997, 37.6% of the Properties' collective net operating income was derived from
apartment communities in six major metropolitan areas: Atlanta, Columbus,
Indianapolis, Miami, Orlando and Tampa (the "Core Markets"). The remainder of
the Properties are geographically diversified throughout the midwestern and
southeastern United States, which the Company believes has the effect of
stabilizing its revenue stream. See "Business and Properties." The Company
believes its current portfolio benefits from the following Core Market
characteristics:
Attractive Market Growth. The apartment industry in the Core Markets
generally is characterized by increasing demand generated by steady population
and job growth. The compound annual population growth rate for the Core Markets
is projected to be 1.64% through 2001, which is nearly double the projected .86%
compound annual growth rate for the nation. Similarly, the projected compound
annual job growth rate for the Core Markets is 2.62% through 2001, again almost
double the national average of 1.34%.
Favorable Supply/Demand Balance. The Core Markets have experienced stable
supply/demand dynamics. The ratio of construction to net absorption has remained
relatively steady, and is expected to be in balance through 2001.
Potential for Rent and Occupancy Increases. The Company has steadily
increased rent while improving occupancy rates at the Properties in its Core
Markets. From 1995 through 1997, the average potential monthly
5
<PAGE> 13
rent of Properties in the Core Markets increased 4.24% compounded annually,
while in those markets overall such increases averaged 3.30%. While Lexford's
average physical occupancy (93.3% in the third quarter of 1997) is still
slightly below the average physical occupancy in its Core Markets (95.1% in the
third quarter of 1997), the Company has increased its average occupancy at a
rate considerably in excess of the increase in the average occupancy level in
its Core Markets. The Company believes it can continue to achieve rent and
occupancy increases through improved property management and its capital
expenditure program. The differential between the Company's monthly rents and
the average multifamily rents in the Core Markets ranged from $93 to $207 in the
third quarter of 1997. The Company believes that these spreads indicate (i) new
apartment construction is occurring predominantly in the higher rent segments
and (ii) the Company may have significant opportunities to improve its
Properties and increase rents without competing with newer developments or
apartments with more amenities. See "Business and Properties -- Market
Overview."
RISK FACTORS
Prospective investors should carefully consider the matters discussed under
"Risk Factors" prior to making an investment decision regarding the Common
Shares. These risks include:
- Risks associated with the Company's business and the apartment industry
in general, including operating risks, the illiquidity of real estate
investments, acquisition risks, financing risks, the risk of uninsured
and underinsured losses, the application of various Federal, state and
local laws, renovation and capital improvement requirements and the risk
of environmental liability.
- The risks relating to investment in a single industry since the Federal
income tax laws and Maryland law limit the types of assets that a REIT
may own and risks associated with the Company's focus on a single segment
within the apartment industry.
- The risk that the price of the Common Shares will decrease due to an
increase in interest rates or a downturn in general market conditions,
the Company's operating performance or the market liquidity of the Common
Shares.
- The anti-takeover effect of the Company's ability to limit ownership of
the Common Shares to 9.2% of the outstanding Common Shares, the Company's
ability to issue Preferred Shares and provisions in the Company's
Declaration of Trust as well as Maryland laws inhibiting certain business
combinations and control share acquisitions.
- The possibility that third parties may attempt to rescind or challenge
the Company's acquisition of certain Properties previously partially
owned by the Company or third party equity interests in the entities
which own such Properties or to assert liability against the Company for
an alleged breach of the Company's fiduciary duties in connection with
its acquisition of such Properties or interests.
- Taxation of the Company as a corporation if it fails to qualify as a REIT
for Federal income tax purposes and the resulting potential decrease in
Cash Available for Distribution.
- The requirement to distribute 95% of REIT taxable income which will limit
the ability of the Company to rely on cash from operations to finance
acquisitions or other growth opportunities, remodeling and renovation of
the Company's Properties, or operating activities in the event of future
operating losses, and which may cause the Company to rely on third party
sources of capital.
- The ability of the Company's Board to amend or revise the Company's
investment, debt capitalization and distribution policies and to issue
Common and Preferred Shares without approval of its Shareholders.
DISTRIBUTION POLICY
The Company has paid no dividends since it became a public reporting
company in 1993. However, in order to qualify as a REIT for Federal income tax
purposes, the Company generally will be required each year to distribute to
Shareholders at least 95% of its REIT taxable income. The Company intends to
make such distributions to Shareholders as are required under the Code to
maintain its status as a REIT.
Initially, the Company intends to make quarterly cash distributions to
Shareholders at an annual rate of $1.73 per Common Share, which would represent
approximately 76.4% of the Company's pro forma as adjusted Funds from Operations
for the year ended December 31, 1997 (assuming 20,355,952 Common Shares
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<PAGE> 14
outstanding) and a yield of 7.86% (assuming a Common Share offering price of
$22). The Company intends to commence distributions with a prorated distribution
for the period from the completion of the Offering through June 30, 1998, and to
maintain its initial quarterly distribution rate for the third and fourth
quarters of 1998 and each quarter of 1999, unless actual results of operations,
economic conditions or other factors differ from the assumptions used in its
estimates. The declaration and payment of any distributions by the Company will
be at the discretion of the Board and will depend upon, among other things, the
level of Funds from Operations, the Company's level of indebtedness, contractual
restrictions, if any, imposed by mortgages, the New Credit Facility or other
lending arrangements, capital expenditures in excess of reserves and other
factors considered relevant by the Board. See "Distribution Policy."
FEDERAL INCOME TAX CONSIDERATIONS
The Company intends to elect to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year beginning January 1,
1998, and believes its current organization and method of operation will enable
it to meet the requirements for qualification as a REIT. 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. If the Company fails to qualify as a REIT in any taxable year, the
Company will be subject to Federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates, which
would effectively impose the "double taxation" on income that is subsequently
distributed to Shareholders that generally results from investment in a "C"
corporation. Even if the Company qualifies for taxation as a REIT, the Company
may be subject to certain state and local taxes on its income and property, and
in certain circumstances, Federal income or excise taxes. See "Risk
Factors -- Tax Risks of REIT Status" and "Federal Income Tax Considerations."
For Federal income tax purposes, distributions paid to Shareholders may
consist of ordinary income, capital gains, non-taxable returns of capital or a
combination thereof. Distributions in excess of earnings and profits generally
will be treated as non-taxable return of capital and, therefore, will result in
a reduction of a Shareholder's tax basis in the Common Shares, to the extent of
such basis. Any further such distributions will result in taxable gain. To the
extent that a Shareholder's basis in his or her Common Shares is reduced, the
amount of capital gain realized on any subsequent sale of the Common Shares will
be increased. The Company will provide Shareholders annual statements on IRS
Form 1099-DIV as to the Company's designation of the taxability of
distributions. See "Federal Income Tax Considerations."
THE OFFERING
<TABLE>
<S> <C>
Common Shares offered hereby:
United States offering..................... 8,800,000 shares
International offering..................... 2,200,000 shares
Total................................... 11,000,000 shares
Common Shares outstanding after the
Offering................................... 20,355,952 shares (1)
Use of Proceeds.............................. Repay approximately $173.2 million of Prepayable
Debt, repay approximately $29.1 million of bank debt
incurred to fund the Consolidation Plan, fund the
1998 portion of the Company's capital expenditure
program, pay transaction expenses related to the
Offering and for general business purposes.
NYSE Symbol.................................. "LFT"
</TABLE>
- ---------------
(1) Excludes 594,506 Common Shares reserved for issuance under outstanding stock
options, the Company's Non-Employee Trustee Restricted Stock Plan and
employment agreements with executive officers.
7
<PAGE> 15
SUMMARY PRO FORMA FINANCIAL AND OTHER DATA
The following unaudited summary pro forma financial and other data was
derived from, and should be read in conjunction with, the unaudited pro forma
condensed consolidated financial statements, including the notes thereto, that
appear elsewhere in this Prospectus (the "Pro Forma Financial Information"). The
Consolidation Plan and REIT Conversion have resulted in numerous fundamental
changes to the Company such that, in the opinion of management, the Company's
historical financial statements are not meaningful. The Pro Forma Financial
Information is based upon a combination (giving effect to appropriate
intercompany eliminations and adjustments) of (a) the historical financial
statements of Old Lexford and (b) the combined statements of revenue and certain
expenses of the Consolidating Properties included elsewhere in this Prospectus
(collectively, the "Historical Financial Information"), giving effect to: (i)
the REIT Conversion (including the Reincorporation Merger and the sale of the
third party management business) and (ii) the acquisition of the Consolidating
Properties pursuant to the Consolidation Plan. The Pro Forma Financial
Information is further adjusted to give effect to the Offering and the use of
proceeds therefrom. The unaudited Pro Forma Financial Information is presented
as if the above transactions had occurred at the end of each period presented
for balance sheet data and at the beginning of each period presented for income
statement data.
The Pro Forma Financial Information includes, in the opinion of management,
all adjustments necessary to present fairly the Company's pro forma results of
operations and financial position and are based upon available information and
certain assumptions considered reasonable under the circumstances. The Pro Forma
Financial Information is unaudited and does not purport to present what the
Company's financial position or 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 financial position or results of
operations for any future date or period.
8
<PAGE> 16
LEXFORD RESIDENTIAL TRUST
SUMMARY PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, 1997 MARCH 31, 1998
---------------------------------------------------------------- ------------------
CONSOLIDATING PRO FORMA PRO FORMA
HISTORICAL PROPERTIES (1) PRO FORMA (2) AS ADJUSTED (2) AS ADJUSTED (2)
------------- -------------- ------------- --------------- ------------------
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE AND AVERAGE
RENT)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues
Rental revenue................. $ 41,851 $102,806 $ 144,657 $ 144,657 $ 36,603
Fee based, primarily from
affiliates................... 15,847 -- 3,513 3,513 945
Interest, principally from
unconsolidated
partnerships................. 10,681 -- 2,228 2,228 858
Income from disposals of
assets -- net................ 1,989 -- -- -- --
--------- -------- --------- ----------- -----------
Total........................ $ 70,368 $102,806 $ 150,398 $ 150,398 $ 38,406
Expenses
Property operating and
maintenance.................. 14,884 33,354 45,150 45,150 11,586
Real estate taxes and
insurance.................... 4,060 9,006 13,066 13,066 2,965
Property management............ 12,339 -- 11,117 11,117 3,178
Administration................. 5,447 -- 5,194 5,194 1,515
Performance equity plan........ 6,281 -- 6,281 6,281 --
Non-recurring costs............ 827 -- 400 400 256
Interest -- non-recourse
mortgages.................... 13,770 -- 45,123 29,989 7,420
Interest -- corporate debt..... 657 -- 2,622 -- --
Depreciation and
amortization................. 6,527 -- 21,545 21,545 5,863
--------- -------- --------- ----------- -----------
Total........................ $ 64,792 $ 42,360 $ 150,498 $ 132,742 $ 32,783
--------- -------- --------- ----------- -----------
Income (loss) before gain on
disposals of assets, income
taxes and extraordinary item... 5,576 60,446 (100) 17,656 5,623
Gain on disposals of assets,
net.......................... -- -- 1,989 1,989 89
Provision for income taxes:
Credited to additional
paid-in capital............ 1,809 -- -- -- --
Current...................... 380 -- -- -- --
--------- -------- --------- ----------- -----------
Income before extraordinary
item........................... 3,387 60,446 1,889 19,645 5,712
Extraordinary (loss), net of
income tax benefit........... (181) -- -- -- --
--------- -------- --------- ----------- -----------
Net income....................... $ 3,206 $ 60,446 $ 1,889 $ 19,645 $ 5,712
========= ======== ========= =========== ===========
Basic earnings per share......... $ 0.40 $ 0.23 $ 1.01 $ 0.29
========= ========= =========== ===========
Diluted earnings per share....... $ 0.39 $ 0.22 $ 1.00 $ 0.29
========= ========= =========== ===========
Basic weighted shares
outstanding.................... 8,071,970 8,371,970 19,371,970 19,589,187
Diluted weighted shares
outstanding.................... 8,313,916 8,613,916 19,613,916 19,904,270
BALANCE SHEET DATA (AT PERIOD
END):
Total assets................... $ 659,852 $ 664,967
Total long term debt........... 342,239 341,111
Shareholders' equity........... 286,602 276,087
OTHER FINANCIAL DATA:
Recurring EBITDA (3)........... $ 76,990 $ 20,074
Recurring EBITDA as a percent
of revenue................... 51.1% 52.3%
Ratio of Recurring EBITDA to
interest expense............. 2.6x 2.7x
Funds from Operations (FFO)
(4).......................... $ 46,106 $ 12,324
Cash Available for Distribution
(CAD) (5).................... $ 38,159 $ 10,704
Capital expenditures (6)....... $ 11,572 $ 2,893
</TABLE>
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<PAGE> 17
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
------------------- -------------------
PRO FORMA PRO FORMA
AS ADJUSTED (2) AS ADJUSTED (2)
------------------- -------------------
<S> <C> <C>
OTHER DATA:
Average potential rent (7)................................ $ 433 $ 439
Average physical occupancy................................ 92.7% 93.1%
Total number of Wholly-Owned Property units (at period
end).................................................... 28,929 28,929
Total number of units (at period end) (8)................. 36,510 36,405
Total number of Properties (at period end) (8)............ 518 516
</TABLE>
- ---------------
(1) The entries in this column other than depreciation and amortization and
interest expense -- non-recourse mortgage debt are from the audited
statements of revenues and expenses for the Consolidating Properties
included elsewhere in this Prospectus.
(2) For an understanding of the pro forma adjustments made in presenting the
financial information herein, see the Pro Forma Financial Information.
(3) Recurring EBITDA is computed as EBITDA, as adjusted for non-recurring items.
EBITDA is computed as net income before disposal of properties and
extraordinary items and minority interests plus interest expense, income
taxes and depreciation and amortization. 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.
(4) 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. See "Distribution Policy."
(5) Cash Available for Distribution ("Cash Available for Distribution" or "CAD")
is defined as Funds from Operations adjusted to reflect the non-cash charges
resulting from non-real estate related depreciation and
10
<PAGE> 18
amortization and estimated costs of capital improvements net of amounts
charged to operations. CAD does not actually represent the cash made
available to investors during any particular period. CAD also does not
represent cash flows provided by (used in) operating, investing or financing
activities as determined in accordance with GAAP. CAD 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,
CAD (sometimes referred to as "Funds Available for Distribution") as
disclosed by other REITs may not be comparable to the Company's calculation
of CAD.
(6) Represents the Company's annual targeted maintenance spending level of $400
per wholly-owned unit (including expensed portion) multiplied by the total
number of such units at December 31, 1997 and the portion of such annual
targeted maintenance spending level per wholly-owned unit allocable to the
first quarter ($100) multiplied by the total number of such units at March
31, 1998, respectively.
(7) Represents average gross potential rent for the period and, therefore, does
not reflect vacancies or delinquencies.
(8) Includes economic interests in the 15 Guilford/Hidden Pointe Properties
(3,435 units) which were acquired in December 1997, and therefore had no
effect on operating data or other financial data.
11
<PAGE> 19
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below, each of which could have adverse consequences to the
Company, impair the Company's ability to make distributions to Shareholders, and
adversely affect the value of the Common Shares.
COMPANY BUSINESS RISKS
Investment in a Single Segment of the Apartment Industry. All of the
current Properties are multifamily apartment communities catering to the
value-conscious segment of the apartment industry. The Company does not expect
to seek to diversify its real estate investments and will therefore be subject
to risks inherent in investments in a single segment of the industry. See
"Business and Properties."
Geographic Considerations. The Company's success is dependent upon the
general economic conditions in the geographic areas where a substantial number
of its Properties are located. Adverse changes in national economic conditions
or in the economic conditions of the regions in which the Company conducts
substantial business have an adverse effect on real estate values, interest
rates and, accordingly, the Company's business, income and ability to make
distributions to its Shareholders. The general economic conditions in the
geographic areas where the Company's Properties are located are beyond the
control of the Company.
Competition. The apartment industry is highly competitive. The Company
must compete to attract and retain residents and to acquire and develop
additional properties. The number and quality of competitive properties in a
particular area could have a material effect on the Company's ability to attract
and retain residents and to maintain or increase rent levels and could require
increased capital spending to keep the Properties competitive. In addition,
other forms of housing, including manufactured housing community properties and
single family housing, provide alternatives to potential residents, especially
in low interest rate environments.
There are numerous owners and developers of real estate who will compete
with the Company if the Company seeks to develop new multifamily properties or
acquire undeveloped land or existing multifamily properties. The activities of
the competitors could cause the Company to pay a higher price for a new property
than it otherwise would have paid or may prevent the Company from purchasing a
desired property. Increased competition could adversely affect the Company's
revenues which would adversely affect the Company's ability to make
distributions to Shareholders, acquire or develop additional properties and
renovate existing Properties.
Acquisition Risks. The Company intends to evaluate future opportunities to
acquire interests in additional properties. Acquisitions involve a number of
risks inherent in assessing the values, strengths, weaknesses and profitability
of properties including: adverse short-term effects on the Company's operating
results; diversion of management's attention; and risks associated with
unanticipated problems and latent liabilities or contingencies such as the
existence of hazardous substances or other environmental liabilities. Additional
risks inherent in acquisitions include risks that the acquired properties will
not achieve anticipated rental rates or occupancy levels, and that judgments
with respect to improvements to increase the financial returns of acquired
properties will prove inaccurate. In addition, because acquisitions may be
financed with Common Shares or Preferred Shares or securities (such as OP Units)
convertible or exchangeable into, Common Shares or Preferred Shares, any such
acquisitions may have a dilutive effect on common Shareholders. Although the
Company believes that opportunities for advantageous acquisitions of real
properties will exist for the Company in the future, there can be no assurances
that any such acquisition opportunities will ever arise, that if any such
acquisition opportunity presented itself, the Company would have the resources
available to consummate the acquisition, or that if any such acquisition was
made, the acquisition would prove to be beneficial to the Company. See "The
Company -- Growth Strategy."
Development and Renovation Risks. The Company may develop and renovate
apartment communities when management believes that doing so is consistent with
its business strategies. Development will be subject to a number of risks,
including the risk that construction and/or permanent financing may not be
available on favorable terms, construction costs of property may exceed original
estimates, occupancy and rental rates may not stabilize at anticipated levels
and construction may not be completed on schedule. If the Company undertakes but
elects not to proceed with a development or redevelopment opportunity, the costs
associated therewith will ordinarily be charged against income for the current
period. There can be no assurance that, if undertaken, any
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such development project will be completed or that, if completed, the costs of
construction will not exceed, by a material amount, projected costs. These
activities are also subject to risks relating to the inability to obtain, or
delays in obtaining, the necessary zoning, land use, building, occupancy and
other required governmental permits and authorizations. The Company expects to
invest approximately $36.0 million in excess of its targeted $400 per
wholly-owned unit annual maintenance spending level for various revenue
enhancing projects at certain Properties over the next five years. While the
Company believes that the capital expenditure program will produce a favorable
return on investment by way of increased rental revenues at the selected
Properties, there can be no assurance that the Company will be successful in
increasing rental revenues at such Properties. See "The Company -- Growth
Strategy."
Real Estate Financing Risks. Following repayment of the Prepayable Debt
with a portion of the proceeds of the Offering, 302 of the Wholly-Owned
Properties will remain subject to mortgages (collectively, the "Remaining
Mortgages"), each of which must be repaid in full or refinanced at or prior to
its maturity. The average remaining term to maturity of the Remaining Mortgages
is approximately 7.0 years with a weighted average contractual interest rate of
8.77% per annum. As a result, the Company will be subject to the risks normally
associated with debt financing and refinancing including the risk that a
Property's cash flow will be insufficient to meet required payments of principal
and interest on the related debt financing and the risk that the Company will
not be able to refinance such indebtedness on terms and at interest rates as
favorable as those of the Remaining Mortgages. In addition, under GAAP, the
payment or refinancing of certain mortgages at contractual amounts in excess of
their reduced fresh start book values will require the Company to recognize a
charge against earnings to the extent of such excess. If the Properties incur
variable rate mortgage indebtedness or less favorable fixed interest rates or
mortgage terms, such changes, by themselves or together with an increase in
interest rates, would have an adverse effect on FFO and Cash Available for
Distribution. See "Use of Proceeds," "Management's Discussion and Analysis of
Combined Property Operating Results and the Company's Financial
Condition -- Company Liquidity and Capital Resources" and "The Company -- Growth
Strategy."
In addition, if a Property is mortgaged to secure payment of indebtedness
and the Property is unable to make mortgage payments, the Property could be
foreclosed upon by, or otherwise transferred to, the mortgagee with a
consequential loss of income and asset value to the Company. As of the date
hereof, 26 of the Wholly-Owned Properties are mortgaged pursuant to mortgages
containing cross-default and cross-collateralization provisions to secure
payment of the first mortgage indebtedness secured by such 26 Wholly-Owned
Properties. Although such mortgage indebtedness is non-recourse to the Company,
if the Company is unable to make mortgage payments on any such Property, all
such Properties could be foreclosed upon by, or otherwise transferred to, the
mortgagee, to the extent required to satisfy the indebtedness secured by the
remaining mortgages, with a consequential loss of income and asset value to the
Company.
Credit Facility Restrictions. The Company has obtained a commitment letter
for an unsecured revolving line of credit for up to $150.0 million in available
borrowings (the "New Credit Facility") following consummation of the Offering.
Such New Credit Facility is expected to contain certain covenants which, among
other things, would require the Company to satisfy certain financial covenants,
restrict the ability of the Company to incur additional indebtedness for
acquisitions or otherwise and limit the amount of the Company's distributions to
its Shareholders. See "Management's Discussion and Analysis of Combined Property
Operating Results and the Company's Financial Condition -- Company Liquidity and
Capital Resources."
APARTMENT INDUSTRY RISKS
Operating Risks. The Properties are subject to all operating risks common
to residential apartments in general. Such risks include: competition from other
apartments; excessive building of comparable properties or increases in
unemployment in the areas where the apartment communities are located, any of
which might adversely affect apartment occupancy or rental rates; increases in
operating costs due to inflation and other factors, which increases may not
necessarily be offset by increased rents; the inability or unwillingness of
residents to pay rent increases; and future enactment of rent control laws or
other laws regulating multifamily housing, including present and possible future
laws relating to access by physically impaired persons.
Value and Liquidity of Real Estate. The Properties are relatively
illiquid. The Company's ability to vary its portfolio of apartment communities
in response to changes in economic and other conditions will therefore be
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limited. In addition, certain significant expenditures associated with each
Property (such as mortgage payments, real estate taxes and maintenance costs)
are generally fixed, and therefore, not reduced when circumstances cause a
reduction in income from the Property. Moreover, 26 of the Wholly-Owned
Properties are currently subject to mortgages containing cross-default and
cross-collateralization provisions such that the sale of any one of these 26
Wholly-Owned Properties is further limited.
Uninsured and Underinsured Losses. The Company intends, and in many
instances will be required, to maintain building casualty, public liability,
crime and business interruption insurance and various excess coverage policies
on its Properties. The Company believes the apartment communities' coverage is
of the type and amount, including coverage limits and deductibility provisions,
customarily carried on similar properties. However, there are certain types of
losses, generally of a catastrophic nature, such as earthquakes and floods that
may be uninsurable or not economically insurable. Should an uninsured loss or a
loss in excess of insured limits occur, the Company could lose its investment in
the affected Property as well as the anticipated future revenues from such
Property, which could adversely affect the Company's results of operations and
its ability to make distributions to Shareholders.
Americans with Disabilities Act. The Properties and any newly developed,
renovated or acquired properties must comply with Title III of the Americans
with Disabilities Act (the "ADA") to the extent that such properties are "public
accommodations" and/or "commercial facilities" as defined by the ADA. The ADA
does not, however consider residential properties, such as apartment properties,
to be public accommodations or commercial facilities, except to the extent
portions of such facilities, such as leasing offices, are open to the public.
Conforming the Properties to the ADA requirements could require significant
expenditures by the Company. The Company believes that the Properties comply
with all present requirements under the ADA and applicable state laws, but the
requirements could change and thereby have a material adverse effect on the
Company. Noncompliance with the ADA could result in the imposition of fines or
an award of damages to private litigants. If future required changes involve
greater expenditures or must be made on a more accelerated basis than the
Company currently anticipates, the Company's results of operations and ability
to make distributions, if any, to Shareholders could be adversely affected.
Fair Housing Amendments Act of 1988. The Fair Housing Amendments Act of
1988 (the "FHAA") requires apartment communities first occupied after March 13,
1990 to be accessible to the physically impaired. Noncompliance with the FHAA
could result in the imposition of fines or an award of damages to private
litigants. As of the date hereof, none of the Properties are subject to the
FHAA; however, newly developed or acquired properties, if any, may be subject to
the FHAA.
Other Regulations. Rent control laws or similar rent limiting regulations,
which may be enacted in the future, may limit the ability of the Company to
increase rents and to recover increases in operating expenses and the costs of
capital improvements. As of the date hereof, no such rent control laws apply to
the Properties.
Renovation and Capital Improvements Requirements. Apartment properties
require continuing renovation and capital improvements to remain competitive.
Certain lending arrangements with respect to some of the Properties require the
funding of reserves for renovations and improvements. If major maintenance and
capital expenditure requirements exceed the Company's expectations, the
incremental costs could adversely affect expected distributions to Shareholders.
In addition, renovations and other capital improvements entail certain risks,
including environmental risks, construction cost overruns and delays and
unanticipated downturns in demand or unanticipated emergence of competition in
the affected market.
Potential Environmental Liability. The Company is exposed to potential
environmental liabilities in connection with its role as owner or operator of
the Properties. An owner or operator of real estate may be liable for the costs
of removal or remediation of certain hazardous or toxic substances at the
property. This liability may be imposed without regard to whether the owner or
operator knew of, or was responsible for, the presence of the hazardous or toxic
substances. Furthermore, a person who arranges for the disposal of a hazardous
substance at another property or transports a hazardous substance for disposal
or treatment at another property may be liable for the costs of removal or
remediation of hazardous substances at such off-site third party disposal
locations. The costs of any such remediation or removal may be substantial, and
the presence of any such substance, or the failure to promptly remediate any
such substance, may adversely affect the property owner's ability to sell or
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<PAGE> 22
lease the property or to use it as collateral. Other laws require abatement or
removal of certain asbestos containing materials in connection with demolition
or certain renovations or remodeling, impose worker protection and notification
requirements, and govern emissions of and exposure to asbestos fibers in the
air. Other Federal, state and local laws, ordinances and regulations and the
common law impose on owners and operators certain requirements regarding
conditions and activities that may affect human health or the environment such
as the presence of lead in drinking water and the presence of lead containing
paint in occupied structures. Failure to comply with applicable laws could
result in difficulty in the lease or sale of any affected property or the
imposition of monetary penalties, in addition to compliance costs and potential
liability to third parties. The Company may be potentially liable for such costs
or claims in connection with the ownership or operation of the Properties.
Phase I environmental site assessments have been completed within the last
36 months for approximately 40% of the Properties in connection with mortgage
refinancing transactions. None of the Phase I environmental site assessments
revealed any environmental contamination or condition that the Company believes
would have a material adverse effect on the Properties. Furthermore, the Company
is not aware of any such contamination or condition. Nevertheless, it is
possible that there exists material environmental contamination of which the
Company is unaware.
No assurance can be given that (i) the assessments referred to above
revealed all potential environmental liabilities, (ii) future or amended laws,
ordinances or regulations, or more stringent interpretations or enforcement
policies of existing environmental requirements, will not impose any material
environmental liability on the Company, (iii) the environmental condition of the
Properties has not been and will not be affected by changes in the condition of
properties in the vicinity of the Properties or by the acts of third parties
unrelated to the Company, or (iv) future acquisitions of properties will not
impose any material environmental liability on the Company.
MARKET RISKS OF COMMON SHARE OWNERSHIP
Fluctuations In Interest Rates or Equity Markets. The market price of
equity securities of a publicly traded REIT, such as the Company, is determined
in part by the attractiveness of the yield from distributions on those
securities in relation to prevailing interest rates. Accordingly, an increase in
interest rates generally may lead purchasers of publicly traded REIT securities
in general, including holders of Common Shares, to demand a higher annual yield,
which could adversely affect the market price of the Common Shares. Moreover,
the market value of the Common Shares could be substantially and adversely
affected by changes in general market conditions or fluctuations in the market
for equity securities.
Possible Volatility of Price of Common Shares. The price of publicly
traded securities such as the Common Shares may fluctuate significantly. Prices
for Common Shares may be influenced by many factors, including the current and
expected operating performance of the Company, the depth and liquidity of the
market for Common Shares, investor perception of the Company and general
economic conditions. There can be no assurance that Shareholders will be able to
sell the Common Shares at an acceptable price or at all.
Effect on Market Price of Common Shares Available for Future Sale. No
prediction can be made as to the effect, if any, that future sales, or the
availability of Common Shares for future sale, by the Company will have on the
market price of the Common Shares. After completion of the Offering,
substantially all the outstanding Common Shares (other than those held by
affiliates of the Company), including those held by the Company's largest
Shareholder, Bank of America National Trust and Savings Association ("Bank of
America"), will be freely tradeable, without restriction. Sales of substantial
amounts of Common Shares (including Common Shares issued upon the exercise of
options or the exchange of OP Units which could be issued in the future), or the
perception that such sales could occur, could adversely affect the market price
of the Common Shares.
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RISKS RELATED TO THE DECLARATION OF TRUST AND BYLAWS OF THE COMPANY AND MARYLAND
LAW
Anti-Takeover Provisions; Preferred Shares. Certain provisions of the
Declaration of Trust, the Company's Bylaws (the "Bylaws") and Maryland law
applicable to real estate investment trusts could be used to hinder or delay a
takeover bid for the Company. Such provisions may inhibit takeover bids,
decrease the chance that Shareholders realize a premium over the market price
for their Common Shares as a result of a takeover bid and prevent Shareholders
from effecting changes in the Board through a proxy solicitation. The
Declaration of Trust provides for a classified Board, divided into three classes
with staggered three year terms. In addition, the Declaration of Trust further
provides that a trustee of the Company ("Trustee") may be removed with or
without cause by the affirmative action of a majority of the remaining Trustees.
These provisions may inhibit or prevent a takeover bid or change of control by
making it more difficult for even a majority of Shareholders to take control of
the Board. The Beneficial Ownership Limitations will inhibit any potential
bidder from acquiring more than 9.2% of the Common Shares.
Under Maryland law, certain control share acquisitions are regulated by
generally requiring shareholder approval to attach voting rights to shares
acquired in a transaction which results in the acquiror owning more than 20% of
the outstanding shares of a Maryland real estate investment trust. In addition,
under Maryland law, certain business combinations between a Maryland real estate
investment trust and any person who beneficially owns 10% or more of the
outstanding voting power of such trust are prohibited for five years from the
time the person acquired such shares and then must be recommended by the Board
and approved by the affirmative vote of at least (i) 80% of the shareholders and
(ii) two-thirds of the trust's shareholders other than the person with whom the
business combination is to be effected. See "Description of Common
Shares -- Anti-Takeover Effects of Certain Charter Provisions and Laws."
The Bylaws limit the ability of Shareholders to call special meetings and
require advance notice of Trustee nominations and proposals to be brought before
meetings of Shareholders. These provisions may inhibit potential bidders who
wish to solicit proxies in opposition to management. The Bylaws may only be
amended by the Board and the Declaration of Trust may not be amended without
Board approval; therefore, none of the provisions of the Declaration of Trust or
the Bylaws which inhibit or prevent takeover bids may be changed without the
consent of the Board. In addition, the Declaration of Trust authorizes the
Board, without Shareholder approval, to issue preferred shares, par value $.01
per share ("Preferred Shares"), with such designations, rights, preferences and
restrictions as may be determined from time to time by the Board. The issuance
of Preferred Shares by the Company could be used to prevent a takeover bid and
may have a dilutive effect upon common Shareholders. See "Description of Common
Shares -- Anti-Takeover Effects of Certain Charter Provisions and Laws."
No Limitation On Debt and the Board's Ability to Change Policies. The
principal policies of the Company, including its policies with respect to
financing, growth and investment, operations, debt capitalization and
distributions, will be determined by the Board. In order to maintain financial
flexibility and facilitate rapid deployment of capital over market cycles, the
Company intends, after giving effect to the prepayment of mortgage indebtedness
with proceeds from the Offering, to maintain a debt to total market
capitalization ratio of less than 50%. The Board has adopted this and the other
current policies discussed herein. There can be no assurance that the Board will
not amend or revise such policies. The Board may amend or revise these and other
policies from time to time without a vote of Shareholders. Although the New
Credit Facility may restrict the Company's or its subsidiaries' ability to incur
additional indebtedness, at present neither the Declaration of Trust nor the
Bylaws contain any limitation on the amount (or percentage of total
capitalization) of indebtedness the Company may incur, and the Board could alter
or eliminate the Company's current debt policy. If this policy were changed or
eliminated, the Company could become more leveraged, resulting in increased debt
service requirements, which could adversely affect the Company's available
working capital and the Company's ability to make distributions to Shareholders.
See "Policies and Objectives with Respect to Certain Activities."
Risk of Dilution Due to Issuances of Additional Common Shares, Exchangeable
OP Units or Preferred Shares. The Declaration of Trust authorizes the Board to
cause the Company to issue authorized but unissued Shares without Shareholder
approval. After completion of the Offering, the Company expects to have
approximately 30,000,000 authorized but unissued Common Shares and 5,000,000
authorized but unissued Preferred Shares (other than Excess Shares). The Board
may, without the vote of Shareholders, amend the
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<PAGE> 24
Declaration of Trust from time to time, to increase or decrease the aggregate
number of Shares or the number of Shares of any class or series that the Company
has authority to issue. In order to maintain the Company's desired debt to total
market capitalization ratio, the Company may from time to time in the future
sell additional Common Shares. The issuance of Common Shares after the Offering
could have the effect of diluting the value of the outstanding Common Shares.
See "Description of Common Shares -- General."
The Company may cause the issuance of OP Units to third parties. The OP
Units may be exchangeable into Common Shares. The issuance of OP Units which are
exchangeable into Common Shares could have the effect of diluting the interest
of the Company in the Operating Partnership, which could adversely affect the
value of Common Shares. If OP Units are sold to third parties, the Company may
be required to assume fiduciary responsibilities towards those third party
limited partners which may be inconsistent with the best interest of
Shareholders. The Company may already have such fiduciary responsibilities with
regard to third party limited partners of the Syndicated Properties through its
general partner interests in the Syndicated Properties.
The Declaration of Trust authorizes the Board to cause the Company to issue
up to 5,000,000 Preferred Shares (other than Excess Preferred Shares) and to
establish the preferences and rights of any Preferred Shares issued. The
issuance of Preferred Shares with preferential distribution rights could
diminish the Company's Cash Available for Distribution to Shareholders and
dilute the value of the outstanding Common Shares. See "Description of Common
Shares -- General" and "Distribution Policy."
Restrictions on Types of Assets and Use of Assets Imposed by Maryland Law
and the Declaration of Trust. Under Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland ("Title 8"), a Maryland real estate
investment trust must hold, either directly or through other entities, at least
75% of the value of its assets in real estate assets, mortgages or mortgage
related securities, government securities, cash and cash equivalent items,
including investment grade short term securities and receivables and may not use
or apply land for farming, agriculture, horticulture or similar purposes to
satisfy such requirement. The Declaration of Trust contains an identical
requirement. Therefore, the power or authority of the Company to diversify the
assets of the Company in response to changing market or economic conditions or
for any other reason is limited. See "Policies and Objectives with Respect to
Certain Activities."
RISKS RELATED TO REIT CONVERSION AND REIT STATUS
Ownership Limitations Intended to Ensure REIT Qualification. To maintain
its qualification as a real estate investment trust for Federal income tax
purposes ("REIT"), not more than 50% in value of the Shares may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), to include certain entities). To
facilitate maintenance of its qualification as a REIT for Federal income tax
purposes, the Company's Declaration of Trust (the "Declaration of Trust")
generally prohibits ownership, directly or by virtue of the attribution
provisions of the Code, by any single Shareholder of more than 9.2% of the
issued and outstanding Common Shares and generally prohibits ownership, directly
or by virtue of the attribution provisions of the Code, by any single
Shareholder of more than 9.8% of the issued and outstanding shares of any other
class or series of beneficial interest in the Company (the "Beneficial Ownership
Limitations"). The Company's Board of Trustees (the "Board") may waive or modify
the Beneficial Ownership Limitations with respect to one or more persons who
would not be treated as "individuals" for purposes of the Code, if information
is provided by the party seeking the waiver establishing that ownership in
excess of this limit will not cause a person who is an individual to be treated
as owning shares in excess of the Beneficial Ownership Limitations and will not
otherwise jeopardize the Company's status as a REIT for Federal income tax
purposes. The Declaration of Trust grandfathers Shareholders who owned their
shares at the effective date of the Reincorporation Merger of Old Lexford into
the Company so as to exempt any such Shareholder who held Common Shares in
excess of the Beneficial Ownership Limitations as of the effective date of the
Reincorporation Merger so long as, and only for so long as, such Shareholder
exceeds the Beneficial Ownership Limitations. The Company believes that, prior
to the closing of the Offering, only Bank of America National Trust and Savings
Association will have beneficially owned Common Shares in excess of the
Beneficial Ownership Limitations pursuant to the grandfather provision in the
Declaration of Trust. Following the Offering, Bank of America's percentage
ownership of the outstanding Common Shares is expected to fall below the 9.2%
level. Absent any such waiver or exemption, Common Shares or other shares
acquired or held in violation of the Beneficial
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Ownership Limitations will be designated as either excess Common Shares ("Excess
Common Shares") or excess Preferred Shares ("Excess Preferred Shares" and
together with the Excess Common Shares, "Excess Shares"), depending on what
class or series of shares were so acquired or held, and transferred
automatically to a special trust for the benefit of a designated charitable
beneficiary, and the person who acquired such Common Shares or other shares in
excess of the Beneficial Ownership Limitations will not be entitled to receive
any distributions thereon, to vote such Excess Shares, or to receive any
proceeds from the subsequent sale thereof in excess of the lesser of the price
paid therefor or the amount realized from such sale. The Beneficial Ownership
Limitations and Constructive Ownership Limitations are intended to protect the
Company's election to be taxed as a REIT under the Code, but may have the
additional effect of inhibiting takeover bids and decreasing the chance of
Shareholders to realize a premium over the market price for their Common Shares
as a result of takeover bidding. See "Description of Common
Shares -- Restrictions on Transfer," "Principal Shareholders" and "Federal
Income Tax Considerations -- Requirements for Qualification as a REIT."
Lack of Liquidity and Capital Resources Caused by REIT Qualification
Distribution Requirement. The requirement that the Company distribute 95% of
its REIT taxable income in order to maintain its REIT status for Federal income
tax purposes will limit the ability of the Company to use cash flows from
operations to finance acquisitions or other growth opportunities, to repay
indebtedness and for general working capital purposes. The Company intends to
make distributions to Shareholders to comply with this distribution requirement
and to avoid any nondeductible excise tax. It is possible that, due to timing
differences between income accruals and cash receipts, the Company may require
short term borrowing proceeds to meet its REIT distribution requirements in the
future. There can be no assurance that the Company will be able to obtain such
financing or any additional financing on a timely basis, on favorable terms, or
at all. See "Distribution Policy."
The Properties require continuing renovation and capital improvements to
remain competitive. While capital reserve funds are maintained at the Property
level to fund such renovations and improvements, required expenditures could
exceed the capital reserve funds. The Company may have to rely on third party
sources of capital to meet its capital needs for renovations and capital
improvements. The Company's access to third party sources of capital will depend
upon a number of factors, including the market's perception of the Company's
growth potential and its current and potential future earnings, cash
distributions, capitalization and level of indebtedness and the market price of
Common Shares. Raising capital through debt financing may substantially increase
the Company's leverage and raising capital through equity offerings may dilute
the interest of Shareholders. There can be no assurance that additional capital
will be available to the Company on a timely basis, on favorable terms, or at
all. See "Management's Discussion and Analysis of Combined Property Operating
Results and the Company's Financial Condition -- Company Liquidity and Capital
Resources."
Restrictions on Types of Assets. In order for the Company to qualify for
and maintain REIT status under the Code, at least 75% of its assets must be
represented by interests in real property, interests in mortgages on real
property, shares in other REITs, cash, cash items, certain government securities
and certain property attributable to the temporary investment of new capital.
Therefore, the ability of the Company to diversify its assets in response to
changing market or economic conditions or for any other reason while maintaining
its qualification as a REIT is limited. See "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT."
Risks Related to Implementation of the Consolidation Plan. In conjunction
with the REIT Conversion, the Company recently completed the Consolidation Plan
to minimize third party equity interests in the entities owning the Properties.
As the general partner of the entities that own or previously owned the
Consolidating and the Non-Consolidating Properties, the Company owed fiduciary
duties to the prior holders of interests in the Consolidating Properties and
continues to owe fiduciary duties to all other holders of interests in the
Syndicated Properties. There can be no assurance that present or former third
party partners of Consolidating or Non-Consolidating Properties will not attempt
to assert claims against the Company for an alleged breach of the underlying
partnership agreements or of its fiduciary duties in connection with the
Consolidation Plan or any future acquisitions. While the Company believes that
the Consolidation Plan was not in violation of the underlying partnership
agreements of the Consolidating Properties or its fiduciary duties, no
assurances can be given that a court would not conclude to the contrary and,
among other things, rescind transfers made in connection with the Consolidation
Plan or assess liability against the Company. In addition, the Company will need
to continue to consider its fiduciary duties with respect to the Syndicated
Properties in making decisions that
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<PAGE> 26
affect such Properties, including any transfers of such Properties or interests
in the entities owning them to the Company. See "Company History."
Lack of Operating History as a REIT. Although the Company is continuing
the business of Old Lexford which consists of owning and operating the
Properties, the Company does not have any significant operating history as a
REIT nor experience in satisfying the numerous REIT qualification requirements.
See "Company History."
Possible Reassessment of Properties by Local Tax Assessors. Certain local
real property tax authorities may seek to reassess certain of the Properties as
a result of the transactions pursuant to the Consolidation Plan, the REIT
Conversion or the potential future transfer of interests in Properties or other
properties to the Company. Where appropriate, the Company would vigorously
contest any such reassessment. To the extent that any such increases in property
taxes could not be passed through to residents at the Properties through rent
increases, such increased taxes would decrease Funds from Operations and Cash
Available for Distribution.
TAX RISKS OF REIT STATUS
Failure to Maintain REIT Status. The Company intends to elect REIT status
under the Code, commencing with its taxable year beginning January 1, 1998 and
believes that its organization and proposed method of operation will enable it
to meet the requirements for qualification as a REIT under the Code. The Company
has not requested, and does not expect to request, a ruling from the Internal
Revenue Service ("IRS") regarding the Company's qualification as a REIT for
Federal income tax purposes. Qualification as a REIT involves the application of
technical and complex provisions of the Code for which there are only limited
judicial or administrative interpretations. The determination of various factual
matters and circumstances not entirely within the Company's control may affect
its ability to qualify as a REIT. In addition, no assurance can be given that
legislation, regulations, administrative interpretations or court decisions will
not significantly change the rules with respect to qualification as a REIT or
the Federal income tax consequences of such qualification. The Company is not
aware of any pending legislation that would adversely affect its ability to
operate as a REIT. See "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT."
In order to qualify as a REIT for Federal income tax purposes, the Company
generally will be required each year to distribute to Shareholders at least 95%
of its REIT taxable income (excluding any net capital gain). As a REIT, the
Company will be subject to a 4% nondeductible excise tax on the amount, if any,
by which certain distributions paid by it with respect to any calendar year are
less than the sum of (i) 85% of its REIT ordinary income for such year plus (ii)
95% of its REIT capital gain net income for that year plus (iii) any
undistributed taxable income from the prior REIT years upon which the Company
has not paid Federal income tax. The Company intends to make distributions to
Shareholders to qualify as a REIT and to avoid the nondeductible excise tax. It
is anticipated that the Company's income will consist primarily of income from
the Properties. See "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT."
If the Company fails to qualify as a REIT in any taxable year, the Company
will be subject to Federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates, which would
effectively impose on Shareholders the "double taxation" on income that is
subsequently distributed to Shareholders that generally results from an
investment in a "C" corporation. Unless entitled to relief under certain Code
provisions, the Company also would be disqualified from treatment as a REIT for
four taxable years following the year during which REIT qualification was lost.
As a result, distributions to Shareholders could be reduced or eliminated for
each of the years involved, and distributions to Shareholders would no longer be
required to be made. In recent years, the Company has not paid any Federal
income tax, other than an alternative minimum tax, due to the Company's net
operating loss carryovers and passive activity loss carryovers (as defined in
the Code). Even if the Company qualifies for taxation as a REIT, the Company may
be subject to certain state and local taxes on its income and property and, in
certain circumstances, Federal income or excise taxes. Although the Company
currently intends to operate in a manner designed to qualify it as a REIT, it is
possible that future economic, market, legal, tax or other considerations may
cause the Company not to qualify as a REIT or cause the Board to resolve to
revoke the Company's election to be taxed as a REIT for Federal income tax
purposes. See "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT."
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USE OF PROCEEDS
The net proceeds from the Offering (assuming a Common Share offering price
of $22), after deducting underwriting discounts and commissions and estimated
Offering expenses of approximately $20.0 million, are expected to be
approximately $222.0 million ($255.8 million if the Underwriters' over-allotment
option is exercised in full). The Company intends to use the net proceeds of the
Offering as follows: (i) approximately $173.2 million will be used to repay the
Prepayable Debt; (ii) approximately $29.1 million will be used to repay bank
debt incurred to fund the Consolidation Plan; and (iii) the remainder will be
used for the 1998 portion of the Company's capital expenditure program and for
general business purposes. See "The Company--Growth Strategy."
As of March 31, 1998, the weighted average interest rate per annum on
mortgage indebtedness expected to be prepaid with the net proceeds of the
Offering was approximately 8.51% and the weighted average maturity was
approximately 3.9 years. As of March 31, 1998, the weighted average interest
rate per annum on bank debt expected to be repaid with the net proceeds of the
Offering was approximately 7.47% and the weighted average maturity was
approximately 2.1 years. The bank debt expected to be repaid from the net
proceeds of the Offering was incurred within the last twelve months in
connection with the Consolidation Plan. Pending application of the net proceeds,
the Company will invest such portion of the net proceeds in interest-bearing
accounts and short-term, interest-bearing securities, which are consistent with
the Company's intention to qualify as a REIT for Federal income tax purposes.
See "Management's Discussion and Analysis of Combined Property Operating Results
and the Company's Financial Condition -- Company Liquidity and Capital
Resources."
PRICE RANGE OF COMMON SHARES
Prior to March 19, 1998, the common stock of Old Lexford was traded on the
National Market tier of the NASDAQ Stock Market(SM) under the symbol "CRSI."
Following the Reincorporation Merger, on March 19, 1998, the Common Shares began
trading on the New York Stock Exchange ("NYSE") under the symbol "LFT." The
following table sets forth the high and low closing sales prices of the Old
Lexford common stock on the National Market during 1996 and 1997, the combined
high and low closing sales prices of the Old Lexford common stock on the
National Market and the Common Shares on the NYSE during the first quarter of
1998 and the high and low closing sales prices of the Common Shares on the NYSE
during the second quarter of 1998 up to the date hereof. All such prices for Old
Lexford common stock have been adjusted to reflect the exchange of two Common
Shares for each share of Old Lexford common stock outstanding on March 18, 1998,
the effective date of the Reincorporation Merger.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
First Quarter............................................. $ 9 3/8 $ 8 3/4
Second Quarter............................................ 10 7/8 9 1/4
Third Quarter............................................. 10 3/8 9 1/4
Fourth Quarter............................................ 10 1/8 9 11/16
YEAR ENDED DECEMBER 31, 1997
First Quarter............................................. $13 3/8 $10 1/4
Second Quarter............................................ 13 11 5/8
Third Quarter............................................. 14 1/8 10 7/8
Fourth Quarter............................................ 17 1/4 15 1/8
YEAR ENDING DECEMBER 31, 1998
First Quarter............................................. $20 5/8 $16 7/8
Second Quarter (through May 18)........................... 23 1/4 20 7/16
</TABLE>
As of May 18, 1998 there were approximately 1,309 holders of Common Shares
of record. On May 18, 1998, the last reported sale price on the NYSE of the
Common Shares was $23 3/16 per share.
20
<PAGE> 28
DISTRIBUTION POLICY
The Company has paid no dividends since it became a public reporting
company in 1993. However, in order to qualify to be treated as a REIT for
Federal income tax purposes, the Company generally will be required each year to
distribute to Shareholders at least 95% of its REIT taxable income. As a REIT,
the Company will be subject to a 4% non-deductible excise tax on the amount, if
any, by which certain distributions paid by it with respect to any calendar year
are less than the sum of (a) 85% of its REIT ordinary income for such year, (b)
95% of its REIT capital gain net income for that year and (c) undistributed
taxable income from prior REIT years upon which the Company has not paid Federal
income tax. The Company intends to make distributions to Shareholders to
maintain its status as a REIT and to avoid the non-deductible excise tax.
The Company's estimate of Cash Available for Distribution after the
Offering is based upon pro forma Funds from Operations for the year ended
December 31, 1997 with certain adjustments based on the items described below.
See the Pro Forma Financial Information. To estimate pro forma Cash Available
for Distribution for the year ended December 31, 1998, pro forma Funds from
Operations for the year ended December 31, 1997 was adjusted without giving
effect to any changes in working capital resulting from changes in current
assets and current liabilities (which changes are not anticipated to be
material) or the amount of cash estimated to be used for (a) investing
activities for acquisition and other activities (other than a $400 per
wholly-owned unit annual maintenance reserve) and (b) financing activities. The
estimate of Cash Available for Distribution is being made solely for the purpose
of determining the initial distribution and is not intended to be a projection
or forecast of the Company's results of operations or its liquidity, nor is the
methodology upon which such adjustments were made necessarily intended to be a
basis for determining future distributions. Accordingly, the Company did not
make adjustments for any prospective revenues or expenses. There can be no
assurance that any distributions will be made or that the estimated level of
distributions will be maintained by the Company. The Company anticipates that,
for the foreseeable future, its Cash Available for Distribution will exceed its
REIT taxable income for Federal income tax purposes. The Board may, as it deems
appropriate or necessary, establish reserves from time to time for capital
expenditures, renovation, property development and anticipated acquisitions,
which would result in decreasing the amount of cash distributions made to
Shareholders. The declaration and payment of any distributions by the Company
will be at the discretion of its Board and will depend upon, among other things,
the level of Funds from Operations, the Company's level of indebtedness,
contractual restrictions, if any, imposed by Property mortgages, the New Credit
Facility or other lending arrangements, capital expenditures in excess of
reserves and other factors considered relevant by the Board.
Initially, the Company intends to make quarterly cash distributions to
Shareholders at an annual rate of $1.73 per Common Share, which would represent
approximately 76.4% of the Company's pro forma as adjusted Funds from Operations
for the year ended December 31, 1997 (assuming 20,355,952 Common Shares
outstanding) and a yield of 7.86% (assuming a Common Share offering price of
$22). The Company intends to commence these distributions with a prorated
distribution for the period from the completion of the Offering through June 30,
1998, and to maintain its initial quarterly distribution rate for the third and
fourth quarters of 1998 and each quarter of 1999, unless actual results of
operations, economic conditions or other factors differ from the assumptions
used in its estimates.
For Federal income tax purposes, distributions paid to Shareholders may
consist of ordinary income, capital gains, non-taxable returns of capital or a
combination thereof. Distributions in excess of the Company's earnings and
profits generally will be treated as a non-taxable return of capital and,
therefore, will result in a reduction of a Shareholder's tax basis in the Common
Shares, to the extent of such basis. Any further such distributions will result
in taxable gain. To the extent that a Shareholder's basis in his or her Common
Shares is reduced, the amount of capital gain realized on any subsequent sale of
the Common Shares will be increased. The Company will provide Shareholders an
annual statement (on IRS Form 1099-DIV) as to its designation of the taxability
of distributions. See "Federal Income Tax Considerations."
21
<PAGE> 29
The following table describes the calculation of pro forma as adjusted
Funds from Operations for the year ended December 31, 1997 and illustrates the
adjustments made by the Company to pro forma as adjusted Funds from Operations
in order to estimate Cash Available for Distribution and determine initial
annual distributions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C>
Pro forma as adjusted net income.......................... $19,645
Add (deduct) non-cash and non-recurring items:
Pro forma real estate related depreciation (1).......... 20,849
Income from disposal of assets --net (2)................ (1,989)
Non-cash share awards and compensation (3).............. 7,400
Funds from Operations relating to Properties sold in
1997 (4)............................................. (199)
Non-recurring items (5)................................. 400
-------
Pro forma as adjusted Funds from Operations............... 46,106
Non-real estate related depreciation and amortization
(6)..................................................... 696
Estimated reserve for capital improvement expenditures net
of amounts expensed (7)................................. (8,643)
-------
Estimated Cash Available for Distribution................. $38,159
=======
Total estimated initial annual distribution (8)........... $35,216
Estimated initial annual distribution per share (8)....... $ 1.73
Estimated Cash Available for Distribution payout ratio
(9)..................................................... 92.3%
</TABLE>
- ---------------
(1) Represents pro forma depreciation of real estate property and improvements
of $4,806 and $16,043 for Old Lexford and the Consolidating Properties,
respectively.
(2) Represents income from disposal of assets --net included in pro forma net
income for the year ended December 31,1997.
(3) Represents a one-time non-recurring grant of restricted shares of $6,281
related to the Company's 1997 Performance Equity Plan. The Company's 1997
Performance Equity Plan is intended to provide new members of senior
management meaningful ownership stakes in the Company. Also includes $842
related to the Company's 1996 Incentive Plan and various other share
awards to officers and employees and $277 related to the Non-Employee
Trustee Restricted Stock Plan. All of these amounts are non-cash charges
against net income. Due to the vesting schedules related to such
restricted share grants, the Company expects total share based
compensation (non-cash expense) related to the 1997 Performance Equity
Plan, the 1996 Incentive Plan, the Non-Employee Trustee Restricted Stock
Plan and all other non-cash share awards to be $4,443, $775 and $775 in
1998, 1999 and 2000, respectively. All shares issued under the 1997
Performance Equity Plan (whether or not vested) have been included in
calculating the estimated initial annual distribution per share. Because
the Company does not anticipate grants of restricted shares to occur at
such levels in the future, the non-cash expense attributable to these
grants has been added back in determining FFO to ensure comparability with
future periods. There are no shares available for further grants under the
1997 Performance Equity Plan, and no material numbers of shares available
under the 1996 Incentive Plan or Non-Employee Trustee Restricted Stock
Plan. The Company is currently considering a new incentive equity
compensation plan, which will be subject to shareholder approval. The
Company expects that such plan, if adopted, will be largely or entirely
option based, and that it will not contain significant, if any, grants of
restricted shares resulting in non-cash charges against net income.
(4) Represents $687 in revenue, $228 in Property operating and maintenance
expense, $66 in real estate taxes and insurance expense and $194 in
interest -- non-recourse mortgages expense included in pro forma net
income related to the operations of two Properties that were sold in 1997.
(5) Represents a non-recurring restructuring charge relating to employee
severance and related costs incurred in integrating the LPI acquisition.
22
<PAGE> 30
(6) Represents depreciation of corporate furniture and equipment of $620, and
amortization of loan fees and land lease costs of $52 and $24,
respectively.
(7) Represents estimated capital improvement expenditures for 28,929 units at
$400 per unit, net of expensed portion of $2,929, for the Wholly-Owned
Properties. At December 31, 1997, escrows of $10.3 million were available
to fund capital expenditures of the Wholly-Owned Properties. Does not
reflect Offering proceeds used for the 1998 portion of the Company's
capital expenditure program.
(8) Based on a total of 20,355,952 Common Shares outstanding following
completion of the Offering.
(9) Calculated as the estimated initial annual distribution divided by the
estimated Cash Available for Distribution for the year ended December 31,
1997. The payout ratio of pro forma Funds from Operations for the year
ended December 31, 1997 equals 76.4%.
Cash Available for Distribution (CAD) is defined as Funds from Operations
adjusted to reflect the non-cash charges resulting from non-real estate related
depreciation and amortization and estimated costs of capital improvements net of
amounts charged to operations. The calculation of adjustments to pro forma Funds
from Operations is being made solely for the purpose of setting the initial
distribution amount and is not intended to be a projection or prediction of the
Company's actual results of operations nor is the methodology upon which such
adjustments are made intended to be a basis for determining future
distributions. Management considers Funds from Operations an appropriate measure
of performance of an equity REIT because industry analysts have accepted it as
such. The Company computes Funds from Operations in accordance with standards
established by the Board of Governors of NAREIT in its March 1995 White Paper as
further adjusted by the Company to eliminate expenses attributable to certain
non-cash share awards and compensation (see footnote 3), operations from sold
properties and certain non-recurring expenditures which may differ from the
methodology for calculating Funds from Operations used by other multifamily
REITs and, accordingly, may not be comparable to such other REITs. Further,
Funds from Operations does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations or other commitments and uncertainties. See "Management's
Discussion and Analysis of Combined Property Operating Results and the Company's
Financial Condition."
THE ESTIMATE OF CASH AVAILABLE FOR DISTRIBUTION IS BEING MADE SOLELY FOR
THE PURPOSE OF DETERMINING THE INITIAL DISTRIBUTION RATE AND IS NOT INTENDED TO
BE A PROJECTION OR FORECAST OF THE COMPANY'S RESULTS OF OPERATIONS OR OF ITS
LIQUIDITY. PRO FORMA FUNDS FROM OPERATIONS DOES NOT REPRESENT CASH FLOW PROVIDED
BY OPERATING ACTIVITIES AS DEFINED BY GAAP, IS NOT NECESSARILY INDICATIVE OF
CASH AVAILABLE TO FUND ALL OF THE COMPANY'S CASH NEEDS AND SHOULD NOT BE
CONSIDERED AS AN ALTERNATIVE TO NET INCOME FOR PURPOSES OF EVALUATING THE
COMPANY'S OPERATING PERFORMANCE.
23
<PAGE> 31
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 as follows: (i) historical, (ii) after giving pro forma effect
for the REIT Conversion (including the Reincorporation Merger and the sale of
the third party management business) and the Consolidation Plan and (iii) as
further adjusted for the Offering and the use of proceeds therefrom. The
information set forth in the following table should be read in conjunction with
the Pro Forma Financial Information and the discussion set forth in
"Management's Discussion and Analysis of Combined Property Operating Results and
the Company's Financial Condition -- Company Liquidity and Capital Resources."
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long term obligations, including current portions (1)
Obligations under corporate borrowings................. $ 21,760 $ 29,110 $ --
Mortgage notes payable................................. 457,762 506,118 341,111
Deferred compensation liability........................ 9,680 9,680 9,680
-------- ---------- ----------
Total long term obligations......................... 489,202 544,908 350,791
Shareholders' equity
Preferred Shares, $.01 par value; 5,000,000 shares
authorized, none issued............................. -- -- --
Common Shares, $.01 par value; 50,000,000 shares
authorized, 9,216,593, 9,216,593 and 20,216,593
shares outstanding, respectively (2)................ 92 92 202
Additional paid-in capital............................. 62,755 62,755 284,645
Retained earnings...................................... 13,736 13,736 5,370
Cost of treasury shares (2)............................ (14,130) (14,130) (14,130)
-------- ---------- ----------
Total shareholders' equity.......................... 62,453 62,453 276,087
-------- ---------- ----------
Total capitalization................................ $551,655 $ 607,361 $ 626,878
======== ========== ==========
</TABLE>
- ---------------
(1) For information concerning the Company's borrowing arrangements, see
"Management's Discussion and Analysis of Combined Property Operating Results
and the Company's Financial Condition -- Company Liquidity and Capital
Resources."
(2) Includes 9,216,593 shares outstanding at March 31, 1998 (including 1,015,107
vested and non-vested deferred compensation shares held in the Rabbi Trust)
and 11,000,000 shares issued in the Offering, respectively. Outstanding
shares exclude 630,280 Common Shares reserved for future issuance pursuant
to the Company's stock option plans of which options for 522,738 Common
Shares were outstanding as of March 31, 1998. Outstanding shares also
exclude 71,768 Common Shares reserved for issuance under the Company's
Non-Employee Trustee Restricted Stock Plan and under certain employment
agreements with executive officers. On March 19, 1998, the Emerging Issues
Task Force reached a conclusion (EITF Issue 97-14) regarding the method of
accounting and reporting for shares of an employer's stock which are held by
a rabbi trust relating to deferred compensation arrangements. The conclusion
stipulates that the rabbi trust must be consolidated in the financial
statements of the employer with shares of the employer stock classified as
treasury shares and therefore a reduction of total shareholders' equity. The
liability to beneficiaries related to vested shares is reported as a
liability in the employer's balance sheet. At March 31, 1998, 722,664 vested
shares in the Company's Rabbi Trust are included in weighted average shares
outstanding for earnings per share purposes and 292,443 non-vested shares
held in the Rabbi Trust are excluded from weighted average shares
outstanding for earnings per share purposes.
24
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF COMBINED PROPERTY OPERATING RESULTS AND
THE COMPANY'S FINANCIAL CONDITION
INTRODUCTION
The following discussion and analysis is based on (i) the Company's
property-level operating results derived from the combined operating results of
the Consolidating Properties and the 111 Properties which were wholly-owned
during the periods presented and (ii) the financial condition of the Company
taken as a whole. The Consolidation Plan and REIT Conversion have resulted in
numerous fundamental changes to the Company such that, in the opinion of
management, the Company's Historical Financial Information, and any discussion
thereof, are not meaningful. In order to facilitate relevant analysis of the
historical operating results of the Properties, the Company prepared the
following statement of Property operating results for the fiscal years ended
December 31, 1997, 1996 and 1995. The unaudited combined property operating
results, in the opinion of management, present fairly the combined operating
results of such Properties but do not reflect the operating results of the
Company as a whole.
The combined property operating results reflect property-level operating
results of the 111 Properties described above and the 326 Consolidating
Properties (collectively, the "Wholly-Owned Properties"). The Company has
significant corporate and property management overhead expenses (as well as
revenues derived from fee income and interest income attributable to the 79
Non-Consolidating Properties) which do not appear in the combined property
operating results. The combined property operating results are thus not
indicative of the Company's results of operations, but rather are presented as
an indicator of property-level operating results which management believes is
useful for an understanding of the financial performance of the Wholly-Owned
Properties on a historical basis. See "Summary Pro Forma Financial and Other
Data," as well as the Historical Financial Information.
The combined property operating results do not purport to project the
Company's or the Properties' results of operations for any future date or
period. Unless otherwise indicated, dollar amounts and percentages in the
following discussion have been rounded to the nearest hundred thousand in the
case of dollar amounts over one million, to the nearest thousand in the case of
dollar amounts under one million and to the nearest tenth of a percent in the
case of percentages.
OVERVIEW
Rental revenues are derived from the 437 Properties that, for purposes of
the combined property operating results, comprise the Company's wholly-owned
operating real estate assets. These revenues represent rental receipts from
residents of the Properties, and also include certain ancillary revenues such as
laundry room income.
Expenses are derived from property operating and maintenance expenses, real
estate taxes and insurance, interest expense and depreciation and amortization.
Property operating and maintenance expenses represent normal operating expenses
of the Wholly-Owned Properties, including costs associated with on-site
management, utilities, grounds maintenance, advertising and the expense portion
of capital improvements. The property operating and maintenance expenses exclude
management and other fees charged by the Company.
25
<PAGE> 33
UNAUDITED COMBINED PROPERTY OPERATING RESULTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues
Rental revenues................. $ 131,685 $ 140,003 $ 144,051 $ 34,949 $ 36,611
Expenses
Property operating and
maintenance expenses.......... 42,284 45,278 44,924 11,168 11,327
Real estate taxes and
insurance..................... 12,944 13,053 13,080 3,228 3,013
--------- --------- --------- --------- ---------
Total operating expenses... 55,228 58,331 58,004 14,396 14,340
--------- --------- --------- --------- ---------
Net operating income............... 76,457 81,672 86,047 20,553 22,271
Interest expense................ 44,038 43,913 44,390 11,293 11,084
Depreciation and amortization... 18,793 19,448 21,283 4,645 4,851
--------- --------- --------- --------- ---------
Income from Wholly-Owned
Properties...................... $ 13,626 $ 18,311 $ 20,374 $ 4,615 $ 6,336
========= ========= ========= ========= =========
OTHER FINANCIAL DATA:
Net operating income as a percent
of revenue...................... 58.1% 58.3% 59.8% 58.8% 60.8%
Ratio of net operating income to
interest expense................ 1.7x 1.9x 1.9x 1.8x 2.0x
</TABLE>
- ---------------
PROPERTY OPERATING RESULTS
Comparison of Property Operating Results For the Three Months ended March 31,
1998 and March 31, 1997
Revenues
Rental Revenues. Rental revenues increased $1.7 million, or 4.5%, to $36.6
million for the three months ended March 31, 1998 as compared to $34.9 million
for the same period in 1997. The increase was primarily due to a 2.1% increase
in average monthly rent collected from occupied units to $432 in the three
months ended March 31, 1998 from $423 in the three months ended March 31, 1997,
combined with an increase in average physical occupancy to 93.1% in the three
months ended March 31, 1998 as compared to 92.0% for the same period in 1997.
Expenses
Property Operating and Maintenance Expenses. Property operating and
maintenance expenses increased $159,000, or 1.4%, to $11.3 million in the three
months ended March 31, 1998 from $11.2 million in the three months ended March
31, 1997. Property operating and maintenance expenses declined to 31.1% of
rental revenues in the three months ended March 31, 1998, compared to 32.0% in
the three months ended March 31, 1997.
Real Estate Taxes and Insurance. Real estate taxes and insurance decreased
$215,000, or 6.7%, to $3.0 million for the three months ended March 31, 1998, as
compared to $3.2 million for the same period in 1997. The decrease was primarily
due to a decline in insurance expense as a result of renewal of coverage on more
favorable terms. As a percentage of rental revenues, these expenses declined to
8.3% in the three months ended March 31, 1998, versus 9.2% in the three months
ended March 31, 1997.
Interest Expense. Interest expense decreased approximately $209,000 or
1.9%, to $11.1 million for the three months ended March 31, 1998, as compared to
$11.3 million for the same period in 1997. Interest expense equaled 30.4% of
rental revenues in the three months ended March 31, 1998, compared to 32.3% in
the three months ended March 31, 1997.
26
<PAGE> 34
Comparison of Property Operating Results for the Years ended December 31, 1997
and December 31, 1996
Revenues
Rental Revenues. Rental revenues increased $4.0 million, or 2.8%, to
$144.0 million in 1997 as compared to $140.0 million in 1996. The increase was
primarily due to a 2.1% increase in average monthly rent collected from occupied
units to $431 in 1997 from $420 in 1996 as well as an increase in ancillary
revenues, partially offset by the decline in the average physical occupancy to
92.7% in 1997 from 93.4% in 1996.
Expenses
Property Operating and Maintenance Expenses. Property operating and
maintenance expenses decreased $355,000 or .8% to $44.9 million in 1997 from
$45.3 million in 1996. Property operating and maintenance expenses were 31.2% of
total revenues in 1997, compared to 32.3% in 1996. The increase in property
operating and maintenance expenses reflected a 2.1% increase in normal operating
expenses to $42.0 million in 1997 from $41.1 million in 1996 while the expensed
portion of major maintenance declined to $2.9 million in 1997 from $4.2 million
in 1996. The Company anticipates a significant increase in major maintenance
expenditures in 1998 and 1999 as a result of the implementation of the Company's
capital expenditure program. See "-- Company Liquidity and Capital Resources"
and "The Company -- Growth Strategy."
Real Estate Taxes and Insurance. Real estate taxes and insurance increased
$27,000, or .2% in 1997 as compared to 1996. As a percentage of total revenues,
these expenses declined to 9.0% in 1997 from 9.3% in 1996.
Interest Expense. Interest expense increased $477,000, or 1.1%, to $44.4
million in 1997 as compared to $43.9 million in 1996, as a result of higher
principal amounts due to excess refinancing proceeds used to fund deferred
maintenance, offset by a decrease in average interest rates. Interest expense
equaled 30.8% of total revenues in 1997, compared to 31.4% in 1996. See
"-- Company Liquidity and Capital Resources."
Comparison of Property Operating Results for the Years ended December 31, 1996
and December 31, 1995
Revenues
Rental Revenues. Rental revenues increased $8.3 million, or 6.3%, to
$140.0 million in 1996 as compared to $131.7 million in 1995. The increase was
primarily due to a 5.3% increase in average monthly rent collected from occupied
units to $420 in 1996 from $397 in 1995, and an increase in average physical
occupancy to 93.4% in 1996 from 92.9% in 1995.
Expenses
Property Operating and Maintenance Expenses. Property operating and
maintenance expenses increased $3.0 million, or 7.1%, to $45.3 million in 1996
as compared to $42.3 million in 1995. The increase in property operating and
maintenance expenses reflected a 7.0% increase in normal operating expenses to
$41.1 million in 1996 from $38.4 million in 1995 while the expensed portion of
major maintenance increased to $4.2 million in 1996 from $3.9 million in 1995.
Major maintenance costs were exceptionally high in 1995 as a result of certain
deferred maintenance items undertaken in conjunction with mortgage refinancings.
Property operating and maintenance expenses increased as a percentage of total
revenues to 32.3% in 1996 from 32.1% in 1995.
Real Estate Taxes and Insurance. Real estate taxes and insurance were
almost unchanged in 1996 from 1995, but declined to 9.3% of total revenues in
1996 compared to 9.8% in 1995.
Interest Expense. Interest expense decreased $125,000 or .3% to $43.9
million in 1996, from $44.0 million in 1995. The decrease was due in part to the
mortgage refinancing transactions completed in 1996 and 1995. Overall, interest
expense declined to 31.4% as a percentage of total revenues in 1996, versus
33.4% in 1995.
COMPANY LIQUIDITY AND CAPITAL RESOURCES
The following discussion and analysis is based on the liquidity and capital
resources of the Company, taken as a whole. Pro forma Funds from Operations was
derived from, and should be read in conjunction with, the Pro Forma Financial
Information appearing elsewhere in this Prospectus.
27
<PAGE> 35
The principal sources of liquidity for the Company are cash flow from its
operations and borrowings available under the Company's existing credit
facility. The Company's Funds from Operations increased to $28.4 million in 1997
from $21.2 million in 1996. The following table reflects the Company's pro forma
FFO for the years ended December 31, 1996 and 1997, and as further adjusted to
give effect to the Offering and the use of proceeds therefrom. These
calculations are based upon the Pro Forma Financial Information and should be
read in conjunction therewith.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31, 1998
----------------------------------- --------------
1997
1996 1997 PRO FORMA PRO FORMA
PRO FORMA PRO FORMA AS ADJUSTED AS ADJUSTED
--------- --------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Pro forma net income.............................. $ 1,182 $ 1,889 $19,645 $ 5,712
Add (deduct) non-cash and non-recurring items:
Pro forma real estate related depreciation and
amortization................................. 20,849 20,849 20,849 5,534
Income from disposal of assets -- net........... (963) (1,989) (1,989) (89)
Non-cash share awards and compensation.......... 326 7,400 7,400 511
Funds from Operations relating to Properties
sold......................................... (435) (199) (199) --
Non-recurring items............................. 243 400 400 656
------- ------- ------- -------
Pro forma Funds from Operations (1)............... $21,202 $28,350 $46,106 $12,324
======= ======= ======= =======
Percentage increase.... 33.8%
</TABLE>
- ---------------
(1) Funds from Operations is calculated in accordance with the White Paper on
FFO approved by 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 and reserves. 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. See "Distribution Policy."
The Company's capital expenditures for 1997 amounted to $9.9 million.
Approximately $3.4 million of such capital expenditures were funded from
available escrows and the balance from cash flow generated from operations. 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. The Company expects to invest
approximately $36.0 million over the next five years on such Properties in
excess of its targeted annual capital spending of $400 per wholly-owned unit. At
March 31, 1998, $8.9 million was available in escrows to fund capital
expenditures in 1998 and thereafter.
The Company is upgrading its software systems in order to obtain optimal
efficiencies from technology. Although there can be no assurance, management
believes this enhanced technology will improve property performance and provide
operational efficiencies which will offset the increased costs associated with
the new system.
Prior to the Offering, the Company maintained a revolving credit facility
for $40.0 million. Borrowings under the existing credit facility were made
primarily to fund the Consolidation Plan. The Company intends to
28
<PAGE> 36
pay off all amounts borrowed under, and terminate, the facility with a portion
of the proceeds of the Offering. See "Use of Proceeds."
The Company has obtained a commitment letter from BankBoston, N.A. for a
two-year unsecured revolving line of credit at the Operating Partnership level
in the amount of up to $150.0 million, subject to customary terms and conditions
including the execution and delivery of definitive documentation. Pursuant to
such commitment letter, borrowings under the New Credit Facility will bear
interest at a floating rate equal to, at the Company's option, BankBoston,
N.A.'s base rate or LIBOR plus 1.25% to 1.5% per annum depending upon the
Company's leverage ratio.
The Operating Partnership's ability to borrow under the New Credit Facility
will be subject to the Company's ongoing compliance with a number of financial
and other covenants. The New Credit Facility will require that the Company
maintain, among other things: (i) a ratio of total liabilities to total assets
(defined as a multiple of EBITDA); (ii) a ratio of secured debt to total assets
of not more than .47 to 1 until June 29, 1999 and .40 to 1 thereafter; (iii) a
ratio of EBITDA (less non-cash charges and extraordinary items) to total
interest expense (including capitalized interest and preferred stock dividends)
of at least 2 to 1; and (iv) a ratio of net operating cash flow to fixed charges
of at least 1.75 to 1. The New Credit Facility also will, except under certain
circumstances, (x) limit the Operating Partnership's ability to make
distributions of not more than 90% of its annual FFO; (y) prohibit the
incurrence of recourse debt; and (z) limit the Operating Partnership's
investments, other than 100% ownership of income producing real estate, to not
more than 15% of total assets. The Company intends to use the New Credit
Facility principally for acquisitions, to repay mortgage indebtedness and for
working capital purposes.
The Company anticipates that cash flow from its operations and borrowings
expected to be available under the Company's New Credit Facility will be
adequate to meet the reasonably foreseeable capital and liquidity needs of the
Company. If the Company is successful in its future growth plans, it may be
necessary to seek additional capital sources through other debt or equity
sources.
The following table sets forth certain information relating to the
Company's consolidated mortgage indebtedness, collateralized by 302 of the
Wholly-Owned Properties, after giving effect to the application of the net
proceeds of the Offering.
OUTSTANDING MORTGAGE DEBT POST-OFFERING
<TABLE>
<CAPTION>
PRINCIPAL WEIGHTED WEIGHTED
BALANCE AVERAGE WEIGHTED AVERAGE
AS OF INTEREST AVERAGE YEARS TO
MORTGAGE POOLS 3/31/98 (1) RATE (2) CONSTANT (3) MATURITY (4)
- --------------------------------------- ------------ -------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DLJ I.................................. $ 89,095 8.65% 11.57% 3.03
DLJ II................................. 79,353 8.71 10.13 7.47
PaineWebber ("PW")..................... 117,706 8.81 8.89 8.66
Other.................................. 54,957 8.96 9.94 9.56
--------
Total........................ $341,111 8.77 10.05 7.04
========
</TABLE>
- ---------------
(1) Total includes $338,744 of first mortgage debt and $2,367 of second mortgage
debt.
(2) Weighted averages based on first mortgage debt only.
(3) Based on principal balance as of March 31, 1998. PW mortgages include 72
loans ($83,587 principal balance) which require interest-only payments until
September 1999. The constant is determined by dividing the total annual
required debt service payments of both principal and interest by the
outstanding principal balance.
(4) Many of the mortgages allow prepayment after expiration of "lock-out
periods." Of the large pools, the DLJ I mortgages become prepayable at March
31, 1999; the DLJ II mortgages become prepayable beginning February 2000;
and the PW mortgages become prepayable beginning October 1998. Even after
the lock-out periods, many of the mortgages remain subject to yield
maintenance premiums determined by discounting the cash flow scheduled until
maturity at variable rates based on U.S. Treasury obligations of equal
duration.
29
<PAGE> 37
THE COMPANY
The Company is a fully integrated REIT which owns, manages and
opportunistically acquires apartment communities, with whole or partial equity
ownership or other economic interests in 516 apartment communities representing
a total of 36,405 residential units at 402 sites throughout the midwestern and
southeastern United States. 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. The Company generated pro forma revenues of
approximately $150.4 million in 1997, with an average physical occupancy of
92.7% during the year. The Company increased pro forma Funds from Operations
from $21.2 million in 1996 to $28.4 million in 1997, an increase of 33.8%. As
adjusted for the Offering and the use of proceeds therefrom, pro forma Funds
from Operations was $46.1 million in 1997.
FOCUS ON VALUE-CONSCIOUS RENTERS
The Company's primary mission is to become the leading multifamily REIT
operating in the value-conscious segment. The value-conscious segment consists
of renters 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
rents which currently range from $350 to $550 per apartment unit. The Company
believes such rates are generally 20% to 25% below the average multifamily
rental rates in its markets.
The Company believes it can continue to achieve attractive financial
returns in the value-conscious segment by capitalizing on the following Company
strengths:
Attractive Residential Alternative. The Company believes the Properties
provide a superior residential alternative to most other comparably priced
apartments and an attractive residential feel through their mature, park-like
landscaping, well maintained lawns and gardens and their multiple building,
single story layouts. The Properties present an attractive alternative to high
density apartment complexes, averaging only 14 apartment units per acre of land.
Most of the Company's units were constructed on land which at the time was
located in outer suburbs of its Core Markets and other medium sized cities, as
well as rural and other lower cost areas. The Company believes that the growth
and expansion of several such cities and suburbs toward and around Property
sites has resulted in many Properties now being located in more attractive areas
and desirable neighborhoods compared to similarly priced apartments.
Low Cost Structure. The Properties are comprised almost entirely of
apartments made of solid, durable modular components that were pre-manufactured
off-site in a quality controlled environment. The Company believes that the
durability, strength and uniformity of the Properties provide for economies and
efficiencies in operating and maintenance costs. As a result of these low
operating and maintenance costs, the Properties can offer very competitive rents
for clean, attractive units while maintaining relatively high operating margins.
The Company maintained property-level operating margins of approximately 60% in
1997.
Operating and Management Experience. The Company has unique experience in
owning and managing apartment communities appealing to the value-conscious
market segment as well as apartment communities with relatively smaller numbers
of units located in secondary and tertiary markets. The Company has actively
operated and managed all but 15 of the Properties since their initial
development during the 1970s and 1980s. The Company's property management
personnel include 14 property management executives who have Certified Property
Management certification. The Company's property management executives have an
average of 14.5 years of professional property management experience.
RECENT INITIATIVES
Over the last two years, the Company has completely replaced its senior
management team in an effort to turn around the Company's operating performance
and enhance long term Shareholder value. The Company hired a talented group of
seasoned senior executives with significant experience in real estate,
multifamily operations, finance and capital markets. As a result of their
efforts, the performance of the Properties improved significantly, resulting in
the Company's pro forma FFO increasing by 33.8%, from $21.2 million in 1996 to
$28.4 million in
30
<PAGE> 38
1997. This new senior management team has taken several steps to continue to
improve operating performance and enable the Company to take advantage of its
strong position in the value-conscious segment:
- First Mortgage Loan Refinancings. Since 1994, the Company has refinanced
non-recourse first mortgage loans on the Properties in an aggregate
principal amount of $532.6 million, resulting in increased cash flows at
the Properties and funds for capital improvement. The Company's pro forma
debt to total market capitalization ratio has decreased from 80.9% at
December 31, 1995 to 64.8% at December 31, 1997. After giving effect to
the Offering and the use of proceeds therefrom, the Company's debt to
total market capitalization ratio will be approximately 43.3% (assuming a
Common Share offering price of $22). See "Use of Proceeds."
- Use of Refinancing Proceeds to Effect Capital Improvements. Beginning in
1994, the Company was able to apply excess proceeds made available in many
of the mortgage loan refinancings referred to above to fund capital
improvements at the related Properties, thereby facilitating monthly
rental increases. For example, the performance of 183 Properties where
improvements were effected in connection with two mortgage pool
refinancings has improved significantly with revenues from such Properties
increasing 16.3% from 1994 to 1997.
- Lexford Properties Acquisition. To bolster property operating
capabilities, in August 1996 the Company acquired LPI, a widely respected
national third party property management firm that provides the Company
with significant property management talent and efficient operating
practices. At the time of its acquisition, LPI, which was formed by a
group of former Trammell Crow Residential executives, managed over 21,000
units. Following the sale of the third party management business, LPI now
focuses solely on managing the Company's Properties.
- The Consolidation Plan. The Company completed the Consolidation Plan by
acquiring all the third party equity interests in 326 Properties formerly
owned in part by approximately 7,000 limited partners. These acquisitions
have significantly simplified the Company's organizational structure,
creating improved operating efficiencies and enhancing the Company's
ability to maximize financial returns from the Consolidating Properties.
See "Company History -- Consolidation Plan."
- Decision to Elect REIT Status. The Company has decided to elect REIT
status to take advantage of favorable Federal and state income tax
treatment available to REITs and has engaged in a number of transactions
to facilitate REIT qualification. The Company believes market valuations
and access to capital markets are more favorable to REITs as compared to
traditional "C" corporation real estate operating companies such as Old
Lexford and, therefore, the Company believes its REIT status will enhance
its ability to pursue its growth strategy. See "Company History -- REIT
Conversion."
GROWTH STRATEGY
As a result of these recent initiatives, the Company is well-positioned to
take advantage of substantial opportunities to realize sustainable increases in
Funds from Operations and Shareholder value through the following growth
strategies:
Increase Revenues at Existing Properties. The Company will continue to
seek to increase rental rates by embarking on a capital expenditure program over
the next five years. The Company historically has been able to effectuate
meaningful rental rate increases following expenditures on deferred maintenance
and capital improvements. For example, the performance of 183 Properties where
improvements were effected in connection with two mortgage pool refinancings has
improved significantly, with revenues from such Properties increasing 16.3% from
1994 to 1997. Following thorough analysis of the Properties and the
sensitivities to rent increases in their respective locales, management has
identified 224 Properties (approximately 15,000 units) for which it believes
disciplined capital spending will yield substantial revenue increases and
attractive returns on investments. The Company expects to invest approximately
$36.0 million in excess of its targeted $400 per wholly-owned unit annual
maintenance spending level for various revenue enhancing projects at such
Properties over the next five years.
The Company believes that it is uniquely positioned to identify required
improvements and achieve favorable pricing on these improvements, because of the
homogeneous nature of the Properties and the
31
<PAGE> 39
Company's extensive database of historical capital improvements. The homogeneity
of the Company's apartments enables the Company to accurately assess useful
lives of all major components (i.e. roofs, appliances, painting, asphalt, etc.)
and the Company's database of historical capital expenditures by Property,
component and year of replacement provides the Company with a useful tool to
accurately forecast capital expenditures, and thus budget appropriate reserves.
Leverage Operating Efficiencies. The Company emphasizes on-site property
management and believes there are significant opportunities to improve the
profitability of individual Properties. Particular attention is paid to
opportunities to increase rents, raise occupancy rates and control costs, with
property managers being rewarded for monitoring and reacting to market trends.
Since the Company's acquisition of LPI in August 1996, LPI personnel have
assumed responsibility for managing all Properties under the Company's
management, and in doing so have brought to the Company their collective
experience and high standards for personnel, training and management systems.
The Company believes that the durability and uniformity of its Properties
provide for economies and efficiencies in operating and maintenance costs. The
Company seeks to manage expenses through a system of detailed management
reporting and accountability. The Company also expects to realize significant
expense reductions as a result of the Consolidation Plan, which eliminates the
costly and cumbersome reporting (both tax and financial), communication and, in
many instances, cash segregation required to administer 326 Properties formerly
owned in part by approximately 7,000 limited partners. The Company may further
seek to control expenses through investment in cost saving initiatives such as
national contracting, implementation of improved technology, and the
installation of individual apartment unit water and utility meters in certain
locations. With relatively low operating and maintenance costs, the Properties
can offer very competitive rents and still maintain attractive operating
margins.
Increase FFO Through Deleveraging. The Company intends to prepay mortgage
indebtedness secured by the Wholly-Owned Properties. The Company expects that
these actions will significantly increase FFO and Cash Available for
Distribution, reduce the Company's consolidated debt to total market
capitalization ratio to a level more consistent with other comparable publicly
traded REITs, lower the Company's aggregate cost of capital (by eliminating
higher cost mortgage indebtedness) and enhance borrowing capacity to fund future
acquisitions and capital expenditures. The Company will use approximately $173.2
million of the net proceeds from the Offering to pay the Prepayable Debt.
Following such payment, the Company's ratio of debt to total market
capitalization (assuming a Common Share offering price of $22) will be
approximately 43.3%. Following the payment of the Prepayable Debt, the Company
will have approximately $341.1 million of mortgage indebtedness remaining on the
Wholly-Owned Properties of which $101.0 million becomes prepayable in the third
and fourth quarters of 1998, $106.8 million in 1999, $101.9 million in 2000 and
$17.3 million in 2001, with weighted average interest rates of 8.89%, 8.62%,
8.90% and 8.54% per annum, respectively. The Company intends to further reduce
its interest expense and therefore increase FFO and Cash Available for
Distribution by retiring such indebtedness as it becomes prepayable, subject to
the availability of capital at pricing which makes prepayment desirable. See
"Use of Proceeds."
Acquisitions. The Company expects to grow by acquiring individual
apartment properties or portfolios of properties where such acquisitions yield
improved economies of scale and increased cash flow and profitability. The
Company believes the following factors support its acquisition strategy:
- Relatively little consolidation activity has occurred within the
value-conscious segment of the apartment industry unlike the high middle
and upper income segments.
- Less competition exists among REITs for properties within the
value-conscious segment and properties containing less than 150 units.
- In contrast to the Company, many owners and operators of these types of
properties are inadequately capitalized or lack professional property
management expertise.
- The Company has the experience and resources to manage properties with
smaller numbers of units at a low cost and with high operating margins.
- The Company generally is able to achieve attractive operating margins at
rents below market averages.
32
<PAGE> 40
- The Company's management experience and industry relationships help it
identify attractive acquisition targets within the value-conscious
segment.
As a result, the Company believes that properties catering to the
value-conscious segment and properties with less than 150 units can be acquired
at attractive prices. The Company further believes that it will be able to
improve the profitability of such properties through revenue enhancement and
cost reduction.
Following the Offering, the Company may make acquisitions of additional
apartment properties by issuing OP Units (which may be exchangeable for Common
Shares) in exchange for equity interests in such apartment properties. Such
exchanges may provide the former owners of the acquired properties with
advantageous tax deferral opportunities. In addition, the Company's use of a
portion of the proceeds from the Offering to pay Prepayable Debt should improve
the Company's ability to raise capital for future acquisitions of apartment
properties through new borrowings. The Company has obtained a commitment letter
for an unsecured revolving line of credit of approximately $150.0 million to
further facilitate acquisitions. The Company also has the option of issuing
Common Shares or other securities to finance future acquisitions. See
"Management's Discussion and Analysis of Combined Property Operating Results and
the Company's Financial Condition -- Company Liquidity and Capital Resources"
and "Operating Partnership Agreement."
The Company owns interests in 64 Syndicated Properties, which continue to
have third party equity interest holders. In 1997, these 64 Syndicated
Properties generated an aggregate net operating income of approximately $12.1
million, and as of the date of this Prospectus have, collectively, approximately
$20.8 million of mortgage indebtedness which by its terms is prepayable without
substantial penalty or premium. In addition, in December 1997, the Company
entered into a strategic alliance with Meridian Capital Corp. of Dallas, Texas,
and invested approximately $5.1 million to acquire the management contracts for
the Guilford/Hidden Pointe Properties. The Company intends to pursue the
acquisition of third party equity interests in such Syndicated Properties and
some or all of the Guilford/Hidden Pointe Properties (possibly through the
issuance of OP Units) as part of its growth strategy. Other acquisition
opportunities may exist with respect to apartment communities consisting of the
same pre-fabricated modules as the Properties. The Company's predecessor
developed approximately 359 apartment communities in addition to those included
among the Properties, including some apartment communities which are located on
sites contiguous to the Properties. Because of its expertise and economies of
scale, the Company believes that it may be an advantaged acquiror of such
apartment communities if and when they become available for acquisition.
33
<PAGE> 41
BUSINESS AND PROPERTIES
MARKET OVERVIEW
The Company believes that its portfolio is well positioned geographically
and demographically to take advantage of the favorable trends in the apartment
industry.
Largest and Deepest Segment. From a demographic perspective, the Company
believes that its apartment communities are positioned to appeal to the largest
and deepest base of renters. According to the National Multi Housing Council,
the median household income of U.S. apartment renters living in privately owned
housing in 1997 was $24,000, and 68% had household income of less than $35,000.
Lexford targets this segment by seeking to price its monthly rents at an
attractive rental rate relative to average multifamily rental rates in its
markets. The Company's typical monthly rents currently range from $350 to $550
per apartment unit. The following graphs demonstrate that value-conscious
residents constitute the deep middle market of apartment renters, with
approximately 42% of all apartment residents paying monthly rents in this range
in 1995. In addition, the Company believes that the value-conscious segment is
less susceptible to fluctuations in the economy, experiencing less volatility
during recessionary economic cycles, which contributes to revenue stability.
<TABLE>
<CAPTION>
DISTRIBUTION OF MONTHLY RENTS AMONG INCOME DISTRIBUTION OF ALL
ALL APARTMENT RENTERS IN 1995 APARTMENT RENTERS IN 1997
(using 1995 American Housing Survey) (from Current Population Survey for March 1997)
- --------------------------------------------- ----------------------------------------------
APARTMENT RENTER APARTMENT RENTER
HOUSEHOLDS HOUSEHOLDS
MONTHLY RENT($) (IN 1,000s) ANNUAL INCOME($) (IN 1,000s)
- ---------------------- ---------------- -------------------------- -----------------
<S> <C> <C> <C>
from 0 to less than 50 74 from 0 to less than 5,000 600
from 50 to less than 100 66 from 5,000 to less than 10,000 1,403
100 less than 150 127 10,000 less than 15,000 1,385
150 less than 200 176 15,000 less than 20,000 1,228
200 less than 250 305 20,000 less than 25,000 1,212
250 less than 300 606 25,000 less than 30,000 957
300 less than 350 946 30,000 less than 35,000 815
350 less than 400 1,395 35,000 less than 40,000 682
400 less than 450 1,359 40,000 less than 45,000 675
450 less than 500 1,648 45,000 less than 50,000 421
500 less than 550 1,443 50,000 less than 55,000 389
550 less than 600 1,326 55,000 less than 60,000 307
600 less than 650 1,078 60,000 less than 65,000 235
650 less than 700 845 65,000 less than 70,000 188
700 less than 750 629 70,000 less than 75,000 133
750 less than 800 468 75,000 less than 80,000 112
800 less than 850 358 80,000 less than 85,000 104
850 less than 900 240 85,000 less than 90,000 58
900 less than 950 194 90,000 less than 95,000 52
950 less than 1,000 124 95,000 less than 100,000 28
1,000 less than 1,050 80 100,000 less than 105,000 36
1,050+ 447 105,000 less than 110,000 28
110,000 less than 115,000 31
115,000 less than 120,000 31
120,000 less than 125,000 13
125,000 less than 130,000 22
130,000 less than 135,000 13
135,000 less than 140,000 6
140,000 less than 145,000 11
145,000 less than 150,000 4
150,000+ 116
</TABLE>
- ---------------
* The American Housing Survey only allows respondents to state their monthly
rent up to $1,100. If rent exceeds this amount, such respondent is allocated
to the $1,100 group.
Barriers to Entry in the Value-Conscious Rental Segment. The cost of new
apartment construction generally requires rents considerably in excess of the
Company's current rent levels to make such new construction economically
feasible. According to the National Real Estate Index, the national average cost
for newly-constructed apartments in the third quarter of 1997 was more than $78
per square foot, and such apartments are typically larger than the Company's
average unit. As a result, the Company believes that average rents for
newly-constructed apartments are well above the Company's typical monthly rents
which currently range from $350 to $550. The Company believes the lack of supply
of new apartments in the value-conscious segment, combined with expected
increases in demand for such units, results in a favorable outlook for the
Properties.
34
<PAGE> 42
Higher Investment Returns. The Company believes that apartment properties
catering to the value-conscious resident can be acquired at higher
capitalization rates (projected net operating income divided by purchase price)
and thus provide the opportunity for higher financial returns. Information
compiled by the Company indicates an average capitalization rate of 8.9% for
properties built after 1985 with 150 units or more. Properties built before 1986
or that have fewer than 150 apartment units sold at an average capitalization
rate of slightly over 11.0%. This information was compiled from appraisers and
other vendors such as E-Comps and DataComp. The difference in capitalization
rate is also evident in the CB Commercial National Investor Survey (third
quarter 1997) which indicates capitalization rates of 8.5% for class "A"
properties and 10.8% for class "C" properties.
Core Market Growth. In the Company's Core Markets, the apartment industry
generally is characterized by increasing demand generated by steady population
and job growth, a balanced supply of new apartment construction and continued
strong occupancies. According to industry data supplied by Regional Financial
Associates and as shown in the tables below, the Company's Core Markets are
projected to be substantially above the national average in terms of population
and job growth. In the Company's Core Markets, population is projected to grow
at a compound annual growth rate ("CAGR") of 1.64% through 2001, which is nearly
double the projected .86% CAGR for the nation. The strong projected population
growth rate for the Core Markets suggests that demand for multifamily housing
should remain strong in these markets. In fact, three of the Core Markets
(Atlanta, Tampa and Orlando) are projected to have compound annual growth rates
through the year 2001 that are more than two times the national average. The
only two Core Markets projected to lag the national average, in terms of
compound annual population growth, are Indianapolis and Miami (.70% and .72%
CAGR, respectively). However, offsetting the slower population growth in both of
these markets is employment growth which is projected to be in excess of the
national average.
POPULATION GROWTH
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
ANNUAL
%
METROPOLITAN 2001 % CAGR CHANGE % CAGR
AREA 1990 1996 1997 PROJECTED 1990-1997 1996-1997 1997-2001*
------------ ------- ------- ------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Atlanta, GA........ 2,978 3,543 3,585 3,902 2.69% 1.17% 2.14%
Columbus, OH....... 1,350 1,449 1,462 1,522 1.14 0.94 1.00
Indianapolis, IN... 1,385 1,490 1,501 1,543 1.15 0.68 0.70
Miami, FL.......... 1,942 2,057 2,067 2,127 0.90 0.48 0.72
Orlando, FL........ 1,239 1,413 1,439 1,592 2.16 1.83 2.56
Tampa, FL.......... 2,076 2,199 2,238 2,432 1.08 1.74 2.10
Average............ 1,828 2,025 2,048 2,186 1.64 1.15 1.64
National........... 249,400 265,300 267,700 277,000 1.02 0.90 0.86
</TABLE>
- ---------------
* Denotes a projection.
Source: Regional Financial Associates, 1997.
35
<PAGE> 43
Similarly, the projected compound annual job growth rate for the Company's
Core Markets is 2.62% through 2001, again almost double the national average of
1.34%. Three of Lexford's Core Markets (Atlanta, Orlando and Tampa) are each
projected to have a CAGR that is more than two times higher than the national
CAGR. These strong employment growth projections, reflected in the following
table, appear to be indicative of future increased demand for multifamily
housing in Core Markets.
EMPLOYMENT GROWTH
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
ANNUAL
%
METROPOLITAN 2001 % CAGR CHANGE % CAGR
AREA 1990 1996 1997 PROJECTED 1990-1997 1996-1997 1997-2001*
------------ ------- ------- ------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Atlanta, GA........ 1,897 2,348 2,402 2,709 3.43% 2.30% 3.05%
Columbus, OH....... 848 979 1,001 1,080 2.39 2.25 1.93
Indianapolis, IN... 867 980 995 1,056 1.99 1.55 1.51
Miami, FL.......... 1,070 1,136 1,162 1,241 1.19 2.30 1.66
Orlando, FL........ 744 887 922 1,078 3.11 4.00 3.98
Tampa, FL.......... 1,082 1,219 1,265 1,426 2.26 3.76 3.04
Average............ 1,085 1,258 1,291 1,432 2.52 2.63 2.62
National........... 109,400 119,500 122,100 128,800 1.58 2.18 1.34
</TABLE>
- ---------------
* Denotes a projection.
Source: Regional Financial Associates, 1997.
Favorable Supply/Demand Balance in Core Markets. Based on projections
published in the REIS Reports, the Core Markets have experienced stable
supply/demand dynamics. The ratio of construction to net absorption has remained
relatively steady, and is expected to be in balance through 2001. The only Core
Market which has experienced excess supply has been Atlanta, where construction
has outpaced the net absorption of multifamily housing by 1.7 to 1.0 in 1997.
Based on projections made in the REIS Reports, the construction to net
absorption ratio in Atlanta should stabilize at 1.1 by the end of 1998.
The following table sets forth the construction to net absorption ratios in
the Company's Core Markets for the past three years and projected through 2001.
The construction to net absorption ratio is calculated by dividing the number of
new units completed during a year by the net change in units occupied during
that year.
CONSTRUCTION TO NET ABSORPTION RATIO
<TABLE>
<CAPTION>
AVERAGE
ABSORPTION
1996 1997 1998* 1999* 2000* 2001* 1998-2001*
---- ---- ----- ----- ----- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Atlanta........................... 1.5 1.7 1.1 1.0 1.0 1.0 1.0
Columbus.......................... 0.9 1.0 1.2 1.2 1.2 1.2 1.2
Indianapolis...................... 0.8 0.9 1.1 1.1 1.1 1.1 1.1
Miami............................. 1.0 0.9 1.1 1.1 1.1 1.1 1.1
Orlando........................... 0.8 0.7 1.0 1.1 1.2 1.2 1.1
Tampa/St. Petersburg.............. 1.2 1.1 1.1 1.2 1.1 1.1 1.1
</TABLE>
- ---------------
* Denotes a projection.
Source: The REIS Reports, 1997.
36
<PAGE> 44
Potential for Rent and Occupancy Increases. The favorable supply/demand
balance and demographic growth have supported rent and occupancy increases in
the Company's Core Markets. The Company believes that it can continue to achieve
rent and occupancy increases through improved property management and its
capital expenditure program.
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. The Company expects to
invest approximately $36.0 million over the next five years on such Properties
in excess of its targeted annual capital spending of $400 per wholly-owned unit.
See "The Company -- Growth Strategy."
The differential between the Company's monthly rents and the average
multifamily rents in the Company's Core Markets ranged from $93 to $207 in the
third quarter of 1997. The Company believes that these spreads indicate (i) new
apartment construction is occurring predominantly in the higher rent segments
and (ii) the Company may have significant opportunities to improve its
Properties and increase rents without competing with newer developments or
apartments with more amenities.
As illustrated by the table below, from 1995 through 1997, the average
potential monthly rent of Properties, on a same store basis, in the Company's
Core Markets increased 4.24% compounded annually, while the increases in those
markets overall averaged 3.30%. The only Core Market where Lexford's rental rate
increases lagged the market significantly was Orlando; however, the Company's
increase in occupancy rates in Orlando was significantly higher than that of the
market overall.
AVERAGE POTENTIAL MONTHLY RENT (1)
<TABLE>
<CAPTION>
% CAGR
3Q95 3Q96 3Q97 3Q95-3Q97
------------------ ------------------ ------------------ ------------------
MARKETS MARKET LEXFORD MARKET LEXFORD MARKET LEXFORD MARKET LEXFORD
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Atlanta, GA........... $595 $402 $622 $428 $654 $447 4.84% 5.45%
Columbus, OH.......... 482 367 496 403 507 414 2.56 6.21
Indianapolis, IN...... 507 389 525 409 544 419 3.59 3.78
Miami, FL............. 679 482 684 508 702 518 1.68 3.67
Orlando, FL........... 536 406 557 418 575 431 3.57 3.03
Tampa, FL............. 515 376 532 392 550 407 3.34 4.04
Average............. 552 404 569 426 589 439 3.30 4.24
Other Markets......... -- 380 -- 399 -- 408 -- 3.62
Total Lexford......... -- 400 -- 422 -- 435 -- 4.28
</TABLE>
- ---------------
(1) Excludes the Guilford/Hidden Pointe Properties.
Source: M/PF Research, Inc.
37
<PAGE> 45
The Company has steadily increased rent while improving occupancy rates at
the Properties in its Core Markets. As shown by the following chart, while
Lexford's average physical occupancy (93.3% in the third quarter of 1997) is
still slightly below the average physical occupancy in its Core Markets (95.1%
in the third quarter of 1997), the Company has increased its average occupancy,
on a same store basis, at a rate considerably in excess of the increase in the
average occupancy level in its Core Markets. Management believes that Lexford's
average physical occupancy dropped slightly (.9%) in 1997, due in large part, to
aggressive rent increases in 1996 in a non-inflationary economy, but expects
that such occupancy rates will increase in 1998 with increased management focus.
In fact, physical occupancy for the Properties in the Core Markets in the first
quarter of 1998 averaged 93.6%, which represents a significant improvement over
the 91.8% for the first quarter of 1997.
AVERAGE PHYSICAL OCCUPANCY (1)
<TABLE>
<CAPTION>
% CHANGE
3Q95 3Q96 3Q97 3Q95-3Q97
------------------ ------------------ ------------------ ------------------
MARKETS MARKET LEXFORD MARKET LEXFORD MARKET LEXFORD MARKET LEXFORD
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Atlanta, GA 95.6% 92.7% 96.2% 96.1% 95.2% 93.9% (.42)% 1.29%
Columbus, OH 95.2 92.4 96.1 94.2 96.4 93.7 1.26 1.41
Indianapolis, IN 93.8 90.1 94.1 93.4 94.4 91.6 .64 1.66
Miami, FL 95.2 90.1 95.0 95.2 95.1 93.8 (.11) 4.11
Orlando, FL 91.9 88.5 93.8 94.9 94.8 95.1 3.16 7.46
Tampa, FL 94.5 91.4 94.8 91.6 94.4 91.9 (.11) .55
Average 94.4 90.9 95.0 94.2 95.1 93.3 .74 2.64
Other Markets......... -- 92.5 -- 94.6 -- 93.7 -- 1.30
Total Lexford......... -- 92.1 -- 94.5 -- 93.6 -- 1.63
</TABLE>
- ---------------
(1) Excludes the Guilford/Hidden Pointe Properties.
Source: M/PF Research, Inc.
COMPANY PROPERTIES
The Company's Properties are located in the following fourteen states:
Alabama, Florida, Georgia, Illinois, Indiana, Kentucky, Maryland, Michigan,
Ohio, Pennsylvania, South Carolina, Tennessee, Texas and West Virginia. During
1997, 37.6% of the Properties' collective net operating income was derived from
apartment communities in its Core Markets. The remainder of the Properties are
geographically diversified throughout the midwestern and southeastern United
States, which the Company believes has the effect of stabilizing its revenue
stream.
The Company owns all the equity interests in 437 Wholly-Owned Properties
consisting of 28,929 apartment units and has a minority equity interest in 65 of
the Non-Consolidating Properties consisting of 4,481 apartment units. The
Company expects to pursue the acquisition of third party equity interests in
such Non-Consolidating Properties as part of its growth strategy. In addition,
the Company has management contracts for all the Syndicated Properties and 13 of
the Guilford/Hidden Pointe Properties, consisting of a total of 7,036 units.
The Company has organized its Properties among five regions with a Regional
Director of Operations responsible for the management and oversight of several
District Managers in each region. The Company believes this structure enables it
to be flexible and responsive to individual property needs in a cost effective
manner, as well as provide key information at a level which permits management
to monitor market trends and fluctuations.
38
<PAGE> 46
The following table provides certain key performance data for the
Properties in each region (excluding the Guilford/Hidden Pointe Properties):
<TABLE>
<CAPTION>
AVERAGE MONTHLY AVERAGE NET OPERATING INCOME
NUMBER NUMBER RENT PHYSICAL OCCUPANCY ---------------------------
OF OF ------------------ ------------------ (IN THOUSANDS)
REGION PROPERTIES(1) UNITS(1) 1995 1996 1997 1995 1996 1997 1995 1996 1997
------ ------------- --------- ---- ---- ---- ---- ---- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northeast
Wholly-Owned 124 7,856 $402 $429 $438 93.5% 93.1% 93.0% $21,983 $23,253 $24,501
Syndicated 16 965 424 442 454 94.1 94.8 94.4 2,799 2,964 3,176
--- ------ ------- ------- -------
Total 140 8,821 24,782 26,217 27,677
Florida/Georgia
Region A
Wholly-Owned 93 6,859 426 445 459 91.4 93.4 92.3 17,957 19,635 20,880
Syndicated 18 1,225 448 472 486 94.4 94.5 93.0 3,392 3,689 3,814
--- ------ ------- ------- -------
Total 111 8,084 21,349 23,324 24,694
Florida/Georgia
Region B
Wholly-Owned 81 5,436 388 406 416 92.6 93.4 92.2 13,045 13,951 14,574
Syndicated 19 1,215 381 401 414 90.8 92.9 92.2 2,756 2,888 3,130
--- ------ ------- ------- -------
Total 100 6,651 15,801 16,839 17,704
Mid-Atlantic
Wholly-Owned 4 346 484 482 480 95.1 90.0 93.0 1,300 1,238 1,168
Syndicated 1 67 504 516 538 95.0 94.0 95.6 244 254 282
--- ------ ------- ------- -------
Total 5 413 1,544 1,492 1,450
Northern
Wholly-Owned 135 8,432 394 410 417 93.4 93.6 92.3 22,171 23,595 24,925
Syndicated 12 674 377 395 401 94.4 94.0 91.2 1,415 1,578 1,612
--- ------ ------- ------- -------
Total 147 9,106 23,586 25,173 26,537
OVERALL TOTALS
Wholly-Owned 437 28,929 404 423 433 92.9 93.4 92.7 76,456 81,672 86,048
Syndicated 66 4,146 404 424 437 93.2 94.1 92.8 10,606 11,373 12,014
--- ------ ------- ------- -------
Total 503 33,075 404 423 433 92.9 93.5 92.7 $87,062 $93,045 $98,062
=== ====== ======= ======= =======
<CAPTION>
PERCENTAGE
OF TOTAL
REGION 1997 NOI
------ ----------
<S> <C>
Northeast
Wholly-Owned 28.5%
Syndicated --
Total
Florida/Georgia
Region A
Wholly-Owned 24.3
Syndicated --
Total
Florida/Georgia
Region B
Wholly-Owned 17.0
Syndicated --
Total
Mid-Atlantic
Wholly-Owned 1.4
Syndicated --
Total
Northern
Wholly-Owned 28.8
Syndicated --
Total
OVERALL TOTALS
Wholly-Owned 100.0
Syndicated --
Total
</TABLE>
- ---------------
(1) At December 31, 1997, the Company had a partial equity interest in two
Properties which were subsequently sold. Data related to these Properties has
been included in the data relating to Syndicated Properties.
Physical Characteristics. The Properties consist of apartment properties
which, except for the Guilford/Hidden Pointe Properties, were constructed by the
Company's predecessor and are comprised almost entirely of single story
buildings of modular construction built between 1972 and 1989, with an average
age of 14 years. The Company believes that the standardized engineering and
controlled environment assembly of the component modules has resulted in
numerous competitive advantages, including durability, relatively uniform
maintenance programs, and a homogeneous "look" and "feel" throughout the
portfolio. The modular components were built off-site in plants owned and
operated by the Company's predecessor and then shipped to the Company's Property
sites. Modular components were then installed in various configurations to offer
a range of room and floor plan choices for residents. In certain instances two
or more such apartment communities were built in phases on contiguous sites, so
that the 501 Properties described herein are located on a total of 390 separate
sites. For purposes of this Prospectus, each such contiguous apartment community
is treated and referred to herein as a separate Property.
The Properties (excluding the Guilford/Hidden Pointe Properties) are
comprised of 23,318 one-bedroom units (70.7%), 4,825 studio efficiency units
(14.6%), 3,419 two-bedroom, one bath units (10.4%), 1,389 two-bedroom, two bath
units (4.2%) and 19 three-bedroom units (.1%). The modular nature of the
apartments' design allowed for flexible configurations which were believed
fitting for a location's particular demographics. Managers may reconfigure units
within an apartment community to produce more of the unit sizes which are in
greater demand.
39
<PAGE> 47
The average size of the Properties (excluding the Guilford/Hidden Pointe
Properties) is 64 units (average site size is 90 units), with the smallest
community being 13 units and the largest being 244 units. The average sizes of
the apartment units are 288 square feet for studios, 576 square feet for
one-bedroom units and 867 square feet for two-bedroom, two bath units. Each
Property site has multiple one story buildings, with each building averaging 7
units. The average density of the Properties is 14.0 units per acre.
The interiors of the units were designed for durability, standardized
maintenance and low cost turnover. As an example, instead of typical apartment
walls which require expensive painting before each new resident moves in, the
walls of the Properties' units are covered with a commercial grade vinyl wall
covering which only requires cleaning and has an estimated useful life of 20
years.
The Properties are located throughout the lower midwestern and southeastern
regions of the United States with 37.6% of net operating income from the
Properties in 1997 being derived from Properties in the Company's Core Markets.
Most of the Properties are located in suburban and rural markets. Many of the
sites were purchased for development in the 1970s and early 1980s in what were
outlying locations at the time and consequently less expensive than more mature,
developed areas. A number of these sites are in areas which have since witnessed
newer developments of both single family homes and apartments that typically
charge higher rents than the Company. As a result, the Company's apartment
communities often afford value-conscious residents an opportunity to reside in
neighborhoods where average rents and personal incomes are much higher than one
might traditionally expect in areas surrounding affordable multifamily housing.
Property Management. The Company operates as a self-managed REIT. The
Company believes it has extensive property management experience and skilled
personnel for its value-conscious market segment. It has managed substantially
all of its Properties since their initial construction and lease-up. The Company
further believes that it has substantially increased its property management
capabilities as a result of the acquisition of LPI. As of the date hereof, the
Company's property management personnel include 14 property management
executives who have Certified Property Management certification. The Company's
property management executives have an average of 14.5 years of professional
property management experience. The Company believes that its property
management executives and other property management employees have attained a
level of skill and experience superior to that which could otherwise be garnered
from property management for a single owner-employer managing its own properties
as a result of their experience in providing property management services for
independent property owners in arm's-length relationships.
The Company employs five regional managers, each of whom reports to the
Company's senior management (including, without limitation, the Company's Senior
Vice President--Property Management, Senior Vice President--Asset Management,
Vice President of Human Resources and Executive Vice President and Chief
Operating Officer). The Company also employs 29 district managers with
approximately six district managers in each region. The district managers report
to the regional managers within their respective region. Finally, the Company
employs 641 resident and maintenance managers on site at the Company's
Properties. The resident and maintenance managers are responsible for the
day-to-day operation and maintenance of the Properties. The Company's regional
and district managers, under the supervision of the Company's property
management executives, make all major business decisions regarding the
Properties for which they are responsible and have broad responsibilities that
include development and implementation of an annual budget and business plan for
each Property, formulation of leasing strategies, solicitation of residents and
leasing activities. The Company's resident managers are responsible for
accepting and processing lease applications from prospective residents,
execution and performance of approved resident applicants, rent collection,
resident service, maintenance, repair, preparing vacated units for rental and
supervision of cleaning, landscaping and security services.
Product Management. The Company's product management team consists of five
employees who are charged with the development and implementation of long term
strategic ownership and operating strategies for the Properties as well as
capital expenditure plans and deferred maintenance and renovation plans and
expenditures. In its allocation of capital expenditure dollars, the Company
analyzes expenditures as investments, making decisions on a property by property
basis taking into account all relevant factors and anticipated returns.
40
<PAGE> 48
PROPERTY MANAGEMENT AND RELATED SERVICES TO SYNDICATED PROPERTIES
As of the date hereof, the Company, through LPI, acts as the property
manager under management agreements related to each of the Syndicated Properties
and 13 Guilford/Hidden Pointe Properties. As such, LPI provides traditional
property management services to such Properties, and also engages in ancillary
services which include tenant application processing, provision of agency
services for renter's insurance and coordinating group purchasing. While a
portion of the revenues derived from LPI's services for the Syndicated
Properties and 13 Guilford/Hidden Pointe Properties constitutes Non-Qualifying
Income for REIT purposes, the Company does not believe that such Non-Qualifying
Income will jeopardize the Company's ability to qualify as a REIT under the
Code.
OPERATING PARTNERSHIP
The Company intends to contribute substantially all of its equity interests
in the Properties to the Operating Partnership and conduct substantially all of
its operations through the Operating Partnership, with the exception of the
services which LPI provides to the Syndicated Properties. Lexford generally has
full, exclusive and complete responsibility and discretion in the management and
control of the Operating Partnership. See "Operating Partnership Agreement" and
"Company History -- REIT Conversion."
COMPETITION
The apartment industry is highly competitive. The Company must compete to
attract and retain residents and to acquire and develop additional properties.
The number and quality of competitive properties in a particular area could have
a material effect on the Company's ability to attract and retain residents and
to maintain or increase rent levels and could require increased capital spending
to keep the Properties competitive. In addition, other forms of housing,
including manufactured housing community properties and single family housing,
provide alternatives to potential Property residents, especially in low interest
rate environments.
There are numerous owners and developers of real estate who will compete
with the Company if the Company seeks to develop new multifamily properties or
acquire undeveloped land or existing multifamily properties. The activities of
the competitors could cause the Company to pay a higher price for a new property
than it otherwise would have paid or may prevent the Company from purchasing a
desired property. Increased competition could adversely affect the Company's
financial condition and results of operations which would adversely affect the
Company's ability to make distributions to Shareholders, acquire or develop
additional properties and renovate existing Properties.
ENVIRONMENTAL MATTERS
Phase I environmental site assessments have been completed within the last
36 months for approximately 40% of the Properties in connection with mortgage
refinancing transactions. None of the Phase I environmental site assessments
revealed any environmental contaminant or condition that the Company believes
would have a material adverse effect on the Company or the Properties.
Nevertheless, it is possible that there exists material environmental
contamination of which the Company is unaware. See "Risk Factors -- Apartment
Industry Risks."
EMPLOYEES
On March 31, 1998, the Company employed 1,678 persons, 126 of whom were
located at the Company's Columbus, Ohio executive offices and operations center,
1,477 of whom were located at Property sites, and the remainder of whom were
based in locales convenient for the performance of district and regional
management supervisory duties.
INSURANCE
The Company carries blanket coverage for the Properties, with a single
aggregate policy limit and deductible. Management believes that its Properties
are covered adequately by commercial general liability
41
<PAGE> 49
insurance, including excess liability coverage, and commercial "all risks"
property insurance, including loss of rents coverage, with commercially
reasonable deductibles, limits and policy terms and conditions customarily
carried for similar properties. There are, however, certain types of losses
which may be uninsurable or not economically insurable, such as losses due to
loss of rents caused by earthquakes or floods. Should an uninsured loss occur,
the Company could lose both its invested capital in and anticipated profits from
a Property.
COMPANY HISTORY
BACKGROUND
Old Lexford (then known as Cardinal Industries, Inc.) was one of the
nation's largest manufacturers of modular housing during the early 1980s. Old
Lexford formed hundreds of limited partnerships which owned apartment
communities built with its modular housing and sold interests therein to third
parties. In the late 1980s, Old Lexford's revenues dropped precipitously due to
reduced demand for investments in its modular housing. The reduced demand was
attributable to the enactment of the Code in 1986, which made new construction
and investments in limited partnerships less advantageous, and the savings and
loan crisis, which decreased the availability of capital for real estate
development. Despite this reduced demand, Old Lexford's senior management during
the late 1980s (none of whom are members of the Company's senior management
team) did not sufficiently reduce its rate of manufacturing of modular housing
or the development of apartment communities in time to avoid severe losses and
liquidity problems.
In 1989, Old Lexford sought reorganization under Chapter 11 of the
Bankruptcy Code. In September 1992, the plan of reorganization was confirmed.
Under the plan of reorganization, Old Lexford stopped constructing modular
housing and stopped syndicating limited partnerships but continued to own,
operate and manage existing properties. In addition, Old Lexford changed its
name to Cardinal Realty Services, Inc. and became a public company by issuing
stock to its creditors. The initial trading price of Old Lexford's common stock
was $1.50 on December 18, 1992 (as adjusted to reflect the exchange of two
Common Shares for each share of Old Lexford common stock pursuant to the
Reincorporation Merger).
From September 1992 through fiscal year 1995, the Company focused on
renegotiating terms of mortgage indebtedness and preserving its investments in
Properties. Emerging from Chapter 11 with over $40 million of corporate debt and
no ability to obtain additional investment capital, the Company worked to
refinance Properties on an asset by asset basis. With only a handful of
properties generating positive cash flow, the Company initially struggled to
fund even the most modest capital investments.
Beginning in December 1993, the Company was successful in negotiating new
mortgage loans for two large pools of Properties, which loans were then
securitized and publicly sold in real estate mortgage investment conduits. The
Company reached a settlement which included mortgage refinancing of
approximately 150 Properties with the Resolution Trust Corporation during 1994.
Each of these transactions resulted in significant mortgage payoff discounts. In
1995 and 1996, the Company continued to cause Properties to refinance mortgage
indebtedness. In certain cases, mortgages refinanced in these years resulted in
prepayment of mortgages refinanced in 1994 on improved terms and in most cases
also generated funding for substantial deferred maintenance work on a portion of
the Properties.
As the portfolio gradually stabilized and much needed capital slowly became
available, the financial performance of the Properties improved significantly.
The revenues from 183 Properties where capital improvements were effected in
connection with two mortgage pool refinancings increased 16.3% from 1994 to
1997. Given these improved results, the Company is optimistic about the
potential to increase revenues through the Company's capital expenditure
program. See "The Company -- Growth Strategy" and "Business and
Properties -- Market Overview."
REIT CONVERSION
After careful consideration and consultation with its legal, tax and
financial advisers, Old Lexford announced on December 19, 1997 that it would
seek to elect to be taxed as a REIT. To help facilitate REIT qualification, Old
Lexford engaged in the following transactions (collectively referred to as the
"REIT Conversion"): (i) the Reincorporation Merger, (ii) the formation of the
Operating Partnership, and (iii) the sale of
42
<PAGE> 50
its third party management business. The REIT Conversion was structured so as to
allow the Company to carry on Old Lexford's 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 market valuations and access to capital
markets are more favorable to REITs as compared to traditional "C" corporation
real estate operating companies such as Old Lexford, and, therefore, the Company
believes its REIT status will enhance its ability to pursue its growth strategy.
Reincorporation Merger. On March 18, 1998, Old Lexford effected a
reincorporation merger of Old Lexford (an Ohio corporation) into the Company (a
Maryland real estate investment trust) with each Old Lexford shareholder
receiving two Common Shares for each share of Old Lexford common stock (the
"Reincorporation Merger"). Old Lexford effected the Reincorporation Merger to
take advantage of the Maryland real estate investment trust statute, enjoy
certain state income and franchise tax advantages and protect against an
inadvertent loss of REIT status in the future.
Formation of Operating Partnership. The Company and a wholly-owned
subsidiary of the Company formed Lexford Properties L.P. on March 30, 1998 (the
"Operating Partnership"). The Company intends to contribute substantially all of
its equity interests in the Properties to the Operating Partnership in exchange
for OP Units. The Operating Partnership was created to help facilitate future
tax deferred acquisitions. As of the date of this Prospectus, the Company owns
all the equity interests in the Operating Partnership, however, the Company may
cause the Operating Partnership to issue OP Units in the future to facilitate
such acquisitions. In furtherance of this objective, the Company is actively
soliciting the consent of Property lenders and/or third party equity holders, if
necessary, and has begun transferring such equity interests and complying with
other legal requirements in connection with such transfers. See "Operating
Partnership Agreement."
Pursuant to the Operating Partnership's partnership agreement (the
"Operating Partnership Agreement") the Company's subsidiary, as general partner,
will have complete and exclusive responsibility for the day to day management of
the Operating Partnership.
The Operating Partnership (through direct or indirect ownership interests
in Wholly-Owned Properties) will be entitled to receive all, or substantially
all, cash distributions from such Wholly-Owned Properties. The Operating
Partnership will also be entitled to all, or substantially all, cash flow
generated by refinancing the mortgages on Properties held by any such
Wholly-Owned Properties. Upon a sale or liquidation of a Wholly-Owned Property
owned by the Operating Partnership, the Operating Partnership will be entitled
to receive either cash or property, or both, with a fair market value equal to
its capital account balance in such Wholly-Owned Property.
The Operating Partnership, as a general partner and in some cases a limited
partner, in any Non-Consolidating Properties will generally be entitled to
receive between 1% and 50% of cash distributions from such Non-Consolidating
Properties (typically from 1% to 10% in the case of the Syndicated Properties).
The Operating Partnership will also generally be entitled to between 1% and 50%
of cash flow generated by refinancing the mortgages on such Properties. Upon a
sale or liquidation of a Non-Consolidating Property, the Operating Partnership
will be entitled to receive cash or property, or both, with a fair market value
equal to its capital account balance in such Non-Consolidating Property.
Such Non-Consolidating Property's profits and losses from operations or
losses on the sale of a Non-Consolidating Property will generally be allocated
to the Operating Partnership at a rate between 1% and 50%, except to the extent
the law requires a different allocation. Gains on the sale of any such
Non-Consolidating Property will generally be allocated first to any partner who
has been allocated cumulative losses in excess of cumulative profits, then to
any partner who has received cumulative distributions in excess of cumulative
profit allocations and thereafter from 1% to 50% to the Operating Partnership.
Allocations of taxable income or loss may vary from allocations of profits,
gains and losses for capital account purposes since Section 704(c) of the Code
requires that tax allocations take into account the variation between the fair
market value and tax basis of any property contributed by a partner to a
partnership (or by a member to a limited liability company).
43
<PAGE> 51
Sale of Third Party Management Business. Because of Code limitations on
the nature and amount of non-qualified income a REIT can have, the Company sold
all its interests in its property management services business provided to
apartment communities owned entirely by third parties (other than its management
contracts with 13 Guilford/Hidden Pointe Properties). The Company, however,
retained a majority of LPI's former executive officers and LPI's training
programs and property management systems to facilitate improved management of
the Company's Properties.
In order to facilitate the sale of the third party management business, the
Company caused LPI to form a subsidiary, Lexford Property Management, Inc.
("LPM") and contributed all of its third party management business assets
(including, without limitation, all its rights to management contracts for
properties owned entirely by third parties other than those relating to 13
Guilford/Hidden Pointe Properties) to LPM in exchange for all of LPM's issued
and outstanding preferred stock. Effective as of April 1, 1998, all the
outstanding capital stock of LPM was sold to a company formed for such purpose
by 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 LPI 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 and
LPI. Mr. Fimberg remains a Trustee of the Company. The Company received a
Promissory Note in the principal amount of $1,833,333 payable in nine equal
annual installments commencing April 1, 2000, in exchange for all the
outstanding preferred stock of LPM. Pursuant to the terms of the agreement
governing the sale, LPM will fund all LPI's leasehold payment obligations for
its offices in Dallas, Texas in exchange for LPM's access to an allocated
portion of such offices and use of LPI's human resources and property management
training personnel. See "Certain Transactions."
CONSOLIDATION PLAN
In conjunction with the REIT Conversion in November 1997, the Company
initiated the Consolidation Plan, the purpose of which was to minimize third
party equity interests in the entities owning the Properties (the "Consolidation
Plan"). Pursuant to the Consolidation Plan, out of a total of 405 Properties
partially-owned by the Company at such time, 326 Properties (the "Consolidating
Properties") have become Wholly-Owned Properties of the Company. Since January
1998, the Company has acquired all the third party equity interests in the
Consolidating Properties in exchange for $35.2 million in cash. As of March 31,
1998, the Company also had incurred approximately $211,000 of expenses for
legal, title and other costs associated with the Consolidation Plan, and expects
to incur approximately $1.2 million of additional expenses. With the proceeds
from the Offering, the Company will repay bank debt and pay expenses incurred in
connection with the Consolidation Plan. In addition, the Company intends to
pursue the acquisition of the third party equity interests in all or a
substantial portion of the Non-Consolidating Properties as part of its growth
strategy. The Company expects the Consolidation Plan to significantly simplify
the Company's organizational structure and improve the Company's ability to
manage the Consolidating Properties to maximize their financial returns. See
"Use of Proceeds" and "--REIT Conversion."
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
The Company's current investment objectives and policies set forth and the
other matters discussed below have been established by the Board and may be
amended or revised from time to time at the discretion of the Board without a
vote of Shareholders, except that changes in certain policies with respect to
conflicts of interest must be consistent with legal requirements. The Board is
currently comprised of seven members with four vacancies. The Board has no
present plans to fill the four vacancies prior to completion of the Offering.
The Board presently intends to continue the principal policies of the Company,
however, the Board has the discretion to revise, amend or replace all such
policies from time to time and there can be no assurance that the Board will not
do so at any time following the Offering.
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<PAGE> 52
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate. The Company's real
estate assets consist exclusively of multifamily apartment communities, which
are held primarily for the purpose of income and secondarily for capital
appreciation. During 1997, the Company derived 37.6% of its net operating income
from apartment communities in its Core Markets: Atlanta, Columbus, Indianapolis,
Miami, Orlando and Tampa. The remainder of the Company's Properties are
geographically diversified in the midwestern and southeastern United States. See
"Business and Properties--Company Properties."
The Company expects to grow by acquiring individual apartment properties or
portfolios of properties. Initially, the Company will seek to acquire the
Non-Consolidating Properties. The Company may acquire other properties or
portfolios in the future and intends to focus on multifamily apartment
properties in the value-conscious segment. Specifically, acquisition
opportunities may exist with respect to properties consisting of the same
prefabricated modules as the Properties. The Company's predecessor developed
approximately 359 apartment communities in addition to those included among the
Properties, some of which are located on sites contiguous to certain of the
Properties. Subject to the restrictions set forth in the Federal income tax laws
and Maryland law on REITs, the Company also may invest in other types of
properties or portfolios of properties which represent investment opportunities
at the discretion of management and the Board. Future acquisitions will not be
limited to any geographic area or to a specified percentage of the Company's
assets. See "The Company--Growth Strategy."
In addition, the Company plans to invest in the renovation of certain of
its Properties for which it believes disciplined capital spending will yield
substantial revenue increases and attractive returns. See "The Company -- Growth
Strategy" and "Management's Discussion and Analysis of Combined Property
Operating Results and the Company's Financial Condition -- Company Liquidity and
Capital Resources."
Following the Offering and the use of proceeds therefrom, the Company
intends to finance its acquisitions and capital expenditures with cash provided
by operating activities, funds expected to be available under the New Credit
Facility and through the issuance of Common Shares (or other securities) or OP
Units. The Company also may participate with other entities in property
ownership through joint ventures, partnerships or other types of co-ownership.
Equity investments may be subject to existing mortgage financing and other
indebtedness or such financing or indebtedness may be incurred in connection
with acquiring investments. Any such financing or indebtedness will have
priority over the Company's equity interest in such property. Where
circumstances warrant, the Company or the Operating Partnership may sell
Properties.
Investments in Real Estate Mortgages. While the Company will emphasize
equity real estate investments, it may, in its discretion, invest in mortgages,
deeds of trust and other similar interests. The Company does not intend to
invest significantly in mortgages or deeds of trust, but may acquire such
interests as a strategy for acquiring ownership of a property or the economic
equivalent thereof, subject to the investment restrictions applicable to REITs.
In addition, the Company may invest in mortgage related securities and/or may
seek to issue securities representing interests in such mortgage related
securities as a method of raising additional funds. See "Federal Income Tax
Consequences--Taxation of the Company as a REIT."
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. Subject to the gross income and asset tests
necessary for REIT qualification, the Company also may invest in securities of
entities engaged in real estate activities or securities of other issuers,
including for the purpose of exercising control over such entities. The Company
may acquire all or substantially all of the securities or assets of other REITs
or similar entities where such investments would be consistent with the
Company's investment policies. In any event, the Company does not intend that
its investments in securities will require it or the Operating Partnership to
register as an "investment company" under the Investment Company Act of 1940, as
amended.
Cash Investments. In addition, the Company may also from time to time
temporarily invest in interest bearing accounts and short term interest bearing
securities. See "Use of Proceeds."
Limitations on Investments. The Company does not intend to make
investments other than as described herein, although it may do so depending on
future circumstances. The Company intends to make investments at
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<PAGE> 53
all times in a manner consistent with the requirements of the Code in order for
the Company to qualify and maintain its status as a REIT unless, because of
changing circumstances or changes in the Code, in treasury regulations
thereunder or in the interpretations of either, the Board determines that it is
no longer in the best interests of the Company and Shareholders to qualify as a
REIT. The Company also intends to make investments in such a way that it will
not be treated as an investment company under the Investment Company Act of
1940, as amended.
DEBT POLICY
In order to maintain financial flexibility and facilitate rapid deployment
of capital over market cycles, the Company presently intends to operate with a
debt to total market capitalization ratio of less than 50% following the
Offering. After giving effect to the application of the net proceeds of the
Offering, the Company's debt to total market capitalization ratio (assuming a
Common Share offering price of $22) will be 43.3%. The Company expects to reduce
this ratio over time to a level more consistent with other comparable publicly
traded REITs. Following repayment of the Prepayable Debt, the Company will have
$341.1 million of mortgage indebtedness remaining on the Wholly-Owned Properties
of which $101.0 million becomes prepayable in the third and fourth quarters of
1998 with a weighted average constant of 8.98%, $106.8 million in 1999 with a
weighted average constant of 11.06%, $101.9 million becomes prepayable without
penalty in 2000 with a weighted average constant of 10.19%, and $17.3 million
becomes prepayable without penalty in 2001 with a weighted average constant of
9.89%. The Company intends to further reduce its interest expense and therefore
increase FFO and Cash Available for Distribution by retiring such indebtedness
as it becomes prepayable, subject to the availability of capital at pricing
which makes prepayment desirable. From time to time, the Company may increase
its debt to total market capitalization above 50% on a temporary basis by virtue
of borrowings under the New Credit Facility or otherwise for future
acquisitions, developments or capital improvements. Additionally, if the Common
Share market price decreases, the Company's debt to total market capitalization
ratio will increase even though the Company has not incurred additional debt.
See "Use of Proceeds."
In addition, the Company may from time to time reevaluate this policy and
decrease or increase such ratio in light of then current economic conditions,
relative costs to the Company of debt and equity capital, market values of its
Properties, growth and acquisition opportunities and other factors. There is no
limit on the debt to total market capitalization ratio imposed by either the
Declaration of Trust or Bylaws of the Company. To the extent the Board
determines to obtain additional capital, the Company may issue equity
securities, or cause the Operating Partnership to issue OP Units or retain
earnings (subject to provisions in the Code requiring distributions of taxable
income to maintain REIT status), or a combination of the foregoing. The Board
has the ability to change the Company's debt policy and may revise, amend or
abandon its debt policy without Shareholder approval. See "Risk Factors -- Risks
Related to the Declaration of Trust and Bylaws of the Company and Maryland Law."
To the extent that the Board determines to obtain debt financing in
addition to existing mortgage indebtedness, the Company intends to do so
generally through mortgages on Properties and the New Credit Facility; however,
the Company may also issue or cause the Operating Partnership to issue debt
securities in the future. Any such indebtedness may be recourse, non-recourse or
cross-collateralized and may contain cross-default provisions. The Company does
not have a policy limiting the number or amount of mortgages that may be placed
on any particular Property, but mortgage financing instruments usually limit
additional indebtedness on such Properties. In the future, the Company may seek
to extend, expand, reduce or renew the New Credit Facility, or obtain new credit
facilities or lines of credit, subject to its debt policy, for the purpose of
making acquisitions or capital improvements or providing working capital or
meeting the distribution requirements for REITs under the Code. See "The
Company -- Growth Strategy."
CONFLICTS OF INTEREST POLICY
The Declaration of Trust generally provides that a transaction between the
Company and a Trustee is not void or voidable solely because of (1) the common
interest, (2) the Trustee's presence at the board meeting where the Company
authorized, approved or ratified the transaction, or (3) the Trustee's vote
being counted in the Company's authorization, approval or ratification of the
transaction, if (a) the common interest is disclosed or
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<PAGE> 54
known to (i) the Board and the Board authorizes, approves or ratifies the
transaction by a vote of disinterested Trustees, or (ii) the Shareholders and
the Shareholders authorize, approve or ratify the transaction by a vote of
disinterested Shareholders, or (b) the transaction is fair and reasonable to the
Company.
The Declaration of Trust also generally provides that the Company may lend
money to, or guarantee an obligation of a Trustee or officer or other employee
or agent of the Company, if the loan, guarantee or assistance, in the judgment
of the Board, reasonably may be expected, directly or indirectly, to benefit the
Company, or is an advance made against indemnification in accordance with the
Declaration of Trust or the Bylaws.
OTHER POLICIES
The Board has authority, with or without Shareholder approval, to issue and
sell additional Common Shares, Preferred Shares or other debt or equity
securities which may be senior to the Common Shares (consistent with the debt
policy discussed above) and to repurchase or otherwise reacquire its Common
Shares, Preferred Shares or any other securities. The Company may engage in such
activities in the future although it has no current plans to do so. The
Operating Partnership has the authority to issue and sell OP Units in exchange
for properties or portfolios of properties and to repurchase OP Units, and may
engage in such activities in the future. Neither the Company nor the Operating
Partnership has engaged, and does not currently intend to engage, in trading,
underwriting or agency distribution or sale of securities of other issuers.
LENDING POLICIES
The Company may consider offering purchase money financing in connection
with the sale of Properties where the provision of such financing will increase
the value received by the Company for the Property sold. The Operating
Partnership also may make loans to joint ventures in which it may participate in
the future. The Company may also make loans to the Operating Partnership, joint
ventures and other entities in which it or the Operating Partnership have an
equity interest.
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<PAGE> 55
MANAGEMENT
The Trustees and executive officers of the Company, their ages as of March
31, 1998 and their positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John B. Bartling, Jr................. 40 Chief Executive Officer, President and Trustee
Mark D. Thompson..................... 40 Chief Financial Officer and Executive Vice President
Leslie B. Fox........................ 39 Chief Operating Officer and Executive Vice President
Bradley A. Van Auken................. 40 Senior Vice President -- General Counsel and
Secretary
Mark M. Culwell...................... 46 Senior Vice President -- Asset Management
Annette Hoover....................... 70 Senior Vice President -- Property Operations
Paul R. Selid........................ 35 Senior Vice President -- Acquisitions
Ronald P. Koegler.................... 45 Controller and Vice President
Michael F. Sosh...................... 36 Treasurer and Vice President
Stanley R. Fimberg................... 63 Trustee
Patrick M. Holder.................... 49 Trustee
Joseph E. Madigan.................... 65 Chairman of the Board and Trustee
Glenn C. Pollack..................... 40 Trustee
H. Jeffrey Schwartz.................. 43 Trustee
Robert J. Weiler..................... 62 Trustee
</TABLE>
Set forth below is certain biographical information concerning the Trustees and
executive officers of the Company.
John B. Bartling, Jr. Mr. Bartling is a Trustee and the Chief Executive
Officer and President of the Company and served in the equivalent capacities for
Old Lexford since December 1995. From April 1993 until December 1995, Mr.
Bartling was a Director in the Real Estate Products Group of CS First Boston, an
investment banking firm. He was an executive officer of NHP, Inc., a company
specializing in the development, ownership and management of real estate assets,
from June 1987 to April 1993. During his tenure with NHP, Inc., Mr. Bartling
also served as Executive Vice President of NHP Real Estate Corp., NHP Capital
Corp. and NHP Servicing Inc., wholly-owned subsidiaries of NHP, Inc. Mr.
Bartling is a member of the Executive Committee of the National Multi-Housing
Council.
Mark D. Thompson. Mr. Thompson is the Chief Financial Officer and
Executive Vice President of the Company and served in the same capacities for
Old Lexford since October 1996. Mr. Thompson was Executive Vice President of
Corporate Acquisitions of Old Lexford from April 1996 to October 1996 and a
partner in the law firm of McDonald, Hopkins, Burke & Haber from January 1995 to
April 1996. Prior to that time, Mr. Thompson was an associate and partner in the
law firm of Benesch, Friedlander, Coplan & Aronoff LLP from January 1985 and
October 1992, respectively.
Leslie B. Fox. Ms. Fox is the Chief Operating Officer and Executive Vice
President of the Company and served in the same capacity for Old Lexford since
December 1997. Prior to that, she had been Executive Vice
President -- Investment Management of Old Lexford since June 1997. Ms. Fox was
President of each of Asset Investors Corporation ("AIC") and Commercial Assets,
Inc. ("CAI"), both publicly traded real estate investment trusts, from October
1996 through May 1997. Prior to that time, Ms. Fox served as Executive Vice
President and Chief Operating Officer of CAI and AIC from February 1995 through
September 1996. From November 1993 through February 1995, Ms. Fox served as a
Vice President of AIC and as Executive Vice President, Chief Investment Officer
and Assistant Secretary of CAI. Ms. Fox served as Senior Vice President of NHP
Capital
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<PAGE> 56
Corp., a subsidiary of NHP, Inc. from December 1991 to October 1993 and Vice
President of Finance/MIS of NHP Property Management, Inc., a subsidiary of NHP,
Inc. from November 1987 to November 1991.
Bradley A. Van Auken. Mr. Van Auken is the Company's Senior Vice
President, General Counsel and Secretary, serving in such capacity for the
Company since January 1998. Mr. Van Auken was a partner and associate with the
law firm of Benesch, Friedlander, Coplan & Aronoff LLP from January 1992 and
November 1986, respectively.
Mark M. Culwell. Mr. Culwell has served as Senior Vice President -- Asset
Management of the Company since December 1997 and served as Construction
Services Supervisor of LPI from April through December of 1997. Mr. Culwell was
Vice President -- Real Estate Investment and Construction of Cornerstone Housing
Corp., a company engaged in real estate investment and construction, from
October 1991 through March 1997. He was a southwest partner of Trammell Crow
Residential from October 1982 to December 1986.
Annette Hoover. Ms. Hoover was elected as the Senior Vice
President -- Property Operations in December 1997. Prior to that time, Ms.
Hoover was a Vice President of LPI since August 1996. From 1988 to August 1996,
Ms. Hoover was Vice President of Lexford Partners, a property management firm
and the predecessor of LPI prior to its acquisition by the Company.
Paul R. Selid. Mr. Selid is Senior Vice President -- Acquisitions of the
Company and served in the same capacity for Old Lexford since April 1996. Prior
to that time, Mr. Selid was Vice President of Acquisitions of NHP, Inc. since
December 1994. Mr. Selid also served as Vice President of Asset Management &
Underwriting of NHP, Inc. from September 1992 to December 1994. Mr. Selid
previously served as Vice President of Finance of Hall Financial Group, Inc.
from January 1990 to September 1992.
Ronald P. Koegler. Mr. Koegler is Vice President and Controller of the
Company and served in the same capacities for Old Lexford since October 1996.
Mr. Koegler served as Vice President and Treasurer of Old Lexford from January
1996 to October 1996. Prior to that time, Mr. Koegler was Controller of Old
Lexford since April 1992. He served as Assistant Controller of Old Lexford from
October 1989 to April 1992.
Michael F. Sosh. Mr. Sosh is Vice President and Treasurer of the Company
and served in the same capacities for Old Lexford since January 1997. Prior to
that time, Mr. Sosh served as Divisional Vice President and Assistant Treasurer
of The Bon-Ton Stores, Inc. since March 1995. He previously served as Manager of
Financial Planning and Financial Analyst of The Bon-Ton Stores, Inc. from June
1987 to March 1995. Mr. Sosh was a banking officer with Meridian Bancorp, Inc.
from June 1983 to May 1987.
Stanley R. Fimberg. Mr. Fimberg is a Trustee of the Company and served in
an equivalent capacity for Old Lexford since October 1997. Mr. Fimberg has been
the managing member of FSC Realty, LLC, a real estate firm specializing in the
ownership of multifamily properties, since March 1996. Mr. Fimberg served as
President of Fimberg Realty, Inc., a co-venturer of Lexford Partners, a Texas
joint venture and manager of multifamily properties and successor to Brentwood
Properties (and the predecessor to LPI), from 1988 until July 1996. Mr. Fimberg
has devoted his energies solely to real estate investment activities since 1970.
Prior to the time, Mr. Fimberg served as an attorney with O'Melveny & Myers and
worked in the office of the Tax Legislative Counsel of the U.S. Treasury
Department in Washington, D.C.
Patrick M. Holder. Mr. Holder is a Trustee of the Company and served in an
equivalent capacity for Old Lexford since October 1997. Mr. Holder served as an
Executive Vice President of the Company until December 1997 and has served as
President of LPI since August 1996. Mr. Holder had previously been President of
Lexford Partners, a Texas joint venture and manager of multifamily properties
and successor to Brentwood Properties (and the predecessor to LPI) from 1988
through July 1996. Mr. Holder previously served as President of Brentwood
Properties, a property management firm, from 1987 to 1988.
Joseph E. Madigan. A corporate financial consultant, Mr. Madigan also is a
Director of Donatos Pizza, Inc., VOCA Holdings, Inc., Columbus Show Case Company
and The Frank Gates Service Company. Mr. Madigan is a Trustee of the Company and
served in an equivalent capacity for Old Lexford since September 1992 and
currently serves as Chairman of the Company's Board and served as Acting
Chairman and Chief Executive Officer of Old Lexford from June 1995 to December
1995. Mr. Madigan was Executive Vice President,
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<PAGE> 57
Chief Financial Officer and Director of Wendy's International, Inc. from July
1980 through December 1987. He was Treasurer and Vice President of Borden, Inc.
between October 1968 and June 1980.
Glenn C. Pollack. Mr. Pollack is a Trustee of the Company and served in an
equivalent capacity for Old Lexford since December 1992. Mr. Pollack has been
Managing Director and Principal of Brown, Gibbons, Lang & Company, L.P., an
investment banking firm located in Cleveland, Ohio, since January 1997. Mr.
Pollack served as President of Zeus Advisors, Inc., a consulting firm located in
Cleveland, Ohio from November 1994 to December 1996. From September 1989 to
October 1994, Mr. Pollack was Chief Executive Officer of A & W Foods, Inc., a
regional food distributor. Mr. Pollack was a senior manager in the Corporate
Strategies Group at the Cleveland office of Price Waterhouse in 1988 and 1989,
and served in a similar capacity from 1984 to 1988 with Siedmann & Associates, a
Cleveland based consulting firm.
H. Jeffrey Schwartz. Mr. Schwartz is a Trustee of the Company and served
in an equivalent capacity for Old Lexford since December 1992. Mr. Schwartz has
been a partner in the law firm of Benesch, Friedlander, Coplan & Aronoff LLP
since 1988 and Chairman of the firm's Business Reorganizations Department since
1991. Prior to joining the law firm in 1983, Mr. Schwartz was a law clerk to the
Honorable William J. O'Neill, United States Bankruptcy Court for the Northern
District of Ohio, from 1982 to 1983 and to the Honorable Joseph T. Molitoris,
United States Bankruptcy Court for the Northern District of Ohio, from 1980 to
1982. Mr. Schwartz was a faculty member of the Bankruptcy Litigation Institute,
has written numerous articles on securities, real estate and business
reorganization law and is a former Chairman of the Section of Bankruptcy and
Commercial Law of the Cleveland Bar Association.
Robert J. Weiler. Mr. Weiler is a Trustee of the Company and served in an
equivalent capacity for Old Lexford since September 1992. Mr. Weiler served as
Acting President and Chief Operating Officer of Old Lexford from June 1995 to
December 1995. A central Ohio real estate developer, Mr. Weiler has been
associated with The Robert Weiler Company since 1957 and has been Chairman of
the Board since 1987. A real estate consultant since 1970, Mr. Weiler also is a
licensed real estate appraiser and a member of the Appraisal Institute, having
served as President of the Ohio Chapter. He was a Director of the National and
Ohio Association of Realtors and is a past President of the Columbus Board of
Realtors. Mr. Weiler is a member of the Executive Committee of the Capital
University Board of Trustees. He also was a member of the Columbus Board of
Education where he served as its President in 1987.
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<PAGE> 58
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning beneficial
ownership of Common Shares as of April 27, 1998 by: (i) each person who is known
by the Company to be the beneficial owner of more than five percent of the
outstanding Common Shares, (ii) each of the Trustees, (iii) the five most highly
compensated current executive officers of the Company and the five most highly
compensated executive officers who were serving as executive officers at
December 31, 1997 and (iv) the Trustees and executive officers of the Company as
a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
AMOUNT AND BENEFICIALLY OWNED
NATURE OF --------------------- UNVESTED
BENEFICIAL BEFORE AFTER COMPENSATORY
NAME OWNERSHIP (a) OFFERING OFFERING SHARES (b)
---- ------------- --------- --------- ------------
<S> <C> <C> <C> <C>
Bank of America National..................... 1,027,858 11.0 5.0 --
Trust & Savings Association
333 South Hope Street
Los Angeles, CA 90071
Trustees and Executive Officers
John B. Bartling, Jr......................... 268,880(c) 2.9 1.3 48,000
Mark D. Thompson............................. 156,546(d) 1.7 * 32,000
Leslie B. Fox................................ 43,655(e) * * 113,000
Bradley A. Van Auken......................... 12,000(f) * * 27,000
Ronald P. Koegler............................ 39,194(g) * * 16,000
Michael F. Sosh.............................. 23,666(h) * * 14,334
Stanley R. Fimberg........................... 210,000(i) 2.3 1.0 11,419
Patrick M. Holder............................ 200,000 2.2 * --
Joseph E. Madigan............................ 51,650(j) * * 21,667
Glenn C. Pollack............................. 55,614(k) * * 15,512
H. Jeffrey Schwartz.......................... 70,938(l) * * 15,512
Robert J. Weiler............................. 122,098(m) 1.3 * 15,000
All present Trustees and executive officers
of the Company as a group (16 persons)..... 1,458,582(n) 15.5 7.1 354,001
</TABLE>
* less than one percent
- ---------------
(a) Unless otherwise indicated, the beneficial owner has sole voting and
investment power over these shares subject to the spousal rights, if any,
of the spouses of those beneficial owners who have spouses.
(b) The amounts reported in this column consist of restricted share awards
issued pursuant to the Company's 1997 Performance Equity Plan and the
Company's Incentive Equity Plan and other restricted share awards granted
pursuant to certain individual employees' employment agreements
(collectively, "Restricted Shares"), which will not vest within 60 days,
held on behalf of the specified individual by the Cardinal Realty Services,
Inc. Executive Deferred Compensation Rabbi Trust ("Rabbi Trust") and as to
which the specified individual has neither investment nor voting power, and
Common Shares subject to options which are not exercisable within 60 days.
These amounts are not deemed to be beneficially owned and are not included
in the column "Amount and Nature of Beneficial Ownership."
(c) This amount includes 40,000 Common Shares subject to options which are
exercisable within 60 days. This amount also includes 218,880 Common Shares
held on behalf of Mr. Bartling by the Rabbi Trust which shares Mr. Bartling
has the right to receive under certain circumstances within 60 days. This
amount does not include 48,000 Restricted Shares held on behalf of Mr.
Bartling by the Rabbi Trust as to which shares Mr. Bartling has neither
investment nor voting power.
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<PAGE> 59
(d) This amount includes 25,000 Common Shares subject to options which are
exercisable within 60 days. This amount also includes 126,546 Common Shares
held on behalf of Mr. Thompson by the Rabbi Trust which shares Mr. Thompson
has the right to receive under certain circumstances within 60 days. This
amount does not include 32,000 Restricted Shares held on behalf of Mr.
Thompson by the Rabbi Trust as to which shares Mr. Thompson has neither
investment nor voting power.
(e) This amount does not include 25,000 Common Shares subject to options which
are not exercisable within 60 days. This amount includes 43,655 Common
Shares held on behalf of Ms. Fox by the Rabbi Trust which shares Ms. Fox
has the right to receive under certain circumstances within 60 days. This
amount does not include 88,000 Restricted Shares held on behalf of Ms. Fox
by the Rabbi Trust as to which shares Ms. Fox has neither investment nor
voting power.
(f) This amount includes 11,000 Common Shares held on behalf of Mr. Van Auken
by the Rabbi Trust which shares Mr. Van Auken has the right to receive
under certain circumstances within 60 days. This amount does not include
5,000 Common Shares subject to options which are not exercisable within 60
days. This amount does not include 22,000 Restricted Shares held on behalf
of Mr. Van Auken by the Rabbi Trust as to which shares Mr. Van Auken has
neither investment nor voting power.
(g) This amount includes 856 Common Shares held in Mr. Koegler's 401(k)
retirement plan account and 5,210 Common Shares subject to options which
are exercisable within 60 days but does not include 5,000 Common Shares
subject to options which are not exercisable within 60 days. This amount
also includes 22,968 Common Shares held on behalf of Mr. Koegler by the
Rabbi Trust which shares Mr. Koegler has the right to receive under certain
circumstances within 60 days. This amount does not include 11,000
Restricted Shares held on behalf of Mr. Koegler by the Rabbi Trust as to
which shares Mr. Koegler has neither investment nor voting power.
(h) This amount includes 1,666 Common Shares subject to options which are
exercisable within 60 days but does not include 3,334 Common Shares subject
to options which are not exercisable within 60 days. This amount also
includes 22,000 Common Shares held on behalf of Mr. Sosh by the Rabbi Trust
which shares Mr. Sosh has the right to receive under certain circumstances
within 60 days. This amount does not include 11,000 Restricted Shares held
on behalf of Mr. Sosh by the Rabbi Trust as to which shares Mr. Sosh has
neither investment nor voting power.
(i) This amount includes 22,000 Common Shares held on behalf of Mr. Fimberg by
the Rabbi Trust which shares Mr. Fimberg has the right to receive under
certain circumstances within 60 days. This amount also includes 188,000
shares of which Mr. Fimberg is attributed beneficial ownership by reason of
his position as managing member of FSC Realty, LLC. This amount does not
include 11,419 Restricted Shares held on behalf of Mr. Fimberg by the Rabbi
Trust as to which shares Mr. Fimberg has neither investment nor voting
power.
(j) This amount includes 23,000 Common Shares subject to options which are
exercisable within 60 days but does not include 4,000 Common Shares subject
to options which are not exercisable within 60 days. This amount also
includes 23,333 Common Shares held on behalf of Mr. Madigan by the Rabbi
Trust which shares Mr. Madigan has the right to receive under certain
circumstances within 60 days and 5,317 Restricted Shares as to which Mr.
Madigan has voting power but does not have investment power. This amount
does not include 17,667 Restricted Shares held on behalf of Mr. Madigan by
the Rabbi Trust as to which shares Mr. Madigan has neither investment nor
voting power.
(k) This amount includes 28,000 Common Shares subject to options which are
exercisable within 60 days but does not include 4,000 Common Shares subject
to options which are not exercisable within 60 days. This amount also
includes 22,000 Common Shares held on behalf of Mr. Pollack by the Rabbi
Trust which shares Mr. Pollack has the right to receive under certain
circumstances within 60 days and 6,126 Restricted Shares as to which Mr.
Pollack has voting power but does not have investment power. This amount
does not include 11,512 Restricted Shares held on behalf of Mr. Pollack by
the Rabbi Trust as to which shares Mr. Pollack has neither investment nor
voting power.
(l) This amount includes 43,000 Common Shares subject to options which are
exercisable within 60 days but does not include 4,000 Common Shares subject
to options which are not exercisable within 60 days. This amount also
includes 22,000 Common Shares held on behalf of Mr. Schwartz by the Rabbi
Trust which
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<PAGE> 60
shares Mr. Schwartz has the right to receive under certain circumstances
within 60 days and 5,938 Restricted Shares as to which Mr. Schwartz has
voting power but does not have investment power. This amount does not
include 11,512 Restricted Shares held on behalf of Mr. Schwartz by the
Rabbi Trust as to which shares Mr. Schwartz has neither investment nor
voting power.
(m) This amount includes 95,000 Common Shares subject to options which are
exercisable within 60 days but does not include 4,000 Common Shares subject
to options which are not exercisable within 60 days. This amount also
includes 22,000 Common Shares held on behalf of Mr. Weiler by the Rabbi
Trust which shares Mr. Weiler has the right to receive under certain
circumstances within 60 days and 5,098 Restricted Shares as to which Mr.
Weiler has voting power but does not have investment power. This amount does
not include 11,000 Restricted Shares held on behalf of Mr. Weiler by the
Rabbi Trust as to which shares Mr. Weiler has neither investment nor voting
power.
(n) This amount includes 856 Common Shares held in individual Trustee and
executive officer 401(k) retirement plan accounts, 20,744 Restricted Shares
as to which certain Trustees have voting power but do not have investment
power, 611,866 Common Shares held on behalf of certain Trustees and
executive officers by the Rabbi Trust which shares such Trustees and
executive officers have the right to receive under certain circumstances
within 60 days, and 825,116 Common Shares subject to options which are
exercisable within 60 days. This amount does not include 69,334 Common
Shares subject to options which are not exercisable within 60 days. This
amount does not include 284,667 Restricted Shares held on behalf of certain
Trustees and executive officers by the Rabbi Trust as to which shares such
Trustees and executive officers have neither investment nor voting power.
Following the Offering, the Company's Board may propose a new equity
incentive compensation plan substantially consistent with those of other
comparable publicly traded REITs. The Company anticipates that any such new
equity incentive compensation plan will provide for aggregate Common Share
compensation to not exceed five percent of the Company's issued and outstanding
Common Shares. Such new incentive compensation plan will be subject to the
approval of the Shareholders.
CERTAIN TRANSACTIONS
In order to facilitate the sale of the third party management business, the
Company caused LPI to form LPM and contributed all of its third party management
business assets (including, without limitation, all its rights to management
contracts for Properties owned entirely by third parties other than those
relating to 13 Guilford/Hidden Pointe Properties) to LPM in exchange for all of
LPM's issued and outstanding preferred stock. Effective as of April 1, 1998, all
the outstanding capital stock of LPM was sold to a company formed for such
purpose by 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 LPI 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 and LPI. Mr. Fimberg remains a Trustee of the Company. The Company
received a Promissory Note in the principal amount of $1,833,333 payable in nine
equal annual installments commencing April 1, 2000 in exchange for all the
outstanding preferred stock of LPM. The promissory note bears interest at a rate
of 6.0% per annum until April 1, 2000 and 11.0% per annum thereafter. Pursuant
to the terms of the agreement governing the sale, LPM will fund all LPI's
leasehold payment obligations for its offices in Dallas, Texas in exchange for
LPM's access to an allocated portion of such offices and use of LPI's human
resources and property management training personnel. 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.
For services rendered to the Company in his capacity as Chairman of the
Board, Joseph E. Madigan receives a monthly retainer of $5,000 and an annual
restricted share grant of 4,000 Common Shares, vesting equally over a three year
period.
Robert J. Weiler, a Trustee of the Company, is a principal of Americana
Investment Company, the lessor of the building housing the Company's operation
center in Reynoldsburg, Ohio. Mr. Weiler did not participate in the
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Company's decision to select its office space or in the lease negotiations.
Management believes that the lease terms for the Company's executive offices are
competitive with commercial lease rates in the Columbus, Ohio market.
DESCRIPTION OF COMMON SHARES
The following description of the Common Shares, Preferred Shares, Excess
Shares and of certain provisions of the Declaration of Trust and Bylaws and
Maryland law is a summary of and is qualified in its entirety by reference to
the Declaration of Trust and the Bylaws, copies of which are on file with the
Commission.
GENERAL
The Declaration of Trust authorizes the issuance of up to 110,000,000
shares of beneficial interest consisting of 50,000,000 Common Shares, 5,000,000
Preferred Shares, 5,000,000 Excess Preferred Shares, and 50,000,000 Excess
Common Shares. All the shares have a par value of one cent ($0.01) per share. As
of April 30, 1998, approximately 9,355,952 Common Shares, and no Preferred
Shares nor any Excess Shares were issued and outstanding. The Declaration of
Trust authorizes the Board to cause the Company to issue authorized but unissued
shares without Shareholder approval. The Board may, without Shareholder
approval, amend the Declaration of Trust from time to time, to increase or
decrease the aggregate number of shares or the number of shares of any class or
series that the Company has authority to issue. The Declaration of Trust
authorizes the Board to classify or reclassify any unissued shares by setting or
changing the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to distributions, qualifications or terms
or conditions of redemption of such shares.
The issued and outstanding Common Shares are, and the Common Shares
issuable in the Offering will be, upon receipt of payment therefor and delivery
thereof, duly authorized, validly issued, fully paid and nonassessable. Both
Maryland statutory law governing real estate investment trusts organized under
the laws of that state and the Declaration of Trust provide that no Shareholder
will be personally liable for any obligation of the Company, solely by reason of
being a Shareholder. Pursuant to the Declaration of Trust, the Company must
indemnify a Shareholder against any claim or liability to which the Shareholder
may become subject solely by reason of his being or having been a Shareholder,
and that the Company shall appoint counsel for, defend, and bear the expenses
and costs of such defense, for each Shareholder for reasonable expenses incurred
by him in connection with any such claim or liability. The obligations of the
Company to indemnify or defend any Shareholder or pay his expenses do not extend
to any liability or obligation of the Shareholder under the business combination
provisions or the control share acquisition provisions of Maryland law, the
Ownership Restrictions or control share provisions of the Declaration of Trust,
or certain provisions of the Securities Act or the Exchange Act. A Shareholder
is not entitled to indemnification with respect to a suit by or on behalf of the
Company or by any other Shareholder for money damages (i) for an improper
benefit or profit in money, property or services, or (ii) for active and
deliberate dishonesty that was material to the cause of action adjudicated in
the proceeding.
COMMON SHARES
Each Common Share entitles the holder thereof to one vote on all matters
submitted to a vote of holders of Common Shares, including the election of
Trustees. Since there is no cumulative voting in the election of Trustees, the
holders of a simple majority of the outstanding Common Shares entitled to vote
on the election of Trustees have the power to elect all of the Trustees to be
elected at a given meeting and the holders of the remaining shares, by
themselves, would not be able to elect any Trustees at that meeting. Holders of
Common Shares are entitled to receive ratably, in proportion to the number of
Common Shares held by them, such dividends and distributions as may be declared
by the Board from time to time, after the payment of any dividend or making of
any distribution to the holders of any class or series of Preferred Shares to
the extent that the then existing terms of such class or series grant them
priority over the holders of Common Shares. The Trustees will endeavor to
declare and pay such distributions as are necessary for the Company to qualify,
and continue to qualify, as a REIT under the Code. Upon the liquidation,
dissolution or winding up of the Company, holders of Common Shares are entitled
to receive ratably, in proportion to the number of Common Shares held by them,
the
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assets remaining after the payment of creditors and the holders of any class or
series of Preferred Shares to the extent that the then existing terms of such
class or series grant them priority over holders of Common Shares. Holders of
Common Shares have no preemptive rights to subscribe to any securities of the
Company, and no conversion or redemption rights. See "Distribution Policy."
The transfer agent for the Common Shares is: Fifth Third Bank, Corporate
Trust Administration, Fifth Third Center, Mail Drop 109002, Cincinnati, Ohio
45263.
PREFERRED SHARES
Preferred Shares may be issued from time to time in one or more classes or
series in such amounts and with such preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or distributions,
qualifications and terms or conditions of redemption as may be fixed by the
Board. The Board may, without prior Shareholder approval, issue Preferred Shares
with dividend, liquidation, conversion, voting or other rights which could
adversely affect the relative voting power or other rights of common
Shareholders. Preferred Shares could be used, under certain circumstances, as a
method of discouraging, delaying, or preventing a change in control of the
Company. Although the Company has no present intention of issuing any Preferred
Shares, there can be no assurance that it will not do so in the future. If the
Company issues Preferred Shares, such issuance may have a dilutive effect upon
common Shareholders, including the purchasers of Common Shares offered hereby.
See "Risk Factors -- Risks Related to the Declaration of Trust and Bylaws of the
Company and Maryland Law"
EXCESS SHARES
The Declaration of Trust provides that no holder may own, or be deemed to
own under the applicable attribution rules of the Code, Common Shares or
Preferred Shares in excess of the Beneficial Ownership Limitations or the
Constructive Ownership Limitations and that no purported transfer of Common
Shares or Preferred Shares may be given effect if it results in ownership of all
of the outstanding Common Shares and Preferred Shares by fewer than 100 persons
(collectively the "Ownership Restrictions"). In the event of a purported
transfer or other event that would, if effective, result in Common Share or
Preferred Share ownership in violation of the Ownership Restrictions, the Shares
in excess of the Ownership Restrictions which would otherwise be held by such
holder will be automatically designated Excess Shares and, in accordance with
the Declaration of Trust, transferred automatically to the special trust (the
"Special Trust") for the exclusive benefit of one or more charitable
beneficiaries.
The Excess Shares will be held by the Special Trust for the exclusive
benefit of one or more charitable beneficiaries whose ownership of Excess Common
Shares or Excess Preferred Shares will not violate the Ownership Restrictions
and which is an organization described in Sections 170(b)(1)(A) and 170(c)(2) of
the Code (a "Charitable Beneficiary"). The Company will appoint a trustee of the
Special Trust who is unaffiliated with the Company or with any person involved
in the transfer which required a designation of Excess Shares.
Holders of Excess Shares shall not benefit economically from ownership of
any Excess Shares held in the Special Trust, shall have no rights to dividends
and shall not possess any rights to vote the Excess Shares. The trustee shall
have all voting power and rights to dividends with respect to the Excess Shares,
which rights shall be exercised for the exclusive benefit of the Charitable
Beneficiary. Any distribution paid prior to the discovery by the Company that
the Excess Shares have been transferred to the Special Trust must be paid to the
trustee upon demand.
As soon as reasonably practicable, and in an orderly fashion so as not to
affect in a materially adverse manner the market price of the shares, the
trustee will sell the Excess Shares to a person whose ownership of the Excess
Shares will not violate the Ownership Restrictions. The transferee in the
transaction that resulted in the designation and transfer of Excess Shares to
the Special Trust will receive the lesser of (i) the price paid by the
transferee in such transaction and (ii) the price received by the trustee (net
of any commissions and other expenses of sale) in the sale of the Excess Shares.
Any net sales proceeds in excess of the amount paid to the transferee will
immediately be paid to the Charitable Beneficiary.
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Upon sale of the Excess Shares, such Excess Shares will be automatically
exchanged for an equal number of Common Shares or Preferred Shares (depending on
the type and class or series of shares that were originally designated as such
Excess Shares).
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT for Federal income tax purposes, it
must meet certain requirements concerning the ownership of its outstanding
shares. Specifically, not more than 50% in value of the outstanding shares may
be owned, directly or indirectly, by five or fewer individuals (as defined in
the Code to include certain entities) during the last half of a taxable year
(other than the first year of the Company's existence as a REIT) or during a
proportionate part of a shorter taxable year, and the Company must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year (other than the first REIT year) or during a proportionate part of a
shorter taxable year. See "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT."
The Declaration of Trust contains a number of provisions which restrict the
ownership and transfer of shares and which are designed to safeguard the Company
against an inadvertent loss of REIT status. In order to prevent any Shareholder
from owning shares in an amount which would cause more than 50% of the value of
the outstanding shares to be held by five or fewer individuals, the Declaration
of Trust contains Beneficial Ownership Limitations that restrict, with certain
exceptions, Shareholders from owning under the applicable attribution rules of
the Code, more than 9.2% of the outstanding Common Shares or more than 9.8% of
the outstanding shares of any other class or series. The Company currently has
only Common Shares outstanding. Any Shareholder who owned, under the applicable
attribution rules of the Code, more than 9.2% of the Common Shares immediately
after the Reincorporation Merger may continue to do so subject to the
restriction that its Common Shares may not be transferred if, as a result of the
transfer more than 50% of the value of the outstanding Shares would be held by
five or fewer individuals. The Company believes that, prior to the closing of
the Offering, only Bank of America National Trust and Savings Association will
have beneficially owned Common Shares in excess of the Beneficial Ownership
Limitations. Following the Offering, Bank of America's percentage ownership of
the outstanding Common Shares is expected to fall below the 9.2% level. See
"Federal Income Tax Considerations -- Taxation of the Company as a REIT."
Under the Code, rental income received by a REIT from persons in which the
REIT is treated, under the applicable attribution rules of the Code, as owning a
10% or greater interest, does not constitute qualifying income for purposes of
the income requirements that REITs must satisfy. For these purposes, the Company
is treated as owning any stock owned, under the applicable attribution rules of
the Code, by a person that owns 10% or more of the value of the outstanding
shares. Therefore, in order to ensure that rental income of the Company will not
be treated as nonqualifying income under the rule described above, and thus to
ensure that there will not be an inadvertent loss of REIT status as a result of
the ownership of shares by a tenant, or a person that holds an interest in a
tenant, the Declaration of Trust also contains a constructive ownership
limitation (the "Constructive Ownership Limitation") that restricts, with
certain exceptions, Shareholders from owning, under the applicable attribution
rules of the Code (which are different from those applicable with respect to the
Beneficial Ownership Limitations), more than 9.2% of the outstanding Common
Shares or 9.8% of the shares of any class or series. Any Shareholder who owns,
under the applicable attribution rules of the Code, shares in excess of the
Constructive Ownership Limitation immediately after the Reincorporation Merger
generally will not be subject to the Constructive Ownership Limitation. Subject
to an exception for tenants and subtenants from whom the REIT receives, directly
or indirectly, rental income that is not in excess of a specified threshold, the
Declaration of Trust also contains restrictions that are designed to ensure that
Shareholders who own, under the applicable attribution rules of the Code, shares
in excess of the Constructive Ownership Limitation immediately after the
Reincorporation Merger will not, in the aggregate, own an interest in a tenant
or subtenant of the REIT of sufficient magnitude to cause rental income
received, directly or indirectly, by the REIT from such tenant or subtenant to
be treated as nonqualifying income for purposes of the income requirements that
REITs must satisfy. The Board may, but is not required to, waive the Beneficial
Ownership Limitations or Constructive Ownership Limitations if it determines
that greater ownership will not jeopardize the Company's status as a REIT. As a
condition of that waiver, the Board may require opinions of counsel satisfactory
to it and undertakings or
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representations from the applicant with respect to preserving the REIT status of
the Company. See "Federal Income Tax Considerations -- Taxation of the Company
as a REIT."
If any purported transfer of shares or any other event would otherwise
result in any person or entity violating the Ownership Restrictions, that
transfer will be void and of no force or effect as to the number of shares in
excess of the Ownership Restrictions, and the purported transferee (the
"Prohibited Transferee") will acquire no right or interest (or, in the case of
any event other than a purported transfer, the person or entity holding record
title to shares in excess of the Ownership Restrictions (the "Prohibited Owner")
will cease to own any right or interest) in the Excess Shares. In addition, if
any purported transfer of shares or any other event would cause the Company to
become "closely held" under the Code or otherwise to fail to qualify as a REIT
under the Code, that transfer will be void and of no force or effect as to the
number of shares in excess of the number that could have been transferred
without that result, and the Prohibited Transferee will acquire no right or
interest (or, in the case of any event other than a transfer, the Prohibited
Owner will cease to own any right or interest) in the Excess Shares. Also, if
any purported transfer of shares or any other event would otherwise cause the
Company to own, or be deemed to own by virtue of the applicable attribution
provisions of the Code, 10% or more, by vote or value, of the ownership
interests in any lessee or in any sublessee, that transfer or event will be void
and of no force or effect as to the number of shares in excess of the number
that could have been transferred or affected by that event without that result,
and the Prohibited Transferee will acquire no right or interest (or, in the case
of any event other than a transfer, the Prohibited Owner will cease to own any
right or interest) in the Excess Shares. Any Excess Shares arising from a
prohibited transfer described above will be transferred automatically to the
Special Trust.
All certificates representing shares will bear a legend referring to the
restrictions described above.
Every owner of a certain percentage of the outstanding shares (such
percentage being set forth in the Treasury Regulations according to the number
of Shareholders of record) will be required to file no later than January 30 of
each year a written notice with the Company containing the information specified
in the Declaration of Trust. In addition, each Shareholder will be required,
upon demand, to disclose to the Company in writing such information as the
Company may request in order to determine the effect, if any, of that
Shareholder's actual and constructive ownership on the Company's status as a
REIT and to ensure compliance with the Ownership Restrictions.
The Ownership Restrictions may have the effect of precluding an acquisition
of control of the Company without approval of the Board. See " -- Anti-Takeover
Effects of Certain Charter Provisions and Laws."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS AND LAWS
In addition to the Ownership Restrictions and the Board's authority to
designate and issue Preferred Shares described above, certain features of the
Declaration of Trust, the Bylaws and Maryland law, which are further described
below, may have the effect of deterring third parties from making takeover bids
for control of the Company, may be used to hinder or delay a takeover bid
thereby decreasing the chance of Shareholders realizing a premium over market
price for their Common Shares as a result of such bids and may have the effect
of preventing challenges for control of the Board. See "Risk Factors--Risks
Related to the Declaration of Trust and Bylaws of the Company and Maryland Law."
Limitations on Shareholder Actions. The Declaration of Trust provides that
Shareholder action may only be taken at a meeting of Shareholders. Thus, a
holder of a majority of the voting power could not take action to replace the
Board, or any class thereof, without a meeting of Shareholders. Furthermore,
under the provisions of the Declaration of Trust and Bylaws, special meetings of
Shareholders may only be called by the Board. Therefore, a Shareholder, even one
who holds a majority of the voting power, may not replace sitting Trustees
before the next annual meeting of Shareholders. The Bylaws may only be amended
by the Board and the Declaration of Trust may not be amended without Board
approval; therefore none of the provisions of the Declaration of Trust or the
Bylaws which inhibit or prevent takeover bids may be changed without the consent
of the Board.
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Advance Notice Provisions. The Bylaws provide for an advance notice
procedure for the nomination, other than by the Board, of candidates for
election as Trustees as well as for other Shareholder proposals to be considered
at annual meetings of Shareholders. In general, notice of intent to nominate a
Trustee or raise matters at meetings must be received by the Company not less
than 120 days before the first anniversary of the mailing of the Company's proxy
statement for the previous year's annual meeting, and must contain certain
information concerning the person to be nominated or the matters to be brought
before the meeting and concerning the Shareholder submitting the proposal.
Classified Board. The Declaration of Trust and the Bylaws divide the Board
into three classes with staggered three year terms. At each annual meeting of
Shareholders, the terms of one class of Trustees will expire and the newly
nominated Trustees of that class will be elected for a term of three years. The
Board will be able to determine the total number of Trustees constituting the
full Board and the number of Trustees in each class, but the total number of
Trustees may not exceed 17 nor may the number of Trustees in any class exceed
six. Subject to these rules, the classes of Trustees need not have equal numbers
of members. No reduction in the total number of Trustees or in the number of
Trustees in a given class will have the effect of removing a Trustee from office
or reducing the term of any then sitting Trustee. Shareholders may only remove
trustees for cause. If the Board increases the number of Trustees in a class, it
will be able to fill the vacancies created for the full remaining term of a
Trustee in that class even though the term may extend beyond the next annual
meeting. The Board will also be able to fill any other vacancies for the full
remaining term of the Trustee whose death, resignation or removal caused the
vacancy.
A person who has a majority of the voting power at a given meeting will not
in any one year be able to replace a majority of the Trustees since only one
class of the Trustees will stand for election in any one year. As a result, at
least two annual meeting elections will be required to change the majority of
the Trustees by the requisite vote of Shareholders. The purpose of classifying
the Board is to provide for a continuing body, even in the face of a person who
accumulates a sufficient amount of voting power, whether by ownership or proxy
or a combination, to have a majority of the voting power at a given meeting and
who may seek to take control of the Company without paying a fair premium for
control to all Shareholders. This will allow the Board time to negotiate with
such a person and to protect the interests of the other Shareholders. However,
it may also have the effect of deterring third parties from making takeover bids
for control of the Company or may be used to hinder or delay a takeover bid
thereby decreasing the chance of Shareholders realizing a premium over market
price for their Common Shares as a result of such bids.
Moreover, the Declaration of Trust provides that a Trustee may be removed
with or without cause by a majority of the remaining Trustees. Accordingly, even
if Shareholders were able to replace an entire class of Trustees, such Trustees
could be removed by the vote of the Trustees of the other classes, if they
constitute a majority of all the Trustees. This may also have the effect of
preventing proxy contests for control of the Board and entrenching management.
Control Share Act. Certain "control share acquisitions," are regulated by
Subtitle 7 of Title 3 of the Corporations and Associations Article of the
Annotated Code of Maryland (the "Control Share Act"). These provisions generally
require that "control shares" of the Company acquired in an acquisition that
would leave the Shareholder, directly or indirectly, exercising or directing the
exercise of (i) one-fifth or more but less than one-third of the voting power,
(ii) one-third or more but less than a majority of the voting power, or (iii) a
majority or more of the voting power (a "Control Share Acquisition"), have no
voting rights except to the extent such voting rights are approved by
Shareholders at a meeting by the affirmative vote of two-thirds of all the votes
entitled to be cast on the matter, excluding all "interested shares." Pursuant
to the Declaration of Trust, the Trustees are under no obligation to call a
special meeting of Shareholders to vote on the voting rights to be accorded to
the "control shares" if the Trustees determine, (i) that the required acquiring
person statement made in connection with the proposed Control Share Acquisition
was not made in good faith, (ii) that the proposed Control Share Acquisition
would not be in the best interests of the Company and its Shareholders, or (iii)
that the proposed Control Share Acquisition could not be consummated for
financial or legal reasons, including, but not limited to, any adverse impact
the proposed Control Share Acquisition would have upon the Company's ability to
comply with the REIT provisions of the Code or Title 8.
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Business Combination Act. Under Subtitle 6 of Title 3 of the Corporations
and Associations Article of the Annotated Code of Maryland (the "Business
Combination Act") certain "business combinations" (including, but not limited
to, a merger, consolidation, share exchange, or, in certain circumstances, asset
transfer or issuance or reclassification of equity securities) between a
Maryland real estate investment trust and any person who beneficially owns 10%
or more of the voting power of the shares (an "Interested Shareholder") or any
affiliate of an Interested Shareholder are, subject to certain exceptions, (a)
prohibited for a period of five years from the time the person became an
Interested Shareholder and (b) then must be recommended by the board of trustees
and approved by the affirmative vote of at least (i) 80% of the votes entitled
to be cast by holders of outstanding voting shares of the trust and (ii)
two-thirds of the votes entitled to be cast by holders of outstanding voting
shares other than shares held by the Interested Shareholder who will (or whose
affiliate will) be a party to the business combination to be effected, unless,
among other things, Shareholders receive a statutorily calculated minimum price
for their shares and the consideration is received in cash or in the same form
as previously paid by the Interested Shareholder for his shares. These
provisions of the Business Combination Act will not apply to any real estate
investment trust that adopts, by the affirmative vote of at least 80% of the
shareholders, an amendment to the declaration of trust stating that these
restrictions will not apply. Such an amendment will not take effect until
eighteen (18) months after its adoption by the shareholders. The Business
Combination Act could have the effect of discouraging offers to acquire the
Company and of increasing the difficulty of consummating any such offer. See
"Risk Factors -- Risks Related to the Declaration of Trust and Bylaws of the
Company and Maryland Law."
CERTAIN OTHER PROVISIONS OF MARYLAND LAW AND THE DECLARATION OF TRUST
General. Lexford Residential Trust is a real estate investment trust
organized under Title 8 of the Corporations and Associations Annotated Code of
Maryland, is an unincorporated business trust and is not a corporation, general
or limited partnership, limited liability company, joint venture or any other
type of business entity. The Company is a legal entity separate and apart from
the Trustees and Shareholders. The laws of the State of Maryland govern with
respect to the organization of the Company. The Declaration of Trust, under
which the Company was organized and is operated, was filed with the Department
of Assessments and Taxation of the State of Maryland, and became operative on
January 16, 1998. The Company will exist perpetually until it is dissolved.
Purposes; Powers. The purpose for which the Company was formed is to
engage in any activity permitted to real estate investment trusts under the laws
of the State of Maryland including, but not limited to, investing in and
acquiring, holding, managing, administering, controlling and disposing of
property for the benefit of those persons who are or who may, from time to time,
become Shareholders. In accordance with Title 8 and the Declaration of Trust,
the Company must hold, either directly or through other entities, at least 75
percent of the value of its assets in real estate assets, mortgage or mortgage
related securities, government securities, cash and cash equivalent items,
including high-grade short term securities and receivables; but the Company may
not use or apply land for farming, agriculture, horticulture, or similar
purposes. Under the Declaration of Trust and Maryland law, the Company has broad
powers substantially equivalent to those held by corporations under most state
laws. However, these powers are subject to the limited purposes described above.
Any entity wishing to qualify as a REIT for Federal income tax purposes has to
meet certain asset, income and distribution requirements. See "Risk
Factors -- Risks Related to REIT Conversion and REIT Status."
Board of Trustees. Under the Declaration of Trust, the business of the
Company is managed by the Board. The Declaration of Trust requires a Trustee to
perform his duties as a Trustee, including his duties as a member of a committee
of the Board on which he serves, in good faith in a manner he reasonably
believes to be in the best interests of the Company, and with the care that an
ordinarily prudent person in a like position would use under similar
circumstances. In performing his duties, a Trustee is entitled to rely on any
information, opinion, report, or statement, including any financial statement or
other financial data, prepared or presented by: (i) an officer or employee of
the Company whom the Trustee reasonably believes to be reliable and competent in
the matters presented; (ii) a lawyer, public accountant, or other person, as to
a matter which the Trustee reasonably believes to be within the person's
professional or expert competence; or (iii) a committee of the Board on which
the Trustee does not serve, as to a matter within its designated authority.
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Annual Reports; Meetings of Shareholders. Each year the Company will
prepare an annual report of its operations. The report will include a balance
sheet, an income statement and a statement of shareholders' equity. The
financial statements in the annual report will be certified by an independent
certified public accountant based on the accountant's full examination of the
books and records of the Company in accordance with generally accepted auditing
standards. The annual report must be submitted to Shareholders at or before the
annual meeting of Shareholders, and, within the earlier of 20 days after the
annual meeting of Shareholders or 120 days after the end of the fiscal year,
must be placed on file at the principal office of the Company. There will be an
annual meeting of Shareholders, after the delivery of the annual report, at such
convenient location, as the Board may determine, for the purpose of electing
Trustees. Any other proper business may be transacted at the annual meeting.
Special meetings of Shareholders may be called by the Board for such purposes
and at such date, time and place as may be designated by the Board. Business
transacted at any special meeting of Shareholders shall be limited to the
purposes stated in the notice of meeting. No officer, Trustee nor Shareholder
has the authority to call a meeting of Shareholders without the express
authorization of the Board. The Declaration of Trust prohibits the taking of
Shareholder action without a meeting.
The Declaration of Trust provides that, subject to the provisions of any
class or series of shares then outstanding, Shareholders are entitled to vote
only on those matters which the Declaration of Trust, the Bylaws or Title 8
expressly require be voted on by Shareholders, those matters that the Board has
duly submitted to Shareholders and those matters properly brought before a
meeting by a Shareholder pursuant to the Bylaws. Except with respect to the
foregoing matters, no action taken by Shareholders at any meeting shall in any
way bind the Board. Shareholders will not be entitled to cumulatively vote their
shares in the election of the Trustees.
Under the Declaration of Trust, notwithstanding any provision of Title 8
which requires for any action the concurrence of a greater portion of the votes
of Shareholders than a majority of the votes entitled to be cast, such as the
provisions concerning the approval of mergers and certain amendments to the
Declaration of Trust, Shareholders may take or authorize any action by the
concurrence of a majority of the number of votes entitled to be cast on the
matter.
Limitations of Liability. Pursuant to Title 8 and the Declaration of
Trust, the liability of Trustees and officers of the Company to the Company or
to any Shareholder for money damages has been eliminated, except for (a) actual
receipt of an improper personal benefit in money, property or services and (b)
for active and deliberate dishonesty established by a final judgment as being
material to the cause of action.
A Trustee may not be liable to the Company or its Shareholders for errors
in judgment or other acts or omissions not amounting to willful misconduct since
provision has been made in the Declaration of Trust for exculpation of a
Trustee. Therefore, purchasers of Common Shares may have a more limited right of
action than they would have absent the limitation in the Declaration of Trust.
The Company has been informed that, in the opinion of the Securities and
Exchange Commission (the "Commission"), Section 14 of the Securities Act may
void this provision insofar as it purports to bind any person acquiring any
security to waive compliance with any provision of the Securities Act or any
rules or regulations of the Commission promulgated thereunder.
Indemnification. Under the Declaration of Trust, the Company is required
to indemnify any Trustee or officer (a) against reasonable expenses incurred by
him in the successful defense (on the merits or otherwise) of any proceeding to
which he is made a party by reason of such status or (b) against judgments,
penalties, fines, settlements, and reasonable expenses actually incurred in
connection with a proceeding that he may become subject to by reason of such
status unless it is established that (i) the act or omission was material to the
matter giving rise to the claim and was committed in bad faith or was the result
of active and deliberate dishonesty, (ii) he actually received an improper
personal benefit in money, property or services or (iii) in the case of a
criminal proceeding, he had reasonable cause to believe that his act or omission
was unlawful. The Company is also required by the Declaration of Trust to pay or
reimburse, in advance of a final disposition, reasonable expenses of a Trustee
or officer, and may choose to do so for an employee or agent, who is made a
party to a proceeding by reason of his status as such upon receipt of a written
affirmation by the Trustee, officer, employee, or agent of his good faith belief
that he has met the applicable standard for indemnification under the
Declaration
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of Trust and a written undertaking to repay such expenses if it is ultimately
determined that the applicable standard was not met. Under the Declaration of
Trust, indemnification is determined to be proper by (i) a majority vote of a
quorum made up of disinterested Trustees, (ii) special legal counsel, or (iii) a
majority vote of Shareholders entitled to vote on the matter at a meeting called
for such purpose, voting as a single class.
The Declaration of Trust provides for indemnification of the Trustees by
the Company for liabilities they incur in dealings with third parties on behalf
of the Company. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to Trustees, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Dividends and Other Distributions. The Declaration of Trust provides that
the Board will endeavor to declare and pay such dividends and make such
distributions as shall be necessary for the Company to elect and maintain its
status as a REIT under the Code. The Declaration of Trust provides that the
payment of dividends by the Company is not limited by any rules concerning the
capital or surplus of the Company or the par value of the shares. However, the
Board may not declare or pay any dividend nor authorize or make any other
distribution, if the Company is insolvent, or would be rendered insolvent by
such dividend or distribution, or if such dividend or distribution would be
fraudulent as to the creditors of the Company. See "Distribution Policy."
Amendment of Declaration of Trust and Bylaws. Under Title 8 and the
Declaration of Trust, the Trustees, by a two-thirds vote, may at any time amend
the Declaration of Trust to enable the Company to qualify as a REIT under the
Code or as a real estate investment trust under Title 8, without the approval of
Shareholders. The Board may also amend the Declaration of Trust to set the terms
of Preferred Shares, or to change the number of authorized shares without
Shareholder approval. Other amendments to the Declaration of Trust must be
approved by vote of a majority of the outstanding voting shares after approval
by the Board. The Bylaws provide that they may be amended or repealed, and new
bylaws may be adopted by the Board.
Termination of REIT Status; Dissolution of the Company. The Declaration of
Trust permits the Board to terminate the status of the Company as a REIT under
the Code at any time, if the Trustees determine, after receiving the advice of
tax counsel to the Company, that it is not advantageous to the Company and
Shareholders to be a REIT. If the Board determines that the dissolution and
winding-up of the Company is advisable and in the best interest of Shareholders,
it may adopt a resolution dissolving and winding up the Company and call a
meeting of Shareholders for the purpose of considering the resolution. If the
resolution of the Board approving the dissolution and winding-up of the Company
is adopted by the affirmative vote of the holders of not less than a majority of
the shares then outstanding and entitled to vote thereon, the Company will be
dissolved, its properties liquidated and its affairs wound-up.
Mergers, Acquisitions and Certain Other Transactions. Title 8 provides
that a merger involving a real estate investment trust generally requires
approval by the affirmative vote of two-thirds of all the votes entitled to be
cast on the matter, unless the Declaration of Trust specifies a lower
percentage, but not less than a majority. The Declaration of Trust specifies
that a majority of the votes entitled to be cast will approve a merger. Title 8
does not address the requirements for approval of a disposition of all or
substantially all of the assets of the Company. However, if the Company intends
to sell all or substantially all of the assets of the Company outside of the
ordinary course of business for a consideration other than cash or the
assumption of debt and not pursuant to a dissolution, then, under the
Declaration of Trust, the holders of not less than a majority of the shares
entitled to vote on the matter must approve the transaction. Under the
Declaration of Trust, the transfer of all or substantially all of the assets of
the Company to a wholly-owned subsidiary is not deemed to be a sale requiring
Shareholder approval.
The Board has the power to divide or combine the outstanding shares of any
class or series, without a vote of Shareholders, into a greater or lesser number
of shares of that class or series. Such combination or division will not affect
the par value of the shares so combined or divided. The Company may, without
consent or approval of any Shareholder, issue fractional shares, eliminate a
fraction of a share by rounding up or down to a full share, arrange for the
disposition of a fraction of a share by the person entitled to it, or pay cash
for the fair value of a fraction of a share.
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Rights of Dissenting Shareholders. Title 8 provides dissenters' right of
appraisal for any shareholder who objects to a merger involving the real estate
investment trust to the same extent as a corporation's shareholder would enjoy
such rights. A dissenting Shareholder has the right to demand and receive
payment of the fair value of his shares unless, (1) the shares are listed on a
national securities exchange, such as the NYSE, or are designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. on the record date for determining
shareholders entitled to vote on the merger, or (2) the shares are those of the
successor entity, provided that the merger does not alter the contract rights of
the shares as expressly set forth in the charter documents, or the shares are
converted in whole or in part in the merger into something other than stock in
the successor entity or cash, scrip, or other rights or interests arising out of
the provisions for the treatment of fractional shares. The Declaration of Trust
permits dissenters' rights only to the extent of those rights provided for in
Title 8. No dissenters' right of appraisal or similar rights are available under
Title 8 to Shareholders who dissent from the approval of any sale of all or
substantially all of the assets of the Company.
Inspection of Books and Records. Under Title 8, any Shareholder may
inspect and copy the Bylaws, minutes of proceedings of Shareholders, the
Company's annual reports of operations, and voting trust agreements, if any. In
addition, any Shareholder may make a written request upon the Company for a
statement showing all securities issued by the Company during a specified period
of not more than 12 months before the date of request. Within twenty days after
the request, the Company will have available a list containing (i) the number of
shares or other securities issued during the specified period, (ii) the
consideration received per share, and (iii) the value of any consideration other
than money received, as set by the Board. Title 8 also provides that one or more
Shareholders who together have been the record holders of at least 5% of the
outstanding shares for at least six months can (i) upon written request, inspect
and copy during usual business hours the Company's books of account and its
stock ledger, (ii) present to any officer or resident agent of the Company a
written request for a statement of its affairs, and (iii) if the Company does
not maintain a share ledger at its principal office, present to any officer or
resident agent of the Company a written request for a list of Shareholders. The
Declaration of Trust does not provide any additional rights of inspection for
Shareholders.
OPERATING PARTNERSHIP AGREEMENT
The following summary of the terms of the Operating Partnership Agreement
and the descriptions of certain provisions thereof set forth elsewhere in this
Prospectus, are qualified in their entirety by reference to the Operating
Partnership Agreement, which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. As of the date of this Prospectus,
the Company controls all outstanding general and limited partnership interests
in the Operating Partnership. The Company may cause the Operating Partnership to
issue OP Units to newly admitted parties ("Additional Limited Partners", and
together with the Company, "Limited Partners") to fund future acquisitions. The
Company currently intends to maintain control over the general partner ("General
Partner") in the Operating Partnership.
MANAGEMENT
The Operating Partnership is an Ohio limited partnership. The Operating
Partnership has been formed to own, directly or indirectly, substantially all of
the ownership interests in the Properties formerly held by the Company and to
own all other interests in properties or portfolio of properties that the
Company may acquire in the future. Accordingly, the income and expenses
reflected in the Company's financial statements will include the Company's
allocable portion of the income and expenses of the Operating Partnership.
Pursuant to the Operating Partnership Agreement, the General Partner will have
full, exclusive and complete responsibility and discretion in the management and
control of the Operating Partnership. The Limited Partners have no authority to
transact business for, or participate in the management, activities or decision
of, the Operating Partnership; provided, however, that any amendment or decision
of the General Partner to cause the Operating Partnership to (i) seek to impose
personal liability on the Limited Partners, (ii) impose on Limited Partners the
obligation to make additional capital contributions, (iii) amend, modify or
terminate any exchange rights granted to any Additional Limited Partner, (iv)
dissolve or liquidate the Operating Partnership, (v) institute any proceeding
for bankruptcy
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or insolvency, or (vi) make a general assignment for the benefit of creditors or
appoint or acquiesce in the appointment of a custodian, receiver or trustee
shall require the approval of the Company and a majority (measured by percentage
interests) of the Additional Limited Partners, if any.
TRANSFERABILITY OF INTERESTS
The General Partner may not withdraw from the Operating Partnership or
transfer or assign its interest in the Operating Partnership without the consent
of the Company and a majority in interests (measured by percentage interests) of
the Additional Limited Partners, if any. With certain limited exceptions, the
Limited Partners may not transfer their interests in the Operating Partnership
without the consent of the General Partner. The General Partner may not consent
to any transfer that would cause the Operating Partnership to be treated as a
corporation for Federal income tax purposes.
CAPITAL CONTRIBUTIONS
The Company intends to contribute to the Operating Partnership (on behalf
of itself and the General Partner) substantially all of its equity interests in
the Properties (other than interests held by special purpose entities).
The Operating Partnership Agreement provides that if the Operating
Partnership requires additional funds at any time or from time to time in excess
of funds available to the Operating Partnership from borrowings or capital
contributions, the Company may borrow those funds from a financial institution
or other lender and lend those funds to the Operating Partnership on
substantially the same terms and conditions as are applicable to the Company's
borrowing of the funds. As an alternative to borrowing funds required by the
Operating Partnership, the Company may contribute the amount of the required
funds as an additional capital contribution to the Operating Partnership. If the
Company so contributes additional capital, the Company's partnership interest in
the Operating Partnership will be increased on a proportionate basis based on
the amount of the additional capital contributions and the value of the
Operating Partnership at the time of the contributions. The percentage interests
of any Additional Limited Partners will be correspondingly decreased or adjusted
in connection with any such contribution.
EXCHANGE RIGHTS
It is anticipated that Additional Limited Partners will receive exchange
rights, which will enable them to cause the Operating Partnership to purchase
their OP Units for cash. It is anticipated that the amount of cash to be
received by an Additional Limited Partner exercising exchange rights will be
determined by mathematically converting the Additional Limited Partner's OP
Units to a number of Common Shares based on the then applicable conversion rate
and then multiplying the resulting number of Common Shares by the average daily
market price of a Common Share for the 10 consecutive trading days immediately
preceding the date the Company receives the applicable notice of exchange from
that Additional Limited Partner.
The Company may elect to assume and directly satisfy an exchange right by
paying cash to the Additional Limited Partner or by delivering Common Shares for
the exchanged OP Units based on the conversion ratio.
The number of Common Shares into which OP Units are converted for purposes
of determining the cash payable on exercise of exchange rights will be adjusted
on the occurrence of stock splits, mergers, consolidations or similar pro-rata
share transactions that otherwise would have the effect of diluting the
ownership interests of the Additional Limited Partners or Shareholders.
TAX MATTERS; PROFITS AND LOSSES
Pursuant to the Operating Partnership Agreement, the General Partner will
be the tax matters partner of the Operating Partnership and, as such, will have
authority to make tax elections under the Code on behalf of the Operating
Partnership.
Profits and losses of the Operating Partnership will generally be allocated
among the partners in accordance with their respective percentage interests in
the Operating Partnership, except as otherwise required by the tax law
(including, but not limited to Section 704(c) of the Code).
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OPERATIONS
The Operating Partnership Agreement requires that the Operating Partnership
be operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT for Federal income tax purposes.
DISTRIBUTIONS
The Operating Partnership Agreement provides that the Operating Partnership
will make cash distributions quarterly, in amounts equal to all its cash
available for distribution. Distributions will generally be made in proportion
to the partners' percentage interests in the Operating Partnership. Upon a
liquidation of the Operating Partnership, any assets available for distribution
to its partners will be distributed among the partners in accordance with their
respective positive capital account balances in the Operating Partnership. The
Company expects the New Credit Facility to restrict the Operating Partnership's
ability to make distributions to its partners. See "Management's Discussion and
Analysis of Combined Property Operating Results and the Company's Financial
Condition."
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material Federal income tax
considerations affecting a Shareholder by virtue of the Company's qualification
as a REIT and the ownership of Common Shares. The discussion does not address
all aspects of Federal income tax law that may be relevant to a particular
Shareholder in light of his or her particular circumstances or to certain types
of Shareholders (including insurance companies, financial institutions or
broker-dealers, and (except to the limited extent discussed herein) foreign
corporations and persons who are not citizens or residents of the United States)
subject to special treatment under the Federal income tax laws. The state, local
and foreign tax implications of the REIT election are also not discussed. As
used in this section, the term "Properties" means the limited partnerships or
limited liability companies which directly own the apartment communities.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING
AND THE COMPANY URGES EACH PROSPECTIVE SHAREHOLDER TO CONSULT WITH HIS OR HER
OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE
OWNERSHIP AND SALE OF SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF SUCH
OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
GENERAL
The Company expects that it will be organized and will operate in such a
manner so as to qualify for taxation as a REIT under Sections 856 through 860 of
the Code commencing with its taxable year beginning January 1, 1998, and the
Company intends to operate in such a manner in the future. No assurance can be
given, however, that the Company will operate in a manner so as to qualify or
remain qualified as a REIT. In this regard, the Company has not requested, and
does not expect to request, a ruling from the IRS regarding the Company's status
as a REIT.
Willkie Farr & Gallagher has rendered its opinion, subject to certain
assumptions and conditioned upon certain factual representations made by the
Company and the making of the election to be taxed as a REIT for 1998, that (i)
the Company is organized in conformity with the requirements for qualification
as a REIT under the Code, (ii) that the proposed method of operation of the
Company, the Operating Partnership and the Properties as contemplated to be
undertaken after 1997 will permit the Company to so qualify for 1998 and future
taxable years, and (iii) that the summary of Federal income tax considerations
set forth in this Prospectus accurately summarizes all tax consequences likely
to be material to a Shareholder. Unlike a tax ruling, an opinion is not binding
on the IRS, and no assurance can be given that the IRS will not challenge the
status of the Company as a REIT for Federal income tax purposes. With respect to
Willkie Farr & Gallagher's opinion relating to the qualification of the Company
as a REIT, it should be noted that the Company's continued qualification as a
REIT in current and future taxable years will depend upon whether the Company,
the Operating Partnership and the Properties continue to meet the various
qualification tests imposed under the Code (discussed below). Willkie Farr &
Gallagher will not review compliance with these tests on a periodic or
continuing basis. Accordingly, no
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assurance can be given that the actual results of the Company's operations for
the current or future taxable years will satisfy such requirements. See "Federal
Income Tax Considerations -- Requirements for Qualification as a REIT."
The opinions and discussion herein are based upon the Code, as currently in
effect, applicable Treasury Regulations adopted thereunder, reported judicial
decisions and IRS rulings, all as of the date hereof, and certain factual
representations and assumptions made by the Company concerning the organization
and proposed method of operation of the Company, the Operating Partnership and
the Properties. In February 1998, the Clinton Administration published certain
Revenue Proposals relating to REITs. Although none of the Revenue Proposals
adversely affect the Company, the Revenue Proposals are subject to change. There
can be no assurance that the legal authorities on which such opinions and this
discussion are based will not change, perhaps retroactively, that the Company's
representations and factual assumptions underlying this discussion will be
accurate, or that there will not be a change in circumstances of the Company
that would affect this discussion. Accordingly, there can be no assurance that
the IRS will not challenge the conclusion of such opinions.
TAXATION OF THE COMPANY AS A REIT
If the Company qualifies as a REIT and distributes to Shareholders at least
95% of its REIT taxable income, it generally will not be subject to Federal
corporate income tax on the portion of its ordinary income or capital gain that
is timely distributed to Shareholders. This treatment substantially eliminates
the "double taxation" (at the corporate and shareholder levels) that generally
results from an investment in a "C" corporation. If the Company were to fail to
qualify as a REIT, it would be taxed at rates applicable to corporations on all
of its income, whether or not distributed to Shareholders, and Shareholders
would be taxed in the same manner as shareholders of ordinary corporations. Even
if the Company qualifies as a REIT, it may be subject to Federal income or
excise tax as follows:
(i) The Company will be taxed at regular corporate rates on REIT
taxable income and net capital gains not distributed to Shareholders;
(ii) Under certain circumstances, the Company may be subject to the
"alternative minimum tax" due to items of tax preference, if any, or
differences in the amount and character of its tax attributes for regular
and alternative minimum tax purposes;
(iii) If the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property,
other than foreclosure property, held primarily for sale to customers in
the ordinary course of business), net income derived from such transactions
will be subject to a 100% tax;
(iv) If the Company should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), and has nonetheless
maintained its qualification as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the income attributable
to the greater of the amount by which the Company fails the 75% or 95%
test, multiplied by a fraction intended to reflect the Company's
profitability;
(v) If the Company should fail to distribute during each calendar year
at least the sum of (a) 85% of its REIT ordinary income for such year, (b)
95% of its REIT capital gain net income for such year and (c) any
undistributed taxable income from prior REIT years upon which the Company
has not paid Federal income tax, it would be subject to a 4% excise tax on
the excess of such required distribution over the amounts actually
distributed;
(vi) If the Company has (a) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property
acquired by the Company by foreclosure or otherwise on default on a loan
secured by the property) or (b) other nonqualifying income from foreclosure
property, it will be subject to tax on such income at the highest corporate
rate (currently 35%); and
(vii) Because the Company acquired appreciated assets from Old Lexford
(a "C" corporation) in a transaction (the Reincorporation Merger) in which
the Company's basis in the acquired assets was determined by reference to
Old Lexford's basis in the acquired assets, and because the Company made an
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election pursuant to IRS Notice 88-19 to defer the recognition of the net
unrealized built-in gain on such assets, if the Company recognizes gain on
the disposition of such assets in any taxable year during the 10-year
period (the "Restriction Period") beginning on the date on which such
assets were acquired by the Company, then gain recognized to the extent of
the excess of the fair market value of such property at the beginning of
the applicable Restriction Period over the Company's adjusted basis in such
property as of the beginning of such Restriction Period will be subject to
tax at the highest corporate rate, but only to the extent that (a) the gain
from all such dispositions during such year exceeds the amount of built-in
losses recognized in such taxable year plus the amount of any net operating
loss carryforwards which may be used to offset such gains and (b) the total
net recognized built-in gain for such year and all prior taxable years in
the Restriction Period does not exceed the net unrealized built-in gain at
the beginning of the Restriction Period. Similar treatment would apply to
any other appreciated assets the Company acquires from a "C" corporation in
a transaction in which the Company receives a carryover basis and makes the
election pursuant to IRS Notice 88-19 (to the extent IRS Notice 88-19 is
still in effect at such time).
REQUIREMENTS FOR QUALIFICATION AS A REIT
General. The Code defines a REIT as a corporation, trust or association:
(i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(iii) which would be taxable as a domestic corporation but for
Sections 856 through 859 of the Code;
(iv) which is neither a financial institution nor an insurance company
subject to certain provisions of the Code;
(v) which has the calendar year as its taxable year;
(vi) the beneficial ownership of which is held by 100 or more persons
(the "100 shareholder requirement");
(vii) during the last half of each taxable year not more than 50% in
value of the outstanding shares is owned, directly or indirectly, by five
or fewer individuals (as defined in the Code to include certain entities)
(the "five or fewer requirement");
(viii) which makes an election to be a REIT (or made such an election
in a previous taxable year that is still valid); and
(ix) which meets certain income and asset tests, described below.
Conditions (i) through (v), inclusive, must be met during the entire
taxable year and condition (vi) must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of
less than 12 months. However, conditions (vi) and (vii) will not apply until
after the first taxable year for which an election is made to be taxed as a
REIT.
The Company's taxable year will be the calendar year. The Company currently
satisfies the share ownership requirements set forth in (vi) and (vii) above. In
order to ensure continuing compliance with the share ownership requirements, the
Company has placed certain restrictions on the transfer of its equity securities
to prevent further concentration of share ownership. Moreover, to evidence
compliance with the requirement set forth in (vii) above, the Company must
maintain records which disclose the actual ownership of its outstanding shares.
In fulfilling its obligation to maintain these records, the Company must, and
will, demand written statements each year from the record Shareholders of
designated percentages of its Common Shares disclosing the actual owners of such
Common Shares. A list of those persons failing or refusing to comply with such
demand must be maintained as a part of the Company's records. A Shareholder
failing or refusing to comply with the Company's written demand must submit with
his or her tax return a similar statement and certain other information. See
"Description of Common Shares -- Restrictions on Transfer."
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The Company owns certain interests through wholly-owned subsidiaries.
Section 856(i) of the Code provides that a corporation which is a "qualified
REIT subsidiary" shall not be treated as a separate corporation, and all assets,
liabilities, and items of income, deduction, and credit of a qualified REIT
subsidiary shall be treated as assets, liabilities, and such items (as the case
may be) of the REIT. Thus, in applying the requirements described herein, the
Company's qualified REIT subsidiaries will be ignored, and all assets,
liabilities and items of income, deduction and credit of such subsidiaries will
be treated as assets, liabilities and items of the Company. Similarly, to the
extent that the Company or the Operating Partnership (to the extent treated as a
separate taxable entity) own interests in an entity that is a partnership or
limited liability company for state law purposes, but which is disregarded as an
entity separate from its owner for Federal income tax purposes, the owner of
such entity will be treated as the owner of such entity's assets, liabilities
and items of income, gain or expense for Federal income tax purposes.
Asset Tests. In order for the Company to maintain its qualification as a
REIT, at the close of each quarter of its taxable year, it must satisfy three
tests relating to the nature of its assets (the "Asset Tests"):
(i) At least 75% of the value of the Company's total assets must be
represented by any combination of interests in real property, interests in
mortgages on real property, shares in other REITs, cash, cash items,
certain government securities, and certain property attributable to the
temporary investment of new capital.
(ii) Not more than 25% of the Company's total assets may be
represented by securities other than those qualifying for the 75% asset
test.
(iii) Except for securities of a "qualified REIT subsidiary" (as
defined in the Code) and securities qualifying for the 75% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5%
of the value of the Company's total assets, and the Company may not own
more than 10% of any one issuer's outstanding voting securities.
Where the Company directly or indirectly owns an interest in a partnership, it
will be treated for purposes of the Asset Tests as owning a proportionate part
of the partnership's assets. See "Federal Income Tax Considerations -- Tax
Aspects of the Company's Investment in the Properties." Substantially all of the
Company's investment in the Properties (through the Company's direct and
indirect interests in the Operating Partnership) will constitute investments in
real property for purposes of the 75% asset test. As such, the Company expects
that more than 75% of the value of its assets will be of the type needed to meet
the 75% asset test. "Federal Income Tax Considerations -- Tax Aspects of the
Company's Investment in the Properties."
The Company has made various secured and unsecured loans to the Syndicated
Properties. Loans that are secured by mortgages on real property or by
non-recourse loans secured by mortgage notes will be considered to be assets
that qualify for the 75% asset test to the extent of the real estate collateral
value for such loans. Loans that are not secured by mortgages on real property
or mortgage notes will not qualify for the 75% asset test. The Company expects
that its non-qualifying loans will not cause the Company to fail the 75% asset
test. Moreover, the Company does not anticipate that its non-qualifying loans
will cause the Company to fail the 75% asset test in the future.
Except with respect to its qualified REIT subsidiaries, the Company does
not expect to hold any securities representing 10% or more of any one issuer's
voting securities or to hold securities of any one issuer exceeding 5% of the
value of the Company's total assets. As stated previously, qualified REIT
subsidiaries are not treated as separate corporations for Federal income tax
purposes. Thus, the Company's ownership of stock of a qualified REIT subsidiary
will not cause the Company to fail either the 10% or 5% asset tests. All of the
Company's currently held wholly-owned subsidiaries will be treated as qualified
REIT subsidiaries.
If the Company inadvertently fails one or more of the Asset Tests at the
end of a calendar quarter, such a failure would not cause it to lose its REIT
status, provided that (i) it satisfied all of the Asset Tests at the close of a
preceding calendar quarter, and (ii) the discrepancy between the values of the
Company's assets and the standards imposed by the Asset Tests either did not
exist immediately after the acquisition of any particular asset or was not
wholly or partly caused by such an acquisition. If the condition described in
clause (ii) of the
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preceding sentence was not satisfied, the Company could still avoid
disqualification by eliminating any discrepancy within 30 days after the close
of the calendar quarter in which it arose.
Income Tests. In order for the Company to maintain its qualification as a
REIT, it must satisfy two separate percentage tests relating to the source of
its gross income in each taxable year. For purposes of these income tests, where
the Company invests in a partnership, the Company will be treated as receiving
its proportionate share of the gross income of the partnership, and such gross
income will retain the same character in the hands of the Company as it had in
the hands of the partnership. See "Federal Income Tax Considerations -- Tax
Aspects of the Company's Investment in the Properties."
(i) The "75% Income Test." At least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from specified real estate sources, including "rents from
real property," interest earned from mortgages on real property, gain from
the sale of real property or mortgages (which are not held primarily for
sale to customers in the ordinary course of business) or income from
qualified types of temporary investments.
(ii) The "95% Income Test." At least 95% of the Company's gross
income (excluding gross income from prohibited transactions) for each
taxable year must be derived from the same items which qualify under the
75% Income Test or from dividends, interest and gain from the sale or
disposition of stock or securities, or from any combination of the
foregoing.
Rents received by the Company will qualify as "rents from real property"
for purposes of the 75% and 95% Income Tests if the following requirements are
met:
(i) The amount of rent received must generally not be based in whole
or in part on the income or profits derived by any person from such
property. However, amounts received or accrued generally will not be
excluded from the term "rents from real property" solely by reason of being
based on a fixed percentage or percentages of receipts or sales. Further,
if the amounts received or accrued are based on the net income or profits
of the tenant and the tenant derives substantially all of its income with
respect to such property from the leasing or subleasing of substantially
all of such property and such tenant receives from subtenants amounts which
would be treated as rents from real property if received directly by the
Company ("Qualified Rents"), such Qualified Rents will qualify as "rents
from real property."
(ii) The rents are not received from a tenant in which the Company or
a direct or indirect owner of 10% or more of the Company, owns directly or
constructively 10% or more of the ownership interests or has an interest
equal to 10% or more in the assets or net profits of such tenant (a
"Related Party Tenant").
(iii) Any services performed by the Company for its tenants must be
services customarily provided by owners of real property in the geographic
location where the Company's property is located and of a type that may be
rendered by tax-exempt entities without jeopardizing the treatment of the
income derived as rents from real property. Any amounts characterized as
"impermissible tenant service income" will not qualify as "rents from real
property". "Impermissible tenant service income" consists of amounts
received or accrued by the Company either for services furnished or
rendered to the tenants or for managing or operating the property. The
following types of income will not be classified as "impermissible tenant
service income:"
(a) amounts received or accrued for services performed by an
independent contractor from which the Company derives no income, or
(b) amounts received or accrued for services which would not be
characterized as unrelated business taxable income if received or
accrued by a tax-exempt organization.
A person qualifies as an independent contractor if such person does not
own, directly or indirectly, more than 35% of the shares of the Company, and at
least 35% of such person is not owned, directly or indirectly, by one or more
persons which also own at least 35% of the Company.
If the Company receives "impermissible tenant service income" from any one
property in an amount which exceeds 1% of the total amount received from such
property during the taxable year, all amounts received or
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accrued from such property during such taxable year will be characterized as
nonqualifying income for the 75% and 95% Income Tests. For purposes of this de
minimis test, amounts equal to at least 150% of the direct cost of providing
such service (or management or operation) will be deemed received for any
service (or management or operation) provided by the Company to its tenants.
(iv) The rent is attributable to personal property leased in
connection with a lease of real property and the rent attributable to
personal property is not greater than 15% of the total rent received under
the lease.
None of the Properties currently charge rent for any property that is based
in whole or in part on the income or profits of any person (except by reason of
being based on a fixed percentage of receipts or sales), nor does the Company,
directly or indirectly through the Operating Partnership, intend to cause the
Properties to do so in the future. Except for insignificant items which would
not disqualify any rent received by the Company by virtue of failing to satisfy
(iv) above, none of the Properties currently lease personal property to their
tenants, nor does the Company, directly or indirectly through the Operating
Partnership, intend to cause the Properties to do so in the future (except for
insignificant items). None of the Properties currently rent property to a
Related Party Tenant, nor does the Company, directly or indirectly through the
Operating Partnership, intend to cause the Properties to do so in the future.
Although the Company intends to provide management services to the tenants of
the Properties, the Company has represented that the services (i) are customary
management services provided by landlords in the geographic areas in which the
Company owns Properties, (ii) are not primarily for the convenience of its
residents, and (iii) would not generate income includible in unrelated business
taxable income if received by a tax-exempt organization. Although the Company
may perform some noncustomary services that may constitute "impermissible tenant
service income", the Company has represented that the amounts received for such
noncustomary services from any one property will not exceed 1% of the total
amount collected from such property during the taxable year. If the Company
discovers that "impermissible tenant service income" to be received or accrued
from any one property may violate the 1% de minimis test, the Company has
represented that it will contract with an independent contractor from whom the
Company will derive no income to perform such services.
Based on the foregoing, the rents received by the Company from the
Properties should qualify as "rents from real property" for purposes of the 75%
and 95% Income Tests. As described above, the foregoing conclusions as to the
qualification of the Company to be taxed as a REIT are based upon an analysis of
all the facts and circumstances and upon rulings and judicial decisions
involving situations that are considered to be analogous, as well as
representations by the Company, the Operating Partnership and the Properties and
assumptions that are described above. Accordingly, there cannot be complete
assurance that the IRS will not successfully assert a contrary position and,
therefore, prevent the Company from qualifying for taxation as a REIT.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
The Company receives interest on secured and unsecured loans made to
certain Properties. Interest income attributable to loans secured by mortgages
on real property or non-recourse loans secured by mortgage notes will qualify
for both the 95% and the 75% Income Tests. Interest income attributable to loans
which are not secured by mortgages on real property or mortgage notes will
qualify for the 95% Income Test but not the 75% Income Test. The Company expects
that income from such loans will not cause the Company to fail the 75% and 95%
Income Tests. Moreover, it is not anticipated that interest income earned from
such loans will cause the Company to fail the Income Tests in the future.
If the sum of the income realized by the Company (whether directly or
through its interest in the Properties) which does not satisfy the requirements
of the 75% and the 95% Income Tests (collectively, "Non-Qualifying Income"),
exceeds 25% and 5%, respectively, of the Company's gross income for any taxable
year, the Company's status as a REIT would be jeopardized. The Company believes
and has represented that the amount of its Non-Qualifying Income will not exceed
5% of the Company's annual gross income for any taxable year.
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If the Company fails to satisfy one or both of the 75% or 95% Income Tests
for any taxable year, it may still qualify as a REIT in such year if (i) it
attaches a schedule of the nature and amount of each item of its gross income to
its Federal income tax return for such year; (ii) the inclusion of any incorrect
information in such schedule is not due to fraud with intent to evade tax; and
(iii) the Company's failure to meet such tests is due to reasonable cause and
not due to willful neglect. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. Even if these relief provisions were to apply, the Company would
still be subject to a tax imposed with respect to the excess net income. See
"Federal Income Tax Considerations -- Taxation of the Company as a REIT."
Special Distribution Requirements. The Company plans to elect to be taxed
as a REIT by filing such an election with its Federal income tax return for the
taxable year beginning January 1, 1998. In order for the Company to qualify for
REIT status during the 1998 taxable year, the Company must distribute all
earnings and profits accumulated by Old Lexford by December 31, 1998. Although
calculations of earnings and profits are complex, the Company believes, that
based upon its own analysis and the conclusions expressed by Ernst & Young LLP
in its review of the Company's analysis that Old Lexford had no significant
accumulated earnings and profits as of January 1, 1998. Any distributions in
this regard will be distributed as part of regular distributions.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
Shareholders in an amount at least equal to (i) the sum of (a) 95% of the
Company's REIT taxable income (computed without regard to the dividends paid
deduction and excluding net capital gain) and (b) 95% of the net income (after
tax), if any, from foreclosure property, minus (ii) the sum of certain items of
noncash income (such as, for example, original issue discount and cancellation
of indebtedness income). In addition, because the IRS Notice 88-19 election was
made, if the Company disposes of any asset acquired from Old Lexford during its
Restriction Period, the Company will be required to distribute at least 95% of
the net built-in gain (after tax), if any, recognized by it for the taxable year
in which the disposal occurred. All such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before the Company timely files its income tax return for such year and if paid
on or before the first regular dividend payment after such declaration. To the
extent that the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its REIT taxable income, as
adjusted, it will be subject to tax on the undistributed amount at regular
capital gains and ordinary corporate tax rates. Moreover, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year; (ii) 95% of its REIT capital gain net income
for such year; and (iii) any undistributed taxable income from prior REIT years
upon which the Company has not paid Federal income tax, the Company would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Amounts are considered distributed for purposes of
the 4% excise tax if the Company pays tax on the income. Thus, capital gains
which are retained by the Company, and upon which the Company pays capital gains
tax, will not be subject to the 4% excise tax.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements. In this regard, the Company, has agreed to
take such steps as may be necessary to cause the Properties (through its
ownership interests in the Operating Partnership) to distribute to their
partners or members an amount sufficient to permit the Company to meet these
distribution requirements. It is possible that the Company, from time to time,
may not have sufficient cash or other liquid assets to meet the 95% distribution
requirement due primarily to the expenditure of cash for nondeductible expenses
such as principal amortization or capital expenditures. The Company does not
expect to have significant amounts of non-cash income in the form of original
issue discount arising from loans to the Syndicated Properties. In the event
that such timing differences occur, the Company may find it necessary to cause
the Operating Partnership or Properties to arrange for borrowings or liquidate
some of their investments in order to meet the annual distribution requirement.
In order to avoid any problem with the 95% distribution requirement, the Company
will closely monitor the relationship between its REIT taxable income and cash
flow and, if necessary, will seek to borrow funds (or cause either the Operating
Partnership or the Properties to seek to borrow funds) in order to satisfy the
distribution requirements.
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If the Company fails to satisfy the 95% distribution requirement as a
result of an adjustment to the Company's Federal income tax return by either the
IRS or a court, the Company may be permitted to remedy such a failure by paying
a "deficiency dividend" (plus applicable interest and penalties) within a
specified time.
Prohibited Transactions. Under REIT rules, the Company's share of any gain
realized by a Property on the sale of any property held as inventory or other
property held primarily for sale to customers in the ordinary course of a trade
or business ("Dealer Property") will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. Under existing law, whether
property is Dealer Property is a question of fact that depends on all the facts
and circumstances with respect to the particular transaction. A safe harbor to
avoid classification as a prohibited transaction exists as to real estate assets
held for the production of rental income by a REIT (i) for at least four years,
(ii) which are sold in a taxable year when the REIT has made no more than seven
sales of property or, in the alternative, the aggregate of the adjusted bases of
all properties sold during the year does not exceed 10% of the aggregate bases
of all of the REIT's properties as of the beginning of the taxable year and
(iii) the expenditures includable in a property's basis made during the
four-year period prior to disposition do not exceed 30% of the property's net
sales price. The Company's purchase of the Properties pursuant to the
Consolidation Plan is not expected to give rise to prohibited transaction gain
to the extent of the Company's share of such gain. Moreover, the Company, the
Operating Partnership, and the Properties will attempt to comply with the terms
of the safe-harbor provisions of the Code so as to avoid the implications of the
100% penalty tax. No assurance can be given, however, that the Company,
Operating Partnership or the Properties will be able to comply with the
safe-harbor provisions of the Code or avoid owning property that may be
characterized as Dealer Property. See "Federal Income Tax
Considerations -- Taxation of the Company as a REIT."
Record Keeping Requirements. Pursuant to applicable Treasury Regulations,
the Company must maintain certain records and request on an annual basis certain
information from its shareholders designed to disclose the actual ownership of
its outstanding shares. Failure to satisfy these requirements may result in the
assertion by the IRS of monetary penalties against the Company. The Company
intends to comply with these recordkeeping requirements.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year and the relief provisions do not apply, the Company would be
subject to tax (including any applicable corporate alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to Shareholders in
any year in which the Company fails to qualify would not be deductible by the
Company, nor would they be required to be made. In such event, to the extent of
current and accumulated earnings and profits, all distributions to Shareholders
would be taxable to them as ordinary income, and, subject to certain limitations
of the Code, corporate distributees would be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also would be ineligible for qualification as a REIT for the four
taxable years following the year during which qualification was lost. It is not
possible to state whether or not the Company would be entitled to such specific
statutory relief.
TAX ASPECTS OF THE COMPANY'S INVESTMENT IN THE PROPERTIES
General. The Company will hold indirect interests in the Properties. In
general, a partnership is not subject to Federal income tax. Rather, each
partner includes in the partner's taxable income or loss its allocable share of
the partnership's items of income, gain, loss, deduction and credit, without
regard to whether the partner receives a distribution from the partnership. The
rules described above will also apply to the Company's membership interests in
limited liability companies which are treated as partnerships for Federal income
tax purposes. Accordingly, references to partnerships and their partners shall
include limited liability companies and their members, respectively. The
Company, through its indirect interests in the Properties, will include its
proportionate share of the foregoing items of the Properties in its income for
purposes of the various REIT income tests and in the computation of its REIT
taxable income because the Properties will either be properly classified as
partnerships or disregarded as entities separate from their owners for Federal
income tax purposes. Any resultant increase in the Company's REIT taxable income
will increase its distribution requirements, but will not be subject to Federal
income tax in the hands of the Company provided that all such income is
distributed by
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the Company to Shareholders. Moreover, for purposes of the Asset Tests, the
Company, through its indirect interests in the Properties, will include its
proportionate share of assets held by the Properties.
Entity Classification. Because each of the Properties properly claimed
partnership classification for periods prior to the effective date of Treasury
Regulation Section 301.7701-3, which Treasury Regulation provides that an entity
may elect its Federal income tax classification for taxable periods beginning on
or after January 1, 1997, each of the Properties will be either properly
classified as a partnership or disregarded as an entity for Federal income tax
purposes beginning on and after January 1, 1998. Because the Operating
Partnership was formed after the effective date of Treasury Regulation Section
301.7701-3 and satisfies the requirements of such regulation, it will also
either be disregarded as an entity or properly be classified as a partnership
for Federal income tax purposes. If the Operating Partnership or any Property
affirmatively elects to be classified as an association taxable as a
corporation, such election could preclude the Company from satisfying certain of
the REIT requirements. The Company does not intend to, directly or indirectly,
cause the Operating Partnership or any Properties to elect to be classified as
an association taxable as a corporation.
If the Operating Partnership or any of the Properties are deemed to be a
publicly traded partnership, such entity may be treated under the Code as an
association taxable as a corporation. Such classification may preclude the
Company from satisfying certain of the REIT requirements. The Company does not
intend to cause, directly or indirectly, the Operating Partnership or any of the
Properties to be classified as publicly traded partnerships under the Code.
The following discussion shall apply to the Operating Partnership at such
time as it is properly classified as a partnership, as opposed to being
disregarded as an entity separate from the Company, for Federal income tax
purposes.
Basis in Operating Partnership Interest. The Company's adjusted tax basis
in its limited partnership interest in the Operating Partnership and the General
Partner's adjusted tax basis in its general partnership interest in the
Operating Partnership generally (i) will be equal to the sum of the cash
contributed, if any, and the adjusted bases of the interests that each
respectively contributes to the Operating Partnership; (ii) will be increased by
(a) their respective allocable shares of the Operating Partnership's income and
(b) their allocable shares of indebtedness of the Operating Partnership; and
(iii) will be reduced, but not below zero, by their respective allocable shares
of (a) the Operating Partnership's losses; (b) the amount of cash distributed to
them; and (c) by constructive distributions resulting from a reduction in their
shares of indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's interest in
the Operating Partnership, the recognition of such loss will generally be
deferred until such time and to the extent that the Company has sufficient
adjusted tax basis in its interest in the Operating Partnership to offset the
loss. To the extent that the Operating Partnership's distributions, or any
decrease in the Company's share of the indebtedness of the Operating Partnership
(such decrease being considered a constructive cash distribution to the
partners), exceed the Company's adjusted tax basis in the Operating Partnership,
such distributions (including such constructive distributions) will constitute
taxable income to the Company. Such distributions and constructive distributions
normally will be characterized as capital gain, and if the Company's interest in
the Operating Partnership has been held for longer than the long-term capital
gain holding period, the distributions and constructive distributions will
constitute long-term capital gain.
Tax Allocations With Respect to Contributed Property. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
or depreciated property that is contributed to a partnership in exchange for an
interest in the partnership must be allocated for Federal income tax purposes in
a manner that the contributor is charged with, or benefits from, the unrealized
gain or loss associated with the property at the time of contribution. The
amount of such unrealized gain or loss is generally equal to the difference
between the fair market value of the contributed property at the time of
contribution and the adjusted tax basis of such property at such time (the
"Book-Tax Difference"). The Operating Partnership Agreement will require
allocations of income, gain, loss and deduction attributable to contributed
property to be made in a manner that is consistent with Section 704(c) of the
Code.
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TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to taxable
domestic Shareholders out of current or accumulated earnings and profits (and
not designated as capital gain dividends) will be taken into account by such
Shareholders as ordinary income. Domestic Shareholders generally are
Shareholders who are (i) citizens or residents of the United States; (ii)
corporations, partnerships or other entities created in or organized under the
laws of the United States or any political subdivision thereof; (iii) an estate
whose income from sources outside the United States is includible in gross
income for U.S. Federal income tax purposes regardless of its connection with
the conduct of a trade or business within the United States; or (iv) any trust
with respect to which (a) a U.S. Court is able to exercise primary supervision
over the administration of such trust, and (b) one or more U.S. fiduciaries have
the authority to control all substantial decisions of the trust. Corporate
Shareholders will not be entitled to the dividends received deduction. Any
dividend declared by the Company in October, November or December of any year
payable to a Shareholder of record on a specific date in any such month shall be
treated as both paid by the Company and received by the Shareholder on December
31 of such year, provided that the dividend is actually paid by the Company
during January of the following calendar year.
Distributions that are designated as capital gain dividends by the Company
will be treated as a gain from the sale of a capital asset held for more than
one year (to the extent they do not exceed the Company's actual net capital gain
for the taxable year) without regard to the period for which the Shareholder has
held its Common Shares. The Company may elect to designate in a notice mailed to
Shareholders within 60 days of the end of the taxable year (or in a notice
mailed with its annual report for the taxable year) the amount of its
undistributed net long-term capital gains for the taxable year. The Shareholders
must include in income as long-term capital gains their proportionate share of
the undistributed long-term capital gains as designated by the Company. Each
Shareholder will be deemed to have paid such Shareholder's share of the tax paid
by the Company on such gains, which tax will be credited or refunded to the
Shareholder. A Shareholder may increase his tax basis in his Common Shares by
the difference between the amount of income included by the Shareholder as a
result of the designation and the amount of tax deemed paid by the Shareholder.
Corporate Shareholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a Shareholder to the extent that they do not exceed the
adjusted basis of the Shareholder's Common Shares, but rather will reduce the
adjusted basis of such shares. To the extent that such distributions exceed the
adjusted basis of a Shareholder's Common Shares, they will be included in income
as capital gain assuming the Common Shares are a capital asset in the hands of
the Shareholder.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. In general, a Shareholder
will realize capital gain or loss on the disposition of Common Shares equal to
the difference between (a) the sales price for such shares and (b) the adjusted
tax basis of such shares. Gains realized upon the sale or exchange of Common
Shares by an individual Shareholder who has held such Common Shares for more
than one year (after applying certain holding period rules) will be taxed at
beneficial capital gains rates. However, losses incurred upon a sale or exchange
of Common Shares by a Shareholder who has held such shares for six months or
less (after applying certain holding period rules) will be deemed a long-term
capital loss to the extent of any capital gain dividends received by the selling
Shareholder with respect to such Common Shares.
Distributions from the Company and gain from the disposition of Common
Shares will not be treated as passive activity income. Distributions from the
Company (to the extent they do not constitute a return of capital) will
generally be treated as investment income for purposes of the investment
interest limitation. Gain from the disposition of Common Shares and capital gain
dividends will not be treated as investment income unless the taxpayer elects to
have the gain taxed at ordinary income rates.
In 1997, Congress made certain changes to the taxation of capital gains of
individuals, trust and estates. Subject to certain exceptions, for individuals,
trust and estates, the maximum rate of tax on the net capital gain from a sale
or exchange occurring after July 28, 1997 of a capital asset held for more than
18 months is 20%. The maximum rate has been reduced to 18% for capital assets
acquired after December 21, 2000 and held for more than five years. The maximum
rate for capital assets held for more than one year but not more than 18 months
is
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28%. The maximum rate for net capital gains attributable to the sale of
depreciable real property held for more than 18 months is 25% to the extent of
the prior deductions for depreciation taken with respect to such property.
Capital gain from the sale of depreciable property held by the Company for more
than one year but for not more than 18 months will be taxed at ordinary income
rates to the extent of depreciation deductions claimed by the Company in excess
of the amount of depreciation allowable under the straight-line method of
depreciation, with the remaining gain taxed at a maximum rate of 28%.
Congress directed the Treasury Department to promulgate regulations
describing the application of these capital gains rates to distributions made by
"pass-through" entities such as the Company. Such regulations, if and when
issued, could apply on a retroactive basis.
On November 10, 1997, the IRS issued Notice 97-64 to describe how regulated
investment companies ("RICs"), REITs and their shareholders must apply the
capital gain provisions of the 1997 Taxpayer Relief Act to their capital gain
dividends. RICs, REITs and their shareholders must use the guidance in Notice
97-64 until further guidance is issued. Under Notice 97-64, if the Company
designates a dividend as a capital gain dividend (or makes a capital gains
designation for an undistributed amount), it may also designate the dividend (or
undistributed amount) as a 20% rate gain distribution, an unrecaptured Section
1250 gain distribution, or a 28% rate gain distribution. If no additional
designation is made regarding a capital gain dividend (or undistributed amount),
it will be treated as a 28% rate gain distribution.
Backup Withholding. The Company will report annually to its domestic
Shareholders and the IRS the amount of dividends paid during each calendar year,
and the amount of tax withheld, if any, with respect thereto. Under the backup
withholding rules, a Shareholder may be subject to backup withholding at the
rate of 31% with respect to dividends paid unless such Shareholder (i) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (ii) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. A
Shareholder who does not provide the Company with his or her correct taxpayer
identification number may be subject to penalties imposed by the IRS. Any amount
paid as backup withholding will be creditable against the Shareholder's income
tax liability. In addition, the Company may be required to withhold a portion of
capital gain distributions made to any Shareholders who fail to certify their
nonforeign status to the Company.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and
profit-sharing trusts ("Pension Trusts"), individual retirement accounts and
certain funded welfare plan arrangements ("Exempt Organizations"), generally are
exempt from Federal income taxation. However, they are subject to taxation on
their unrelated business taxable income ("UBTI"). While many investments in real
estate generate UBTI, the IRS has issued a published ruling that dividend
distributions by a REIT to a Pension Trust do not constitute UBTI, provided that
the shares of the REIT are not otherwise used in an unrelated trade or business
of the Pension Trust. The Company believes that based on its intentions and that
ruling, amounts distributed by the Company to Exempt Organizations generally
should not constitute UBTI. However, if an Exempt Organization finances its
acquisition of the Common Shares with debt, a portion of its income from the
Company may constitute UBTI pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefits associations,
supplemental unemployment benefit trusts, and qualified group legal services
plans that are exempt from taxation under paragraphs (7), (9), (17), and (20),
respectively, of Section 501(c) of the Code are subject to different UBTI rules,
which generally will require them to characterize distributions from the Company
as UBTI. In addition, a Pension Trust that owns more than 10% of the Company may
be required to treat a percentage of the dividends from the Company as UBTI (the
"UBTI Percentage") in certain circumstances. However, under the Ownership
Restrictions contained in the Declaration of Trust, no Shareholder may own more
than 9.2% of the Common Shares. See "Description of Common Shares --
Restrictions on Transfer."
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TAXATION OF FOREIGN SHAREHOLDERS
The rules governing Federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
Shareholders (collectively, "Non-U.S. Shareholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON SHARES, INCLUDING ANY REPORTING REQUIREMENTS.
It is currently anticipated that the Company will qualify as a
"domestically controlled REIT" (i.e., a REIT in which at all times during a
specified testing period less than 50% of the value of the shares is owned
directly or indirectly by Non-U.S. Shareholders) and therefore gain from the
sale of Common Shares by a Non-U.S. Shareholder would not be subject to United
States Federal income taxation unless such gain is treated as "effectively
connected" with the Non-U.S. Shareholder's United States trade or business.
Distributions that are not attributable to gain from the sale or exchange
by the Company of United States real property interests (and are not designated
as capital gain dividends) will be treated as dividends of ordinary income to
the extent that they are made out of current or accumulated earnings and profits
of the Company. Such distributions generally will be subject to a United States
withholding tax equal to 30% of the gross amount of the distribution, subject to
reduction or elimination under an applicable tax treaty. However, if dividends
from the investment in the shares are treated as "effectively connected" with
the Non-U.S. Shareholder's conduct of a United States trade or business, such
dividends will be subject to regular U.S. income taxation (foreign corporations
may also be subject to the 30% branch profits tax). The Company expects to
withhold United States income tax at the rate of 30% on the gross amount of any
such dividends made to a Non-U.S. Shareholder unless: (i) a lower treaty rate
applies and the Non-U.S. Shareholder files certain information evidencing its
entitlement to such lower treaty rate; or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with the Company claiming that the distribution is "effectively
connected" income. Distributions which exceed current and accumulated earnings
and profits of the Company will not be taxable to the extent that they do not
exceed the adjusted basis of a Non-U.S. Shareholder's shares but, rather, will
reduce (but not below zero) the adjusted basis of such shares. To the extent
that such distributions exceed the adjusted basis of a Non-U.S. Shareholder's
shares, they generally will give rise to United States tax liability if the
Non-U.S. Shareholder would otherwise be subject to tax on gain from the sale or
disposition of his or her shares in the Company, as described above. If it
cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distributions will be subject to withholding at the same rate as dividends.
However, amounts thus withheld are refundable if it is subsequently determined
that such distribution was, in fact, in excess of current and accumulated
earnings and profits of the Company. In October 1997, final regulations dealing
with withholding tax on income paid to foreign persons and related matters were
promulgated. In general, the new withholding regulations do not significantly
alter the substantive withholding and information reporting requirements, but
unify current certification procedures and forms and clarify reliance standards.
For example, the new withholding regulations adopt a certification rule which
was in the proposed regulations under which a foreign shareholder who wishes to
claim the benefit of an applicable treaty rate with respect to dividends from a
U.S. corporation will be required to satisfy certain certification and other
requirements. Beginning with payments made on or after January 1, 2000, the new
regulations require a corporation that is a REIT to treat as a dividend the
portion of a distribution that is not designated as a capital gain dividend or
return of basis and apply the 30% withholding tax (subject to any applicable
deduction or exemption) to such portion, and to apply the provisions of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") withholding rules
(discussed below) with respect to the remainder of the distribution.
Distributions by the Company to a Non-U.S. Shareholder that are
attributable to gain from sales or exchanges by the Company of a United States
real property interest are subject to income and withholding tax under FIRPTA.
Under FIRPTA, these distributions, if any, are treated as gain recognized from
the sale of a United States real property interest and are taxed as income
"effectively connected" with a United States business. Non-U.S. Shareholders
would thus be taxed at the normal capital gain rates applicable to U.S.
shareholders (subject to the applicable alternative minimum tax and a special
alternative minimum tax for nonresident alien individuals). Also, distributions
subject to FIRPTA may be subject to a 30% branch profits tax
75
<PAGE> 83
in the hands of a foreign corporate shareholder not entitled to treaty
exemption. The Company is required by applicable Treasury Regulations to
withhold 35% of any distribution that could be designated by the Company as a
capital gains dividend. This amount is creditable against the Non-U.S.
Shareholder's FIRPTA tax liability. A refund may be available if the amount
exceeds the Non-U.S. Shareholder's Federal income tax liability.
OTHER TAX CONSIDERATIONS
State, Local and Other Taxes. The Company or Shareholders or both may be
subject to state, local or other taxation in various state, local or other
jurisdictions, including those in which they transact business or reside. The
tax treatment in such jurisdictions may differ from the Federal income tax
consequences discussed above. Consequently, prospective Shareholders should
consult with their own tax advisors regarding the effect of state, local and
other tax laws on an investment in the Common Shares.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit sharing, retirement, welfare or other
employee benefit plan ("Employee Plan") subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), should consider the fiduciary
standards under ERISA in the context of the Employee Plan's particular
circumstances before authorizing an investment of a portion of the Employee
Plan's assets in the Common Shares. Accordingly, any such fiduciary should
consider: (i) whether the investment satisfies the diversification requirements
of Section 404(a)(1)(C) of ERISA; (ii) whether the investment is in accordance
with the documents and instruments governing the Employee Plan as required by
Section 404(a)(1)(D) of ERISA; and (iii) whether the investment is prudent under
ERISA. In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA, and the corresponding provisions
of the Code, prohibit a wide range of transactions involving the assets of the
Employee Plan and persons who have certain specified relationships to the
Employee Plan ("parties in interest" within the meaning of ERISA, "disqualified
persons" within the meaning of the Code). Thus, an Employee Plan fiduciary
considering an investment in the Common Shares also should consider whether the
acquisition (or receipt in connection with the distribution) or the continued
holding of the Common Shares might constitute or give rise to a direct or
indirect prohibited transaction.
The Department of Labor (the "DOL") has issued final regulations (the "DOL
Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under the DOL Regulations, if an Employee Plan acquires an equity
interest in an entity, which interest is neither a "publicly offered security"
nor a security issued by an investment company registered under the Investment
Company Act of 1940, as amended, the Employee Plan's assets would include, for
purposes of the fiduciary responsibility provisions of ERISA, both the equity
interest and an undivided interest in each of the entity's underlying assets
unless certain specified exceptions apply. The DOL Regulations define a publicly
offered security as a security that is "widely held," "freely transferable," and
either part of a class of securities registered under the Exchange Act, or sold
pursuant to an effective registration statement under the Securities Act
(provided the securities are registered under the Exchange Act within 120 days
after the end of the fiscal year of the issuer during which the public offering
occurred). The Common Shares are being sold in an offering registered under the
Securities Act and will be registered under the Exchange Act.
The DOL Regulations provide that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control. The
Company expects the Common Shares to be "widely held" on completion of the
distribution.
The DOL Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulations further provide that when
a security is part of an offering in which the minimum investment is $10,000 or
less, as is the case with the Offering, certain restrictions ordinarily will
not, alone or in combination, affect the finding that those securities are
"freely transferable." The Company believes that the restrictions imposed under
its Declaration of Trust on the transfer of the Common Shares are limited to the
restrictions on transfer generally permitted under the DOL
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<PAGE> 84
Regulations and are not likely to result in the failure of the Common Shares to
be "freely transferable." The DOL Regulations only establish a presumption in
favor of the finding of free transferability, and, therefore, no assurance can
be given that the DOL and the U.S. Treasury Department will not reach a contrary
conclusion.
Assuming that the Common Shares will be "widely held" and are "freely
transferable," the Company believes that the Common Shares will be publicly
offered securities for purposes of the DOL Regulations and that the assets of
the Company will not be deemed to be "plan assets" of any Employee Plan that
invests in the Company.
THE DISCUSSION IN THIS SECTION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL
ERISA PLANNING AND INDIVIDUAL CONSULTATION WITH AN ERISA ADVISOR, AND EACH
SHAREHOLDER IS URGED TO CONSULT HIS ERISA ADVISOR AS TO THE SPECIFIC ERISA
CONSEQUENCES TO HIM OF THE DISTRIBUTION.
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<PAGE> 85
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the U.S. Underwriters
named below for whom Morgan Stanley & Co. Incorporated, PaineWebber
Incorporated, Smith Barney Inc., J.C. Bradford & Co. and Wheat First Union, a
division of Wheat First Securities, Inc. are acting as U.S. Representatives, and
the International Underwriters named below for whom Morgan Stanley & Co.
International Limited, PaineWebber International (U.K.) Ltd., Smith Barney Inc.,
J.C. Bradford & Co. and Wheat First Union, a division of Wheat First Securities,
Inc. are acting as International Representatives, have severally agreed to
purchase, and the Company has agreed to sell to them, severally, the respective
number of Common Shares set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME COMMON SHARES
---- -------------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.........................
PaineWebber Incorporated..................................
Smith Barney Inc..........................................
J.C. Bradford & Co........................................
Wheat First Securities, Inc...............................
-----------
Subtotal............................................... 8,800,000
-----------
International Underwriters:
Morgan Stanley & Co. International Limited................
PaineWebber International (U.K.) Ltd......................
Smith Barney Inc..........................................
J.C. Bradford & Co........................................
Wheat First Securities, Inc...............................
-----------
Subtotal............................................... 2,200,000
-----------
Total................................................ 11,000,000
===========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the Common Shares offered hereby are subject
to the approval of certain legal matters by their counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all of the Common
Shares offered hereby (other than those covered by the U.S. Underwriters'
over-allotment option described below) if any such shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Common Shares (as defined herein) for the account of
anyone other than a United States or Canadian Person (as defined herein) and
(ii) it has not offered or sold, and will not offer or sell, directly or
indirectly, any Common Shares or distribute any prospectus relating to the
Common Shares outside the United States or Canada or to anyone other than a
United States or Canadian Person. Pursuant to the Agreement between U.S. and
International Underwriters, each International Underwriter has represented and
agreed that, with certain exceptions: (i) it is not purchasing any Common Shares
for the account of any United States or Canadian Person and (ii) it has not
offered or sold, and will not offer to sell, directly or indirectly, any Common
Shares or distribute any prospectus relating to the Common shares in the United
States or Canada or to any United States or Canadian Person. With respect to any
Underwriter that is a U.S. Underwriter and an International Underwriter, the
foregoing representations and agreements (i) made by it in its capacity as a
U.S. Underwriter apply only to it in its capacity as a U.S. Underwriter and (ii)
made by it in its capacity as an International Underwriter apply only to it in
its capacity as an International Underwriter. The foregoing limitations do not
apply to stabilization transactions or to certain other
78
<PAGE> 86
transactions specified in the Agreement between U.S. and International
Underwriters. As used herein, "United States or Canadian Person" means any
national or resident of the United States or Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the laws
of the United States or Canada or any political subdivision thereof (other than
a branch located outside the United States and Canada of any United States or
Canadian Person), and includes any United States or Canadian branch of a person
who is otherwise not a United States or Canadian Person. All Common Shares to be
purchased by the Underwriters under the Underwriting Agreement are referred to
herein as the "Shares."
Pursuant to the Agreement between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of Shares as may be mutually agreed. The per share price of any
Shares sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per share
amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any Shares, directly or indirectly, in any province or
territory of Canada, or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of Shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
of the Shares a notice stating in substance that, by purchasing such Shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer to sell, directly or indirectly, any of such Shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of Shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer is made, and that such dealer will deliver to any other
dealer to whom it sells any of such Shares a notice containing substantially the
same statement as is contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and, prior to the date six months after the closing date for the sale of
Shares to the International Underwriters, will not offer to sell, any Shares to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Shares in, from or otherwise involving
the United Kingdom; and (iii) it has only issued or passed on and will only
issue or pass on in the United Kingdom any document received by it in connection
with the offering of the Shares to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom such document may otherwise
lawfully be issued or passed on.
The Underwriters initially propose to offer part of the Common Shares
directly to the public at the public offering price set forth on the cover page
hereof and part to certain dealers at a price that represents a concession not
in excess of $ a share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ a share to other Underwriters or to certain dealers. After the
initial offering of the Common Shares, the offering price and other selling
terms may from time to time be varied by the Representatives.
Pursuant to the Underwriting Agreement, the Company has granted to the U.S.
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an aggregate of 1,650,000 additional Common Shares
at the public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The U.S. Underwriters may exercise such
option to purchase solely for the purpose of covering over-allotments, if any,
made in connection with the Offering of Common Shares offered hereby. To the
extent such option is exercised, each U.S. Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional Common Shares as the number set forth next to such U.S.
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<PAGE> 87
Underwriter's name in the preceding table bears to the total number of Common
Shares set forth next to the names of all U.S. Underwriters in the preceding
table.
The Shares have been approved for listing, subject to official notice of
issuance, on the NYSE under the symbol "LFT."
Each of the Company and the Trustees and executive officers of the Company
has agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of this Prospectus (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 or otherwise
transfer or dispose of, directly or indirectly, any Common Shares or any
securities convertible into or exercisable or exchangeable for Common Shares or
(ii) enter into any swap or 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, other than (a) the sale of Common Shares to the Underwriters, (b) the
issuance by the Company of Common Shares upon the exercise of an option or a
warrant or the conversion of a security outstanding on the date of this
Prospectus of which the Underwriters have been advised in writing and recurring
issuances by the Company of Common Shares, subject to prohibition of resale
during such 180 day period, under existing employment agreements or
arrangements, (c) the issuance of OP Units, as long as such OP Units are not
exchangeable for or convertible into Common Shares during the period ending 180
days after the date of this Prospectus, (d) transactions by any person other
than the Company relating to Common Shares or other securities acquired in open
market transactions after the completion of the Offering and (e) the pledge of
Common Shares in order to finance the purchase of Common Shares.
In order to facilitate the offering of the Common Shares, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Shares. Specifically, the Underwriters may overallot in
connection with the Offering, creating a short position in the Common Shares for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Shares, the Underwriters may bid for, and purchase, Common
Shares in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing the
Common Shares in the Offering, if the syndicate repurchases previously
distributed Common Shares in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Shares above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
Morgan Stanley & Co. Incorporated has from time to time provided investment
banking and financial advisory services to the Company. Over the past three
years, affiliates of PaineWebber Incorporated, Wheat First Securities, Inc. and
Morgan Stanley & Co. Incorporated have originated mortgage loans for the
Company.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
80
<PAGE> 88
EXPERTS
The consolidated financial statements of Lexford Residential Trust
(formerly Lexford, Inc. and Cardinal Realty Services, Inc.) and Subsidiaries as
of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997, and the combined statements of revenue and certain
expenses of the Consolidating Properties for each of the three years in the
period ended December 31, 1997, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports appearing elsewhere herein, and are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by Benesch, Friedlander, Coplan & Aronoff LLP, Columbus and
Cleveland, Ohio. Certain legal matters will be passed upon for the Underwriters
by Shearman & Sterling, New York, New York. Certain legal matters relating to
Maryland law, including the validity of the issuance of the Common Shares, will
be passed upon for the Company by Shaw Pittman Potts & Trowbridge, Washington,
D.C. In addition, subject to the conditions, qualifications and limitations set
forth in their opinion, the description of Federal income tax matters contained
in this Prospectus under the caption "Federal Income Tax Considerations," in the
opinion of Willkie Farr & Gallagher, special tax counsel to the Company,
accurately summarizes all Federal tax consequences likely to be material to a
Shareholder. H. Jeffrey Schwartz, a partner in Benesch, Friedlander, Coplan &
Aronoff LLP, is a Trustee of the Company and beneficially owns 70,938 Common
Shares.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Commission. Copies of such reports, proxy statements and
other information can be inspected and copied, at prescribed rates, at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511; and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material may be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Company files reports, proxy statements and other information with the
Commission electronically. The Commission maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The Commission's web
site can be accessed at http://www.sec.gov. The Company's Common Shares are
listed on The New York Stock Exchange. Reports, proxy statements and other
information concerning the Company may be inspected at the offices of The New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") under the Securities Act, with the Commission for the
offering of the Common Shares hereunder. This Prospectus, which is a part of
such Registration Statement, does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit or incorporated by reference to the Registration Statement
of which this Prospectus forms a part. Each such statement is qualified in all
respects by such reference. For further information with respect to the Company
and the Common Shares offered hereby, reference is made to the Registration
Statement and the exhibits and schedules thereto. Copies of the Registration
Statement and the exhibits and schedules thereto can be inspected, and copied,
at prescribed rates, at the Commission and its regional offices as described
above or accessed through the Commission's web site described above.
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<PAGE> 89
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed by the Company with the Commission
are incorporated by reference in this Prospectus:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
(b) The Company's Current Reports on Form 8-K filed February 17, 1998,
March 2, 1998, March 20, 1998, April 1, 1998, April 20, 1998.
(c) The Company's Quarterly Report on Form 10-Q for the period ended March
31, 1998, filed May 15, 1998.
The information relating to the Company contained in this Prospectus does
not purport to be complete and should be read together with the information
contained in the documents incorporated herein by reference.
All documents filed by the Company (i) pursuant to the Exchange Act after
the date of the Registration Statement and prior to the effectiveness of the
Registration Statements and (ii) pursuant to Section 13(a) or 14 of the Exchange
Act subsequent to the date hereof and prior to the termination of the Offering
shall be deemed to be incorporated by reference into this Prospectus and shall
be deemed a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein (or in any other subsequently filed document which is
also incorporated by reference herein) modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed to constitute a part
of this Prospectus, except as so modified or superseded.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. Such documents (other than exhibits to such
documents unless such exhibits are specifically incorporated by reference) are
available, upon written or oral request, without charge, to any person,
including any beneficial owner, to whom this Prospectus is delivered. Requests
for such copies should be directed to: Lexford Residential Trust, The Huntington
Center, 41 South High Street, Suite 2410, Columbus, Ohio 43215, Attention:
Investor Relations Department (telephone number (614) 242-3850).
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<PAGE> 90
GLOSSARY
The following terms are defined on the pages set forth below:
"ADA" is defined at page 14.
"Additional Limited Partners" is defined at page 62.
"AIC" is defined at page 48.
"Asset Tests" is defined at page 67.
"Bank of America" is defined at page 15.
"Beneficial Ownership Limitations" is defined at page 17.
"Board" is defined at page 17.
"Book-Tax Difference" is defined at page 72.
"Business Combination Act" is defined at page 59.
"Bylaws" is defined at page 15.
"CAI" is defined at page 48.
"CAD" or "Cash Available for Distribution" is defined at page 10.
"CAGR" or "compound annual growth rate" is defined at page 35.
"Cautionary Statements" is defined at page iii.
"Charitable Beneficiary" is defined at page 55.
"Code" is defined at page 17.
"Commission" is defined at page 60.
"Company" is defined at page 1.
"Consolidating Properties" is defined at page 44.
"Consolidation Plan" is defined at page 44.
"Constructive Ownership Limitation" is defined at page 56.
"Control Share Acquisition" is defined at page 58.
"Control Share Act" is defined at page 58.
"Core Markets" is defined at page 5.
"Dealer Property" is defined at page 71.
"Declaration of Trust" is defined at page 17.
"DOL" is defined at page 76.
"DOL Regulations" is defined at page 76.
"economic interest" means a direct or indirect equity interest in a
property or a contractual right to manage a property.
"Employee Plan" is defined at page 76.
"ERISA" is defined at page 76.
"Excess Common Shares" is defined at page 17.
"Excess Preferred Shares" is defined at page 17
"Excess Shares" is defined at page 17.
"Exchange Act" is defined at page iii.
"Exempt Organizations" is defined at page 74.
"FHAA" is defined at page 14.
"FIRPTA" is defined at page 75.
"five or fewer requirement" is defined at page 66.
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<PAGE> 91
"Funds from Operations" or "FFO" is defined at page 10.
"GAAP" is defined at page 10.
"General Partner" is defined at page 62.
"Guilford/Hidden Pointe Properties" is defined at page 4.
"Historical Financial Information" is defined at page 8.
"IRS" is defined at page 19.
"Interested Shareholder" is defined at page 59.
"Lexford" is defined at page 1.
"LPI" is defined at page 2.
"LPM" is defined at page 44.
"Limited Partners" is defined at page 62.
"NAREIT" is defined at page 10.
"New Credit Facility" is defined at page 13.
"Non-Consolidating Properties" is defined at page 4.
"Non-Qualifying Income" is defined at page 69.
"Non-U.S. Shareholders" is defined at page 75.
"NYSE" is defined at page 20.
"Old Lexford" is defined at page 1.
"OP Units" is defined at page 4.
"Operating Partnership Agreement" is defined at page 43.
"Operating Partnership" is defined at page 43.
"Ownership Restrictions" is defined at page 55.
"Pension Trusts" is defined at page 74.
"Preferred Shares" is defined at page 16.
"Prepayable Debt" is defined at page 3.
"Pro Forma Financial Information" defined at page 8.
"Prohibited Owner" is defined at page 57.
"Prohibited Transferee" is defined at page 57.
"Properties" is defined at page 1.
"Qualified Rents" is defined at page 68.
"Rabbi Trust" is defined at page 51.
"REIS Reports" is defined at page iii.
"REIT" is defined at page 17.
"REIT Conversion" is defined at page 42.
"Registration Statement" is defined at page 81.
"Reincorporation Merger" is defined at page 43.
"Related Party Tenant" is defined at page 68.
"Remaining Mortgages" is defined at page 13.
"Representatives" is defined at page 78.
"Restriction Period" is defined at page 66.
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<PAGE> 92
"Restricted Shares" is defined at page 51.
"RICs" is defined at page 74.
"Securities Act" is defined at page iii.
"Special Trust" is defined at page 55.
"Syndicated Properties" is defined at page 4.
"third party management business" is described at page 44.
"Title 8" is defined at page 17.
"Trustee" is defined at page 16.
"UBTI" is defined at page 74.
"UBTI Percentage" is defined at page 74.
"Underwriting Agreement" is defined at page 78.
"Underwriters" is defined at page 78.
"Wholly-Owned Properties" is defined at page 25.
"100 shareholder requirement" is defined at page 66.
"75% Income Test" is defined at page 68.
"95% Income Test" is defined at page 68.
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<PAGE> 93
APPENDIX A
INDIVIDUAL PROPERTY INFORMATION
FOR THE 437 WHOLLY-OWNED PROPERTIES
(AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997)
<TABLE>
<CAPTION>
PHYSICAL
OCCUPANCY
DATE OF AS OF NET
RENTABLE CONSTRUCTION AVERAGE RENT DECEMBER 31, OPERATING
NAME LOCATION UNITS OR OPENING COLLECTED/MONTH 1997 INCOME
---- -------- -------- ------------ --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
GLENVIEW.......................... AL 90 08/01/86 $355 91.1% $ 224,655
WOOD VALLEY CALHOUN............... AL 69 03/03/86 396 91.3 226,521
AMBERWOOD......................... FL 50 11/01/81 388 96.0 115,635
APPLEWOOD......................... FL 69 05/01/82 396 98.5 178,546
APPLEWOOD II...................... FL 93 04/20/84 359 71.6 144,843
BAYSIDE........................... FL 59 05/01/82 352 94.9 46,299
BEL AIRE.......................... FL 69 -- (1) 524 91.4 205,770
BEL AIRE II....................... FL 51 01/01/86 517 82.3 138,546
BERRY PINES....................... FL 64 04/01/85 398 96.8 168,563
BLUEBERRY HILL I.................. FL 68 12/01/86 411 86.7 200,506
BRANCHWOOD........................ FL 117 04/01/81 431 97.4 344,120
BRANDYWYNE EAST................... FL 38 09/01/81 388 97.3 97,084
CALIFORNIA GARDENS................ FL 71 07/01/87 426 67.6 154,290
CANDLELIGHT....................... FL 51 10/01/82 359 84.3 91,678
CANDLELIGHT II.................... FL 60 05/27/85 355 90.0 102,125
CANTERBURY CROSSINGS.............. FL 70 12/01/83 582 100.0 301,463
CEDARWOOD......................... FL 55 03/01/78 352 90.9 128,126
CEDARWOOD II...................... FL 39 04/01/80 374 94.8 92,916
CENTRE LAKE III................... FL 233 06/01/86 520 99.5 790,174
CLEARLAKE PINES II................ FL 51 07/01/85 440 86.5 137,481
COUNTRYSIDE....................... FL 59 04/01/82 420 93.3 160,218
COUNTRYSIDE II.................... FL 96 04/01/82 430 95.8 256,962
CYPRESS........................... FL 70 03/01/85 415 84.2 210,663
DEERWOOD.......................... FL 50 08/01/82 414 82.0 124,600
DRIFTWOOD......................... FL 63 05/15/85 452 92.0 175,576
ELMWOOD........................... FL 52 03/01/84 510 94.2 190,912
ELMWOOD II........................ FL 50 10/01/84 512 96.0 186,801
FOREST GLEN....................... FL 73 01/01/86 411 83.7 211,178
GARDEN TERRACE II................. FL 65 10/01/82 381 74.2 96,181
GARDEN TERRACE I.................. FL 59 09/01/81 386 81.6 116,732
HERON POINTE...................... FL 99 01/01/86 429 87.1 227,331
HICKORY PLACE..................... FL 70 08/01/83 440 100.0 207,047
HIDDEN ACRES...................... FL 94 01/01/87 422 97.8 248,786
HIDDEN PINES...................... FL 56 07/01/81 482 98.2 156,017
HIGH POINTS....................... FL 95 04/01/86 350 95.7 245,890
HILLCREST VILLA................... FL 65 04/22/85 389 89.2 170,952
HILLSIDE TRACE.................... FL 64 09/01/87 365 95.3 163,418
HOLLY RIDGE....................... FL 98 01/01/86 525 93.8 274,416
HOLLY SANDS....................... FL 72 04/01/85 451 88.8 258,816
HOLLY SANDS II.................... FL 52 06/01/86 437 94.2 175,953
JEFFERSON WAY I................... FL 56 08/01/87 454 91.0 169,387
JUPITER COVE I.................... FL 63 09/01/87 519 100.0 236,263
JUPITER COVE III.................. FL 63 09/01/87 524 98.4 247,929
MARK LANDING I.................... FL 71 11/01/87 466 94.4 219,940
MEADOWOOD II...................... FL 54 11/01/80 445 98.1 159,531
MIGUEL PL......................... FL 91 10/01/87 367 95.6 213,105
MORNINGSIDE II.................... FL 182 01/01/84 353 76.0 148,517
MOSSWOOD.......................... FL 57 08/01/81 441 98.2 154,943
MOSSWOOD II....................... FL 89 05/01/82 442 98.8 260,634
NOVA GLEN......................... FL 61 06/08/84 434 100.0 134,947
NOVA GLEN II...................... FL 81 01/01/86 408 91.3 160,707
NOVAWOOD.......................... FL 57 05/01/80 419 100.0 113,453
NOVAWOOD II....................... FL 61 09/01/80 412 98.3 135,790
</TABLE>
- ---------------
(1) Property acquired after date of construction or opening.
A-1
<PAGE> 94
<TABLE>
<CAPTION>
PHYSICAL
OCCUPANCY
DATE OF AS OF NET
RENTABLE CONSTRUCTION AVERAGE RENT DECEMBER 31, OPERATING
NAME LOCATION UNITS OR OPENING COLLECTED/MONTH 1997 INCOME
---- -------- -------- ------------ --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
OAK GARDENS....................... FL 106 01/01/88 $524 91.5% $ 334,506
OAK RIDGE......................... FL 63 05/17/85 412 96.8 191,186
OAK SHADE......................... FL 82 04/01/85 436 100.0 246,519
OAKWOOD MANOR..................... FL 63 04/01/86 474 89.0 191,034
OAKWOOD VILLAGE................... FL 74 01/01/86 360 100.0 147,608
OLD ARCHER COURT.................. FL 72 08/01/77 419 100.0 198,734
PALATKA OAKS...................... FL 34 08/01/77 350 82.3 48,440
PALATKA OAKS II................... FL 23 08/01/80 435 91.3 48,891
PALM BAY/WINDWOOD II.............. FL 64 12/31/87 379 93.7 118,675
PALM PLACE........................ FL 80 01/01/84 485 96.3 263,393
PELICAN POINTE I.................. FL 86 11/01/87 411 94.1 248,999
PELICAN POINTE II................. FL 74 11/01/87 416 85.1 218,314
PINE BARRENS...................... FL 104 06/01/86 425 93.3 296,204
PINE LAKE......................... FL 41 10/01/82 401 90.2 81,356
PINE MEADOWS...................... FL 60 02/01/85 469 93.4 171,533
PINE TERRACE...................... FL 80 08/01/83 394 77.5 205,502
PINE TERRACE II................... FL 68 11/09/84 394 77.9 173,970
PINELLAS PINES.................... FL 68 12/01/83 448 94.1 195,882
RANCHSIDE......................... FL 76 08/01/85 357 98.6 172,959
RIVERS END........................ FL 66 02/01/86 445 90.9 201,867
RIVERS END II..................... FL 69 01/01/86 435 94.2 221,682
SANDPIPER II...................... FL 66 09/01/82 416 89.3 141,383
SANFORD COURT INVESTORS........... FL 106 11/01/76 420 99.0 270,674
SHADOW BAY........................ FL 53 04/01/84 450 96.3 139,862
SHADOW BAY II..................... FL 59 08/01/85 451 91.6 149,484
SHADOW RIDGE...................... FL 62 10/01/83 435 98.3 177,085
SHADOWOOD......................... FL 69 01/01/82 426 95.6 198,527
SHADOWOOD II...................... FL 70 05/01/83 424 91.4 198,756
SILVER FOREST..................... FL 51 02/01/85 403 94.1 134,021
SKY PINES......................... FL 88 01/01/86 433 91.0 244,965
SKY PINES II...................... FL 52 06/01/86 438 92.3 145,065
SPRING GATE....................... FL 66 11/01/83 404 89.3 170,589
STRAWBERRY PLACE.................. FL 55 06/01/82 376 89.0 105,447
SUGARTREE......................... FL 60 06/01/84 433 88.3 179,000
SUNSET WAY I...................... FL 100 08/01/87 533 92.0 309,905
SUNSET WAY II..................... FL 99 04/27/88 539 97.0 297,420
SUTTON PLACE...................... FL 55 07/01/84 391 92.7 117,737
TERRACE TRACE..................... FL 87 05/01/85 394 89.7 221,157
THE LANDINGS...................... FL 60 04/01/84 386 98.3 123,525
THYMEWOOD II...................... FL 70 01/01/86 602 88.5 243,549
TURKSCAP.......................... FL 49 12/01/77 404 93.8 107,582
TURKSCAP III...................... FL 50 11/01/82 421 96.0 129,180
UNIVERSITY SQUARE................. FL 81 07/01/79 387 95.0 208,849
WESTCREEK......................... FL 86 01/01/86 444 73.2 240,908
WHISPERING PINES II............... FL 43 03/31/86 401 97.7 101,052
WINDWOOD I........................ FL 63 05/01/88 385 90.6 113,631
WINGWOOD.......................... FL 86 11/01/80 431 96.5 239,486
WINTER WOODS...................... FL 57 07/01/85 429 96.4 137,996
WOODLAND.......................... FL 92 07/01/84 447 96.7 284,864
WOODLAND II....................... FL 77 08/01/85 451 92.2 238,466
BARRINGTON DEKALB................. GA 47 11/26/84 528 93.6 163,307
CAMDEN WAY........................ GA 61 02/01/85 372 90.4 129,064
CAMDEN WAY II..................... GA 57 02/01/86 375 88.3 133,197
CARRIAGE HILLS DUBLIN............. GA 60 04/29/85 388 96.6 154,665
CEDARGATE LAWRENCEVILLE........... GA 55 03/01/83 543 87.2 233,472
COUNTRYSIDE MANOR DOUGLASVILLE.... GA 82 02/22/85 503 97.5 312,763
ELMWOODS MARIETTA................. GA 48 09/07/84 545 97.9 203,625
FOREST RIDGE RICHMOND............. GA 74 12/06/85 374 77.3 119,530
FOREST VILLAGE BIBB............... GA 83 10/21/83 457 87.9 275,463
GENTIAN OAKS COLUMBUS............. GA 62 05/10/85 414 96.7 202,284
</TABLE>
- ---------------
(1) Property acquired after date of construction or opening.
A-2
<PAGE> 95
<TABLE>
<CAPTION>
PHYSICAL
OCCUPANCY
DATE OF AS OF NET
RENTABLE CONSTRUCTION AVERAGE RENT DECEMBER 31, OPERATING
NAME LOCATION UNITS OR OPENING COLLECTED/MONTH 1997 INCOME
---- -------- -------- ------------ --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
GLEN ARM MANOR.................... GA 70 01/01/86 $380 97.1% $ 210,062
GLENWOOD VILLAGE.................. GA 80 12/01/86 400 81.2 197,780
GREENBRIAR GLEN................... GA 74 03/28/88 534 81.3 289,619
HARBINWOOD GWINNETT............... GA 73 08/15/85 543 94.4 310,969
HATCHERWAY........................ GA 64 01/01/86 345 93.7 123,760
HILLANDALE MANOR DEKALB........... GA 48 06/26/85 541 100.0 212,878
HILLSIDE MANOR AMERICUS........... GA 60 08/26/85 361 95.0 111,231
HOLLY PARK COLUMBUS............... GA 66 12/06/85 386 87.8 168,445
INDIAN LAKE I..................... GA 244 08/11/87 496 95.9 909,758
IRIS GLEN ROCKDALE................ GA 79 03/09/84 523 91.2 258,017
KINGS COLONY...................... GA 89 11/15/87 443 87.6 269,011
LAKESHORE I....................... GA 79 06/20/86 395 88.6 216,421
LAUREL GLEN....................... GA 81 04/04/86 488 96.3 321,326
LINK TERRACE...................... GA 54 08/01/84 443 90.7 153,268
MARSH LANDING..................... GA 57 07/01/84 418 94.8 155,832
MARSHLANDING II................... GA 48 12/31/86 418 95.9 131,184
MEADOWLAND CLARKE................. GA 60 06/11/84 464 95.0 166,109
MEADOWOOD NORCROSS................ GA 61 11/01/82 546 93.6 264,614
MEADOWOOD NORCROSS II............. GA 51 04/02/84 539 92.1 212,914
MILL RUN.......................... GA 88 04/14/86 384 89.7 252,214
MORGAN TRACE UNION CITY........... GA 80 05/16/86 460 98.7 210,599
NORTHRIDGE CARROLLTON............. GA 77 08/22/85 434 94.8 258,644
OAKLEY WOODS UNION CITY........... GA 60 10/15/84 495 98.3 175,215
OAKWOOD VILLAGE RICHMOND.......... GA 70 11/30/85 411 90.0 214,481
PINE KNOLL CLAYTON................ GA 46 04/12/85 485 95.6 167,274
QUAIL CALL........................ GA 55 10/01/84 380 100.0 139,227
RAMBLEWOOD II..................... GA 28 10/01/83 398 75.0 91,783
RAMBLEWOOD II..................... GA 102 10/01/86 389 89.2 286,346
REDAN VILLAGE DEKALB.............. GA 78 10/19/84 515 87.1 279,770
REDAN VILLAGE DEKALB II........... GA 76 02/17/86 500 86.8 246,032
RIDGEWOOD DEKALB.................. GA 63 03/04/84 520 90.4 239,668
RIDGEWOOD DEKALB II............... GA 52 03/03/86 504 84.6 185,364
SHADOW TRACE DEKALB............... GA 81 07/13/84 532 80.2 298,380
SKYRIDGE.......................... GA 120 05/11/87 495 94.1 470,238
STEWART WAY I..................... GA 69 01/01/86 421 91.3 194,891
STEWART WAY II.................... GA 63 12/01/86 438 88.8 193,793
STILLWATER........................ GA 53 05/01/83 462 96.2 164,991
STRATFORD LANE COLUMBUS........... GA 67 12/31/84 418 94.1 224,507
SUNNYSIDE......................... GA 72 06/01/84 378 97.2 194,214
TIMBERWOODS PERRY................. GA 60 05/25/85 404 93.3 160,835
VALLEYBROOK....................... GA 71 10/15/86 471 93.0 299,685
VALLEYFIELD DEKALB................ GA 66 05/18/84 531 92.4 286,312
VALLEYFIELD DEKALB II............. GA 66 09/30/85 532 96.9 280,625
WATERBURY CLARKE.................. GA 53 06/12/85 476 94.3 182,989
WESTWAY........................... GA 70 12/01/84 424 94.2 194,878
WHISPERWOOD CORDELE............... GA 50 07/15/85 376 88.0 119,522
WILCREST WOODS.................... GA 68 12/31/86 440 91.3 214,864
WILLOW CREEK GRIFFIN.............. GA 53 05/08/85 454 98.1 173,710
WILLOW RUN DEKALB................. GA 73 08/22/83 537 93.2 250,714
WILLOWOOD MILLEDGEVILLE........... GA 61 04/07/84 433 100.0 195,865
WOOD TRAIL NEWMAN................. GA 61 10/15/84 490 100.0 277,418
WOODCLIFF LILBURN................. GA 71 12/31/84 532 90.4 304,513
WOODCLIFF LILBURN II.............. GA 72 01/13/86 494 97.2 282,832
WOODCREST WARNER ROBINS........... GA 66 12/31/84 424 86.3 204,997
WOODSIDE.......................... GA 52 02/01/83 397 84.6 178,679
ANSLEY OAKS O'FALLON.............. IL 69 05/01/86 408 79.7 168,073
BRADFORD PL....................... IL 68 07/23/86 396 98.5 178,448
BRUNSWICK......................... IL 80 04/01/86 444 91.4 228,590
HUNTER GLEN....................... IL 64 03/01/87 433 95.4 200,010
ACADIA COURT BLOOMINGTON.......... IN 97 08/19/85 490 91.9 340,653
ACADIA CT II...................... IN 104 06/06/86 451 92.3 334,522
</TABLE>
- ---------------
(1) Property acquired after date of construction or opening.
A-3
<PAGE> 96
<TABLE>
<CAPTION>
PHYSICAL
OCCUPANCY
DATE OF AS OF NET
RENTABLE CONSTRUCTION AVERAGE RENT DECEMBER 31, OPERATING
NAME LOCATION UNITS OR OPENING COLLECTED/MONTH 1997 INCOME
---- -------- -------- ------------ --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
ANNHURST INDIANAPOLIS............. IN 83 02/15/85 $429 97.6% $ 198,445
APPLEGATE COLUMBUS................ IN 58 09/11/82 443 100.0 199,696
APPLEGATE DELAWARE................ IN 53 03/01/84 453 90.7 165,960
APPLEGATE II...................... IN 80 06/01/87 423 90.0 226,180
ARAGON WOODS...................... IN 68 12/26/86 432 92.7 209,598
ASHGROVE INDIANAPOLIS............. IN 57 08/01/83 476 96.5 198,807
BECKFORD PLACE NEW CASTLE......... IN 41 06/13/84 416 100.0 122,073
BRANDON COURT BLOOMINGTON......... IN 78 10/01/84 481 86.2 211,753
CAMBRIDGE COMMONS INDIANAPOLIS.... IN 86 05/01/86 398 94.3 231,249
CAMBRIDGE COMMONS INDIANAPOLIS
II.............................. IN 75 03/07/87 403 93.4 183,950
CAMBRIDGE COMMONS III............. IN 75 01/29/88 388 64.9 122,763
CEDARGATE BLOOMINGTON............. IN 68 11/01/83 496 88.5 224,499
CEDARGATE BLOOMINGTON II.......... IN 58 06/01/85 490 94.8 190,429
CEDARGATE MICHIGAN CITY........... IN 53 11/01/83 413 100.0 128,563
CEDARWOOD GOSHEN.................. IN 43 03/11/83 393 97.6 135,964
CEDARWOOD GOSHEN II............... IN 47 08/03/84 398 97.8 146,133
CHERRY GLEN I..................... IN 69 07/10/86 428 97.2 206,519
CHERRY GLENN II................... IN 69 04/01/87 424 91.3 205,919
CLEARVIEW GREENWOOD............... IN 71 06/19/86 442 95.8 233,876
CLEARVIEW GREENWOOD II............ IN 80 02/01/87 450 97.5 307,289
CONCORD SQUARE KOKOMO............. IN 49 06/01/83 451 91.8 168,989
CONCORD SQUARE LAWRENCEBURG....... IN 48 05/04/82 401 91.8 138,082
DOGWOOD GLEN MARION II............ IN 77 04/13/87 428 93.5 230,174
DOGWOOD GLEN I.................... IN 83 07/18/86 435 92.9 268,222
ELMTREE PARK I.................... IN 72 06/08/86 428 91.8 224,225
ELMTREE PARK II................... IN 53 05/01/87 421 86.7 155,819
HAMPSHIRE BLUFFTON................ IN 45 04/04/82 383 97.8 110,230
HARTWICK TIPTON................... IN 44 10/18/82 434 97.7 145,773
HEATHMOORE EVANSVILLE............. IN 74 08/03/84 391 87.8 202,223
HEATHMOORE INDIANAPOLIS........... IN 55 08/01/83 456 80.0 159,371
LAURELWOOD COURT BEDFORD.......... IN 50 02/26/86 386 90.0 147,226
MARABOU MILLS I................... IN 86 06/23/86 431 89.7 283,470
MARABOU MILLS II.................. IN 63 -- (1) 435 90.6 216,925
MARABOU MILLS III................. IN 59 12/01/87 449 91.5 208,927
MEADOWOOD CRAWFORDSVILLE.......... IN 64 04/03/83 421 93.7 168,438
MEADOWOOD FRANKLIN................ IN 51 04/04/83 475 98.0 198,362
MEADOWOOD LOGANSPORT.............. IN 42 07/02/84 393 100.0 113,089
MEADOWOOD WARRICK................. IN 65 04/07/84 372 81.5 133,592
MEADOWOOD II...................... IN 74 05/30/86 389 88.0 138,962
OLIVEWOOD INDIANAPOLIS............ IN 62 05/09/85 453 93.6 214,936
OLIVEWOOD INDIANAPOLIS II......... IN 67 02/18/86 424 88.0 207,098
PARKVILLE GAS CITY................ IN 49 11/01/82 396 95.9 117,701
PLUMWOOD CHESTERFIELD............. IN 39 11/25/80 394 84.6 102,359
PLUMWOOD FT. WAYNE................ IN 55 05/15/81 388 98.2 152,796
PRINCETON COURT EVANSVILLE........ IN 62 06/07/85 412 90.4 163,867
RIDGEWOOD BEDFORD................. IN 48 07/02/84 403 95.8 144,030
RIDGEWOOD ELHART.................. IN 69 -- (1) 413 95.7 186,209
RIDGEWOOD II...................... IN 99 03/01/86 384 96.0 271,367
ROSEWOOD COMMONS INDIANAPOLIS..... IN 96 01/11/86 399 96.9 256,775
ROSEWOOD COMMONS II............... IN 77 06/01/87 422 94.8 227,110
SHERBROOK......................... IN 76 06/16/86 441 93.5 213,234
SLATE RUN INDIANAPOLIS............ IN 90 01/25/84 465 98.9 340,779
SLATE RUN LEBANON................. IN 61 07/13/84 449 96.7 182,555
SPICEWOOD......................... IN 50 03/16/86 452 96.1 172,375
SPRINGWOOD NEW HAVEN.............. IN 48 10/01/81 411 97.9 125,780
STONEHENGE INDIANAPOLIS........... IN 60 06/25/84 461 81.9 213,190
STONEHENGE JASPER................. IN 40 04/22/85 348 100.0 91,216
</TABLE>
- ---------------
(1) Property acquired after date of construction or opening.
A-4
<PAGE> 97
<TABLE>
<CAPTION>
PHYSICAL
OCCUPANCY
DATE OF AS OF NET
RENTABLE CONSTRUCTION AVERAGE RENT DECEMBER 31, OPERATING
NAME LOCATION UNITS OR OPENING COLLECTED/MONTH 1997 INCOME
---- -------- -------- ------------ --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
STONEHENGE RICHMOND............... IN 59 06/30/84 $440 100.0% $ 205,372
WATERBURY GREENWOOD............... IN 44 05/31/84 478 97.7 137,002
WESTWOOD ROCHESTER................ IN 42 05/03/84 375 100.0 87,788
WILLOW RUN NEW ALBANY............. IN 64 07/01/84 443 100.0 229,048
WILLOWOOD COLUMBUS................ IN 51 07/05/83 444 96.1 189,798
WILLOWOOD EAST INDIANAPOLIS II.... IN 60 07/08/85 405 76.6 128,116
WILLOWOOD II...................... IN 58 08/01/86 411 100.0 188,178
ASHGROVE JEFFERSON................ KY 60 08/01/84 435 95.0 206,928
CAMELLIA COURT CARROLLTON......... KY 55 11/15/82 361 98.2 142,918
CEDARGATE BOWLING GREEN........... KY 59 07/23/83 410 94.9 194,214
CEDARGATE SHELBY.................. KY 58 07/01/84 430 93.1 172,611
CEDARGATE II...................... KY 58 06/01/86 385 96.5 175,527
CEDARWOOD II...................... KY 47 01/01/86 432 85.4 140,966
CEDARWOOD III..................... KY 48 05/20/86 421 89.5 144,352
FORSYTHIA COURT JEFFERSON......... KY 98 06/07/85 415 97.9 300,216
HAYFIELD PARK..................... KY 86 07/17/86 415 100.0 312,867
HEATHMOORE JEFFERSON.............. KY 62 09/21/83 408 93.6 188,252
LONGWOOD LEXINGTON................ KY 60 08/10/85 415 83.6 193,699
MEADOWOOD FLATWOODS............... KY 52 06/01/83 368 88.6 126,442
MEADOWOOD LEXINGTON............... KY 50 06/22/84 419 84.3 139,192
MEADOWOOD NICHOLASVILLE........... KY 67 11/28/83 412 97.0 233,761
RIDGEWOOD LEXINGTON............... KY 62 07/19/84 449 95.2 248,676
RIDGEWOOD RUSSELVILLE............. KY 52 06/01/84 365 81.1 111,537
ROSEWOOD JEFFERSON................ KY 77 09/28/84 475 93.5 282,110
SLATE RUN BARDSTOWN............... KY 54 07/19/84 346 96.3 144,149
SLATE RUN HOPKINSVILLE............ KY 57 07/02/84 384 93.1 100,543
SLATE RUN JEFFERSON............... KY 65 07/02/84 418 100.0 200,467
SLATE RUN JEFFERSON II............ KY 63 04/29/85 414 95.3 205,300
SPRINGWOOD........................ KY 54 01/01/86 340 92.5 143,262
STONEHENGE GLASGOW................ KY 54 08/01/83 344 92.5 130,927
STONEHENGE JEFFERSON.............. KY 61 05/21/84 425 95.1 204,628
VALLEYFIELD LEXINGTON............. KY 83 08/01/85 444 96.4 314,745
WILLOW RUN MADISONVILLE........... KY 71 09/18/84 374 90.4 167,167
WILLOWOOD FRANKFORT............... KY 57 08/20/84 404 98.2 156,498
WILLOWOOD FRANKFORT II............ KY 53 11/06/85 387 98.1 128,414
WILLOWOOD OWENSBORO............... KY 55 09/24/84 337 96.4 116,819
WINTHROP COURT FRANKFURT.......... KY 77 06/07/85 403 96.2 217,036
WOODLANDS FRANKLIN................ KY 56 07/01/83 341 98.2 100,302
CHERRY TREE....................... MD 100 09/01/86 485 96.1 373,520
FORSYTHIA COURT HARFORD........... MD 76 02/28/86 493 96.0 264,240
FORSYTHIA CT II................... MD 75 06/01/87 482 92.1 222,917
MERRIFIELD........................ MD 95 01/11/88 463 98.9 304,870
AMBERIDGE ROSEVILLE............... MI 45 12/02/85 506 95.7 162,667
APPLE RUN HILLSDALE............... MI 39 12/27/82 419 92.3 112,423
ASHGROVE CALHOUN.................. MI 51 08/15/83 432 96.0 135,739
ASHGROVE STERLING HEIGHTS......... MI 115 11/15/85 515 96.5 456,199
ASHGROVE STERLING HEIGHTS II...... MI 89 01/09/87 527 98.9 355,371
FOXTON MONROE..................... MI 51 08/22/83 465 98.0 169,492
GARDEN CT......................... MI 102 04/22/88 480 97.1 400,643
HEATHMOORE MACOMB................. MI 72 11/23/83 475 100.0 241,748
HEATHMOORE WAYNE II............... MI 51 12/12/86 557 90.2 221,577
HEATHMOORE I...................... MI 59 07/31/86 565 93.4 261,037
LAUREL BAY........................ MI 68 10/01/89 496 97.1 204,543
MEADOWOOD JACKSON................. MI 47 01/17/83 445 100.0 166,268
MEADOWOOD MONROE.................. MI 57 09/24/84 444 98.2 200,614
MONTGOMERY COURT INGHAM........... MI 59 11/26/84 471 89.8 191,764
NEWBERRY EATON.................... MI 62 01/15/85 450 96.8 217,319
NEWBERRY II....................... MI 48 12/26/86 452 97.9 170,231
RIDGEWOOD WESTLAND................ MI 56 11/01/83 528 98.2 205,001
</TABLE>
- ---------------
(1) Property acquired after date of construction or opening.
A-5
<PAGE> 98
<TABLE>
<CAPTION>
PHYSICAL
OCCUPANCY
DATE OF AS OF NET
RENTABLE CONSTRUCTION AVERAGE RENT DECEMBER 31, OPERATING
NAME LOCATION UNITS OR OPENING COLLECTED/MONTH 1997 INCOME
---- -------- -------- ------------ --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
ROANOKE OAKLAND................... MI 88 01/03/85 $609 94.3% $ 439,760
STERLING HEIGHTS OLIVEWOOD........ MI 151 12/03/86 510 92.2 650,445
STONEHENGE TECUMSEH............... MI 48 08/20/84 483 100.0 159,822
WATERBURY WESTLAND................ MI 100 11/21/85 529 94.1 380,151
WENTWORTH ROSEVILLE............... MI 75 09/13/85 497 97.3 287,776
AMBERWOOD......................... OH 63 10/01/87 411 81.2 151,810
AMESBURY I........................ OH 68 02/17/86 387 97.1 165,623
AMESBURY II....................... OH 81 -- (1) 379 91.3 174,524
AMHURST........................... OH 73 08/24/79 379 86.6 172,994
AMHURST DAYTON II................. OH 74 02/03/81 385 90.5 183,621
AMHURST TOLEDO.................... OH 58 03/28/83 420 96.5 183,142
ANDOVER COURT MT. VERNON.......... OH 51 02/02/82 420 100.0 130,812
ANNHURST II....................... OH 54 07/01/86 402 96.3 155,535
ANNHURST III...................... OH 52 05/05/88 427 90.3 177,405
APPLE RIDGE CIRCLEVILLE III....... OH 30 10/16/82 373 96.6 89,335
APPLE RIDGE I..................... OH 60 01/01/87 362 98.3 153,139
APPLE RUN COLUMBUS II............. OH 50 09/26/80 393 96.0 123,476
APPLE RUN TRUMBULL................ OH 48 08/05/83 419 89.5 109,331
APPLEGATE CHILLICOTHE II.......... OH 41 09/10/81 367 73.8 57,083
APPLEGATE LORDSTOWN............... OH 39 05/24/82 411 90.0 105,018
ASHFORD HILL...................... OH 77 06/23/86 414 94.9 213,596
ASHGROVE FRANKLIN................. OH 63 01/24/83 412 89.0 188,308
BECKFORD PLACE NORTH CANTON....... OH 60 04/15/83 442 83.3 200,617
BECKFORD PLACE NORTH CANTON II.... OH 60 05/24/85 444 88.3 211,400
BECKFORD PLACE THE PLAINS......... OH 60 12/21/82 425 86.6 200,656
BECKFORD PLACE WAPAKONETA......... OH 40 09/29/81 349 90.2 96,667
BEREA TABOR RIDGE................. OH 97 02/24/86 473 97.9 280,379
CAMELLIA COURT COLUMBUS........... OH 64 12/28/81 420 92.1 222,474
CAMELLIA COURT COLUMBUS II........ OH 40 04/14/84 430 97.5 148,008
CAMELLIA COURT DAYTON............. OH 58 07/22/81 406 84.2 145,257
CAMELLIA COURT DAYTON II.......... OH 53 09/20/82 413 92.4 146,242
CAMELLIA COURT WASHINGTON CH...... OH 40 05/14/81 378 92.6 93,082
CEDARGATE ENGLEWOOD............... OH 61 06/25/84 432 95.0 203,406
CEDARGATE LANCASTER............... OH 47 12/01/83 365 93.7 105,151
CEDARWOOD BELPRE.................. OH 44 09/26/80 355 80.0 98,037
CEDARWOOD SABINA.................. OH 31 03/12/82 392 84.3 61,008
CHARING CROSS BOWLING GREEN....... OH 67 07/22/78 361 98.5 184,613
CHELSEA COURT SANDUSKY............ OH 62 05/15/81 403 84.1 173,028
CLEARWATER........................ OH 42 11/01/86 484 81.4 139,419
CONCORD SQUARE ONTARIO............ OH 41 08/10/81 392 97.6 105,881
CONCORD SQUARE ONTARIO II......... OH 31 02/08/83 381 93.5 68,033
DANIEL COURT CLERMONT............. OH 114 02/01/85 431 95.6 348,110
DARTMOUTH PL II................... OH 49 07/18/86 478 87.7 165,214
DARTMOUTH PLACE KENT.............. OH 53 08/03/82 488 94.4 179,703
DOGWOOD TERRACE LANCASTER......... OH 110 01/01/82 393 94.5 132,470
DOVER PLACE EASTLAKE.............. OH 64 10/04/82 498 100.0 285,116
DOVER PLACE EASTLAKE II........... OH 65 11/01/83 484 95.4 262,966
DOVER PLACE EASTLAKE III.......... OH 30 11/23/83 500 100.0 132,497
DOVER PLACE EASTLAKE IV........... OH 72 11/25/86 491 94.5 289,584
FOREST PARK MEADOWOOD............. OH 106 08/26/85 466 98.1 379,909
FOXHAVEN.......................... OH 107 08/18/86 392 97.2 312,668
FOXTON DAYTON II.................. OH 79 02/11/83 416 90.0 202,582
GREENGLEN ALLEN II................ OH 54 12/04/81 366 87.0 142,536
GREENGLEN DAYTON.................. OH 76 08/29/83 412 96.1 233,150
GREENGLEN TOLEDO II............... OH 59 06/05/82 388 93.2 174,912
HAMPSHIRE ELYRIA II............... OH 56 03/15/81 399 82.4 139,138
HARVEST GROVE I................... OH 73 09/08/86 405 94.5 232,608
</TABLE>
- ---------------
(1) Property acquired after date of construction or opening.
A-6
<PAGE> 99
<TABLE>
<CAPTION>
PHYSICAL
OCCUPANCY
DATE OF AS OF NET
RENTABLE CONSTRUCTION AVERAGE RENT DECEMBER 31, OPERATING
NAME LOCATION UNITS OR OPENING COLLECTED/MONTH 1997 INCOME
---- -------- -------- ------------ --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
HARVEST GROVE II.................. OH 57 -- (1) $424 91.2% $ 171,246
HICKORY MILL COLUMBUS............. OH 60 05/02/80 431 95.1 180,776
INDEPENDENCE VILLAGE.............. OH 124 10/18/78 384 99.1 241,484
KETWOOD........................... OH 94 12/29/79 402 100.0 273,360
LARKSPUR COLUMBUS................. OH 60 02/11/83 468 93.3 204,839
LARKSPUR MORAINE.................. OH 29 01/08/82 391 76.6 84,654
LARKSPUR MORAINE II............... OH 16 08/10/84 364 100.0 41,364
LAUREL COURT FREMONT.............. OH 69 08/15/78 353 87.1 173,111
LINDENDALE........................ OH 77 03/01/87 409 97.4 238,938
LONDON LAMPLIGHT.................. OH 53 10/31/72 373 81.4 97,198
MEADOWOOD......................... OH 40 01/01/86 378 92.5 73,095
MEADOWOOD COLUMBUS................ OH 60 06/01/84 433 98.3 191,049
MEADOWOOD COLUMBUS II............. OH 23 04/01/85 434 95.6 72,347
MEADOWOOD CUYAHOGA FALLS.......... OH 59 04/08/85 500 91.6 213,189
MEADOWOOD MANSFIELD............... OH 49 04/04/83 399 98.0 135,034
MELDON PLACE TOLEDO............... OH 127 01/02/78 374 85.2 370,805
MILLBURN DAYTON II................ OH 51 07/27/81 434 90.3 150,376
MILLBURN STOW..................... OH 52 08/06/84 559 96.2 233,296
MILLSTON ABERDEEN................. OH 54 05/18/81 288 90.9 96,642
MILLSTON ABERDEEN II.............. OH 39 01/29/82 294 84.6 72,810
MONTGOMERY COURT COLUMBUS......... OH 60 07/01/85 466 93.5 199,000
MONTGOMERY COURT COLUMBUS II...... OH 57 03/03/86 442 89.4 167,084
MONTROSE SQUARE................... OH 129 01/01/87 372 81.4 262,227
PARKVILLE......................... OH 100 07/23/78 393 98.0 270,256
PARKVILLE ENGLEWOOD............... OH 48 02/11/82 411 97.9 144,747
PICKERINGTON MEADOWS.............. OH 60 -- (1) 446 90.0 206,402
PICKERINGTON MEADOWS.............. OH 60 08/12/85 401 98.3 181,736
PLUMWOOD.......................... OH 109 04/01/78 400 90.0 307,763
PLUMWOOD COLUMBUS III............. OH 34 04/18/83 437 94.1 124,251
RED DEER FAIRBORN................. OH 68 06/16/86 436 90.0 249,816
RED DEER II....................... OH 63 08/01/87 439 93.6 238,125
RIDGEWOOD COLUMBUS................ OH 60 01/06/84 453 98.3 221,330
RIDGEWOOD COLUMBUS II............. OH 58 03/18/85 460 93.1 216,333
RIVER GLEN I...................... OH 60 04/01/87 412 96.7 208,800
RIVER GLEN II..................... OH 53 11/01/87 445 88.6 196,523
RIVERVIEW ESTATES................. OH 90 01/01/87 368 82.0 202,243
ROSEWOOD COLUMBUS................. OH 90 05/28/85 417 83.5 235,532
SANDALWOOD TOLEDO................. OH 50 02/24/84 426 96.0 175,399
SHERBROOK COLUMBUS................ OH 60 07/29/85 401 98.3 180,956
SLATE RUN MIAMISBURG.............. OH 48 05/13/85 440 97.9 160,843
SPRINGWOOD AUSTINTOWN II.......... OH 43 10/04/82 402 93.0 95,269
SPRINGWOOD COLUMBUS............... OH 64 -- (1) 414 92.1 171,970
STONEHENGE MONTGOMERY............. OH 69 10/26/85 424 88.4 209,072
STONEHENGE OTTAWA................. OH 36 08/08/83 369 100.0 108,520
STONEHENGE STARK.................. OH 60 04/01/84 405 96.7 168,426
SUFFOLK GROVE GROVE CITY.......... OH 71 12/06/85 451 90.1 253,204
SUFFOLK GROVE II.................. OH 49 06/01/87 481 93.8 187,664
THE BIRCHES OF LIMA............... OH 58 04/16/77 356 84.4 135,910
THE WILLOWS DELAWARE II........... OH 41 10/28/81 401 97.6 121,413
THE WILLOWS I..................... OH 50 01/01/87 384 78.0 126,000
THE WILLOWS III................... OH 43 07/01/87 417 97.7 144,992
TIMBERCREEK TOLEDO................ OH 77 06/29/87 402 89.7 227,844
WATERBURY CLERMONT................ OH 70 09/13/85 448 94.2 220,049
WEST OF EASTLAND COLUMBUS......... OH 124 03/31/77 369 92.0 289,059
WESTWOOD NEWARK................... OH 13 11/19/80 361 100.0 19,179
WILLOW RUN WILLARD................ OH 61 07/01/83 338 90.1 133,153
WILLOWOOD GROVE CITY.............. OH 46 05/01/84 460 93.6 152,504
WILLOWOOD GROVE CITY II........... OH 26 06/21/85 459 96.1 80,327
</TABLE>
- ---------------
(1) Property acquired after date of construction or opening.
A-7
<PAGE> 100
<TABLE>
<CAPTION>
PHYSICAL
OCCUPANCY
DATE OF AS OF NET
RENTABLE CONSTRUCTION AVERAGE RENT DECEMBER 31, OPERATING
NAME LOCATION UNITS OR OPENING COLLECTED/MONTH 1997 INCOME
---- -------- -------- ------------ --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
WILLOWOOD WOOSTER................. OH 51 06/01/84 $404 92.3% $ 139,887
WILLOWOOD WOOSTER II.............. OH 53 02/25/86 379 81.1 110,805
WILLOWOOD II...................... OH 65 06/01/87 359 96.9 158,051
WINTHROP CT II.................... OH 38 02/25/86 436 92.1 118,839
WOODBINE CUYAHOGA FALLS........... OH 55 05/24/82 482 94.5 217,394
WOODBINE PORTSMOUTH............... OH 41 02/23/81 342 92.6 96,996
WOODLANDS COLUMBUS................ OH 88 05/23/83 442 90.0 266,983
WOODLANDS COLUMBUS II............. OH 70 09/30/84 436 91.5 217,689
WOODLANDS COLUMBUS III............ OH 93 06/12/87 425 87.3 261,866
WOODLANDS STREETSBORO............. OH 60 10/01/84 505 98.3 245,980
WOODLANDS STREETSBORO II.......... OH 60 11/18/85 505 98.3 241,577
ALLEGHENY CO. VALLEYFIELD......... PA 77 10/15/85 580 94.8 324,619
ANNHURST ALLEGHENY................ PA 97 11/26/84 532 98.9 365,460
CARLETON COURT ERIE............... PA 60 11/08/85 435 88.3 153,889
NORTHRUP COURT ALLEGHENY.......... PA 60 06/24/85 526 80.0 219,045
NORTHRUP COURT ALLEGHENY II....... PA 49 10/15/85 524 87.7 187,014
SHERBROOK......................... PA 73 12/20/86 561 100.0 314,311
WOODLANDS ZELIENOPLE.............. PA 50 11/01/83 497 92.0 180,655
WOODLANDS II...................... PA 62 03/01/87 480 91.9 210,733
RAVENWOOD......................... SC 82 05/07/87 426 87.8 240,735
SPRINGBROOK....................... SC 92 06/13/86 417 81.7 240,833
WILLOW LAKES...................... SC 95 12/12/86 418 67.3 184,626
CEDAR HILL........................ TN 74 05/30/86 442 91.8 243,636
KNOX LANDING KNOXVILLE............ TN 85 04/04/86 412 98.8 241,099
WATERBURY CLARKSVILLE............. TN 54 07/05/85 417 94.4 160,736
WYCLIFFE COURT MURFREESBORO....... TN 63 07/29/85 426 100.0 198,396
WALKER PL......................... TX 67 01/25/88 404 91.9 147,456
BRUNSWICK MONONGALIA.............. WV 101 05/12/86 407 90.2 280,039
BRUNSWICK II...................... WV 82 -- (1) 394 87.9 204,226
CARLETON COURT KANAWHA............ WV 73 03/21/85 417 93.1 242,796
HICKORY MILL HURRICANE............ WV 48 04/15/83 412 95.8 141,340
PARKVILLE PARKERSBURG............. WV 49 10/10/82 379 97.9 129,691
------------
------- -----------
437 28,929 $86,046,602
=== ====== ===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Property acquired after date of construction or opening.
A-8
<PAGE> 101
LEXFORD RESIDENTIAL TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED):
Pro Forma Condensed Consolidated Balance Sheet as of March
31, 1998.................................................. F-3
Notes to Pro Forma Condensed Consolidated Balance Sheet as
of March 31, 1998......................................... F-4
Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1997......................................... F-8
Notes to Pro Forma Condensed Consolidated Balance Sheet as
of December 31, 1997...................................... F-9
Pro Forma Condensed Consolidated Statement of Income for the
three months ended March 31, 1998......................... F-13
Pro Forma Condensed Consolidated Statement of Income for the
year ended December 31, 1997.............................. F-14
Notes to Pro Forma Condensed Consolidated Statements of
Income for the three months ended March 31, 1998 and the
year ended December 31, 1997.............................. F-15
Pro Forma Condensed Consolidated Statement of Income for the
year ended December 31, 1996.............................. F-18
Notes to Pro Forma Condensed Consolidated Statement of
Income for the year ended December 31, 1996............... F-19
HISTORICAL:
Consolidated Balance Sheets as of March 31, 1998 (Unaudited)
and December 31, 1997 (Audited)........................... F-21
Consolidated Statements of Income for the three months ended
March 31, 1998 and 1997 (Unaudited)....................... F-22
Consolidated Statement of Shareholders' Equity for the three
months ended March 31, 1998 (Unaudited)................... F-23
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 (Unaudited)................. F-24
Notes to Consolidated Financial Statements (Unaudited)...... F-26
Report of Independent Auditors.............................. F-34
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-35
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995.......................... F-36
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995.............. F-37
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-38
Notes to Consolidated Financial Statements.................. F-40
Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts.......... F-58
Schedule III -- Real Estate and Accumulated
Depreciation........................................... F-59
CONSOLIDATING PROPERTIES:
Report of Independent Auditors.............................. F-66
Combined Statements of Revenue and Certain Expenses for the
three months ended March 31, 1998 (unaudited) and the
years ended December 31, 1997, 1996 and 1995.............. F-67
Notes to Combined Statements of Revenue and Certain
Expenses.................................................. F-68
</TABLE>
F-1
<PAGE> 102
LEXFORD RESIDENTIAL TRUST
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Consolidation Plan and REIT Conversion have resulted in numerous
fundamental changes to the Company such that, in the opinion of management, the
Company's historical financial statements are not meaningful. The unaudited pro
forma condensed consolidated financial statements are based upon a combination
(giving effect to appropriate intercompany eliminations and adjustments) of (a)
the historical financial statements of Old Lexford and (b) the combined
statements of revenue and certain expenses of the Consolidating Properties,
giving pro forma effect to: (i) the REIT Conversion (including the
Reincorporation Merger and the sale of the third party management business) and
(ii) the acquisition of the Consolidating Properties pursuant to the
Consolidation Plan. The unaudited pro forma condensed consolidated financial
statements are further adjusted to give effect to the Offering and the use of
proceeds therefrom. The unaudited pro forma condensed consolidated financial
statements are presented as if the above transactions had occurred at the end of
each period presented for balance sheet data and at the beginning of each period
presented for income statement data.
The unaudited pro forma condensed consolidated financial statements
include, in the opinion of management, all adjustments necessary to present
fairly the Company's pro forma results of operations and financial position and
are based upon available information and certain assumptions considered
reasonable under the circumstances. The unaudited pro forma condensed
consolidated financial statements do not purport to present what the Company's
financial position or 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 financial position or results of operations
for any future date or period.
F-2
<PAGE> 103
LEXFORD RESIDENTIAL TRUST
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
OFFERING PRO FORMA
HISTORICAL ADJUSTMENTS (A) PRO FORMA ADJUSTMENTS (B) AS ADJUSTED
---------- ----------- --- --------- ----------- --- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash............................................... $ 8,237 $ (4,490) (C) $ 3,747 $ 26,653 (L) $ 30,400
Funds held in escrow............................... 22,567 2,056 (D) 24,623 (5,160) (M) 19,463
Accounts receivable................................ 3,276 118 (E) 3,394 3,394
Prepaids and other................................. 4,405 173 (D) 4,578 (1,976) (N) 2,602
Rental properties:
Land............................................. 54,928 4,664 (F) 59,592 59,592
Buildings, improvements, furniture and
fixtures....................................... 475,614 61,480 (F) 537,094 537,094
Accumulated depreciation......................... (12,625) (12,625) (12,625)
-------- -------- --------
517,917 584,061 584,061
-------- -------- --------
Furniture, fixtures and other, net................. 1,772 1,772 1,772
Investments in and advances to unconsolidated
partnerships..................................... 21,005 (6,513) (G) 14,492 14,492
Note receivable.................................... -- 1,834 (H) 1,834 1,834
Intangible assets.................................. 6,949 6,949 6,949
Net assets of third party management business held
for sale......................................... 1,834 (1,834) (H) -- --
-------- -------- -------- --------- --------
TOTAL ASSETS..................................... $587,962 $ 57,488 $645,450 $ 19,517 $664,967
======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable................................... $ 803 $ 72 (I) $ 875 $ 875
Accrued interest, real estate and other taxes...... 10,569 987 (D) 11,556 11,556
Other accrued expenses............................. 10,377 723 (D) 11,100 11,100
Non-recourse mortgages............................. 457,762 48,356 (J) 506,118 $(165,007) (O) 341,111
Corporate debt..................................... 21,760 7,350 (K) 29,110 (29,110) (P) --
Other liabilities.................................. 14,558 14,558 14,558
Deferred compensation liability.................... 9,680 9,680 9,680
-------- -------- -------- --------- --------
TOTAL LIABILITIES................................ 525,509 57,488 582,997 (194,117) 388,880
-------- -------- -------- --------- --------
Common stock....................................... 92 92 110 (Q) 202
Additional paid-in capital......................... 62,755 62,755 221,890 (Q) 284,645
Retained earnings.................................. 13,736 13,736 (8,366) (R) 5,370
Cost of treasury shares............................ (14,130) (14,130) (14,130)
-------- -------- -------- --------- --------
SHAREHOLDERS' EQUITY............................. 62,453 62,453 213,634 276,087
-------- -------- -------- --------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $587,962 $ 57,488 $645,450 $ 19,517 $664,967
======== ======== ======== ========= ========
</TABLE>
See Notes to the Pro Forma Condensed Consolidated Balance Sheet.
F-3
<PAGE> 104
LEXFORD RESIDENTIAL TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
The pro forma condensed consolidated balance sheet gives effect to the
following adjustments:
(A) Reflects (i) the sale of the third party management business and (ii)
the acquisition of the remaining 39 Consolidating Properties (287 Consolidating
Properties were acquired as of January 31, 1998) pursuant to the Consolidation
Plan, in each case as of March 31, 1998. Investment in the remaining 39
Consolidating Properties will be recorded at the total of the Company's
historical cost of its interests in the partnerships owning the Consolidating
Properties, the debt assumed and the cash paid to acquire third party equity
interests in such partnerships and will be allocated to the assets and
liabilities acquired based upon their respective fair values in accordance with
the purchase method of accounting.
(B) Reflects the Offering and the use of proceeds therefrom.
(C) Represents the operating cash related to the acquisition of the
remaining 39 Consolidating Properties, proceeds from borrowings under the
corporate line of credit and payments related to the acquisition of third party
equity interests in the Consolidating Properties as follows:
<TABLE>
<S> <C>
Operating cash acquired..................................... $ 2,019
Net borrowings under line of credit (See Note (K)).......... 7,350
Payments related to the acquisition (See Note (F)).......... (13,859)
---------
$ (4,490)
=========
</TABLE>
(D) Represents various operating assets and liabilities related to the
acquisition of the remaining 39 Consolidating Properties as follows:
<TABLE>
<S> <C>
Funds held in escrow........................................ $ 2,056
Prepaids and other assets................................... $ 173
Accrued interest, real estate and other taxes............... $ 987
Other accrued expenses...................................... $ 723
</TABLE>
(E) Represents accounts receivable related to the acquisition of the
remaining 39 Consolidating Properties and the elimination of amounts due from
such Properties as follows:
<TABLE>
<S> <C>
Accounts receivable acquired................................ $ 167
Amounts due from the remaining 39 Consolidating Properties
(See Note (I))............................................ (49)
---------
$ 118
=========
</TABLE>
(F) Represents the purchase accounting allocations to land and buildings,
improvements, furniture and fixtures consisting of the Company's historical
investments in and advances to the remaining 39 Consolidating
F-4
<PAGE> 105
LEXFORD RESIDENTIAL TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
Properties, cash paid to acquire third party equity interests, and non-recourse
mortgage debt assumed, net of amounts allocated to current operating assets and
liabilities acquired as follows:
<TABLE>
<S> <C>
Historical investments in and advances to the remaining 39
Consolidating Properties (See Note (G))................... $ 6,513
Cash paid to acquire third party equity interests........... 13,859
Non-recourse mortgage debt assumed (See Note (J))........... 48,356
Allocation to current operating assets and liabilities...... (2,584)
---------
$ 66,144
=========
Allocated to land........................................... $ 4,664
=========
Allocated to buildings, improvements, furniture and
fixtures.................................................. $ 61,480
=========
Current assets and liabilities consist of:
Cash (See Note (C))....................................... $ 2,019
Funds held in escrow (See Note (D))....................... 2,056
Accounts receivable (See Note (E))........................ 167
Prepaids and other assets (See Note (D)).................. 173
Accounts payable (See Note (I))........................... (121)
Accrued interest, real estate and other taxes (See Note
(D))................................................... (987)
Other accrued expenses (See Note (D))..................... (723)
---------
$ 2,584
=========
</TABLE>
(G) Represents elimination of investments in and advances to the remaining
39 Consolidating Partnerships.
(H) Represents the note received as consideration for the net assets of the
third party management business.
(I) Represents accounts payable related to the acquisition of the
Consolidating Properties and the elimination of amounts due to the Company, as
follows:
<TABLE>
<S> <C>
Accounts payable acquired................................... $ 121
Amounts due to the Company.................................. (49)
-----
$ 72
=====
</TABLE>
(J) Represents non-recourse debt assumed in connection with the acquisition
of the remaining 39 Consolidating Properties.
(K) Represents borrowings under the corporate line of credit to fund cash
payments to third party holders of equity interests in the Consolidating
Properties net of cash repayments.
(L) Represents the gross proceeds of the Offering less expenses, repayment
of debt (including prepayment penalties) and release of funds from escrow, which
includes amounts held in cash pending use for the 1998 portion of the capital
expenditure plan, as follows:
<TABLE>
<S> <C>
Gross proceeds of the Offering.............................. $ 242,000
Estimated Offering expenses................................. (20,000)
---------
Estimated net proceeds of the Offering (See Note (Q))..... 222,000
Prepaid Offering expenses at March 31, 1998 (See Note
(N))...................................................... 1,787
Repayment of Property mortgages at contractual balances (See
Note (O))................................................. (172,555)
Prepayment penalties (See Note R)........................... (629)
Release of escrows due to mortgage repayments (See Note
(M))...................................................... 5,160
Repayment of corporate debt (See Note (P)).................. (29,110)
---------
$ 26,653
=========
</TABLE>
(M) Represents escrow funds released upon repayment of Property mortgages.
F-5
<PAGE> 106
LEXFORD RESIDENTIAL TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(N) Represents prepaid Offering expenses charged to paid-in capital upon
completion of the Offering and the write-off of financing fees related to the
repayment of corporate debt, as follows:
<TABLE>
<S> <C>
Prepaid Offering expenses................................... $ (1,787)
Deferred financing fees..................................... (189)
---------
$ (1,976)
=========
</TABLE>
(O) Represents carrying value of the full mortgage indebtedness secured by
135 Wholly-Owned Properties and other mortgage indebtedness secured by certain
other Wholly-Owned Properties repaid with net proceeds from the Offering. See
Note 1 to the historical consolidated financial statements of the Company. As of
March 31, 1998, the weighted average interest rate on such indebtedness was
approximately 8.54% per annum and the weighted average maturity was
approximately 3.9 years. The difference between the contractual balance repaid
($172,555) and the carrying amount ($165,007) is charged to retained earnings.
(See Note (R)). Following the repayment of mortgage debt with the proceeds of
the Offering, the Company will have mortgages outstanding amounting to $341,111,
of which $3,273 matures in 1998, $5,875 matures in 1999, $9,130 matures in 2000,
$85,018 matures in 2001, $20,891 matures in 2002 and $216,924 matures
thereafter. The weighted average term to maturity of the remaining mortgages is
7.0 years and the weighted average interest rate is 8.77% per annum.
Approximately $101.0 million of such indebtedness becomes prepayable in the
third and fourth quarters of 1998, $106.8 million in 1999, $101.9 million in
2000 and $17.3 million in 2001, with weighted average interest rates of 8.89%,
8.62%, 8.90% and 8.54% per annum, respectively. The weighted average constants
related to the amounts prepayable are 8.98%, 11.06%, 10.19% and 9.89%,
respectively.
The following table sets forth certain information relating to the
Company's consolidated mortgage indebtedness, collateralized by 302 of the
Wholly-Owned Properties, after giving effect to the application of the net
proceeds of the Offering.
OUTSTANDING MORTGAGE DEBT POST-OFFERING
<TABLE>
<CAPTION>
PRINCIPAL WEIGHTED WEIGHTED
BALANCE AVERAGE WEIGHTED AVERAGE
AS OF INTEREST AVERAGE YEARS TO
MORTGAGE POOLS 3/31/98 (1) RATE (2) CONSTANT (3) MATURITY (4)
- --------------------------------------- ------------ -------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DLJ I.................................. $ 89,095 8.65% 11.57% 3.03
DLJ II................................. 79,353 8.71 10.13 7.47
PaineWebber ("PW")..................... 117,706 8.81 8.89 8.66
Other.................................. 54,957 8.96 9.94 9.56
--------
Total........................ $341,111 8.77 10.05 7.04
========
</TABLE>
- ---------------
(1) Total includes $338,744 of first mortgage debt and $2,367 of second mortgage
debt.
(2) Weighted averages based on first mortgage debt only.
(3) Based on principal balance as of March 31, 1998. PW mortgages include 72
loans ($83,587 principal balance) which require interest-only payments until
September 1999. The constant is determined by dividing the total annual
required debt service payments of both principal and interest by the
outstanding principal balance.
(4) Many of the mortgages allow prepayment after expiration of "lock-out
periods." Of the large pools, theDLJ I mortgages become prepayable at March
31, 1999; the DLJ II mortgages become prepayable beginning February 2000;
and the PW mortgages become prepayable beginning October 1998. Even after
the lock-out periods, many of the mortgages remain subject to yield
maintenance premiums determined by discounting the cash flow scheduled until
maturity at variable rates based on U.S. Treasury obligations of equal
duration.
F-6
<PAGE> 107
LEXFORD RESIDENTIAL TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(P) Represents repayment of corporate debt, having a weighted average
interest rate of approximately 7.47% per annum and a weighted average maturity
of approximately 2.1 years.
(Q) Represents the net proceeds from the Offering, as follows:
<TABLE>
<S> <C>
Gross proceeds of the Offering.............................. $ 242,000
Offering expenses to be paid................................ (18,213)
Reclassification of prepaid Offering expenses............... (1,787)
---------
$ 222,000
=========
Amount constituting par value............................... $ 110
=========
Amount constituting capital in excess of par value.......... $ 221,890
=========
</TABLE>
(R) Represents the write-off of unamortized mortgage deficiencies
representing the difference between the contractual and carrying values of
certain Property mortgages repaid from Offering proceeds, prepayment penalties
relating to the repayment of certain Property mortgages and the write-off of
financing fees related to the repayment of corporate debt, as follows:
<TABLE>
<S> <C>
Write-off of mortgage deficiencies (See Note 1 to historical
consolidated financial statements of the Company)......... $ (7,548)
Prepayment penalties........................................ (629)
Financing fees.............................................. (189)
---------
$ (8,366)
=========
</TABLE>
F-7
<PAGE> 108
LEXFORD RESIDENTIAL TRUST
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
OFFERING PRO FORMA
HISTORICAL ADJUSTMENTS (A) PRO FORMA ADJUSTMENTS (B) AS ADJUSTED
---------- ----------- --- --------- ----------- --- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash..................................... $ 2,569 $ (1,503) (C) $ 1,066 $ 21,300 (O) $ 22,366
Funds held in escrow..................... 11,888 16,958 (D) 28,846 (6,815) (P) 22,031
Accounts receivable...................... 4,899 1,038 (E) 5,937 5,937
Prepaids and other....................... 1,993 839 (D) 2,832 (1,002) (Q) 1,830
Rental properties:
Land................................... 23,124 34,762 (F) 57,886 57,886
Buildings, improvements, furniture and
fixtures............................. 138,245 401,691 (F) 539,936 539,936
Accumulated depreciation............... (9,152) (9,152) (9,152)
-------- -------- --------
152,217 588,670 588,670
-------- -------- --------
FURNITURE, FIXTURES AND OTHER, NET....... 1,720 1,720 1,720
Investments in and advances to
unconsolidated partnerships............ 57,111 (47,248) (G) 9,863 9,863
Note receivable.......................... -- 1,834 (H) 1,834 1,834
Intangible assets........................ 9,201 (3,600) (I) 5,601 5,601
-------- -------- -------- --------- --------
TOTAL ASSETS....................... $241,598 $404,771 $646,369 $ 13,483 $659,852
======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable......................... $ 1,287 $ 242 (J) $ 1,529 $ 1,529
Accrued interest, real estate and other
taxes.................................. 3,720 8,284 (D) 12,004 12,004
Other accrued expenses................... 8,241 5,733 (D) 13,974 13,974
Non-recourse mortgages................... 142,637 366,078 (K) 508,715 $(166,476) (R) 342,239
Corporate debt........................... 7,362 26,200 (L) 33,562 (33,562) (S) --
Other liabilities........................ 3,504 3,504 3,504
-------- -------- -------- --------- --------
TOTAL LIABILITIES.................. 166,751 406,537 573,288 (200,038) 373,250
-------- -------- -------- --------- --------
COMMON STOCK............................. 85 3 (M) 88 110 (T) 198
Additional paid-in capital............... 54,138 2,997 (M) 57,135 221,890 (T) 279,025
Retained earnings........................ 20,624 (4,766) (N) 15,858 (8,479) (U) 7,379
-------- -------- -------- --------- --------
SHAREHOLDERS' EQUITY............... 74,847 (1,766) 73,081 213,521 286,602
-------- -------- -------- --------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY........................... $241,598 $404,771 $646,369 $ 13,483 $659,852
======== ======== ======== ========= ========
</TABLE>
See Notes to the Pro Forma Condensed Consolidated Balance Sheet.
F-8
<PAGE> 109
LEXFORD RESIDENTIAL TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
The pro forma condensed consolidated balance sheet gives effect to the
following adjustments:
(A) Reflects (i) the REIT Conversion (including the Reincorporation Merger
and the sale of the third party management business) and (ii) the acquisition of
the 326 Consolidating Properties pursuant to the Consolidation Plan, in each
case as of December 31, 1997. Investment in the Consolidating Properties will be
recorded at the total of the Company's historical cost of its interests in the
partnerships owning the Consolidating Properties, the debt assumed and the cash
paid to acquire third party equity interests in such partnerships and will be
allocated to the assets and liabilities acquired based upon their respective
fair values in accordance with the purchase method of accounting.
(B) Reflects the Offering and the use of proceeds therefrom.
(C) Represents the operating cash related to the acquisition of the
Consolidating Properties, proceeds from borrowings under the corporate line of
credit and payments related to the acquisition of third party equity interests
in the Consolidating Properties as follows:
<TABLE>
<S> <C>
Operating cash acquired..................................... $ 8,897
Net borrowings under line of credit (See Note (L)).......... 26,200
Payments related to the acquisition (See Note (F)).......... (36,600)
--------
$ (1,503)
========
</TABLE>
(D) Represents various operating assets and liabilities related to the
acquisition of the Consolidating Properties as follows:
<TABLE>
<S> <C>
Funds held in escrow........................................ $16,958
Prepaids and other assets................................... $ 839
Accrued interest, real estate and other taxes............... $ 8,284
Other accrued expenses...................................... $ 5,733
</TABLE>
(E) Represents accounts receivable related to the acquisition of the
Consolidating Properties and the elimination of amounts due from the
Consolidating Properties as follows:
<TABLE>
<S> <C>
Accounts receivable acquired................................ $ 2,858
Amounts due from the Consolidating Properties (See Note
(J))...................................................... (1,820)
-------
$ 1,038
=======
</TABLE>
(F) Represents the purchase accounting allocations to land and buildings,
improvements, furniture and fixtures consisting of the Company's historical
investments in and advances to the Consolidating Properties, cash paid to
acquire third party equity interests, and non-recourse mortgage debt assumed,
net of amounts allocated to current operating assets and liabilities acquired as
follows:
<TABLE>
<S> <C>
Historical investments in and advances to the Consolidating
Properties (See Note (G))................................. $ 47,248
Cash paid to acquire third party equity interests........... 36,600
Non-recourse mortgage debt assumed (See Note (K))........... 366,078
Allocation to current operating assets and liabilities...... (13,473)
--------
$436,453
========
</TABLE>
F-9
<PAGE> 110
LEXFORD RESIDENTIAL TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
<TABLE>
<S> <C>
Allocated to land........................................... $ 34,762
========
Allocated to buildings, improvements, furniture and
fixtures.................................................. $401,691
========
Current assets and liabilities consist of:
Cash (See Note (C))....................................... $ 8,897
Funds held in escrow (See Note (D))....................... 16,958
Accounts receivable (See Note (E))........................ 2,858
Prepaids and other assets (See Note (D)).................. 839
Accounts payable (See Note (J))........................... (2,062)
Accrued interest, real estate and other taxes (See Note
(D))................................................... (8,284)
Other accrued expenses (See Note (D))..................... (5,733)
--------
$ 13,473
========
</TABLE>
(G) Represents elimination of investments in and advances to Consolidating
Partnerships.
(H) Represents the note received in connection with the sale of the third
party management business.
(I) Represents the increase in goodwill related to 300,000 Common Shares at
$10 per share issued to the prior owners of LPI in settlement of contingent
purchase consideration and the elimination of unamortized management contracts
and goodwill related to the sale of the third party management business, $1,834
of which is recorded as a note receivable from the purchaser with the remaining
$4,766 charged to retained earnings as a loss on disposition. The $10 per share
amount represents the per share fair value of the Common Shares issued to
acquire the third party property management business effective August 1, 1996
(See Note 1 to the historical consolidated financial statements of the Company).
(See Notes (M) and (N)).
<TABLE>
<S> <C>
Common Shares issued to prior owners of LPI................. $ 3,000
Unamortized management contracts and goodwill............... (6,600)
-------
$(3,600)
=======
</TABLE>
(J) Represents accounts payable related to the acquisition of the
Consolidating Properties and the elimination of amounts due to the Company, as
follows:
<TABLE>
<S> <C>
Accounts payable acquired................................... $ 2,062
Amounts due to the Company.................................. (1,820)
-------
$ 242
=======
</TABLE>
(K) Represents non-recourse debt assumed in connection with the acquisition
of the Consolidating Properties.
(L) Represents borrowings under the corporate line of credit to fund cash
payments to third party holders of equity interests in the Consolidating
Properties net of cash repayments.
(M) Represents 300,000 Common Shares at $10 per share issued to the prior
owners in resolution of contingent purchase consideration in connection with the
1996 acquisition of LPI, as follows (See Note (I)):
<TABLE>
<S> <C>
Issuance of shares to prior owners of Lexford Properties
Inc....................................................... $ 3
Paid-in capital in excess of par value...................... 2,997
------
$3,000
======
</TABLE>
(N) Represents the excess of the Company's unamortized management contracts
and goodwill related to the third party management business over consideration
received. (See Note (I))
F-10
<PAGE> 111
LEXFORD RESIDENTIAL TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(O) Represents the gross proceeds of the Offering less expenses, repayment
of debt (including prepayment penalties) and release of funds from escrow, which
includes amounts held in cash pending use for the 1998 portion of the capital
expenditure plan, as follows:
<TABLE>
<S> <C>
Gross proceeds of the Offering.............................. $242,000
Estimated Offering expenses................................. (20,000)
--------
Estimated net proceeds of the Offering (See Note (T))..... 222,000
Prepaid Offering expenses at December 31, 1997 (See Note
(Q))...................................................... 800
Repayment of Property mortgages at contractual balances (See
Note (R))................................................. (174,124)
Prepayment penalties........................................ (629)
Release of escrows due to mortgage repayments (See Note
(P))...................................................... 6,815
Repayment of corporate debt (See Note (S)).................. (33,562)
--------
$ 21,300
========
</TABLE>
(P) Represents escrow funds released upon repayment of Property mortgages.
(Q) Represents prepaid Offering expenses charged to paid-in capital upon
completion of the Offering and the write-off of financing fees related to the
repayment of corporate debt, as follows:
<TABLE>
<S> <C>
Prepaid Offering expenses................................... $ (800)
Deferred financing fees..................................... (202)
-------
$(1,002)
=======
</TABLE>
(R) Represents carrying value of the full mortgage indebtedness secured by
135 Wholly-Owned Properties and other mortgage indebtedness secured by certain
other Wholly-Owned Properties repaid with net proceeds from the Offering. See
Note 1 to the historical consolidated financial statements of the Company. The
difference between the contractual balance repaid ($174,124) and the carrying
amount ($166,476) is charged to retained earnings. (See Note (U)). Following the
repayment of mortgage debt with the proceeds of the Offering, the Company will
have mortgages outstanding amounting to $342,239, of which $4,401 matures in
1998, $5,875 matures in 1999, $9,130 matures in 2000, $85,018 matures in 2001,
$20,891 matures in 2002 and $216,924 matures thereafter.
The following table sets forth certain information relating to the
Company's consolidated mortgage indebtedness after giving effect to the
application of the net proceeds of the Offering.
OUTSTANDING MORTGAGE DEBT POST-OFFERING
<TABLE>
<CAPTION>
PRINCIPAL WEIGHTED WEIGHTED
BALANCE AVERAGE WEIGHTED AVERAGE
AS OF INTEREST AVERAGE YEARS TO
MORTGAGE POOLS 12/31/97 (1) RATE (2) CONSTANT (3) MATURITY (4)
- --------------------------------------- ------------ -------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DLJ I.................................. $ 89,761 8.65% 11.48% 3.28
DLJ II................................. 79,627 8.71 10.09 7.71
PaineWebber ("PW")..................... 117,769 8.81 8.89 8.91
Other.................................. 55,082 8.96 9.91 9.81
--------
Total........................ $342,239 8.77 10.02 7.28
========
</TABLE>
- ---------------
(1) Total includes $339,810 of first mortgage debt and $2,430 of second mortgage
debt.
(2) Weighted averages based on first mortgage debt only.
(3) Based on principal balance as of December 31, 1997. PW mortgages include 72
loans ($83,587 principal balance) which require interest-only payments until
September 1999. The constant is determined by dividing
F-11
<PAGE> 112
LEXFORD RESIDENTIAL TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
the total annual required debt service payments of both principal and interest
by the beginning principal balance.
(4) Many of the mortgages allow prepayment after expiration of "lock-out
periods." Of the large pools, theDLJ I mortgages become prepayable at March
31, 1999; the DLJ II mortgages become prepayable beginning February 2000;
and the PW mortgages become prepayable beginning October 1998. Even after
the lock-out periods, many of the mortgages remain subject to yield
maintenance premiums determined by discounting the cash flow scheduled until
maturity at variable rates based on U.S. Treasury obligations of equal
duration.
(S) Represents repayment of corporate debt.
(T) Represents the net proceeds from the Offering, as follows:
<TABLE>
<S> <C>
Gross proceeds of the Offering.............................. $242,000
Offering expenses to be paid................................ (19,200)
Reclassification of prepaid offering expenses............... (800)
--------
$222,000
========
Amount constituting par value............................... $ (110)
--------
Amount constituting capital in excess of par value.......... $221,890
========
</TABLE>
(U) Represents the write-off of unamortized mortgage deficiencies
representing the difference between the contractual and carrying values of
certain Property mortgages repaid from Offering proceeds, prepayment penalties
relating to the repayment of certain Property mortgages and the write-off of
financing fees related to the repayment of corporate debt, as follows:
<TABLE>
<S> <C>
Write-off of mortgage deficiencies (See Note 1 to historical
consolidated financial statements of the Company)......... $(7,648)
Prepayment penalties........................................ (629)
Financing fees.............................................. (202)
-------
$(8,479)
=======
</TABLE>
F-12
<PAGE> 113
LEXFORD RESIDENTIAL TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATING OFFERING PRO FORMA
HISTORICAL PROPERTIES (A) ADJUSTMENTS (B) PRO FORMA ADJUSTMENTS (C) AS ADJUSTED
---------- -------------- --- ----------- --- ---------- ----------- --- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental revenues............. $ 25,694 $26,164 $(15,255) (D) $ 36,603 $ $ 36,603
Fee based, primarily from
affiliates................ 2,398 -- (1,453) (E) 945 945
Interest, principally from
unconsolidated
partnerships.............. 1,106 -- (248) (F) 858 858
--------- ------- -------- --------- ---------- ----------
Total..................... 29,198 26,164 (16,956) 38,406 38,406
EXPENSES:
Property operating and
maintenance............... 8,306 8,209 (4,929) (H) 11,586 11,586
Real estate taxes and
insurance................. 2,085 2,103 (1,223) (I) 2,965 2,965
Property management......... 3,923 -- (745) (J) 3,178 3,178
Administration.............. 1,515 -- 1,515 1,515
Non-recurring costs......... 1,808 -- (1,552) (L) 256 256
Interest -- non-recourse
mortgages................. 7,887 -- 3,199 (M) 11,086 (3,666) (S) 7,420
Interest -- corporate
debt...................... 161 -- 446 (N) 607 (607) (T) --
Depreciation and
amortization.............. 4,190 -- 1,673 (O) 5,863 5,863
Provision for loss on sale
of third party management
business.................. 6,300 -- (6,300) (P) -- --
--------- ------- -------- --------- ---------- ----------
Total..................... 36,175 10,312 (9,431) 37,036 (4,273) 32,783
--------- ------- -------- --------- ---------- ----------
INCOME (LOSS) BEFORE GAIN ON
DISPOSALS OF ASSETS......... (6,977) 15,852 (7,525) 1,350 4,273 5,623
Gain on disposals of assets,
net....................... 89 -- 89 89
--------- ------- -------- --------- ---------- ----------
NET INCOME (LOSS)............. $ (6,888) $15,852 $ (7,525) $ 1,439 $ 4,273 $ 5,712
========= ======= ======== ========= ========== ----------
BASIC EARNINGS (LOSS) PER
SHARE....................... $ (.80) $ .17 $ .29
========= ========= ==========
DILUTED EARNINGS (LOSS) PER
SHARE....................... $ (.80) $ .16 $ .29
========= ========= ==========
BASIC WEIGHTED SHARES
OUTSTANDING (U) (V)......... 8,589,187 8,589,187 11,000,000 (X) 19,589,187
DILUTED WEIGHTED SHARES
OUTSTANDING (U) (V) (W)..... 8,647,012 8,904,270 11,000,000 (X) 19,904,270
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statement of Income.
F-13
<PAGE> 114
LEXFORD RESIDENTIAL TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATING OFFERING
HISTORICAL PROPERTIES (A) ADJUSTMENTS (B) PRO FORMA ADJUSTMENTS (C)
---------- ------------- --- ----------- --- ---------- ----------- ---
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental revenues............... $ 41,851 $102,806 $ 144,657
Fee based, primarily from
affiliates.................. 15,847 -- $(12,334) (E) 3,513
Interest, principally from
unconsolidated
partnerships................ 10,681 -- (8,453) (F) 2,228
Income from disposals of
assets -- net............... 1,989 -- (1,989) (G)
---------- -------- -------- ---------- -----------
Total....................... 70,368 102,806 (22,776) 150,398
EXPENSES:
Property operating and
maintenance................. 14,884 33,354 (3,088) (H) 45,150
Real estate taxes and
insurance................... 4,060 9,006 13,066
Property management........... 12,339 -- (1,222) (J) 11,117
Administration................ 5,447 -- (253) (K) 5,194
Performance equity plan....... 6,281 -- 6,281
Non-recurring costs........... 827 -- (427) (L) 400
Interest -- non-recourse
mortgages................... 13,770 -- 31,353 (M) 45,123 $ (15,134) (S)
Interest -- corporate debt.... 657 -- 1,965 (N) 2,622 (2,622) (T)
Depreciation and
amortization................ 6,527 -- 15,018 (O) 21,545
---------- -------- -------- ---------- -----------
Total....................... 64,792 42,360 43,346 150,498 (17,756)
---------- -------- -------- ---------- -----------
INCOME (LOSS) BEFORE GAIN ON
DISPOSALS OF ASSETS, INCOME
TAXES AND EXTRAORDINARY
ITEM.......................... 5,576 60,446 (66,122) (100) 17,756
Gain on disposals of assets,
net......................... -- -- 1,989 (G) 1,989
Provision for income taxes:
Credited to additional
paid-in capital........... 1,809 -- (1,809) (Q)
Current..................... 380 -- (380) (Q)
---------- -------- -------- ---------- -----------
INCOME BEFORE EXTRAORDINARY
ITEM.......................... 3,387 60,446 (61,944) 1,889 17,756
Extraordinary (loss), net of
income tax benefit.......... (181) -- 181 (R)
---------- -------- -------- ---------- -----------
NET INCOME...................... $ 3,206 $ 60,446 $(61,763) $ 1,889 $ 17,756
========== ======== ======== ========== ===========
BASIC EARNINGS PER SHARE........ $ 0.40 $ 0.23
========== ==========
DILUTED EARNINGS PER SHARE...... $ 0.39 $ 0.22
========== ==========
BASIC WEIGHTED SHARES
OUTSTANDING (U)............... 8,071,970 300,000 (V) 8,371,970 11,000,000 (X)
DILUTED WEIGHTED SHARES
OUTSTANDING (U)............... 8,313,916 300,000 (V) 8,613,916 11,000,000 (X)
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C> <C>
REVENUES:
Rental revenues............... $ 144,657
Fee based, primarily from
affiliates.................. 3,513
Interest, principally from
unconsolidated
partnerships................ 2,228
Income from disposals of
assets -- net...............
-----------
Total....................... 150,398
EXPENSES:
Property operating and
maintenance................. 45,150
Real estate taxes and
insurance................... 13,066
Property management........... 11,117
Administration................ 5,194
Performance equity plan....... 6,281
Non-recurring costs........... 400
Interest -- non-recourse
mortgages................... 29,989
Interest -- corporate debt.... --
Depreciation and
amortization................ 21,545
-----------
Total....................... 132,742
-----------
INCOME (LOSS) BEFORE GAIN ON
DISPOSALS OF ASSETS, INCOME
TAXES AND EXTRAORDINARY
ITEM.......................... 17,656
Gain on disposals of assets,
net......................... 1,989
Provision for income taxes:
Credited to additional
paid-in capital...........
Current.....................
-----------
INCOME BEFORE EXTRAORDINARY
ITEM.......................... 19,645
Extraordinary (loss), net of
income tax benefit..........
-----------
NET INCOME...................... $ 19,645
===========
BASIC EARNINGS PER SHARE........ $ 1.01
===========
DILUTED EARNINGS PER SHARE...... $ 1.00
===========
BASIC WEIGHTED SHARES
OUTSTANDING (U)............... 19,371,970
DILUTED WEIGHTED SHARES
OUTSTANDING (U)............... 19,613,916
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statement of Income.
F-14
<PAGE> 115
LEXFORD RESIDENTIAL TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
The pro forma condensed consolidated statement of income gives effect to
the following adjustments:
(A) Reflects the historical revenues and certain expenses of the 326
Consolidating Properties.
(B) Reflects (i) the REIT Conversion (including the Reincorporation Merger
and the sale of the third party management business) and (ii) for the three
months ended March 31, 1998, the acquisition of the remaining 39 Consolidating
Properties (287 Consolidating Properties were acquired as of January 1, 1998)
and, for the year ended December 31, 1997, the acquisition of the 326
Consolidating Properties pursuant to the Consolidation Plan, in each case as of
January 1, 1998 and 1997, respectively. The loss from the sale of the third
party management business of $4,766 for the year ended December 31, 1997 has
been excluded from the pro forma condensed consolidated statement of income and
has been charged directly to retained earnings in the pro forma condensed
consolidated balance sheet as of December 31, 1997. During the three months
ended March 31, 1998, the Company reduced the carrying value of net assets
relating to the third party management business to $1,834, which equals its
sales price. Accordingly, no loss is charged to retained earnings in the pro
forma condensed consolidated balance sheet as of March 31, 1998. (See Notes (L)
and (O))
(C) Reflects the Offering and the use of proceeds therefrom. Extraordinary
losses of $8,479 for the year ended December 31, 1997 representing the write off
of $202 in financing fees related to the repayment of corporate debt and
repayment of mortgage loans at the contractual aggregate amount of $174,753
(including prepayment penalties of $629) over the aggregate carrying value of
$166,476 have been excluded from the pro forma condensed consolidated statement
of income for the year ended December 31, 1997 and have been charged directly to
retained earnings in the pro forma condensed consolidated balance sheet as of
December 31, 1997. Extraordinary losses of $8,366 for the three months ended
March 31, 1998 representing the write off of $189 in financing fees related to
the repayment of corporate debt and repayment of mortgage loans at the
contractual aggregate amount of $173,184 (including prepayment penalties of
$629) over the aggregate carrying value of $165,007, have been excluded from the
pro forma condensed consolidated statement of income for the three months ended
March 31, 1998 and have been charged directly to retained earnings in the pro
forma condensed consolidated balance sheet as of March 31, 1998. (See Note 5 to
the historical consolidated financial statements of the Company)
(D) Represents elimination of duplicate rental revenues for February and
March 1998 on 287 Consolidating Properties acquired January 31, 1998, which
revenues are included in the statement of income for the Company and in the
statement of revenue and certain expenses of the Consolidating Properties.
(E) Represents the elimination of fee based revenues associated with
property management and other services provided to the 326 Consolidating
Properties and management fees relating to the third party management business,
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Third party management fees........................ $ 621 $ 4,294
Consolidating Properties:
Management fees.................................. 516 5,015
Bookkeeping fees................................. 125 1,234
Partnership fees................................. 103 935
Payroll processing fees.......................... 23 169
Tax preparation and reporting fees............... -- 350
Insurance administration fees.................... 65 250
Rebate income from preferred vendor program...... -- 758
Expenses of administering the preferred vendor
program....................................... -- (671)
------ -------
$1,453 $12,334
====== =======
</TABLE>
F-15
<PAGE> 116
LEXFORD RESIDENTIAL TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED)
Remaining fees relate to services provided to Properties in which the
Company holds minority equity interests.
(F) Represents the elimination of interest income from loans and advances
to the Consolidating Properties and the interest to be received on the note
relating to the sale of the third party management business, as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Interest from loans and advances to the
Consolidating Properties......................... $(275) $(8,561)
Interest from note receivable at 6% per annum...... 27 108
----- -------
$(248) $(8,453)
===== =======
</TABLE>
(G) Represents the reclassification of such amount for the year ended
December 31, 1997 to conform to traditional REIT income statement presentation.
(H) Represents, for the three months ended March 31, 1998, elimination of
duplicate property operating and maintenance expenses for February and March of
1998 on 287 Consolidating Properties acquired January 31, 1998, which expenses
are included in the statement of income for the Company and the statement of
revenues and certain expenses of the Consolidating Properties, and, for the year
ended December 31, 1997, reclassification of expenses related to the management
of the Company's Wholly-Owned Properties to property management expense and
reduction of property operating expenses resulting from the pass through of all
rebates earned under the preferred vendor program to the Properties, as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Duplicate expenses................................. $(4,929) --
Reclassification of management expenses for
Wholly-Owned Properties.......................... -- $(2,330)
Expense reductions from rebates.................... -- (758)
------- -------
$(4,929) $(3,088)
======= =======
</TABLE>
(I) Represents elimination of duplicate real estate taxes and insurance
expenses for February and March 1998 on 287 Consolidating Properties acquired
January 31, 1998, which expenses are included in the statement of income for the
Company and the statement of revenues and certain expenses of the Consolidating
Properties.
(J) Represents elimination of operating expenses related to the third party
management business and, for the year ended December 31, 1997, the
reclassification of expenses related to the management of the Company's
Wholly-Owned Properties from property operating and maintenance expenses and the
reclassification of administrative expenses relating to the preferred vendor
program, as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Third party management operating expenses.......... $(745) $(4,223)
Reclassification of management expenses for
Wholly-Owned Properties.......................... -- 2,330
Reclassification of preferred vendor administrative
expenses......................................... -- 671
----- -------
$(745) $(1,222)
===== =======
</TABLE>
(K) Represents the elimination of promotional expenses associated with the
third party management business.
(L) Represents, for the year ended December 31, 1997, elimination of the
non-recurring costs related to the withdrawn S-11 filing for the proposed 1997
spin-off of the Company's rental properties and, for the three months ended
March 31, 1998, the costs related to the trustee retirement plan.
F-16
<PAGE> 117
LEXFORD RESIDENTIAL TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED)
(M) Represents interest expense related to non-recourse mortgage loans
assumed of $366,078 for the year ended December 31, 1997 in connection with the
acquisition of the Consolidating Properties. Adjustment for the three months
ended March 31, 1998 includes January interest on $317,722 of mortgage debt
assumed January 31, 1998 upon acquisition of 287 Consolidating Properties and
interest on $48,356 in mortgage debt relating to the remaining 39 Consolidating
Properties acquired April 1, 1998.
(N) Represents interest expense of $1,965 and $446 for the year ended
December 31, 1997 and three months ended March 31, 1998, respectively, at a
weighted average interest rate of 7.5% per annum on additional borrowings of
$26,200 under the corporate line of credit to fund the Consolidation Plan.
(O) Represents depreciation related to the cost of buildings, improvements,
furniture and fixtures of the Consolidating Properties over a 25 year useful
life and the elimination of amortization relating to intangible assets
pertaining to the third party management business, as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Depreciation of buildings, improvements, furniture
and fixtures..................................... $ 1,754 $ 16,043
Amortization of intangible assets.................. (81) (1,025)
------- --------
$ 1,673 $ 15,018
======= ========
</TABLE>
Amortization of intangible assets for the three months ended March 31, 1998
includes amortization of $42 and $39 related to the original recorded value of
management contracts and goodwill, respectively.
(P) Represents elimination of the provision for loss on sale of third party
management business composed of: (i) an accrual of $1,300 related to the
termination of certain consulting and employment agreements and other
miscellaneous costs, (ii) a $2,000 write-down of original goodwill to
recoverable value in connection with intended sale of the third party management
business, and (iii) a $3,000 write-down related to the additional goodwill
recorded upon issuance of the 300,000 shares to the former owners of Lexford
Properties, Inc. in March 1998. (See Note (V))
(Q) Represents elimination of the provision for Federal and state income
taxes resulting from the Company's intention to seek to qualify and elect to be
taxed as a REIT.
(R) Represents the elimination of extraordinary loss relating to repayment
of mortgage loans at contractual balances which exceeded carrying values, net of
income tax.
(S) Represents the reduction of interest expense resulting from the
prepayment of $174,124 and $172,555 (excluding prepayment penalties) of
non-recourse mortgage debt for the year ended December 31, 1997 and three months
ended March 31, 1998, respectively, with interest rates on first mortgages
ranging from 7.0% to 10.7% per annum, from proceeds of the Offering.
(T) Represents elimination of interest expense due to the repayment of
corporate debt from proceeds of the Offering.
(U) Basic and diluted weighted shares outstanding have been adjusted to
reflect the exchange of two Common Shares of beneficial interest of the Company
for one share of common stock of Old Lexford in connection with the
Reincorporation Merger.
(V) Basic and diluted weighted shares outstanding include the 300,000
shares issued to the former owners of Lexford Properties Inc. in March 1998. The
$10 per share amount represents the per share fair value of the Common Shares
issued to acquire the third party management business effective August 1, 1996.
(See Notes 1 and 14 to the historical consolidated financial statements of the
Company)
(W) Diluted weighted shares outstanding on a historical basis excludes the
antidilutive effect of options on 257,258 shares, which options are included in
diluted weighted shares outstanding on a pro forma and pro forma as adjusted
basis.
(X) Basic and diluted weighted shares outstanding include the issuance of
the 11,000,000 Common Shares pursuant to the Offering.
F-17
<PAGE> 118
LEXFORD RESIDENTIAL TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATING
HISTORICAL PROPERTIES (A) ADJUSTMENTS (B) PRO FORMA (C)
---------- -------------- --- ----------- --- ---------- ---
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental revenues........................ $ 41,277 $99,769 $ 141,046
Fee based, primarily from affiliates... 14,164 -- $ (9,958) (D) 4,206
Interest, principally from
unconsolidated partnerships.......... 8,897 -- (7,333) (E) 1,564
Income from disposals of
assets -- net........................ 963 -- (963) (F) --
---------- ------- -------- ----------
Total........................... 65,301 99,769 (18,254) 146,816
EXPENSES:
Property operating and maintenance..... 16,981 33,322 (2,917) (G) 47,386
Real estate taxes and insurance........ 4,148 9,132 13,280
Property management.................... 9,367 -- 924 (H) 10,291
Administration......................... 5,031 -- 5,031
Non-recurring costs.................... 243 -- 243
Interest -- non-recourse mortgages..... 14,132 -- 31,744 (I) 45,876
Interest -- corporate debt............. 1,098 -- 1,965 (J) 3,063
Depreciation and amortization.......... 5,515 -- 15,912 (K) 21,427
---------- ------- -------- ----------
Total........................... 56,515 42,454 47,628 146,597
---------- ------- -------- ----------
INCOME BEFORE GAIN ON DISPOSALS OF
ASSETS, INCOME TAXES AND EXTRAORDINARY
ITEM................................... 8,786 57,315 (65,882) 219
Gain on disposals of Assets, net....... -- -- 963 (F) 963
Provision for income taxes:
Credited to additional paid-in
capital............................ 3,166 -- (3,166) (L) --
Current.............................. 250 -- (250) (L) --
---------- ------- -------- ----------
INCOME BEFORE EXTRAORDINARY ITEM......... 5,370 57,315 (61,503) 1,182
Extraordinary (loss), net of income tax
benefit.............................. (1,614) -- 1,614 (M) --
---------- ------- -------- ----------
NET INCOME............................... $ 3,756 $57,315 $(59,889) $ 1,182
========== ======= ======== ==========
BASIC EARNINGS PER SHARE................. $ 0.50 $ 0.15
========== ==========
DILUTED EARNINGS PER SHARE............... $ 0.48 $ 0.14
========== ==========
BASIC WEIGHTED SHARES OUTSTANDING........ 7,537,298(N) 7,837,298 (O)
DILUTED WEIGHTED SHARES OUTSTANDING...... 7,824,674(N) 8,124,674 (O)
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statement of Income.
F-18
<PAGE> 119
LEXFORD RESIDENTIAL TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
The pro forma condensed consolidated statement of income gives effect to
the following adjustments:
(A) Reflects the historical revenues and certain expenses of the 326
Consolidating Properties.
(B) Reflects (i) the REIT Conversion (including the Reincorporation
Merger and the sale of the third party management business) and (ii) the
acquisition of the 326 Consolidating Properties pursuant to the
Consolidated Plan, in each case as of January 1, 1996.
(C) The loss from the sale of the third party management business of
$4,600 has been excluded from the pro forma condensed consolidated
statement of income.
(D) Represents the elimination of fee based revenues associated with
property management and other services provided to the 326 affiliated
partnerships constituting the Consolidating Properties and management fees
relating to the third party management business, as follows:
<TABLE>
<S> <C>
Third party management fees................................. $2,135
Consolidating Properties:
Management fees........................................... 4,952
Bookkeeping fees.......................................... 1,232
Partnership fees.......................................... 929
Payroll processing fees................................... 180
Tax preparation and reporting fees........................ 269
Insurance administration fees............................. 240
Maintenance supply sales gross margin..................... 940
Expenses of administering the preferred vendor program.... (919)
------
$9,958
======
</TABLE>
Remaining fees of $4,206 relate to services provided to
Non-Consolidating Properties and residents at the Properties, primarily
commissions from renter's insurance sales.
(E) Represents the elimination of interest income from loans and
advances to the Consolidating Properties and the interest to be received on
the note relating to the sale of the third party management business, as
follows:
<TABLE>
<S> <C>
Interest from loans and advances to the Consolidating
Properties................................................ $(7,441)
Interest from note receivable at 6% per annum............... 108
-------
$(7,333)
=======
</TABLE>
(F) Represents the reclassification of such amount for traditional
REIT income statement presentation.
(G) Represents the reclassification of expenses related to the
management of the Company's Wholly-Owned Properties to property management
expense and reduction of property operating expenses resulting from the
pass through of all rebates earned from the preferred vendor program, as
follows:
<TABLE>
<S> <C>
Reclassification of management expenses for Wholly-Owned
Properties................................................ $(1,977)
Expense reductions from rebates............................. (940)
-------
$(2,917)
=======
</TABLE>
F-19
<PAGE> 120
LEXFORD RESIDENTIAL TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME -- (CONTINUED)
(H) Represents elimination of operating expenses related to the third
party management business, the reclassification of expenses related to the
management of the Company's Wholly-Owned Properties from property operating
and maintenance expenses and the reclassification of administrative
expenses relating to the preferred vendor program, as follows:
<TABLE>
<S> <C>
Third party management operating expenses................... $(1,972)
Reclassification of management expenses for Wholly-Owned
Properties................................................ 1,977
Reclassification of maintenance sales administrative
expenses.................................................. 919
-------
$ 924
=======
</TABLE>
(I) Represents interest expense related to $368,423 in non-recourse
mortgage loans secured by the Consolidating Properties.
(J) Represents interest at a weighted average interest rate of 7.5%
per annum on $26,200 of additional borrowings under the corporate line of
credit to fund the Consolidation Plan.
(K) Represents depreciation related to the cost of buildings,
improvements and fixtures of the Consolidating Properties (based upon the
1997 pro forma acquisition cost) over a 25 year useful life and the
elimination of amortization relating to intangible assets pertaining to the
third party management business, as follows:
<TABLE>
<S> <C>
Depreciation of buildings, improvements and fixtures........ $16,043
Amortization of intangible assets........................... (131)
-------
$15,912
=======
</TABLE>
(L) Represents the elimination of the provision for Federal and state
income taxes resulting from the Company's intention to seek to qualify and
elect to be taxed as a REIT.
(M) Represents the elimination of extraordinary loss relating to
repayment of mortgage loans at contractual balances which exceeded carrying
values, net of income tax.
(N) Basic and diluted weighted shares outstanding have been adjusted
to reflect the exchange of two shares of beneficial interest of the Company
for one share of common stock of Old Lexford in connection with the
Reincorporation Merger.
(O) Basic and diluted weighted shares outstanding includes the 300,000
shares issued to the former owners of LPI in March 1998. (See Note 14 of
the historical consolidated financial statements of the Company).
F-20
<PAGE> 121
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 (UNAUDITED) AND
DECEMBER 31, 1997 (AUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ -------------
<S> <C> <C>
ASSETS
Rental properties (Note 2):
Land...................................................... $ 54,928,419 $ 23,124,313
Buildings, improvements and fixtures...................... 475,614,266 138,244,903
------------ ------------
530,542,685 161,369,216
Accumulated depreciation.................................. (12,625,269) (9,151,786)
------------ ------------
517,917,416 152,217,430
Investments in and advances to unconsolidated partnerships,
net of an allowance of $1.2 and $2.6 million at March 31,
1998 and December 31, 1997, respectively (Note 1)......... 21,004,695 57,111,374
Cash........................................................ 8,237,522 2,568,890
Accounts receivable, affiliates (net of an allowance of
$426,507 and $941,521 at March 31, 1998 and December 31,
1997, respectively), residents and other (Note 4)......... 3,276,017 4,898,993
Furniture, fixtures and other, net.......................... 1,771,943 1,719,521
Funds held in escrow (Note 1)............................... 22,566,879 11,887,936
Intangible assets (Note 1).................................. 6,949,201 9,200,531
Net assets of third party management business held for sale
(Note 1).................................................. 1,833,968 0
Prepaids and other (Note 1)................................. 4,404,595 1,992,921
------------ ------------
$587,962,236 $241,597,596
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages and revolving/term debt
Non-recourse mortgages (Note 3)........................... $457,761,800 $142,636,874
Revolving/term debt....................................... 21,760,340 7,361,682
------------ ------------
479,522,140 149,998,556
------------ ------------
Accounts payable............................................ 802,553 1,287,753
Accrued interest, real estate and other taxes............... 10,569,434 3,719,625
Other accrued expenses...................................... 10,377,279 8,241,526
Other liabilities........................................... 14,557,825 3,503,640
Deferred compensation (Note 1).............................. 9,680,181 0
------------ ------------
TOTAL LIABILITIES....................................... 525,509,412 166,751,100
------------ ------------
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, 9,216,593 and 8,493,648 shares issued and
outstanding, at March 31, 1998 and December 31, 1997,
respectively............................................ 92,165 84,936
Additional paid-in capital................................ 62,755,543 54,137,777
Retained earnings......................................... 13,735,580 20,623,783
Less cost of treasury shares (Note 1)..................... (14,130,464) 0
------------ ------------
62,452,824 74,846,496
------------ ------------
$587,962,236 $241,597,596
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-21
<PAGE> 122
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Rental revenues........................................... $25,693,798 $10,187,032
Fee based................................................. 2,397,924 4,043,255
Interest, principally from unconsolidated partnerships.... 1,106,383 2,602,255
----------- -----------
29,198,105 16,832,542
----------- -----------
EXPENSES:
Property operating and maintenance........................ 8,305,797 3,397,651
Real estate taxes and insurance........................... 2,085,062 983,217
Property management....................................... 3,923,337 4,054,479
Administration............................................ 1,514,421 1,041,717
Non-recurring costs (Note 1).............................. 1,808,180 250,000
Interest--non-recourse mortgages.......................... 7,887,391 3,447,086
Interest--revolving/term debt............................. 161,396 169,929
Depreciation and amortization............................. 4,190,091 1,465,070
Provision for loss on sale of third party management
business (Note 1)...................................... 6,300,000 0
----------- -----------
36,175,675 14,809,149
----------- -----------
INCOME/(LOSS) BEFORE GAIN ON DISPOSAL OF ASSETS AND INCOME
TAXES..................................................... (6,977,570) 2,023,393
Provision for income taxes: (Note 1)
Credited to additional paid-in capital.................... 0 (715,800)
Current................................................... 0 (100,000)
Gain on disposal of assets--net............................. 89,367 68,445
----------- -----------
NET INCOME/(LOSS)........................................... $(6,888,203) $ 1,276,038
=========== ===========
BASIC EARNINGS PER SHARE:
Net income/(loss)......................................... $ (0.80) $ 0.16
=========== ===========
DILUTED EARNINGS PER SHARE:
Net income/(loss)......................................... $ (0.80) $ 0.16
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-22
<PAGE> 123
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON SHARES LESS COST
------------------- ADDITIONAL RETAINED OF 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).................. 292,443 2,924 4,447,359 (4,450,283) 0
Establish deferred
compensation liability for
722,664 vested shares held
in the Rabbi Trust (Note
1)........................ (9,680,181) (9,680,181)
Contingent shares issued in
connection with Lexford
Properties, Inc.
acquisition released in
exchange for forfeiture of
600,000 shares (Note 1)... 300,000 3,000 2,997,000 3,000,000
Exercise of options under
nonqualified stock option
plan...................... 13,934 139 11,312 11,451
Trustee retirement plan
shares.................... 44,000 440 651,310 651,750
Share compensation and
trustee restricted stock
plan vested shares (Note
1)........................ 72,568 726 510,785 511,511
Net loss for the period..... (6,888,203) (6,888,203)
--------- ------- ----------- ----------- ------------ -----------
Balance, March 31, 1998..... 9,216,593 $92,165 $62,755,543 $13,735,580 $(14,130,464) $62,452,824
========= ======= =========== =========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-23
<PAGE> 124
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
------------ -----------
<S> <C> <C>
Cash Flows provided by operating activities:
Net income/(loss)......................................... $ (6,888,203) $ 1,276,038
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation........................................... 3,624,654 1,288,410
Amortization........................................... 565,437 176,660
Provision for loss on sale of third party management
business............................................. 6,300,000 0
Provision for losses on accounts receivable............ 676,369 29,225
Income from disposal of assets......................... (89,367) (68,445)
Provisions for income taxes credited to additional
paid-in capital...................................... 0 715,800
Share compensation credited to additional paid-in
capital and common shares............................ 1,163,261 151,418
Changes in operating assets and liabilities:
Investments in and advances to Unconsolidated
Partnerships......................................... 2,710,058 701,901
Accounts receivable and other assets................... (218,105) 2,458,240
Accounts payable and other liabilities................. 956,101 (1,382,190)
------------ -----------
Net cash provided by operating activities................... 8,800,205 5,347,057
------------ -----------
Cash flows provided by/(used in) investing activities:
Proceeds from sale of assets.............................. 117,079 64,031
Capital expenditures...................................... (311,536) (122,775)
Repayment from (advances to) Unconsolidated Partnerships
and other.............................................. (119,543) (128,090)
Investments in Unconsolidated Partnerships................ (3,409,112) 0
Purchase of 287 Unconsolidated Partnerships, net of cash
acquired............................................... (10,584,504) 0
Capital expenditures--real estate......................... (1,401,888) (170,160)
------------ -----------
Net cash (used in) investing activities..................... (15,709,504) (356,994)
------------ -----------
Cash flows provided by/(used in) financing activities:
Proceeds from the exercise of stock options............... 11,451 12,288
Proceeds from revolving/term debt and other............... 14,740,108 0
Principal payment on revolving/term debt and other........ (341,450) (4,778,044)
Payments on mortgages--principal amortization............. (1,545,674) (504,976)
Payments on mortgages--lump sum........................... (286,504) 0
------------ -----------
Net cash provided by/(used in) financing activities......... 12,577,931 (5,270,732)
------------ -----------
Increase/(decrease) in cash................................. 5,668,632 (280,669)
Cash at beginning of year................................... 2,568,890 3,593,121
------------ -----------
Cash at end of period....................................... $ 8,237,522 $ 3,312,452
============ ===========
Supplemental disclosure of cash flow information cash
payments for interest..................................... $ 7,990,978 $ 3,652,954
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-24
<PAGE> 125
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In the first quarter of 1998, the Company acquired the entire ownership
interest in 287 Unconsolidated Partnerships. Such acquisitions resulted in the
following increases (decreases) to the Company's balance sheet (SEE NOTE 2):
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------
<S> <C>
NON-CASH EFFECTS:
Investments in and advances to Unconsolidated
Partnerships.............................................. $(61,180)
Land and building........................................... $367,771
Accounts receivable and other assets........................ $ 16,966
Mortgages................................................... $316,857
Accounts payable and other liabilities...................... $ 13,077
CASH EFFECTS:
Cash paid to prior partners................................. $(16,962)
Net cash acquired........................................... $ 6,377
--------
$(10,585)
========
</TABLE>
On March 13, 1998, the Company negotiated a settlement with the prior
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 in exchange
for the forfeiture of the remaining 600,000 shares (SEE NOTE 1).
F-25
<PAGE> 126
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
three month period ended March 31, 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. As of March 31, 1998, the
Company has whole ownership interest in 398 Rental Properties comprising 26,355
residential units, a partial equity interest in 104 Unconsolidated Partnerships
comprising 7,055 residential units and a significant economic interest as
property manager in 14 Unconsolidated Partnerships comprising 2,995 residential
units. Effective as of April 1, 1998, the Company acquired the entire equity
interest in 37 former Unconsolidated Partnerships comprising 39 Properties and
2,574 residential units. The combined 516 Properties are located at 402 sites
throughout the midwestern and southeastern United States. 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 apartments
communities, averaging approximately 90 units per site. The Company's primary
mission is to become the leading multifamily REIT operating in the
value-conscious segment. The value-conscious segment consists of renters 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
F-26
<PAGE> 127
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION (CONTINUED)
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 the 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 majority of the executive
officers dedicated to the Company's property management activities and its
proprietary interest in property management training programs and systems and
management agreements for 14 Unconsolidated Partnerships in which the Company
currently does not own an equity interest. As a result of these transactions,
the Company has classified the Third Party Management Business as Held for Sale
in the first quarter of 1998 (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).
FUNDS HELD IN ESCROW AND OTHER ASSETS
Funds Held in Escrow at March 31, 1998 include funds of $19.6 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 March 31, 1998 is primarily comprised of goodwill
related to the acquisition of the Third Party Management Business and management
contracts on a portfolio of properties, net of amortization of approximately
$114,000 (SEE "SALE OF THIRD PARTY MANAGEMENT BUSINESS"). In addition,
Intangible Assets includes deferred financing costs of $2.5 million at March 31,
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 March 31, 1998 include $1.8 million of
deferred offering costs. In addition, Prepaids and Other assets consists of $1.6
million of prepaid insurance and real estate taxes, approximately $277,000 of
utility and other deposits and approximately $665,000 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
F-27
<PAGE> 128
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION (CONTINUED)
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 $3,400 for
the first quarter of 1998, and is classified and combined with fee based
revenues in the consolidated statement 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 March 31, 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 Statement of Income for the
three months ended March 31, 1998 does not include a provision for Federal or
state income taxes.
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 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 well as
management agreements for 14 Unconsolidated Partnerships. 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.
F-28
<PAGE> 129
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION (CONTINUED)
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 Provision
for 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 Unconsolidated Partnerships) 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 $1.83 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.
NON-RECURRING COSTS
Non-recurring Costs were approximately $1.8 million for the three months
ended March 31, 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 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.
RABBI TRUST
The Company established the Rabbi Trust in 1997. The Rabbi Trust was
established to permit executive officers and trustees to defer taxes on awards
of Company shares. The Rabbi Trust is 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 must be consolidated
by the Company and carried on the Company's balance sheet. Further, the
Company's
F-29
<PAGE> 130
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION (CONTINUED)
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 March 31, 1998, 722,664 vested
shares in the Company's Rabbi Trust are included in weighted average shares
outstanding for earnings per share purposes and 292,443 non-vested shares held
in the Rabbi Trust are excluded from weighted average shares outstanding for
earnings per share purposes.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform with the Statement 128 requirements.
Earnings per share amounts have also been restated to reflect the two for one
share exchange resulting from the merger of Lexford, Inc. with and into the
Company.
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>
MARCH 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
NUMERATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Net Income/(Loss)......................................... $(6,888,203) $1,276,038
=========== ==========
DENOMINATOR:
Denominator for Basic Earnings Per Share--Weighted
Average Shares........................................ 8,589,187 7,895,270
Effect of Dilutive Securities:
Stock Options (1)...................................... 0 231,626
Time Vesting Restricted Share Awards................... 57,825 61,334
----------- ----------
Dilutive Potential Common Shares.......................... 57,825 292,960
----------- ----------
Denominator for Diluted Earnings Per Share-- Adjusted
Weighted Average Shares................................ 8,647,012 8,188,230
=========== ==========
BASIC EARNINGS PER SHARE:
Net Income/(Loss)......................................... $ (0.80) $ 0.16
----------- ----------
DILUTED EARNINGS PER SHARE:
Net Income/(Loss)......................................... $ (0.80) $ 0.16
=========== ==========
</TABLE>
- ---------------
(1) Stock Options for 257,258 shares were excluded from diluted earnings per
share for the period ended March 31, 1998 because the Company recognized a
net loss for the quarter.
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
F-30
<PAGE> 131
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION (CONTINUED)
shares outstanding during the first quarter of 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"). Through 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. Therefore, the results of operations of the
287 Properties for the two months ended March 31, 1998 are included in the
consolidated financial statements of the Company.
Effective as of April 1, 1998, the Company acquired the entire ownership
interest in an additional 37 Unconsolidated Partnerships that owned 39
Properties, which are accounted for under the equity method in the first quarter
of 1998. The Company has commenced making cash payments to the former partners
of the 287 former Unconsolidated Partnerships totaling $21.3 million, and will
be making cash payments of $13.9 million to the partners of the 37 former
Unconsolidated Partnerships acquired effective as of April 1, 1998. The acquired
former Unconsolidated Partnerships are now classified as Rental Properties.
The acquisition of the 287 former Unconsolidated Partnerships was recorded
as a purchase. The purchase price of $378.1 million was comprised of $21.3
million to purchase former partners' equity interests, $39.9 million of carrying
value of investments in and advances to the 287 former Unconsolidated
Partnerships and the assumption of $316.9 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 287
former Unconsolidated Partnerships at March 31, 1998 and December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ -------------
<S> <C> <C>
Contractual Mortgage Payable...... $465,309,694 $150,284,725
Mortgage Deficiency............... (7,547,894) (7,647,851)
------------ ------------
$457,761,800 $142,636,874
============ ============
</TABLE>
F-31
<PAGE> 132
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 3 -- MORTGAGE DEBT (CONTINUED)
Approximately $169.6 million of the contractual mortgage debt is prepayable
at March 31, 1998. Subject to available financing, the Company intends to prepay
the subject 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.
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 $1.5 million and $3.0 million for the three months
ended March 31, 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 $167,000 and $1.9 million of the
Accounts Receivable were due from the Unconsolidated Partnerships as of March
31, 1998 and December 31, 1997, respectively. The decline in the accounts
receivable is due in part to the acquisition of the 287 former Unconsolidated
Partnerships and is also due to the timing of the billing and collection of
annual insurance premiums collected and paid by the Company on behalf of the
Unconsolidated Partnerships. Fee Based Revenues and Accounts Receivable related
to the Rental Properties are eliminated in consolidation.
The Company advanced to Unconsolidated Partnerships approximately $120,000
in the first three months of 1998 as compared to approximately $128,000 in the
first three months of 1997. These advances were debited to Investments in and
Advances to Unconsolidated Partnerships (SEE NOTE 1 "INVESTMENTS IN AND ADVANCES
TO UNCONSOLIDATED PARTNERSHIPS").
NOTE 5 -- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
The unaudited pro forma condensed consolidated income statements are based
upon a combination (giving effect to appropriate intercompany eliminations and
adjustments) of (a) the historical financial statements of the Company and (b)
the combined statements of revenue and expenses of the 326 acquired Properties,
giving pro forma effect to the acquisition of the 324 former Unconsolidated
Partnerships. The unaudited pro forma condensed consolidated income statements
are presented as if the above transactions had occurred at the beginning of each
period presented. The unaudited pro forma condensed consolidated income
statements include, in the opinion of management, all adjustments necessary to
present fairly the Company's pro forma results of operations and are based upon
available information and certain assumptions considered reasonable under the
circumstances. 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 at the beginning of the
periods indicated above or to project the Company's results of operations for
any future date or period.
F-32
<PAGE> 133
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE 5 -- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
(CONTINUED)
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
-------- --------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C>
REVENUES:
Rental Revenues........................................... $36,603 $35,121
Fee Based and Interest Income............................. 2,397 2,564
------- -------
39,000 37,685
------- -------
EXPENSES:
Property Operating and Maintenance........................ 11,586 11,286
Real Estate Taxes and Insurance........................... 2,965 3,258
Property Management....................................... 3,923 4,054
Administration............................................ 1,515 1,039
Non-recurring Costs....................................... 1,808 250
Interest.................................................. 11,693 12,027
Depreciation and Amortization............................. 5,944 5,476
Provision for Loss on Sale of Third Party Management
Business............................................... 6,300 0
------- -------
45,734 37,390
------- -------
Income/(Loss) before Gain on Disposal of Assets and Income
Taxes..................................................... (6,734) 295
Provision for Income Taxes................................ 0 (139)
Gain on Disposal of Assets................................ 89 68
------- -------
Net Income/(Loss)........................................... $(6,645) $ 224
======= =======
Basic Earnings/(Loss) Per Share............................. $ (0.77) $ 0.03
======= =======
Diluted Earnings/(Loss) Per Share........................... $ (0.77) $ 0.03
======= =======
</TABLE>
The pro forma income statements for the three months ended March 31, 1998
and 1997 assume that all 324 Partnerships acquired in 1998 were purchased as of
January 1, 1998, and 1997, respectively.
F-33
<PAGE> 134
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Trustees
Lexford Residential Trust
We have audited the accompanying consolidated balance sheets of Lexford
Residential Trust (formerly Lexford, Inc. and Cardinal Realty Services, Inc.)
and subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedules listed in the accompanying index. These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Lexford
Residential Trust and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/S/ ERNST & YOUNG LLP
Columbus, Ohio
February 16, 1998, except for Note 14,
as to which the date is March 18, 1998
F-34
<PAGE> 135
NOTE 5 -- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENTS
(CONTINUED)
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Rental Properties (Notes 2 and 5):
Land...................................................... $ 23,124,313 $ 23,652,841
Buildings, improvements and fixtures...................... 138,244,903 137,917,083
------------ ------------
161,369,216 161,569,924
Accumulated depreciation.................................. (9,151,786) (4,478,379)
------------ ------------
152,217,430 157,091,545
Investments in and advances to Unconsolidated Partnerships,
net of an allowance of $2.6 and $1.6 million at December
31, 1997 and 1996, respectively (Notes 3 and 12).......... 57,111,374 54,610,421
Cash........................................................ 2,568,890 3,593,121
Accounts receivable, affiliates ($1,990,967 and $4,089,328,
net of an allowance of $941,521 and $2,034,290, at
December 31, 1997 and 1996, respectively), residents and
other (Note 12)........................................... 4,898,993 5,044,603
Furniture, fixtures and other, net (Note 1)................. 1,719,521 1,167,579
Funds held in escrow (Note 1)............................... 11,887,936 14,011,013
Intangible assets (Note 1).................................. 9,200,531 8,694,925
Prepaids and other.......................................... 1,992,921 1,154,572
------------ ------------
$241,597,596 $245,367,779
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages and corporate debt
Non-recourse mortgages (Note 5)........................... $142,636,874 $148,056,017
Corporate debt (Note 4)................................... 7,361,682 15,263,268
------------ ------------
149,998,556 163,319,285
------------ ------------
Accounts payable............................................ 1,287,753 1,560,749
Accrued interest, real estate and other taxes............... 3,719,625 4,023,310
Other accrued expenses...................................... 8,241,526 8,531,031
Other liabilities........................................... 3,503,640 5,424,226
------------ ------------
Total liabilities.................................. 166,751,100 182,858,601
------------ ------------
Commitments and contingencies (Notes 7, 8, 10)
Shareholders' equity (Notes 1 and 7):
Preferred stock, $.01 par value, 5,000,000 shares
authorized, unissued.................................... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 8,493,648 and 7,817,534 shares issued and
outstanding, at December 31, 1997 and 1996,
respectively............................................ 84,936 78,175
Additional paid-in capital................................ 54,137,777 45,012,798
Retained earnings......................................... 20,623,783 17,418,205
------------ ------------
74,846,496 62,509,178
------------ ------------
$241,597,596 $245,367,779
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-35
<PAGE> 136
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Rental revenues (Note 2).................................. $41,851,081 $41,276,684
Fee based, primarily from affiliates (Note 12)............ 15,847,032 14,164,312 $15,906,553
Interest, principally from unconsolidated partnerships
(Note 12)............................................... 10,680,767 8,897,233 4,361,497
Income from disposal of assets -- net..................... 1,988,611 962,761 3,408,379
----------- ----------- -----------
70,367,491 65,300,990 23,676,429
----------- ----------- -----------
EXPENSES:
Property operating and maintenance........................ 14,883,691 16,980,888
Real estate taxes and insurance........................... 4,060,311 4,148,545
Property management....................................... 12,339,727 9,366,777 8,667,358
Administration............................................ 5,446,969 5,030,967 4,399,349
Performance equity plan (Note 7).......................... 6,280,500 0 0
Non-recurring costs (Note 9).............................. 827,407 242,899 1,537,073
Interest -- non-recourse mortgages (Note 5)............... 13,769,562 14,131,780 0
Interest -- corporate debt (Note 4)....................... 657,349 1,098,333 1,522,087
Depreciation and amortization (Note 2).................... 6,526,863 5,514,571 537,849
----------- ----------- -----------
64,792,379 56,514,760 16,663,716
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM........... 5,575,112 8,786,230 7,012,713
Provision for income taxes (Note 8):
Credited to additional paid-in capital.................. 1,809,000 3,166,000 2,356,000
Current................................................. 380,000 250,000 364,000
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM............................ 3,386,112 5,370,230 4,292,713
Extraordinary (loss) / gain, net of income tax
benefit/(provision) of $115,000 in 1997, $1,015,000 in
1996 and ($510,000) in 1995, respectively (Note 6)........ (180,534) (1,614,356) 804,022
----------- ----------- -----------
NET INCOME.................................................. $ 3,205,578 $ 3,755,874 $ 5,096,735
=========== =========== ===========
BASIC EARNINGS PER SHARE:
Income before extraordinary item.......................... $ 0.42 $ 0.71 $ 0.59
Extraordinary item........................................ (0.02) (0.21) 0.11
----------- ----------- -----------
Net income................................................ $ 0.40 $ 0.50 $ 0.70
=========== =========== ===========
DILUTED EARNINGS PER SHARE:
Income before extraordinary item.......................... $ 0.41 $ 0.69 $ 0.56
Extraordinary item........................................ (0.02) (0.21) 0.11
----------- ----------- -----------
Net income................................................ $ 0.39 $ 0.48 $ 0.67
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-36
<PAGE> 137
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL RETAINED
SHARES AMOUNT PAID-IN CAPITAL EARNINGS TOTAL
--------- ------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995.................. 6,817,254 $68,173 $34,614,374 $ 8,565,596 $43,248,143
Shares issued in 1995, principally in
connection with the claims resolution
process (Note 1)...................... 366,708 3,667 (3,667)
Exercise of options under non-qualified
stock option plan (Note 7)............ 30,606 306 34,910 35,216
Less: treasury shares issued to rental
properties and subsidiaries (Note
1).................................... (8,248) (82) 82
Credit from utilization of
pre-confirmation tax benefits (Note
8).................................... 2,866,000 2,866,000
Net income for the year ended December
31, 1995.............................. 5,096,735 5,096,735
--------- ------- ----------- ----------- -----------
Balance, December 31, 1995................ 7,206,320 72,064 37,511,699 13,662,331 51,246,094
Shares issued in 1996, in connection
with the claims resolution process
(Note 1).............................. 13,340 133 (133)
Shares issued in connection with Lexford
Merger (Note 1)....................... 1,400,000 14,000 13,986,000 14,000,000
Contingent............................ (900,000) (9,000) (8,991,000) (9,000,000)
Exercise of options under non-qualified
stock option plan (Note 7)............ 68,616 686 60,985 61,671
Restricted stock compensation awards and
director restricted stock plan........ 32,334 323 325,546 325,869
Less: treasury shares primarily from the
redemption in 1996 of stock held by
Unconsolidated Partnerships........... (3,076) (31) (31,229) (31,330)
Credit from utilization of
pre-confirmation tax benefits (Note
8).................................... 2,151,000 2,151,000
Net income for the year ended December
31, 1996.............................. 3,755,874 3,755,874
--------- ------- ----------- ----------- -----------
Balance, December 31, 1996................ 7,817,534 78,175 45,012,798 17,418,205 62,509,178
Shares issued in 1997, in connection
with the claims resolution process
(Note 1).............................. 22,264 222 (222)
Exercise of options under non-qualified
stock option plan (Note 7)............ 18,264 183 37,595 37,778
Stock compensation and director
restricted stock plan, net of 267,334
shares subject to vesting restrictions
(Note 7).............................. 635,586 6,356 7,393,606 7,399,962
Credit from utilization of
pre-confirmation tax benefits (Note
8).................................... 1,694,000 1,694,000
Net income for the year ended December
31, 1997.............................. 3,205,578 3,205,578
--------- ------- ----------- ----------- -----------
Balance, December 31, 1997................ 8,493,648 $84,936 $54,137,777 $20,623,783 $74,846,496
========= ======= =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-37
<PAGE> 138
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows provided by/(used in) operating activities:
Management and Investment Management activities:
Cash received from fee based activities................... $ 20,046,613 $ 22,414,166 $ 22,173,861
Interest and other revenues received from Unconsolidated
Partnerships............................................ 12,797,325 9,074,008 4,965,246
Cash receipts -- other.................................... 1,913,305 2,170,253 3,261,207
Cash paid to vendors, suppliers and employees............. (22,337,316) (21,784,246) (21,784,640)
Interest paid on corporate debt........................... (593,913) (1,147,593) (1,554,454)
Income taxes paid -- city and state....................... (285,382) (239,145) (234,436)
Taxes paid, other than income taxes....................... (108,231) (76,575) (553,140)
Payments related to non-recurring items................... (342,361) (2,221,248) (705,075)
------------ ------------ ------------
11,090,040 8,189,620 5,568,569
------------ ------------ ------------
Rental property activities:
Cash received from rental activities...................... 41,586,891 41,297,937 --
Cash paid on rental activities............................ (17,757,630) (19,855,056) --
Real estate taxes......................................... (3,254,401) (3,406,946) --
Interest paid on mortgages................................ (13,579,541) (13,517,318) --
------------ ------------ ------------
6,995,319 4,518,617 --
------------ ------------ ------------
Net cash provided by operating activities................. 18,085,359 12,708,237 5,568,569
------------ ------------ ------------
Cash flow provided by/(used in) investing activities:
Management and Investment Management activities:
Proceeds from sale of assets and other.................. 2,869,955 1,016,334 3,787,441
Capital expenditures.................................... (1,191,992) (422,853) (397,519)
Advances to Unconsolidated Partnerships -- net.......... (992,427) (2,556,807) (8,565,119)
Acquisition of real estate.............................. -- -- (1,864,736)
Investments in unconsolidated partnerships.............. (4,696,916) -- --
Investment in management contracts...................... (1,700,000) -- --
Rental Property activities:
Net cash flow provided by rental activities during
period held for sale (net of Interest paid of
$13,692,045 in 1995).................................. -- -- 3,037,826
Capitalized refinancing costs........................... -- (1,687,492) --
Funding of escrows...................................... 290,805 (41,279) --
Capital expenditures.................................... (2,385,951) (681,639) --
------------ ------------ ------------
Net cash used in investing activities....................... (7,806,526) (4,373,736) (4,002,107)
------------ ------------ ------------
Cash flows provided by/(used in) financing activities:
Management and Investment Management activities:
Proceeds from the exercise of stock options............. 37,778 61,671 35,216
Redemption of stock held by Unconsolidated
Partnerships.......................................... -- (31,330) --
Proceeds from corporate debt and other.................. -- -- 21,000,505
Principal payments on corporate debt and other.......... (8,035,774) (7,052,484) (21,859,553)
Rental Property activities:
Proceeds from mortgage debt............................. 7,428,500 47,442,961 --
Payments on mortgages -- principal amortization......... (2,124,904) (2,139,137) (2,150,733)
Payments on mortgages -- lump sum....................... (8,608,664) (45,775,047) (479,554)
------------ ------------ ------------
Net cash used in financing activities:...................... (11,303,064) (7,493,366) (3,454,119)
------------ ------------ ------------
Increase/(decrease) in cash................................. (1,024,231) 841,135 (1,887,657)
Cash at beginning of year................................... 3,593,121 2,751,986 4,639,643
------------ ------------ ------------
Cash at end of year......................................... $ 2,568,890 $ 3,593,121 $ 2,751,986
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-38
<PAGE> 139
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income.................................................. $ 3,205,578 $ 3,755,874 $ 5,096,735
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 5,426,309 5,111,068 496,392
Amortization.............................................. 1,100,554 403,503 41,457
Provision for losses on accounts receivable............... 389,361 503,421 1,138,869
Income from disposal of assets -- net..................... (1,988,611) (962,761) (3,408,379)
(gain) / loss on debt restructuring 295,534 2,629,356 (1,314,022)
Provision for income taxes credited to additional paid-in
capital................................................. 1,694,000 2,151,000 2,866,000
Stock compensation credited to additional paid-in
capital................................................. 7,399,962 325,869 --
Changes in operating assets and liabilities:
Investments in and advances to unconsolidated
Partnerships.......................................... 1,949,767 (94,014) (390,570)
Accounts receivable and other........................... (339,386) (4,339,533) (17,039)
Funds held in escrow.................................... 1,832,273 (4,857,423) 595,256
Accounts payable and other liabilities.................. (2,879,982) 8,081,877 463,870
----------- ----------- -----------
Net cash provided by operating activities................... $18,085,359 $12,708,237 $ 5,568,569
=========== =========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In 1995, the Company acquired four Rental Properties primarily financed
with $4,770,000 of first mortgages on the properties.
In June 1995, the Company purchased from a mortgage lender the non-recourse
mortgages on one Unconsolidated Partnership and four Rental Properties. The
mortgages totaled $8.8 million and were acquired for $7.8 million. The Company
financed the acquisition with a $7.8 million note payable to the mortgage
lender. The note was repaid in June 1996.
In 1996, the Company granted deeds in lieu of foreclosure to the mortgagee
for three Rental Properties. The properties had an aggregate carrying value of
$3.9 million. In 1995 the Company granted deeds in lieu of foreclosure to the
mortgagees for certain Rental Properties. The properties had an aggregate
carrying value of $3.5 million. No significant gain or loss was recognized on
these transactions because the assets and the non-recourse mortgages on each of
these Rental Properties had been recorded in equal amounts.
Effective August 1, 1996, the Company acquired Lexford Properties, Inc.
through a merger with a wholly-owned subsidiary of the Company. The Company
issued 1,400,000 shares of its common stock (valued at $14,000,000) in
consideration of the acquisition; however 900,000 of the shares issued (valued
at $9,000,000) are subject to forfeiture, in whole or in part, if the Company's
combined property management operations fail to achieve certain profitability
criteria on or before the end of the Company's 1999 fiscal year.
In October 1997 the Company sold two Rental Properties. The buyer assumed
the mortgages with a carrying value of $2.3 million.
In 1997 and 1996, all interest incurred was expensed. In 1995 the interest
incurred on the Rental Properties was capitalized as the properties were held
for sale, while interest on corporate debt was expensed (SEE NOTE 2).
See Notes to Consolidated Financial Statements
F-39
<PAGE> 140
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The principal business of Lexford Residential Trust, Inc., formerly
Lexford, Inc. and Cardinal Realty Services, Inc., and its subsidiaries (the
"Company") is the ownership and management of multifamily apartment properties.
The Company changed its name in October 1997 to emphasize its new executive and
property management personnel and to eliminate the negative stigma associated
with the "Cardinal" name due to its bankruptcy filing in 1989. The Company is
also involved in the acquisition and redevelopment of multifamily apartment
properties. The Company holds an ownership interest in apartment communities
either as (i) the sole owner of various limited partnerships or subsidiaries
which own apartment communities (the "Rental Properties" or "Wholly-Owned
Properties"), or (ii) the general partner in various limited partnerships which
own apartment communities (the "Unconsolidated Partnerships" or "Syndicated
Partnerships"). The Rental Properties and the apartment communities owned by the
Unconsolidated Partnerships are collectively referred to as the "Properties".
The Company's general partner interests in the Unconsolidated Partnerships
ranges from 1.0% to 10.0%, but typically 9.0% to 10.0%. The limited partnership
interests in the Unconsolidated Partnerships are substantially all owned by
unrelated third party investors. The Company also has receivables, typically in
the form of second mortgages, from the Unconsolidated Partnerships that generate
a majority of the interest income recognized by the Company.
The majority of the Properties are located in the midwest and southeast
United States, with the heaviest concentrations in Florida, Ohio, Georgia,
Indiana, Michigan and Kentucky. The typical Property is comprised of multiple
single story buildings with studio, one and two bedroom apartments.
Substantially all of the Properties have non-recourse first mortgage
indebtedness which is owed to financial institutions. The Company is not
dependent for its revenues on any particular Property and the loss of any
Property would not be material to the Company's financial position. Geographic
distribution of the Properties also minimizes the Company's exposure to local
economic conditions.
The Company has historically engaged in and derived revenues from, two
distinct businesses: the real estate investment business in which it owns and
operates multifamily residential real estate ("Investment Management" or "Real
Estate Investment Business") and the real estate services business ("Management
Services" or "Real Estate Services Business") in which it provides fee-based
management and other services to multifamily apartment communities, including
services to properties in which the Company does not have an ownership interest
("Third Party Owners") and their residents.
Investment Management
The objective of the Company's Investment Management division is to
maximize the value of its real estate holdings and its returns on real estate
investments. The Company performs these functions both with respect to the
Rental Properties as well as the Unconsolidated Partnerships. The Company
strives to obtain and maintain the best available financing for the Properties
and to maximize the Properties' operating performance. The Company evaluates the
performance of all real estate holdings to identify investment requirements,
under-performing Properties or those that can be sold at an attractive price
relative to their performance.
The Company's Investment Management division, acting in the Company's
capacity as general partner of the Unconsolidated Partnerships, provides asset
management services to the Unconsolidated Partnerships. In addition, the
Company's Investment Management division performs the following services for the
accounts of the co-owners (limited partners) of the Unconsolidated Partnerships:
informational and financial reporting services (including tax return preparation
and provision of tax return information to the limited partners) and capital and
financial planning (including determination of reserves, funding of capital
requirements and administration of capital distributions to partners).
F-40
<PAGE> 141
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management Services
The Company's Management Services division is charged with the conduct of
the Company's property management business. The Company's property management
business involves all traditional elements of third party property management
including: day-to-day management and maintenance of multifamily residential
apartment properties, attracting and retaining qualified residents, collecting
rents and other receivables from residents, providing cash management services
for rental revenues, security deposits, taxes and insurance and deferred
maintenance escrows, and compiling and furnishing information to property
owners.
Effective August 1, 1996, the Company acquired Lexford Properties, Inc.
("Lexford Properties") by merger of a wholly-owned subsidiary of the Company
with and into Lexford Properties. On that date, Lexford Properties became a
wholly-owned subsidiary of the Company. Lexford Properties has been engaged in
the business of third party property management services to Third Party Owners
since commencing business operations in June 1988. Lexford Properties has
succeeded to the operation of the Company's Management Services Division.
Lexford Properties also operates an adjunct business which the Company
refers to as "Preferred Resource" (formerly referred to as Ancillary Services or
Preferred Vendor). The Preferred Resource business currently provides assistance
to most of the Properties managed by Lexford Properties, in the acquisition of
needed parts and supplies and the management of a coordinated buying group
enjoying substantial volume discounts. In consideration of these services for
the benefit of the Unconsolidated Partnerships, the Company generates income by
retaining some portion of discounts earned. In addition, Preferred Resource
provides services to residents such as renter's insurance.
Fresh Start Accounting
The Company adopted a method of accounting referred to as fresh start
("Fresh Start") reporting as of September 11, 1992 ("The Effective Date") as a
result of the Company's judicial plan of reorganization (the "Plan of
Reorganization"). The Company prepared financial statements on the basis that a
new reporting entity was created with assets and liabilities recorded at their
estimated fair values as of the Effective Date. At the Effective Date, to the
extent the non-recourse debt on certain Rental Property assets exceeded the
estimated fair value of the Rental Property, the Company reduced the contractual
amount of the related non-recourse first mortgage debt by the amounts of the
deficiency (the "Mortgage Deficiencies"). The contractual mortgage balance, net
of any applicable Mortgage Deficiency, is referred to as the "Carrying Value" of
the mortgage. In addition, the Plan of Reorganization provided for the issuance
of the Company's common stock in satisfaction of claims. In accordance with the
Plan of Reorganization, a total of 6,645,246 shares were issued to satisfy
claimants in the bankruptcy case. During 1997, 22,264 shares were released to
claimants upon final resolution of all claims.
Lexford Properties Acquisition
Effective August 1, 1996 the Company acquired Lexford Properties by way of
a merger (the "Lexford Merger") of a wholly-owned subsidiary of the Company with
and into Lexford Properties. The acquisition was accounted for as a purchase.
The terms of the Lexford Merger provided that the Company would succeed to the
ownership of all of the issued and outstanding stock of Lexford Properties and
the shareholders of Lexford Properties would receive 1,400,000 shares of
restricted, newly issued common stock. For purposes of the Lexford Merger, the
common stock was valued at $10 per share. $9.0 million, or 900,000 shares, of
the purchase price is subject to forfeiture in whole or in part in the event
Lexford Properties does not achieve certain profitability criteria by December
31, 1999. These shares are held in escrow pending release or forfeiture. If and
when Lexford Properties attains some or all of the profitability criteria the
corresponding number of shares (up to all 900,000 shares) subject to forfeiture
will be released without contingency and the Company will record the additional
purchase price. The Lexford Properties shareholders received 500,000 shares of
common stock free of contingencies. The 900,000 shares subject to forfeiture are
not reflected in the shareholders' equity section of the
F-41
<PAGE> 142
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's consolidated balance sheets nor in the consolidated statements of
shareholders' equity presented herein (see Note 14).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of FASB Statement No.
107, Disclosure About Fair Value of Financial Instruments. The fair value of
cash and funds held in escrow is equal to their respective carrying amounts. For
investments in and advances to Unconsolidated Partnerships, the Company used the
Fresh Start accounting methodology used at the Effective Date to estimate the
value at December 31, 1997 and 1996, which value approximated $140.3 million and
$133.4 million, respectively. Such methodology is generally based on estimates
of the fair market value of the apartment communities owned by the
Unconsolidated Partnerships, less related indebtedness senior to the Company's
investments and advances. The investments in and advances to Unconsolidated
Partnerships consist substantially of second mortgage loans receivable, whose
ultimate repayment is subject to a number of variables, including the
performance and value of the underlying real estate property and the ultimate
timing of repayments of the receivables. Considerable judgment is required in
the interpretation of market data to develop estimates of fair value,
accordingly, the estimates are not necessarily indicative of the amounts that
could be realized or would be paid in a current market exchange. The effect of
using different market assumptions and/or estimation methodologies may be
material to the estimated fair value amounts (SEE NOTE 3).
The carrying value of the amounts comprising the Company's corporate debt
as described in Note 4 approximate their fair value based upon the Company's
current borrowing rates for similar types of borrowing arrangements. The
carrying amount of accrued interest approximates its fair value.
As further described in Note 5, at December 31, 1997 mortgages on the
Company's Rental Properties in the amount of $142.6 million had contractual
balances totaling $150.3 million (resulting in an aggregate Mortgage Deficiency
of $7.7 million). Interest rates on the mortgages ranged from 7.0% to 10.0% with
rates being fixed on approximately $142.1 million of the contractual balances
(SEE NOTE 5). The Carrying Value of the amounts comprising the mortgages on
Rental Properties as described in Note 5, approximate their fair value based
upon the Company's borrowing rates for similar types of mortgage debt.
Basis of Presentation
The consolidated financial statements include the accounts of Lexford
Residential Trust and its wholly-owned subsidiaries, and all entities in which
the Company has majority interest or control. All significant intercompany
balances and transactions (except for fee based revenues and related expenses
generated from Rental Properties in 1995) have been eliminated in consolidation.
Total revenues from Rental Properties (during the period such properties were
held for sale) amounted to $3.6 million for the year ended December 31, 1995.
Any gross profit on such revenues has been eliminated in consolidation (SEE NOTE
2).
Reclassification
Certain amounts in the 1995 and 1996 consolidated financial statements have
been reclassified to conform to the 1997 presentation.
F-42
<PAGE> 143
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rental Properties (previously Held for Sale)
During 1995 and prior years, the Company classified the Rental Properties
as Held for Sale. However, based upon mortgage debt that had been restructured
with favorable amortization terms, combined with improved net operating income
and cash flow performance, management decided to retain the Rental Properties
for investment. Therefore, commencing January 1, 1996, the Company changed the
classification of the Rental Properties and discontinued the held for sale
accounting treatment. The Rental Properties are carried at lower of cost or fair
value and depreciated over their estimated remaining useful lives, typically
approximately 30 years, using the straight-line method for financial reporting
purposes and tax purposes. The Company capitalizes interior replacement costs
and major building exterior improvements, and depreciates the assets over their
estimated useful lives ranging from five to 20 years (SEE NOTE 2). The Company
evaluates its Rental Properties periodically for indicators of impairment,
including recurring operating losses and other significant adverse changes in
the business climate that affect the recovery of the recorded asset value. If
Rental Property is considered impaired, a loss is provided to reduce the net
Carrying Value of the asset to its estimated fair value. Management is not aware
of any indicator that would result in any significant impairment loss.
Investments in and Advances to Unconsolidated Partnerships
Investments in and advances to Unconsolidated Partnerships represent the
Company's general partners' interest and advances to non-controlled partnerships
which own multifamily apartment communities. The Carrying Value represents the
allocation of the estimated fair value of the underlying real estate assets as
of the Effective Date or, if later, date of purchase or investment and, as
described in Note 3, the contractual amounts of the receivables are
significantly more than the recorded amounts. These receivables generally
include long-term second mortgages and other receivables. In addition,
subsequent to the Effective Date, the Company has made advances to the
Unconsolidated Partnerships. These advances primarily relate to operating needs
and supplemental funding for refinancing transactions, and bear interest at
prime plus one percent. Interest is accrued on the recorded values of the second
mortgages and certain of the other receivables based upon contractual interest
rates, and allowances are provided for estimated uncollectible interest based
upon the underlying Properties' net cash flows. In certain instances, cash flow
received in excess of accrued second mortgage interest on the recorded values of
the second mortgages is recorded as income. The Company is also entitled to
receive incentive management fees and supplemental second mortgage interest
based upon certain levels of cash flows of certain of the underlying Properties.
Also, in the event the underlying Properties are sold or refinanced, the Company
is generally entitled to a participation interest in the net proceeds, as a
general partner and/or a second mortgage holder. The realization of the
investments in and advances to Unconsolidated Partnerships is dependent on the
future operating performance of the Unconsolidated Partnerships.
Prior to November 1, 1997, the Company accounted for its investments by the
cost method. Effective November 1, 1997, based on the Company's board of
directors decision to seek to acquire ownership of third party equity interests
in substantially all of the Unconsolidated Partnerships, the Company began
accounting for its investments on the equity method. The Company's share of net
income or loss of the Unconsolidated Partnerships is classified with fee based
revenues in the consolidated statement of income (SEE NOTES 3 AND 14).
In December 1997, the Company purchased a non-controlling interest in
certain limited partnerships that have an ownership interest and/or other
investments in 15 properties, comprising approximately 3,400 units. The purchase
price of $3.3 million is included in investments in and advances to
Unconsolidated Partnerships at December 31, 1997. The Company is accounting for
these investments under the equity method.
Furniture, Fixtures and Other, Net
Furniture and fixtures, net of accumulated depreciation of $2.5 million and
$1.8 million at December 31, 1997 and 1996, respectively, are recorded at cost
and are depreciated over their estimated useful lives ranging
F-43
<PAGE> 144
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from three to 10 years, using the straight-line method for financial reporting
purposes and various accelerated or straight-line methods for income tax
purposes.
Funds Held in Escrow
The amounts at December 31, 1997 and 1996 include funds of $6.7 million and
$7.0 million, respectively, escrowed by Rental Properties for improvements and
deferred maintenance, real estate taxes, insurance and resident security
deposits. In addition, the Company is holding $2.0 million and $3.0 million, at
December 31, 1997 and 1996, respectively, as funds held primarily for payment of
insurance premiums which are collected from the Properties. At December 31, 1997
and 1996 the Company's funds held in escrow also includes $3.2 million and $4.0
million, respectively, of funds received from the settlement of litigation
brought against the Company's former insurance carrier to prosecute policy
claims for termite infestation losses at certain of the Properties. These funds
are being used to pay additional litigation costs associated with the Company's
prosecution of claims against its former excess coverage insurance carrier. The
Company's other liabilities includes $1.9 million and $3.4 million at December
31, 1997 and 1996, respectively, representing the settlement proceeds from the
litigation allocable to certain Unconsolidated Partnerships.
Revenue Recognition
Rental revenue is recognized as income in the period earned.
Intangible Assets
Intangible assets at December 31, 1997 and 1996 is primarily comprised of
goodwill and management contracts, net of accumulated amortization of
approximately $816,700 and $129,600, respectively. In 1997, the Company acquired
management contracts on a group of affiliated properties for $1.7 million. The
goodwill and management contracts related to the Lexford Merger is being
amortized on the straight line basis over 25 years and 10 years, respectively.
In the third quarter of 1997, the Company recorded a charge of approximately
$364,000 as an amortization adjustment to the value assigned to the third party
management contracts acquired with the Lexford Merger. The adjustment was based
upon the significant decline in the number of third party management contracts.
The management contracts purchased in 1997 are being amortized on the straight
line basis over seven years.
Intangible assets also includes deferred financing costs at December 31,
1997 and 1996 of $2.5 million and $2.7 million, respectively. The costs relate
to mortgage refinancings on the Rental Properties and are amortized over the
terms of the respective loans.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform with the Statement 128 requirements. Also
see Note 14 - Subsequent Events regarding two for one stock exchange.
F-44
<PAGE> 145
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the amounts used in computing basic and diluted
earnings per share as well as weighted average numbers of shares outstanding and
the effect on income of restricted common stock and stock options with dilutive
potential.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Income before extraordinary items....................... $3,386,112 $ 5,370,230 $4,292,713
Extraordinary item...................................... (180,534) (1,614,356) 804,022
---------- ----------- ----------
Net income.............................................. 3,205,578 3,755,874 5,096,735
========== =========== ==========
Denominator:
Denominator for basic earnings per share --
Weighted average shares.............................. 8,071,970 7,537,298 7,256,100
Effect of dilutive securities:
Stock options........................................ 171,862 192,166 260,956
Time vesting restricted stock awards................. 70,084 95,210 69,000
---------- ----------- ----------
Dilutive potential common shares........................ 241,946 287,376 329,956
---------- ----------- ----------
Denominator for diluted earnings per share --
Adjusted weighted average shares..................... 8,313,916 7,824,674 7,586,056
========== =========== ==========
Basic earnings per share:
Income before extraordinary item........................ $ 0.42 $ 0.71 $ 0.59
Extraordinary item...................................... (0.02) (0.21) 0.11
---------- ----------- ----------
Net income.............................................. $ 0.40 $ 0.50 $ 0.70
========== =========== ==========
Diluted earnings per share:
Income before extraordinary item........................ $ 0.41 $ 0.69 $ 0.56
Extraordinary item...................................... (0.02) (0.21) 0.11
---------- ----------- ----------
Net income.............................................. $ 0.39 $ 0.48 $ 0.67
========== =========== ==========
</TABLE>
In August, 1996, the Company issued 1,400,000 shares of common stock in
connection with the Lexford Merger, 900,000 shares of which remain subject to
forfeiture in whole or in part. The 900,000 shares subject to forfeiture are
contingent upon achieving certain profitability criteria. The 900,000 contingent
shares are excluded from the weighted average shares outstanding because
profitability criteria have not been met (see "LEXFORD PROPERTIES ACQUISITION").
The weighted average shares outstanding excludes 267,334 shares of common
stock awarded to certain officers which vesting is contingent upon the Company
achieving certain performance criteria that were not met as of December 31,
1997. In addition, weighted average stock options for 8,000 shares were excluded
from weighted average shares outstanding since the exercise price exceeded the
average stock price. For additional disclosures regarding outstanding employee
stock options, see Note 7.
In February 1997, the Company retired approximately 420,600 shares that
were previously held as treasury shares.
NOTE 2: RENTAL PROPERTIES
During 1995 and prior years, the Company had attempted to market and sell
the Rental Properties and classified the Rental Properties as held for sale.
While the Rental Properties were held for sale, the results of operations from
the Rental Properties were credited to the carrying value of the real estate and
no revenues,
F-45
<PAGE> 146
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating expenses or depreciation were included in the consolidated statements
of income. Cash flows from the Rental Properties prior to 1996 were classified
as cash flow provided by investing activities. Commencing January 1, 1996, based
upon management's decision to retain the Rental Properties for investment, the
operations, including a provision for depreciation, of the Rental Properties
have been fully consolidated in the Company's consolidated statements of income.
Further, the cash flows of the Rental Properties have been reclassified as cash
flows provided by operating activities.
Condensed combined balance sheets, with intercompany payables and
receivables eliminated, of the Company's 111 and 113 Rental Properties as of
December 31, 1997 and 1996, respectively, are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Net rental properties....................................... $152,217,430 $157,091,545
Cash........................................................ 2,619,761 3,322,494
Accounts receivable......................................... 817,948 324,772
Funds held in escrow........................................ 6,689,337 6,980,142
Intangible assets........................................... 2,492,029 2,721,365
Prepaids and other.......................................... 310,292 832,132
------------ ------------
$165,146,797 $171,272,450
============ ============
LIABILITIES AND EQUITY
Non-recourse mortgages payable:
Contractual............................................... $150,284,725 $157,381,603
Mortgage deficiency....................................... (7,647,851) (9,325,586)
------------ ------------
142,636,874 148,056,017
Accounts payable............................................ 561,203 1,160,426
Accrued interest and real estate taxes...................... 2,825,450 2,961,795
Other accrued expenses...................................... 1,175,438 1,337,083
Other liabilities........................................... 959,987 683,202
------------ ------------
148,158,952 154,198,523
Equity...................................................... 16,987,845 17,073,927
------------ ------------
$165,146,797 $171,272,450
============ ============
</TABLE>
Condensed consolidated statement of income of the 116 Rental Properties
while held for sale, including intercompany expenses, for the year ended
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1995
------------
<S> <C>
Rental revenues............................................. $ 40,000,678
Operating expenses.......................................... (18,691,062)
------------
Net operating income...................................... 21,309,616
Improvements and replacement expense........................ (2,213,586)
Improvements and replacement expense funded from escrows.... (1,746,156)
Interest expense (contractual interest of approximately
$14,562,000).............................................. (13,549,258)
Other expenses.............................................. (1,464,630)
------------
Reorganization expenses..................................... (96,227)
------------
Income, less expenses, excluding depreciation............. $ 2,239,759
------------
</TABLE>
F-46
<PAGE> 147
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED PARTNERSHIPS
The investments in and advances to Unconsolidated Partnerships net of
allowances of $2.6 million and $1.6 million, respectively, are comprised of the
following major components:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Second mortgage notes....................................... $35,778,288 $36,450,176
Advances, since the Effective Date.......................... 14,770,765 14,271,906
Investments in Unconsolidated Partnerships.................. 3,395,474 --
Other, including accrued interest........................... 3,166,847 3,888,339
----------- -----------
$57,111,374 $54,610,421
=========== ===========
</TABLE>
The majority of the second mortgage notes bear interest at 6%. Interest
income is accrued based upon the Fresh Start value of the second mortgage notes,
as described in Note 1. The advances currently bear interest at prime plus 1%.
At December 31, 1997 and 1996, the contractual obligations of the Unconsolidated
Partnerships on account of second mortgages, advances and other payables,
including related interest, aggregated $232.5 million and $238.7 million,
respectively. Amounts due under second mortgages are collateralized
substantially by all the real estate assets of the Unconsolidated Partnerships
and are subordinate to the first mortgage debt. There can be no assurance that
the Company will collect the full carrying value of, or any additional
contractual balances owing under, these receivables.
Following is a summary of financial position and results of operations of
the 394 Unconsolidated Partnerships at December 31, 1997 and 406 Unconsolidated
Partnerships at December 31, 1996 and 1995. The presentation does not include
data for 15 additional Unconsolidated Partnerships in which the Company made
initial investments in December 1997 (SEE NOTE 1 -- "INVESTMENTS IN AND ADVANCES
TO UNCONSOLIDATED PARTNERSHIPS").
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Real estate assets, net........................ $ 394,138,048 $ 413,430,542 $ 427,165,373
Cash, funds held in escrow and resident
receivables.................................. 32,117,034 35,821,876 33,579,786
Other assets................................... 12,721,170 14,650,648 11,610,306
------------- ------------- -------------
Total assets................................. $ 438,976,252 $ 463,903,066 $ 472,355,465
============= ============= =============
Non-recourse mortgage debt..................... 437,235,691 456,926,896 457,388,544
Other liabilities.............................. 21,613,975 25,175,139 20,499,327
Amounts due to the Company..................... 232,511,337 238,676,999 237,098,604
------------- ------------- -------------
$ 691,361,003 $ 720,779,034 $ 714,986,475
------------- ------------- -------------
Net deficit.................................. $(252,384,751) $(256,875,968) $(242,631,010)
============= ============= =============
Rental and other revenues...................... $ 123,922,337 $ 122,712,181 $ 117,213,041
============= ============= =============
Net loss....................................... $ (5,019,247) $ (13,732,614) $ (12,482,318)
============= ============= =============
Company's share of loss (equity method)
November 1 through December 31, 1997......... $ (80,644)
=============
</TABLE>
Prior to November 1, 1997 and during 1996 and 1995 the Company's share of
loss relating to its investment in Unconsolidated Partnerships was not recorded
because the Company accounted for the investment under the cost method (SEE NOTE
1).
F-47
<PAGE> 148
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: CORPORATE DEBT
Corporate debt consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Amended and restated revolving credit facility --
principal payable March 30, 2000; interest payable
monthly in arrears at Prime minus 1% (7.5% for 1997)... $2,572,092 $ --
Reducing balance revolving credit agreement -- amended in
1997................................................... -- 9,110,816
Acquisition term debt -- principal and interest in
monthly installments of $139,435 through March 31,
2001; interest at a fixed rate of 7.25%................ 4,733,283 6,007,232
Other notes payable...................................... 56,307 145,220
---------- -----------
$7,361,682 $15,263,268
========== ===========
</TABLE>
On September 30, 1997 the Company entered into an Amended and Restated Loan
and Security Agreement with the Provident Bank ("Bank"). The new revolving
credit facility ("Facility"), is for $35 million and represents an increase to
and replacement of the former Provident revolving credit facilities and
commitments ("Former Lines"), consisting of a $3 million working capital
revolving credit facility ("Working Capital Line"), and a $22 million reducing
balance revolving line ("Reducing Line") and a committed $10 million acquisition
line ("Acquisition Line"). The scheduled term of the Facility expires March 30,
2000, although the Company may elect from time to time to reduce the Facility
and convert all or any portion of the principal amount outstanding under the
Facility into a five year term loan. Revolving loans under the Facility bear
interest equal to the Bank's prime rate of interest, currently 8.5%, minus 1%.
The Facility and Acquisition Term Debt continues to be secured by all of the
Company's assets, subject to the interest of the first mortgage holder on
non-recourse mortgage debt of the Rental Properties. At December 31, 1997 the
Company had unrestricted credit availability of approximately $31.7 million.
This amount is net of $767,400 restricted for unfunded stand-by letters of
credit for 1997.
The Company's loan agreements contain restrictive covenants, including but
not limited to, the maintenance of certain net worth, financial ratios, certain
restrictions on incurrence of additional debt and certain restrictions on
acquisitions.
The Company's annual long-term debt maturities following December 31, 1997
are:
<TABLE>
<S> <C>
1998........................................................ $1,419,915
1999........................................................ 1,503,254
2000........................................................ 4,162,150
2001........................................................ 276,363
----------
$7,361,682
==========
</TABLE>
NOTE 5: NON RECOURSE MORTGAGES
In connection with Fresh Start reporting as further described in Note 1,
mortgages on Rental Properties were restated to their estimated fair value as of
the Effective Date. The contractual principal balances of the mortgages on
Rental Properties exceed the Carrying Values by $7.7 million and $9.3 million at
December 31, 1997 and 1996, respectively. The mortgages are non-recourse, are
collateralized by the Rental Properties (generally on a single Rental Property
by Rental Property basis, although a portfolio of mortgages on 26 Rental
Properties are cross-collateralized and cross-defaulted) and are payable over
periods through 2007. At December 31, 1997
F-48
<PAGE> 149
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contractual interest rates ranged from 7.0% to 10.0% with fixed rates on
approximately $142.1 million of the outstanding contractual mortgage balances.
Interest expense is recorded using the effective interest method based upon the
carrying value of the mortgage debt. The weighted average effective interest
rate was 8.63% at December 31, 1997. The weighted average contractual interest
rate and term to maturity on the mortgages on Rental Properties, was 8.61% and
6.2 years at December 31, 1997. The annual debt service requirement was $15.2
million at December 31, 1997. In addition, ten Rental Properties have second
mortgage debt totaling $1.5 million at December 31, 1997, that requires the
application of all excess cash flow from operations to be applied to the
outstanding principal on such debt. The range of interest rates and related
carrying amounts of mortgages payable at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
CONTRACTUAL CARRYING
CONTRACTUAL RATE BALANCE VALUE
---------------- ------------ ------------
<S> <C> <C>
Less than 8.0%.................................. $ 15,979,531 $ 14,351,759
8.01% -- 9.0%................................... 120,960,409 116,421,071
More than 9.01%................................. 13,344,785 11,864,044
------------ ------------
$150,284,725 $142,636,874
============ ============
</TABLE>
Minimum estimated repayment requirements of mortgages for the next five
years based upon the contractual principal balances are as follows:
<TABLE>
<CAPTION>
CONTRACTUAL
AMOUNTS
------------
<S> <C>
1998........................................................ 10,009,959
1999........................................................ 4,738,553
2000........................................................ 7,408,432
2001........................................................ 22,365,496
2002........................................................ 9,072,499
Thereafter.................................................. 96,689,786
------------
$150,284,725
============
</TABLE>
NOTE 6: EXTRAORDINARY ITEM -- REFINANCED MORTGAGE DEBT
During 1997, the Company refinanced mortgages on six Rental Properties.
Mortgage indebtedness on these Rental Properties, with a contractual value of
approximately $7.4 million and a Carrying Value of approximately $7.1 million,
was refinanced with mortgages bearing a fixed rate of interest ranging from
7.45% to 9.03%, with 25 year amortization and ten year maturities. Annual debt
service on the affected Rental Properties decreased approximately $18,000. An
extraordinary non-cash loss of approximately $180,000, net of tax benefits,
resulted from the mortgage debt refinancings of the Rental Properties. The loss
arose from the mortgages repaid from refinance proceeds at the contractual
balance which exceeded the Carrying Value of the mortgages (SEE NOTE 1).
The refinancing of mortgages on the Unconsolidated Partnerships generated
loan fee revenue of approximately $130,000 in 1997 as compared to $752,000 and
$886,000 in 1996 and 1995, respectively. The fees were based upon a graduated
percentage of the new loan amounts and are classified with fee based revenue in
the consolidated statements of income.
In 1996 and 1995, the Company completed modification or refinancing
transactions on Rental Properties and Unconsolidated Partnerships which resulted
in an extraordinary non-cash loss of $1.6 million, net of tax benefits in 1996
and an extraordinary gain on discharge of indebtedness net of closing costs
reserves and taxes of approximately $804,000 in 1995. The loss arose from those
mortgages repaid from refinance proceeds at the contractual balance which
exceeded the Carrying Value of the mortgage (SEE NOTE 1).
F-49
<PAGE> 150
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: STOCK BASED COMPENSATION
The company provides stock based compensation to employees and non-employee
directors including stock options, stock awards and stock in lieu of cash
payments under various plans and contractual arrangements.
Performance Equity Plan
In October 1997, the shareholders of the Company approved the Company's
1997 Performance Equity Plan (the "Performance Plan"). The Performance Plan
authorizes the grant of restricted stock awards to certain officers and
non-employee directors. The Performance Plan has a three year term (1997 through
1999), with increasing performance goals associated with each year of the term.
A total of 636,000 shares of restricted common stock are available for grants.
On October 7, 1997 the Compensation Committee of the Company's Board of
Directors authorized restricted stock grants for the full 636,000 shares.
Vesting under the Performance Plan occurs only upon attainment of specified
performance goals. The performance goals are stated as percentage increases over
base line amounts established, and as defined, in the Performance Plan approved
by shareholders. Any awards that remain non-vested after the third year will be
forfeited.
In 1997, 424,000 shares awarded under the Performance Plan vested upon
achievement of the performance goals. The vesting of these shares resulted in a
non-cash charge in the fourth quarter of 1997 of approximately $6.3 million.
Incentive Equity Plan and Other Stock Compensation
The Company also has an Incentive Equity Plan (the "Incentive Plan"), that
was established in 1992 and amended with shareholder approval in 1995, that
authorizes the Company's issuance of stock in connection with stock options and
restricted stock awards. The Incentive Plan, which benefits officers, key
employees and non-employee directors, authorized approximately 1,182,000 shares
for officers and key employees and approximately 280,400 shares for non-employee
directors. At December 31, 1997, 287,036 shares remain available for officers
and key employees and approximately 64,400 shares remain available for grants of
stock options to non-employee directors. The shares of stock available for
future options and awards may be granted at the discretion of the Company's
Board of Directors or its Compensation Committee. Approximately 496,800 of the
895,200 shares or options previously issued under the Incentive Plan are held by
officers and key employees currently employed by the Company and all of the
non-employee director shares or options issued are held by individuals currently
serving as directors.
In 1997, the Company granted to officers and key employees stock options
for the purchase of 72,550 shares, 15,000 shares of restricted stock, and 18,000
shares of stock with vesting contingent on certain Company performance criteria.
In addition, stock options for the purchase of 32,000 shares, and 4,000 shares
of restricted stock were granted to non-employee directors in 1997. In addition,
certain officers and key employees received 8,620 shares of stock in lieu of
cash compensation in 1997 and 150,800 shares were issued under employment
agreements.
In 1996, the Company granted stock options for 152,000 shares, including
32,000 to non employee directors, restricted stock awards for 99,000 shares and
deferred stock awards for 76,000 shares. The restricted stock awards included up
to 35,000 shares as a Company match of shares if purchased by officers by April,
1997, and 64,000 shares which vest ratably over time. The deferred stock awards
vest upon achievement of specified performance criteria.
The shares authorized under the Incentive Plan in 1992 were provided for in
the Plan of Reorganization, prior to the Effective Date. Therefore these shares
were deemed awarded prior to the Effective Date with no compensation expense
recorded for periods subsequent to the Effective Date. Awards of shares provided
for in the amendment to the Incentive Plan in 1995, depending on the nature of
the award, may be reflected as
F-50
<PAGE> 151
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation over the vesting period. Compensation expense resulting from
transactions under this plan and other stock compensation arrangements was
$842,600 and $207,500 for 1997 and 1996, respectively, in addition to the non
cash charge recorded for the Performance Plan. There was no stock compensation
expense in 1995. The weighted average per share value at grant date of the
restricted and deferred stock awards was $14.68 and $9.29 for 1997 and 1996,
respectively.
In 1996, the shareholders of the Company approved the director restricted
stock plan (the "Director Plan") that provides for compensation earned by the
directors to be paid, at the option of the Directors, in whole or in part, in
shares of stock in lieu of cash fees. The Director Plan authorized 100,000
shares, of which approximately 66,800 shares remain available at December 31,
1997. In 1997 and 1996 the Company recorded compensation expense of $276,800 and
$118,400, respectively, related to the Director Plan.
Stock Option Valuation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee and director stock options,
because the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock Based Compensation," ("FASB 123") requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FASB 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that Statement. The fair
value for these options was estimated at the date of the grant using
Black-Scholes option pricing model.
The following assumptions were utilized in the pricing model: a weighted
average risk free interest rate of 5.6% in 1997 and 6.5% in 1996 and 1995;
dividend yield of one percent; volatility factors of the expected market price
of the Company's common stock of 0.248 in 1997 and 0.236 in 1996 and 1995; and a
weighted average expected life of 6.3 years in 1997, seven years in 1996 and
eight years in 1995.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restriction
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options vesting period. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net income........................... $3,026,754 $3,629,797 $5,090,716
========== ========== ==========
Pro forma basic earnings per share............. $ 0.37 $ 0.48 $ 0.70
========== ========== ==========
Pro forma diluted earnings per share........... $ 0.36 $ 0.46 $ 0.67
========== ========== ==========
</TABLE>
F-51
<PAGE> 152
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the Company's stock option activity, and
related information for the years ended December 31, 1997, 1996 and 1995 (in
thousands except for exercise prices):
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning
of year......................... 352 $ 5.45 270 $ 2.05 270 $ 1.17
--- ------ --- ------ --- ------
Options granted................. 104 $12.27 152 $ 9.44 35 $ 8.63
Options exercised............... (18) $ 2.07 (68) $ 0.90 (31) $ 1.14
Options forfeited............... (4) $ 9.59 (2) $ 1.31 (4) $ 1.31
--- ------ --- ------ --- ------
Options outstanding at end of
year............................ 434 $ 7.20 352 $ 5.46 270 $ 2.05
=== ====== === ====== === ======
Options exercisable at end of
year............................ 234 $ 4.17 176 $ 2.60 192 $ 1.11
=== ====== === ====== === ======
Weighted average fair value of
options granted during the
year............................ $ 4.15 $ 3.19 $ 3.42
====== ====== ======
</TABLE>
Options awarded have an exercise price equal to or greater than the market
price of the common stock at the time of the award, and are subject to vesting
schedules as determined by the Company's Board of Directors or its Compensation
Committee. The options granted expire, if not exercised, ten years from the date
on which the option was granted. Exercise prices for options outstanding as of
December 31, 1997 ranged from $0.71 to $15.50 per share with a weighted average
remaining term of 7.3 years. At December 31, 1997, there were options
outstanding to purchase approximately 152,000 shares at an exercise price less
than $5 and approximately 282,000 shares at an exercise price in excess of $5.
NOTE 8: INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return. For financial reporting purposes, the Company follows FASB Statement No.
109 ("FASB 109"). In accordance with FASB 109, income taxes have been provided
at statutory rates in effect during the period. Tax benefits associated with net
operating loss carry forwards and other temporary differences that existed at
the time Fresh Start reporting was adopted are reflected as an increase to
additional paid-in capital in the period in which they were realized.
The provision for income taxes in the consolidated statements of income
(including amounts applicable to extraordinary items) is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.............................................. $ -- $ -- $ 50,000
State................................................ 380,000 250,000 314,000
Amounts not payable in cash............................ 1,694,000 2,151,000 2,866,000
---------- ---------- ----------
$2,074,000 $2,401,000 $3,230,000
========== ========== ==========
</TABLE>
The Company's actual income tax payments for the years 1997, 1996 and 1995
were significantly less than the total provision for income taxes because of
available net operating loss carry forwards and other tax benefits.
F-52
<PAGE> 153
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amounts included in the provision for taxes for which no amounts were
payable in cash are set forth in the table above.
The effective income tax rates varied from the Federal statutory rates as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Federal tax provision at statutory rates......... $1,787,000 $2,094,000 $2,832,000
State income taxes, net of federal income tax
benefit........................................ 251,000 165,000 207,000
Other permanent differences...................... 36,000 142,000 191,000
---------- ---------- ----------
$2,074,000 $2,401,000 $3,230,000
========== ========== ==========
Effective income tax rate........................ 39.3% 39.0% 38.8%
========== ========== ==========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(000S OMITTED)
<S> <C> <C>
Deferred tax assets and other:
Net operating loss carry forwards and other carry
forwards............................................... $ 22,000 $ 19,000
Suspended passive activity losses......................... 34,000 38,000
Tax basis of assets in excess of Fresh Start estimated
fair values............................................ 11,000 39,000
-------- --------
67,000 96,000
-------- --------
Less: valuation allowance................................... (31,000) (24,000)
-------- --------
$ 36,000 $ 72,000
-------- --------
Deferred tax liabilities:
Negative capital accounts................................. $ 33,000 $ 41,000
Tax basis of liabilities in excess of related Fresh Start
estimated fair values.................................. 3,000 3,000
Tax basis of assets less than related Fresh Start
estimated fair values.................................. -- 28,000
-------- --------
$ 36,000 $ 72,000
======== ========
</TABLE>
The valuation reserve against deferred tax assets has been reduced by
amounts equivalent to the portions of the tax provisions which are not payable
in cash. Corresponding increases have been made to additional paid-in capital.
As a result of the uncertainties relating to the ultimate utilization of
favorable tax attributes described below, the Company has provided a valuation
allowance for the remaining excess of the net deferred tax assets as of December
31, 1997 and 1996.
In addition to regular corporate income tax, corporations are subject to an
alternative minimum tax liability to the extent alternative minimum tax exceeds
regular tax. The Company will record an alternative minimum tax liability in the
year that events and transactions create an alternative minimum tax which is
probable of being paid and can be reasonably estimated by the Company. As of
December 31, 1997, the Company has estimated that it has net operating loss
("NOL") carry forwards for tax purposes of approximately $64.9 million which if
not utilized, expire in the years 2001 through 2013. In the event that current
or future 5% shareholders (as defined by the Internal Revenue Code) acquire or
dispose of shares, over a defined time period, representing in the aggregate 50%
or more of the Company's outstanding shares, a limitation on the use of NOL
carry forwards will occur. The Company has also estimated that it has
approximately $101.3 million in suspended passive activity losses ("PALs") which
may be available to offset future passive and active income. In December 1997
the Company's
F-53
<PAGE> 154
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Board of Directors accelerated the scheduled termination date of transfer
restrictions with respect to the sale of the Company's stock. This provision was
originally included in the Company's Restated Articles of Incorporation (which,
in turn, were included within the Plan of Reorganization) to prevent the
potential for an ownership change that would otherwise result in a limitation in
the Company's ability to utilize net operating and passive loss carryforwards.
As contemplated under the Restated Articles of Incorporation, the Board
determined that the transfer restriction was no longer necessary. The Company's
determination of its NOLs, PALs, and other tax attributes, as well as its
ability to utilize them to reduce taxable income is subject to uncertainties.
Although the Company believes that its determinations concerning its tax
attributes are supportable under applicable tax laws, there can be no assurance
that taxing authorities, upon examination will not argue to the contrary.
NOTE 9: NON-RECURRING COSTS
In 1997, the Company incurred non-recurring costs totaling approximately
$827,000. Approximately $400,000 of the charge was due to costs related to the
elimination of overlapping functions between Lexford Properties and the
Company's previous management services operations. In the second half of 1997
the Company recorded a charge of approximately $427,000 primarily related to
costs incurred for the Form S-11 filing for the proposed spinoff of the
Company's Rental Properties. The Company has withdrawn this filing as it has
determined to maintain its ownership interests in the Rental Properties and seek
to qualify as a REIT under the Internal Revenue Code (see Note 14). At December
31, 1997, the Company had deferred REIT organization costs of approximately
$808,000. These costs are included in prepaids and other on the consolidated
balance sheet.
In 1995, the Company implemented a corporate restructuring plan and
initiated further restructuring in 1996. The Company recorded a charge of
approximately $243,000 and $1.5 million in 1996 and 1995, respectively, related
to the costs of the restructuring, principally severance and separation costs.
Approximately 26 employees were released as a result of the restructurings in
1995 and 1996. In 1996 the Company paid $1.7 million of costs related to the
1995 and 1996 restructuring.
NOTE 10: COMMITMENTS AND CONTINGENCIES
Office and Operating Leases
The Company leases corporate office space under an operating lease which
expired in October, 1997 and was extended on a month to month basis beginning
November 1, 1997. The Company has an option for five additional terms of three
years each. The Company is responsible for the payment of insurance, real estate
taxes and operating expenses of the leased facility (see Note 12). The Company
entered into an operating lease for its executive offices which expires
December, 2004. Lexford Properties leases office space in four cities to support
its third party management operations. Annual rental requirements are
approximately $463,000 in 1998, $282,000 in 1999, $109,000 in 2000, $102,000 in
2001, $108,000 in 2002 and $235,000 thereafter. The Company also leases various
equipment and software, typically over five years, and management offices under
operating leases which generally have remaining terms of less than one year. The
equipment and software rental requirements are approximately $322,000 in 1998,
$231,000 in 1999, $13,200 in 2000 and $12,000 in 2001. Rent expense for the
years ended December 31, 1997, 1996, and 1995, was approximately $1,122,000,
$749,000, and $512,000, respectively.
Mortgage Notes
In December 1997, the Company entered into a mortgage purchase agreement
with a financial institution wherein the lender agreed to purchase outstanding
mortgage notes with a balance of $4.8 million on certain Unconsolidated
Partnerships. As part of the agreement, the financial institution has a put
option whereby the Company has agreed to purchase the mortgage notes at a
discounted amount of $3.6 million.
F-54
<PAGE> 155
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Litigation
The Company is involved in various legal actions arising out of the normal
course of its business. Management of the Company, based upon knowledge of facts
and the advice of counsel, believes potential exposure to loss from legal
actions should not result in a material adverse effect on the Company's
consolidated financial position.
NOTE 11: RETIREMENT PLAN
The Company maintains the Cardinal Realty Services, Inc. Savings Plan (the
"Savings Plan") under section 401(k) of the Internal Revenue Code (the "Code"),
to which participants may contribute a percentage of their base pay and overtime
earnings up to limits established by the Code. The Savings Plan was amended and
restated, effective July 1, 1993, to (i) provide for discretionary matching
contributions by the Company, (ii) provide for immediate vesting in all Company
contributions and (iii) allow loans to participants. Effective December 31, 1995
the Savings Plan was amended to exclude highly compensated employees. Effective
July 1, 1996, the Savings Plan was amended to include employees at the
Properties as participants, increase the Company match and to allow highly
compensated employees to participate in the Plan. The Company contribution
amounts to 1% of wages for every 2% of wages contributed by a participant up to
a maximum of the lesser of 3% of wages or $2,000 per year. In 1997, 1996, and
1995, the Company's cash contributions amounted to approximately $126,400,
$134,000, and $92,000, respectively. The Company's cash contributions are then
invested in Company stock held by the Savings Plan Trustee.
NOTE 12: RELATED PARTY TRANSACTIONS
The Company is the sole beneficial equity owner of all Rental Properties
and is a general partner in the Unconsolidated Partnerships. The Company also
serves as the management company for substantially all of the Properties and
provides various ancillary services, including a Preferred Resource purchasing
program to the Properties and renter's insurance to residents. The Company's fee
based revenue, and interest income are derived primarily from Properties
affiliated with the Company. Approximately $1.9 million and $4.1 million of the
Company's accounts receivable are due from the Unconsolidated Partnerships as of
December 31, 1997, and 1996, respectively.
The Company advanced, net of amounts repaid, to Unconsolidated Partnerships
approximately $992,000, $2.6 million, and $8.6 million in 1997, 1996 and 1995,
respectively. The majority of the advances relate to operating needs and
advances to facilitate the refinancing of the mortgages on the Properties as
described in Note 6. Effective October 1, 1995, in conjunction with the
favorable terms the Company achieved on its credit facility, the interest rate
on these advances was revised to prime plus one percent from principally prime
plus six percent. The interest rate on advances may be adjusted in the future
based on prevailing market rates.
An outside director of the Company is a partner in the law firm which
serves as outside general counsel to the Company. Legal fees paid related to
services provided to the Company by this law firm were approximately $981,000 in
1997, $286,000 in 1996 and $255,000 in 1995. The Company had accrued expenses of
approximately $176,000 and $105,000 to this law firm at December 31, 1997 and
1996, respectively. In addition, legal fees paid related to debt restructuring
and refinancing services provided by this law firm to the Rental Properties and
Unconsolidated Partnerships were approximately $99,000 in 1997, $523,000 in
1996, and $739,400 in 1995.
Another outside director of the Company has an ownership interest in the
lessor of the office facility that houses the Company's operations (SEE NOTE
10).
F-55
<PAGE> 156
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
1997............................... $16,830,272 $17,524,626 $18,231,947 $17,780,646
1996............................... $14,689,011 $14,711,256 $15,709,041 $20,191,682
Income/(loss) before extraordinary
item
1997............................... $ 1,276,038 $ 1,655,497 $ 1,840,975 $(1,386,398)
1996............................... $ 1,091,350 $ 757,284 $ 887,034 $ 2,634,562
Extraordinary item, net of income
taxes
1997............................... $ -- $ (180,534) $ -- $ --
1996............................... $ -- $ -- $ -- $(1,614,356)
Net income/(loss)
1997............................... $ 1,276,038 $ 1,474,963 $ 1,840,975 $(1,386,398)
1996............................... $ 1,091,350 $ 757,284 $ 887,034 $ 1,020,206
Earnings per share:(1)
Basic
Income/(loss) before extraordinary
item
1997............................ $ 0.16 $ 0.21 $ 0.23 $ (0.16)
1996............................ $ 0.15 $ 0.10 $ 0.12 $ 0.34
Extraordinary item
1997............................ $ 0.00 $ (0.02) $ 0.00 $ 0.00
1996............................ $ 0.00 $ 0.00 $ 0.00 $ (0.21)
Net income/(loss)
1997............................ $ 0.16 $ 0.19 $ 0.23 $ (0.16)
1996............................ $ 0.15 $ 0.10 $ 0.12 $ 0.13
Diluted
Income/(loss) before extraordinary
item
1997............................ $ 0.16 $ 0.20 $ 0.22 $ (0.16)
1996............................ $ 0.14 $ 0.10 $ 0.11 $ 0.32
Extraordinary item
1997............................ $ 0.00 $ (0.02) $ 0.00 $ 0.00
1996............................ $ 0.00 $ 0.00 $ 0.00 $ (0.20)
Net income/(loss)
1997............................ $ 0.16 $ 0.18 $ 0.22 $ (0.16)
1996............................ $ 0.14 $ 0.10 $ 0.11 $ 0.13
</TABLE>
- ---------------
(1) The 1996 and the first three quarters of 1997 earnings per share amounts
have been restated to comply with Statement of Financial Accounting
Standards No. 128, Earnings Per Share. ALSO SEE NOTE 14 -- SUBSEQUENT EVENTS
REGARDING TWO FOR ONE STOCK EXCHANGE.
NOTE 14: SUBSEQUENT EVENTS
In December 1997, Lexford, Inc. announced that it would seek to qualify and
elect to be taxed as a REIT in 1998. In connection with this decision, Lexford,
Inc. established a new entity known as Lexford Residential Trust (the "Company")
and in January 1998 caused the Company to file a Form S-4 Registration Statement
with the Securities and Exchange Commission relating to the proposed merger of
Lexford, Inc. with and into the Company. The Company expects to be taxed as a
REIT. 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
provide that each share of Lexford, Inc.'s common stock be canceled and
converted to two common shares of beneficial interest in the Company. The merger
became effective on March 18, 1998. Shareholders of Lexford, Inc. who did not
vote in favor of the merger were entitled to exercise dissenter's rights through
March 13, 1998. As of
F-56
<PAGE> 157
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March 18, 1998, the Company had not received notice of the exercise of any such
dissenter's rights. All share and earnings per common share amounts disclosed in
the consolidated financial statements and the notes thereto have been restated
giving retroactive effect to the two for one stock exchange.
In connection with Lexford, Inc.'s decision to elect REIT status, Lexford,
Inc. initiated a plan ("the Consolidation Plan"), the purpose of which was to
minimize third party interests in the entities owning the Unconsolidated
Partnerships. As of March 3, 1998, the Company has acquired the entire third
party ownership interests in 287 Unconsolidated Partnerships (the "Consolidating
Properties"). The Company has made cash payments to former partners of the 287
Unconsolidated Partnerships totaling $21.3 million. The Company intends to
pursue the acquisition of the third party interests in all or a substantial
portion of the remaining Unconsolidated Partnerships. The Consolidation Plan
will significantly change the financial statements of the Company. The
investments in and advances to Unconsolidated Partnerships of $57.1 million at
December 31, 1997, and the related interest income derived from such investments
and fee based income earned from managing the properties will be almost entirely
eliminated as the formerly Unconsolidated Partnerships are consolidated in the
financial statements of the Company. In addition, upon qualification and
maintaining REIT status, the Company will no longer record a provision for
income taxes.
On March 13, 1998, the Company negotiated a settlement with the prior
shareholders of Lexford Properties whereby 300,000 of the 900,000 shares subject
to forfeiture were released in exchange for the forfeiture of the remaining
600,000 shares (SEE NOTE 1 "LEXFORD PROPERTIES ACQUISITION"). The agreement was
a result of the Company's decision to elect REIT status which would impact the
third party management business and the ability of Lexford Properties to achieve
the profitability criteria necessary for the release of the shares subject to
forfeiture. The release of the 300,000 shares will result in a $3.0 million
charge in the first quarter of 1998.
F-57
<PAGE> 158
SCHEDULE II
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of period......................... $3,691,117 $3,414,943 $2,276,074
Add charged to costs and expenses:
Recovery of allowances............................ -- (300,000) --
Allowances associated with loan fees.............. -- -- 291,164
Other allowances.................................. 389,361 803,421 847,705
Less: Account charge offs............................ (533,256) (227,247) --
---------- ---------- ----------
Balance at end of period............................... $3,547,222 $3,691,117 $3,414,943
========== ========== ==========
</TABLE>
F-58
<PAGE> 159
SCHEDULE III
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- ---------------------------------- ------------------------------- ---------------------------- -------------------------
DESCRIPTION -- COSTS CAPITALIZED
(ALL GARDEN APARTMENTS) ENCUMBRANCES INITIAL COST TO THE COMPANY SUBSEQUENT TO ACQUISITION
- ---------------------------------- ------------------------------- ---------------------------- -------------------------
AT CONTRACTUAL AT STATED BUILDINGS AND CARRYING
PROPERTY NAME STATE VALUE CARRYING VALUE LAND IMPROVEMENTS IMPROVEMENTS COSTS
------------- ----- -------------- -------------- ------------ ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Glenview................... AL 1,709,168 1,709,168 178,221 1,784,904 11,948 0
Bel Aire II................ FL 1,184,188 435,852 81,451 287,050 7,149 0
Blueberry Hill............. FL 761,259 761,259 63,610 362,610 38,063 0
California Gardens......... FL 1,160,100 582,868 96,067 521,414 11,725 0
Canterbury Crossing........ FL 1,422,021 676,003 78,303 385,838 9,360 0
Centre Lake I, II & III.... FL 4,889,630 4,889,630 1,210,779 3,116,732 68,104 0
Forest Glen................ FL 1,118,325 1,118,325 229,086 994,552 29,840 0
Garden Terrace I........... FL 612,875 612,875 89,123 801,137 98,214 0
Heron Pointe............... FL 1,637,264 1,637,264 367,599 1,440,838 62,162 0
Hidden Acres............... FL 1,674,287 1,674,287 388,349 1,136,083 30,846 0
Hillside Trace............. FL 1,088,000 1,088,000 197,277 833,232 5,764 0
Holly Sands II............. FL 1,054,940 1,054,940 231,970 943,482 78,939 0
Jefferson Way.............. FL 1,045,792 1,045,792 116,366 1,062,590 28,688 0
Jupiter Cove I............. FL 1,360,455 1,133,250 219,698 805,001 9,439 0
Jupiter Cove III........... FL 1,434,204 1,434,204 285,929 1,026,413 8,443 0
Mark Landing I............. FL 1,329,188 1,329,188 250,827 1,481,543 58,239 0
Miguel Place............... FL 1,493,801 1,493,801 237,234 1,125,414 14,504 0
Oak Gardens................ FL 2,707,634 1,857,319 582,419 1,758,597 11,050 0
Oakwood Village............ FL 748,356 314,278 103,045 566,398 26,493 0
Pelican Pointe I........... FL 1,337,084 1,337,084 221,311 1,204,527 33,502 0
Pelican Pointe II.......... FL 1,023,399 1,023,399 158,390 1,190,595 36,446 0
Pine Barrens............... FL 1,538,535 1,538,535 302,399 1,405,048 76,590 0
Rivers End II.............. FL 1,161,409 1,161,409 160,894 936,779 20,100 0
Sky Pines II............... FL 909,906 909,906 266,498 676,283 76,635 0
Sunset Way I............... FL 1,665,024 1,665,024 621,326 1,353,585 27,225 0
Sunset Way II.............. FL 2,694,057 2,131,279 649,409 1,678,049 24,364 0
Thymewood II............... FL 1,692,441 836,509 429,480 731,592 16,512 0
Whispering Pines II........ FL 627,822 627,822 71,433 505,435 8,800 0
Windwood I................. FL 599,612 599,612 24,569 457,382 52,283 0
Colony Woods II............ GA 1,581,032 1,581,032 273,901 1,556,452 4,509 0
Glen Arm Manor............. GA 1,200,000 1,200,000 148,679 1,274,345 68,736 0
Glenwood Village........... GA 1,518,815 887,795 156,445 1,000,148 8,820 0
Hatcherway................. GA 965,525 965,525 111,336 1,102,856 29,093 0
Indian Lake I & II......... GA 4,557,695 4,557,695 898,265 5,262,660 33,694 0
Kings Colony............... GA 2,098,525 1,506,804 237,393 1,723,165 17,690 0
Lakeshore I................ GA 1,256,570 1,256,570 45,846 995,214 36,755 0
Laurel Glen................ GA 1,730,108 1,730,108 265,974 1,627,699 50,551 0
Marshlanding II............ GA 972,993 925,655 28,851 918,445 14,918 0
Mill Run................... GA 1,274,864 1,274,864 187,772 1,260,209 70,545 0
Ramblewood II.............. GA 1,870,245 1,870,245 264,381 1,906,078 12,359 0
Stewart Way I.............. GA 1,387,052 1,387,052 260,869 1,614,962 66,645 0
Stewart Way II............. GA 1,244,267 1,244,267 215,612 1,468,190 41,638 0
Valleybrook................ GA 1,568,241 1,568,241 129,440 1,353,762 38,062 0
Willcrest Woods............ GA 1,060,687 1,060,687 245,513 1,189,165 69,577 0
</TABLE>
F-59
<PAGE> 160
SCHEDULE III
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- ---------------------------------- ------------------------------- ---------------------------- -------------------------
DESCRIPTION -- COSTS CAPITALIZED
(ALL GARDEN APARTMENTS) ENCUMBRANCES INITIAL COST TO THE COMPANY SUBSEQUENT TO ACQUISITION
- ---------------------------------- ------------------------------- ---------------------------- -------------------------
AT CONTRACTUAL AT STATED BUILDINGS AND CARRYING
PROPERTY NAME STATE VALUE CARRYING VALUE LAND IMPROVEMENTS IMPROVEMENTS COSTS
------------- ----- -------------- -------------- ------------ ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Bradford Place............. IL 1,173,564 883,185 215,924 719,156 9,994 0
Brunswick Apts............. IL 1,432,000 1,432,000 53,500 1,644,920 16,323 0
Hunter Glen................ IL 1,022,337 1,022,337 256,720 1,461,719 8,529 0
Acadia Court II............ IN 1,862,018 1,862,018 398,032 1,668,862 19,968 0
Applegate Apts II.......... IN 1,256,575 1,256,575 163,470 1,815,278 20,993 0
Aragon Woods............... IN 1,136,613 1,136,613 298,431 1,248,762 12,454 0
Cambridge Commons III...... IN 0 0 1,087 1,306,118 23,322 0
Cherry Glen I.............. IN 1,369,733 1,369,733 203,862 1,465,002 15,084 0
Cherry Glenn II............ IN 1,115,664 1,115,664 4,343 1,731,393 17,319 0
Dogwood Glen I............. IN 1,779,466 1,779,466 248,246 1,427,201 36,170 0
Elmtree Park I............. IN 1,200,137 1,200,137 208,426 1,308,102 9,396 0
Elmtree Park II............ IN 1,040,873 1,040,873 45,751 1,107,766 9,531 0
Marabou Mills II........... IN 1,009,103 1,009,103 84,391 1,190,609 10,654 0
Marabou Mills III.......... IN 1,196,481 1,196,481 75,122 1,099,183 30,972 0
Maribou Mills.............. IN 1,451,240 1,451,240 179,704 1,570,450 17,585 0
Meadowood II............... IN 744,494 744,494 61,771 1,193,299 18,315 0
Ridgewood.................. IN 1,207,481 1,207,481 100,300 1,320,200 8,200 0
Ridgewood II & III......... IN 1,364,345 1,364,345 100,795 1,564,956 11,831 0
Rosewood Commons II........ IN 1,280,756 1,280,756 121,194 1,172,776 26,240 0
Sherbrook.................. IN 1,202,138 1,202,138 141,991 1,254,354 32,218 0
Spicewood Apt.............. IN 1,029,011 1,029,011 90,619 1,025,442 28,571 0
Willowood II............... IN 1,148,500 1,148,500 149,671 1,310,162 64,383 0
Cedargate II............... KY 1,160,000 1,160,000 123,475 966,198 26,454 0
Cedarwood II............... KY 1,012,738 1,012,738 173,648 913,048 31,399 0
Cedarwood III.............. KY 877,391 877,391 122,917 966,624 31,238 0
Hayfield Park.............. KY 1,603,515 1,603,515 341,799 1,680,717 52,787 0
Springwood................. KY 827,693 827,693 85,723 844,029 34,466 0
Cherry Tree Apt............ MD 2,154,213 2,154,213 623,153 2,711,201 44,484 0
Forsythia Court II......... MD 2,385,060 1,786,419 283,697 1,597,543 14,337 0
Merrifield................. MD 2,102,577 2,102,577 210,294 2,271,824 23,169 0
Garden Court............... MI 2,173,656 2,173,656 127,573 2,247,404 18,534 0
Heathmoore I............... MI 1,590,427 1,590,427 128,605 1,329,672 25,865 0
Laurel Bay................. MI 903,500 903,500 164,159 1,160,480 8,953 0
Newberry II................ MI 1,295,979 733,305 91,315 715,532 5,843 0
Amberwood.................. OH 902,458 902,458 171,878 1,003,228 10,388 0
Amesbury I................. OH 1,248,882 1,248,882 136,179 1,133,012 25,711 0
Amesbury II................ OH 1,314,616 1,314,616 168,000 1,621,000 29,660 0
Annhurst II................ OH 1,106,590 1,182,406 123,397 1,006,847 43,349 0
Annhurst III............... OH 935,760 935,760 70,246 1,003,822 50,596 0
Appleridge I............... OH 1,053,897 1,053,897 214,233 912,594 32,571 0
Ashford Hills.............. OH 1,400,000 1,400,000 359,522 1,260,948 50,205 0
Clearwater Apts............ OH 1,053,902 1,053,902 132,478 1,045,131 33,881 0
Dartmouth Place II......... OH 878,578 878,578 114,393 1,135,027 18,752 0
Foxhaven................... OH 1,871,766 1,871,766 403,075 1,657,128 25,040 0
Harvest Grove I............ OH 1,375,970 1,375,970 225,001 1,276,072 4,741 0
Harvest Grove II........... OH 1,110,103 1,110,103 251,000 1,201,600 16,167 0
Lindendale Apts............ OH 1,422,218 1,422,218 188,724 1,717,434 27,436 0
Meadowood.................. OH 472,439 472,439 50,520 573,536 9,593 0
Montrose Square............ OH 1,778,276 1,778,276 568,914 2,184,937 25,587 0
Pickerington Meadows....... OH 1,177,725 1,177,725 150,000 1,200,000 12,719 0
Red Deer II................ OH 1,234,575 1,234,575 235,173 1,474,820 10,825 0
</TABLE>
F-60
<PAGE> 161
SCHEDULE III
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- ---------------------------------- ------------------------------- ---------------------------- -------------------------
DESCRIPTION -- COSTS CAPITALIZED
(ALL GARDEN APARTMENTS) ENCUMBRANCES INITIAL COST TO THE COMPANY SUBSEQUENT TO ACQUISITION
- ---------------------------------- ------------------------------- ---------------------------- -------------------------
AT CONTRACTUAL AT STATED BUILDINGS AND CARRYING
PROPERTY NAME STATE VALUE CARRYING VALUE LAND IMPROVEMENTS IMPROVEMENTS COSTS
------------- ----- -------------- -------------- ------------ ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
River Glen I............... OH 1,069,821 1,069,821 146,287 1,287,027 10,341 0
River Glen II.............. OH 1,175,707 1,175,707 178,568 1,230,268 3,935 0
Riverview Estates.......... OH 1,374,578 1,374,578 74,073 1,609,026 60,626 0
Suffolk Grove II........... OH 1,082,115 1,082,115 154,263 1,248,211 14,648 0
The Willows I.............. OH 589,511 589,511 157,611 761,576 28,428 0
The Willows III............ OH 877,710 877,710 44,602 871,216 11,338 0
Willowood II............... OH 944,544 944,544 35,657 622,170 9,183 0
Winthrop Court II.......... OH 754,613 754,613 145,906 825,115 17,310 0
Sherbrook.................. PA 1,361,339 1,361,339 355,188 1,492,285 21,350 0
Woodlands II............... PA 1,168,417 1,168,417 118,447 1,346,599 20,173 0
Ravenwood.................. SC 1,672,542 1,672,542 169,601 1,507,589 7,532 0
Springbrook................ SC 1,730,569 1,730,569 120,467 1,762,353 51,993 0
Willow Lake................ SC 2,084,584 2,084,584 188,704 1,738,232 8,820 0
Cedarhill.................. TN 1,476,915 1,476,915 235,269 1,331,238 43,030 0
Walker Place............... TX 1,183,000 1,183,000 269,890 1,196,059 0 0
Brunswick II............... WV 1,324,332 1,324,332 104,000 1,696,000 18,094 0
------------ ------------ ----------- ------------ ---------- --
TOTALS..................... $150,284,725 $142,636,874 $23,124,313 $143,768,544 $3,064,622 $0
============ ============ =========== ============ ========== ==
</TABLE>
F-61
<PAGE> 162
SCHEDULE III
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
- ------------------------------------- ------------------------------------------ ------------ ------------ --------
GROSS AMOUNT AT WHICH CARRIED AT
DESCRIPTION -- CLOSE OF PERIOD, DECEMBER 31, 1997
(ALL GARDEN APARTMENTS) NOTES (1) AND (2)
- ------------------------------------- ------------------------------------------
BUILDINGS AND ACCUMULATED DATE OF DATE
PROPERTY NAME STATE LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
------------- ----- ----------- ------------- ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Glenview...................... AL 178,221 1,608,261 1,786,482 105,648 8/1/86 N/A
Bel Aire II................... FL 81,451 402,530 483,981 27,238 1/1/86 N/A
Blueberry Hill................ FL 63,610 400,114 463,724 25,320 12/1/86 N/A
California Gardens............ FL 96,067 407,896 503,963 26,405 7/1/87 N/A
Canterbury Crossing........... FL 78,303 555,560 633,863 40,298 12/1/83 N/A
Centre Lake I, II & III....... FL 1,210,779 3,171,034 4,381,813 212,759 6/1/86 N/A
Forest Glen................... FL 229,086 932,862 1,161,948 63,594 1/1/86 N/A
Garden Terrace I.............. FL 89,123 898,117 987,240 72,068 9/1/81 N/A
Heron Pointe.................. FL 367,599 1,459,693 1,827,292 99,632 1/1/86 N/A
Hidden Acres.................. FL 388,349 467,556 855,905 31,473 1/1/87 N/A
Hillside Trace................ FL 197,277 837,712 1,034,989 53,029 9/1/87 N/A
Holly Sands II................ FL 231,970 1,001,290 1,233,260 73,551 6/1/86 N/A
Jefferson Way................. FL 116,366 1,069,855 1,186,221 67,887 8/1/87 N/A
Jupiter Cove I................ FL 219,698 887,389 1,107,087 56,580 9/1/87 N/A
Jupiter Cove III.............. FL 285,929 1,033,274 1,319,203 65,626 9/1/87 N/A
Mark Landing I................ FL 250,827 1,537,499 1,788,326 107,681 11/1/87 N/A
Miguel Place.................. FL 237,234 1,098,108 1,335,342 69,936 10/1/87 N/A
Oak Gardens................... FL 582,419 1,260,153 1,842,572 79,905 1/1/88 N/A
Oakwood Village............... FL 103,045 236,593 339,638 16,522 1/1/86 N/A
Pelican Pointe I.............. FL 221,311 1,236,173 1,457,484 78,872 11/1/87 N/A
Pelican Pointe II............. FL 158,390 1,148,174 1,306,564 73,232 11/1/87 N/A
Pine Barrens.................. FL 302,399 1,479,473 1,781,872 101,261 6/1/86 N/A
Rivers End II................. FL 160,894 928,416 1,089,310 62,320 1/1/86 N/A
Sky Pines II.................. FL 266,498 751,876 1,018,374 58,412 6/1/86 N/A
Sunset Way I.................. FL 621,326 1,378,724 2,000,050 88,703 8/1/87 N/A
Sunset Way II................. FL 649,409 1,499,675 2,149,084 93,991 4/27/88 N/A
Thymewood II.................. FL 429,480 379,444 808,924 26,709 1/1/86 N/A
Whispering Pines II........... FL 71,433 513,456 584,889 34,589 3/31/86 N/A
Windwood I.................... FL 24,569 508,960 533,529 32,352 5/1/88 N/A
Colony Woods II............... GA 273,901 1,506,624 1,780,525 93,704 3/28/88 N/A
Glen Arm Manor................ GA 148,679 1,207,004 1,355,683 93,390 1/1/86 N/A
Glenwood Village.............. GA 156,445 665,292 821,737 43,496 12/1/86 N/A
Hatcherway.................... GA 111,336 1,099,966 1,211,302 76,588 1/1/86 N/A
Indian Lake I & II............ GA 898,265 4,907,355 5,805,620 312,759 8/11/87 N/A
Kings Colony.................. GA 237,393 1,244,186 1,481,579 78,687 11/15/87 N/A
Lakeshore I................... GA 45,846 930,784 976,630 62,944 6/20/86 N/A
Laurel Glen................... GA 265,974 1,675,742 1,941,716 111,052 4/4/86 N/A
Marshlanding II............... GA 28,851 894,596 923,447 58,396 12/31/86 N/A
Mill Run...................... GA 187,772 1,328,812 1,516,584 93,353 4/14/86 N/A
Ramblewood II................. GA 264,381 1,775,754 2,040,135 115,118 10/1/86 N/A
Stewart Way I................. GA 260,869 1,667,283 1,928,152 123,098 1/1/86 N/A
Stewart Way II................ GA 215,612 1,507,566 1,723,178 103,151 12/1/86 N/A
Valleybrook................... GA 129,440 1,389,738 1,519,178 94,215 10/15/86 N/A
Willcrest Woods............... GA 245,513 1,225,269 1,470,782 90,474 12/31/86 N/A
<CAPTION>
COLUMN A COLUMN I
- ------------------------------ -------------
DESCRIPTION --
(ALL GARDEN APARTMENTS)
- ------------------------------ LIFE ON WHICH
DEPRECIATION
PROPERTY NAME IS COMPUTED
------------- -------------
<S> <C>
Glenview...................... 31
Bel Aire II................... 30
Blueberry Hill................ 31
California Gardens............ 32
Canterbury Crossing........... 28
Centre Lake I, II & III....... 30
Forest Glen................... 30
Garden Terrace I.............. 26
Heron Pointe.................. 30
Hidden Acres.................. 31
Hillside Trace................ 32
Holly Sands II................ 30
Jefferson Way................. 32
Jupiter Cove I................ 32
Jupiter Cove III.............. 32
Mark Landing I................ 32
Miguel Place.................. 32
Oak Gardens................... 32
Oakwood Village............... 30
Pelican Pointe I.............. 32
Pelican Pointe II............. 32
Pine Barrens.................. 30
Rivers End II................. 30
Sky Pines II.................. 30
Sunset Way I.................. 32
Sunset Way II................. 32
Thymewood II.................. 30
Whispering Pines II........... 30
Windwood I.................... 32
Colony Woods II............... 32
Glen Arm Manor................ 30
Glenwood Village.............. 31
Hatcherway.................... 30
Indian Lake I & II............ 32
Kings Colony.................. 32
Lakeshore I................... 31
Laurel Glen................... 30
Marshlanding II............... 31
Mill Run...................... 30
Ramblewood II................. 31
Stewart Way I................. 30
Stewart Way II................ 31
Valleybrook................... 31
Willcrest Woods............... 31
</TABLE>
F-62
<PAGE> 163
SCHEDULE III
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
- ------------------------------------- ------------------------------------------ ------------ ------------ --------
GROSS AMOUNT AT WHICH CARRIED AT
DESCRIPTION -- CLOSE OF PERIOD, DECEMBER 31, 1997
(ALL GARDEN APARTMENTS) NOTES (1) AND (2)
- ------------------------------------- ------------------------------------------
BUILDINGS AND ACCUMULATED DATE OF DATE
PROPERTY NAME STATE LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
------------- ----- ----------- ------------- ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Bradford Place................ IL 215,924 625,791 841,715 41,522 7/23/86 N/A
Brunswick Apts................ IL 53,500 1,623,865 1,677,365 108,240 4/1/86 N/A
Hunter Glen................... IL 256,720 1,322,878 1,579,598 85,599 3/1/87 N/A
Acadia Court II............... IN 398,032 1,620,669 2,018,701 107,109 6/6/86 N/A
Applegate Apts II............. IN 163,470 1,833,474 1,996,944 119,714 6/1/87 N/A
Aragon Woods.................. IN 298,431 1,183,847 1,482,278 76,700 12/26/86 N/A
Cambridge Commons III......... IN 1,087 1,195,015 1,196,102 73,622 1/29/88 N/A
Cherry Glen I................. IN 203,862 1,465,277 1,669,139 96,609 7/10/86 N/A
Cherry Glenn II............... IN 4,343 1,698,391 1,702,734 109,846 4/1/87 N/A
Dogwood Glen I................ IN 248,246 1,320,813 1,569,059 85,730 7/18/86 N/A
Elmtree Park I................ IN 208,426 1,181,214 1,389,640 77,970 6/8/86 N/A
Elmtree Park II............... IN 45,751 1,115,030 1,160,781 71,553 5/1/87 N/A
Marabou Mills II.............. IN 84,391 1,153,343 1,237,734 71,073 N/A 10/29/93
Marabou Mills III............. IN 75,122 1,128,403 1,203,525 71,606 12/1/87 N/A
Maribou Mills................. IN 179,704 1,585,615 1,765,319 108,653 6/23/86 N/A
Meadowood II.................. IN 61,771 1,058,489 1,120,260 71,408 5/30/86 N/A
Ridgewood..................... IN 100,300 1,328,399 1,428,699 63,215 N/A 8/1/96
Ridgewood II & III............ IN 100,795 1,427,169 1,527,964 96,160 3/1/86 N/A
Rosewood Commons II........... IN 121,194 1,197,210 1,318,404 77,135 6/1/87 N/A
Sherbrook..................... IN 141,991 1,233,871 1,375,862 81,970 6/16/86 N/A
Spicewood Apt................. IN 90,619 1,009,511 1,100,130 68,058 3/16/86 N/A
Willowood II.................. IN 149,671 1,264,887 1,414,558 80,911 6/1/87 N/A
Cedargate II.................. KY 123,475 893,838 1,017,313 59,175 6/1/86 N/A
Cedarwood II.................. KY 173,648 913,492 1,087,140 61,848 1/1/86 N/A
Cedarwood III................. KY 122,917 996,373 1,119,290 70,068 5/20/86 N/A
Hayfield Park................. KY 341,799 1,558,181 1,899,980 103,526 7/17/86 N/A
Springwood.................... KY 85,723 877,194 962,917 60,728 1/1/86 N/A
Cherry Tree Apt............... MD 623,153 2,470,168 3,093,321 161,679 9/1/86 N/A
Forsythia Court II............ MD 283,697 1,484,064 1,767,761 94,891 6/1/87 N/A
Merrifield.................... MD 210,294 2,219,004 2,429,298 139,664 1/11/88 N/A
Garden Court.................. MI 127,573 2,177,868 2,305,441 137,211 4/22/88 N/A
Heathmoore I.................. MI 128,605 1,216,286 1,344,891 80,094 7/31/86 N/A
Laurel Bay.................... MI 164,159 1,079,514 1,243,673 76,263 10/1/89 N/A
Newberry II................... MI 91,315 631,930 723,245 41,777 12/26/86 N/A
Amberwood..................... OH 171,878 1,012,070 1,183,948 64,544 10/1/87 N/A
Amesbury I.................... OH 136,179 1,043,969 1,180,148 72,912 2/17/86 N/A
Amesbury II................... OH 168,000 1,648,162 1,816,162 112,361 N/A 09/26/95
Annhurst II................... OH 123,397 1,171,504 1,294,901 75,772 7/1/86 N/A
Annhurst III.................. OH 70,246 1,028,853 1,099,099 62,381 5/5/88 N/A
Appleridge I.................. OH 214,233 742,825 957,058 52,819 1/1/87 N/A
Ashford Hills................. OH 359,522 975,907 1,335,429 65,009 6/23/86 N/A
Clearwater Apts............... OH 132,478 986,621 1,119,099 68,625 11/1/86 N/A
<CAPTION>
COLUMN A COLUMN I
- ------------------------------ -------------
DESCRIPTION --
(ALL GARDEN APARTMENTS)
- ------------------------------ LIFE ON WHICH
DEPRECIATION
PROPERTY NAME IS COMPUTED
------------- -------------
<S> <C>
Bradford Place................ 31
Brunswick Apts................ 30
Hunter Glen................... 31
Acadia Court II............... 30
Applegate Apts II............. 31
Aragon Woods.................. 31
Cambridge Commons III......... 32
Cherry Glen I................. 31
Cherry Glenn II............... 31
Dogwood Glen I................ 31
Elmtree Park I................ 30
Elmtree Park II............... 31
Marabou Mills II.............. 33
Marabou Mills III............. 32
Maribou Mills................. 31
Meadowood II.................. 30
Ridgewood..................... 30
Ridgewood II & III............ 30
Rosewood Commons II........... 31
Sherbrook..................... 31
Spicewood Apt................. 30
Willowood II.................. 31
Cedargate II.................. 30
Cedarwood II.................. 30
Cedarwood III................. 30
Hayfield Park................. 31
Springwood.................... 30
Cherry Tree Apt............... 31
Forsythia Court II............ 31
Merrifield.................... 32
Garden Court.................. 32
Heathmoore I.................. 31
Laurel Bay.................... 34
Newberry II................... 31
Amberwood..................... 32
Amesbury I.................... 30
Amesbury II................... 30
Annhurst II................... 31
Annhurst III.................. 32
Appleridge I.................. 28
Ashford Hills................. 31
Clearwater Apts............... 31
</TABLE>
F-63
<PAGE> 164
SCHEDULE III
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
- ------------------------------------- ------------------------------------------ ------------ ------------ --------
GROSS AMOUNT AT WHICH CARRIED AT
DESCRIPTION -- CLOSE OF PERIOD, DECEMBER 31, 1997
(ALL GARDEN APARTMENTS) NOTES (1) AND (2)
- ------------------------------------- ------------------------------------------
BUILDINGS AND ACCUMULATED DATE OF DATE
PROPERTY NAME STATE LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
------------- ----- ----------- ------------- ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Dartmouth Place II............ OH 114,393 1,097,803 1,212,196 73,083 7/18/86 N/A
Foxhaven...................... OH 403,075 1,588,159 1,991,234 106,636 8/18/86 N/A
Harvest Grove I............... OH 225,001 1,162,235 1,387,236 76,172 9/8/86 N/A
Harvest Grove II.............. OH 251,000 1,215,915 1,466,915 81,044 N/A 09/26/95
Lindendale Apts............... OH 188,724 1,660,305 1,849,029 107,245 3/1/87 N/A
Meadowood..................... OH 50,520 582,245 632,765 39,060 1/1/86 N/A
Montrose Square............... OH 568,914 2,185,903 2,754,817 146,705 1/1/87 N/A
Pickerington Meadows.......... OH 150,000 1,210,870 1,360,870 79,996 N/A 03/29/95
Red Deer II................... OH 235,173 1,391,719 1,626,892 89,220 8/1/87 N/A
River Glen I.................. OH 146,287 1,255,066 1,401,353 81,434 4/1/87 N/A
River Glen II................. OH 178,568 1,200,194 1,378,762 75,784 11/1/87 N/A
Riverview Estates............. OH 74,073 1,667,173 1,741,246 122,226 1/1/87 N/A
Suffolk Grove II.............. OH 154,263 1,203,575 1,357,838 77,257 6/1/87 N/A
The Willows I................. OH 157,611 768,235 925,846 59,083 1/1/87 N/A
The Willows III............... OH 44,602 845,236 889,838 55,820 7/1/87 N/A
Willowood II.................. OH 35,657 605,790 641,447 39,875 8/1/86 N/A
Winthrop Court II............. OH 145,906 840,546 986,452 56,194 2/25/86 N/A
Sherbrook..................... PA 355,188 1,448,955 1,804,143 94,750 12/20/86 N/A
Woodlands II.................. PA 118,447 1,302,332 1,420,779 84,609 3/1/87 N/A
Ravenwood..................... SC 169,601 1,512,798 1,682,399 96,793 5/7/87 N/A
Springbrook................... SC 120,467 1,744,503 1,864,970 123,541 6/13/86 N/A
Willow Lake................... SC 188,704 1,763,237 1,951,941 114,007 12/12/86 N/A
Cedarhill..................... TN 235,269 1,268,996 1,504,265 82,286 5/30/86 N/A
Walker Place.................. TX 269,890 1,194,215 1,464,105 74,399 1/25/88 N/A
Brunswick II.................. WV 104,000 1,712,076 1,816,076 112,799 N/A 09/26/95
----------- ------------ ------------ ----------
TOTALS........................ $23,124,313 $138,244,903 $161,369,216 $9,151,786
=========== ============ ============ ==========
<CAPTION>
COLUMN A COLUMN I
- ------------------------------ -------------
DESCRIPTION --
(ALL GARDEN APARTMENTS)
- ------------------------------ LIFE ON WHICH
DEPRECIATION
PROPERTY NAME IS COMPUTED
------------- -------------
<S> <C>
Dartmouth Place II............ 31
Foxhaven...................... 31
Harvest Grove I............... 31
Harvest Grove II.............. 30
Lindendale Apts............... 31
Meadowood..................... 30
Montrose Square............... 30
Pickerington Meadows.......... 30
Red Deer II................... 32
River Glen I.................. 31
River Glen II................. 32
Riverview Estates............. 28
Suffolk Grove II.............. 31
The Willows I................. 28
The Willows III............... 32
Willowood II.................. 31
Winthrop Court II............. 30
Sherbrook..................... 31
Woodlands II.................. 31
Ravenwood..................... 31
Springbrook................... 30
Willow Lake................... 31
Cedarhill..................... 30
Walker Place.................. 32
Brunswick II.................. 30
TOTALS........................
</TABLE>
F-64
<PAGE> 165
LEXFORD RESIDENTIAL TRUST AND SUBSIDIARIES
(FORMERLY LEXFORD, INC. AND CARDINAL REALTY SERVICES, INC.)
NOTES TO SCHEDULE III
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Note (1) Schedule III reconciliation:
Balance as of beginning of year............. $161,569,924 $164,334,055 $166,430,698(4)
Additions during the year:
Acquisitions of Property............... -- 1,420,501 6,391,600
Costs capitalized...................... 2,355,122 702,056 --
Deductions during the year:
Disposals through foreclosure.......... -- (4,886,688) (3,380,382)
Disposals through sales................ (2,555,830) -- --
Other (4).............................. -- -- (937,482)
Application of income from the
Effective Date through December 31,
1995 upon full consolidation from
held for sale classification........ -- -- (4,170,379)
------------ ------------ ------------
Balance at close of year:................... 161,369,216 161,569,924 164,334,055
------------ ------------ ------------
Other:
Furniture and fixtures................. -- -- 3,368,617
Application of income from the
Effective Date through December 31,
1995 upon full consolidation from
held for sale classification........ -- -- (3,368,617)
------------ ------------ ------------
Balance, Rental Properties
December 31, 1997, 1996, 1995,
respectively........................... $161,369,216 $161,569,924 $164,334,055
============ ============ ============
</TABLE>
- ---------------
Note (2) Tax basis of assets:
The tax basis for Federal income tax purposes in Rental Properties was
approximately $106,963,000 at December 31, 1997.
Note (3) Depreciation:
No depreciation has been provided for the period September 11, 1992
(Effective Date) to December 31, 1995 as the assets were held for sale
(SEE NOTES 1 AND 2 TO CONSOLIDATED FINANCIAL STATEMENTS).
Note (4) Correction of interest recorded in prior years; such interest was
capitalized during the period the Rental Properties were classified as
held for sale and therefore has no impact on equity.
F-65
<PAGE> 166
REPORT OF INDEPENDENT AUDITORS
To Shareholders and Board of Trustees
Lexford Residential Trust
We have audited the accompanying Combined Statements of Revenue and Certain
Expenses of the Consolidating Properties as described in Notes 1 and 2, for each
of the three years in the period ended December 31, 1997. These Combined
Statements of Revenue and Certain Expenses are the responsibility of the
Properties' management. Our responsibility is to express an opinion on the
Combined Statements of Revenue and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Combined Statements of Revenue and
Certain Expenses are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the Combined
Statements of Revenue and Certain Expenses. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the Combined Statements of Revenue and
Certain Expenses. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-3 of Lexford Residential Trust as described in Note 1 and are not
intended to be a complete presentation of the Consolidating Properties' revenues
and expenses.
In our opinion, the Combined Statements of Revenue and Certain Expenses
referred to above present fairly, in all material respects, the combined revenue
and certain expenses of the Consolidating Properties described in Notes 1 and 2
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Columbus, Ohio
April 1, 1998
F-66
<PAGE> 167
CONSOLIDATING PROPERTIES
COMBINED STATEMENTS OF REVENUE
AND CERTAIN EXPENSES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31,
JANUARY 1, 1998 TO -------------------------------
MARCH 31, 1998 1997 1996 1995
------------------ -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue
Rental revenues $26,164 $102,806 $ 99,769 $ 94,351
Certain expenses
Property operating and maintenance 8,209 33,354 33,322 31,498
Real estate taxes and insurance 2,103 9,006 9,132 9,257
------- -------- -------- --------
10,312 42,360 42,454 40,755
------- -------- -------- --------
Revenue in excess of certain expenses $15,852 $ 60,446 $ 57,315 $ 53,596
======= ======== ======== ========
</TABLE>
See Notes to Combined Statements of Revenue and Certain Expenses
F-67
<PAGE> 168
CONSOLIDATING PROPERTIES
NOTES TO COMBINED STATEMENTS OF
REVENUE AND CERTAIN EXPENSES
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying Combined Statements of Revenue and Certain Expenses for
each of the three years in the period ended December 31, 1997 relate to the
operations of 324 partnerships which own 326 properties (the "Consolidating
Properties") in which Lexford Residential Trust (the "Trust"), or its
predecessor, Lexford, Inc. (the "Company"), acquired all of the third party
partner interests at various dates through April 1, 1998. Prior to and after
such acquisition, the Company or its successor, the Trust, owned general partner
interests in each of the 324 partnerships. The accompanying Combined Statements
of Revenue and Certain Expenses have been prepared for purposes of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in the Trust's Registration Statement on Form S-3. The accompanying
combined statements are not representative of the actual operations of the 326
Consolidating Properties for the periods presented nor indicative of future
operations as certain expenses, primarily depreciation, amortization, interest
expense, management fee expense, and gains and losses on debt restructuring,
which may not be comparable to the expenses expected to be incurred by the Trust
in future operations of the Consolidating Properties, have been excluded.
USE OF ESTIMATES
In preparation of the Combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles, management makes
estimates and assumptions that effect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
INCOME RECOGNITION
Rental income attributable to residential leases is recorded when due from
residents, over the term of the related leases, which are generally for a period
of one year or less.
RELATED PARTY TRANSACTIONS
During each of the years presented, substantially all of the Consolidating
Properties were managed by Lexford Properties, Inc., a wholly-owned subsidiary
of the Company. Management fees, typically five percent of gross receipts, and
other administrative and service fees have been excluded from the Combined
Statements of Revenue and Certain Expenses.
In addition, the Consolidating Properties purchased maintenance materials
and supplies from the Company in 1995 and 1996 at amounts above the Company's
cost, and purchased similar items from third party vendors in 1997, from which
the Company received volume discounts. The accompanying statements include such
parts and supplies at the price paid by the Consolidating Properties.
F-68
<PAGE> 169
CONSOLIDATING PROPERTIES
NOTES TO COMBINED STATEMENTS OF
REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
NOTE 2 -- DESCRIPTION OF PROPERTIES
The following sets forth certain information as of December 31, 1997
regarding the 326 Consolidating Properties included in the accompanying Combined
Statements of Revenue and Certain Expenses:
<TABLE>
<CAPTION>
PARTNERSHIP/PROPERTY NAME LOCATION STATE RENTABLE UNITS
- ------------------------------------------------------ ---------------- ----- --------------
<S> <C> <C> <C>
Wood Valley Of Calhoun Cty Anniston AL 69
--------------
1 Property 69
Amberwood Lake City FL 50
Applewood Deland FL 69
Applewood II Deland FL 93
Bayside Sebring FL 59
Bel Aire Miami FL 69
Berry Pines Milton FL 64
Branchwood Winter Park FL 117
Brandywyne East Winter Haven FL 38
Candlelight Brooksville FL 51
Candlelight II Brooksville FL 60
Cedarwood Ocala FL 55
Cedarwood II Ocala FL 39
Clearlake Pines II Cocoa FL 51
Countryside Daytona Beach FL 59
Countryside II Daytona Beach FL 96
Cypress Panama City Bch FL 70
Deerwood Eustis FL 50
Driftwood Atlantic Beach FL 63
Elmwood West Palm Beach FL 52
Elmwood II West Palm Beach FL 50
Garden Terrace II Tampa FL 65
Hickory Place Gainesville FL 70
Hidden Pines Casselberry FL 56
High Points New Port Richey FL 95
Hillcrest Villa Crestview FL 65
Holly Ridge Pembroke Park FL 98
Holly Sands Ft. Walton Beach FL 72
Meadowood II Altamonte
Springs FL 54
Morningside II Titusville FL 182
Mosswood Winter Springs FL 57
</TABLE>
F-69
<PAGE> 170
CONSOLIDATING PROPERTIES
NOTES TO COMBINED STATEMENTS OF
REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
NOTE 2 -- DESCRIPTION OF PROPERTIES -- (CONTINUED)
<TABLE>
<CAPTION>
PARTNERSHIP/PROPERTY NAME LOCATION STATE RENTABLE UNITS
- ------------------------------------------------------ ---------------- ----- --------------
<S> <C> <C> <C>
Mosswood II Winter Springs FL 89
Nova Glen Daytona Beach FL 61
Nova Glen II Daytona Beach FL 81
Novawood Daytona Beach FL 57
Novawood II Daytona Beach FL 61
Oak Ridge Clermont FL 63
Oak Shade Orange City FL 82
Oakwood Manor Hollywood FL 63
Old Archer Court Gainesville FL 72
Palatka Oaks Palatka FL 34
Palatka Oaks II Palatka FL 23
Palm Bay/Windwood II Palm Bay FL 64
Palm Place Sarasota FL 80
Pine Lake Tampa FL 41
Pine Meadows Ft. Myers FL 60
Pine Terrace Callaway FL 80
Pine Terrace II Callaway FL 68
Pinellas Pines Pinellas Park FL 68
Ranchside New Port Richey FL 76
Rivers End Jacksonville FL 66
Sandpiper II Ft. Pierce FL 66
Sanford Court Investors Sanford FL 106
Shadow Bay Jacksonville FL 53
Shadow Bay II Jacksonville FL 59
Shadow Ridge Tallahassee FL 62
Shadowood Sarasota FL 69
Shadowood II Sarasota FL 70
Silver Forest Ocala FL 51
Sky Pines Orlando FL 88
Spring Gate Springfield FL 66
Strawberry Place Plant City FL 55
Sugartree New Smyrna Beach FL 60
Sutton Place Lakeland FL 55
Terrace Trace Tampa FL 87
The Landings Winter Haven FL 60
Turkscap Brandon FL 49
Turkscap III Brandon FL 50
</TABLE>
F-70
<PAGE> 171
CONSOLIDATING PROPERTIES
NOTES TO COMBINED STATEMENTS OF
REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
NOTE 2 -- DESCRIPTION OF PROPERTIES -- (CONTINUED)
<TABLE>
<CAPTION>
PARTNERSHIP/PROPERTY NAME LOCATION STATE RENTABLE UNITS
- ------------------------------------------------------ ---------------- ----- --------------
<S> <C> <C> <C>
University Square Tampa FL 81
Westcreek Jacksonville FL 86
Wingwood Orlando FL 86
Winter Woods Winter Garden FL 57
Woodland Orlando FL 92
Woodland II Orlando FL 77
--------------
73 Properties 4,943
Barrington Of Dekalb Cty Clarkston GA 47
Camden Way Kingsland GA 61
Camden Way II Kingsland GA 57
Carriage Hills Of Dublin Dublin GA 60
Cedargate Of Lawrenceville Lawrenceville GA 55
Countryside Manor Of Douglasville Douglasville GA 82
Elmwoods Of Marietta Marietta GA 48
Forest Ridge Of Richmond Cty Augusta GA 74
Forest Village Of Bibb Cty Macon GA 83
Gentian Oaks Of Columbus Columbus GA 62
Harbinwood Of Gwinnett Cty Norcross GA 73
Hillandale Manor Of Dekalb Cty Lithonia GA 48
Hillside Manor Of Americus Americus GA 60
Holly Park Of Columbus Columbus GA 66
Iris Glen Of Rockdale Cty Conyers GA 79
Link Terrace Hinesville GA 54
Marsh Landing Brunswick GA 57
Meadowland Of Clarke Cty Bogart GA 60
Meadowood Of Norcross Norcross GA 61
Meadowood Of Norcross II Norcross GA 51
Morgan Trace Of Union City Union City GA 80
Northridge Of Carrollton Carrollton GA 77
Oakley Woods Of Union City Union City GA 60
Oakwood Village Of Richmond Cty Augusta GA 70
Pine Knoll Of Clayton Cty Jonesboro GA 46
Quail Call Albany GA 55
Ramblewood II Valdosta GA 28
Redan Village Of Dekalb Cty Decatur GA 78
Redan Village Of Dekalb Cty II Decatur GA 76
</TABLE>
F-71
<PAGE> 172
CONSOLIDATING PROPERTIES
NOTES TO COMBINED STATEMENTS OF
REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
NOTE 2 -- DESCRIPTION OF PROPERTIES -- (CONTINUED)
<TABLE>
<CAPTION>
PARTNERSHIP/PROPERTY NAME LOCATION STATE RENTABLE UNITS
- ------------------------------------------------------ ---------------- ----- --------------
<S> <C> <C> <C>
Ridgewood Of Dekalb Cty Decatur GA 63
Ridgewood Of Dekalb Cty II Decatur GA 52
Shadow Trace Of Dekalb Cty Stone Mountain GA 81
Skyridge Woodstock GA 120
Stillwater Savannah GA 53
Stratford Lane Of Columbus Columbus GA 67
Sunnyside Tifton GA 72
Timberwoods Of Perry Perry GA 60
Valleyfield Of Dekalb Cty Decatur GA 66
Valleyfield Of Dekalb Cty II Decatur GA 66
Waterbury Of Clarke Cty Athens GA 53
Westway Brunswick GA 70
Whisperwood Of Cordele Cordele GA 50
Willow Creek Of Griffin Griffin GA 53
Willow Run Of Dekalb Cty Stone Mountain GA 73
Willowood Of Milledgeville Milledgeville GA 61
Wood Trail Of Newman Newnan GA 61
Woodcliff Of Lilburn Lilburn GA 71
Woodcliff Of Lilburn II Lilburn GA 72
Woodcrest Of Warner Robins Warner Robins GA 66
Woodside Valdosta GA 52
--------------
50 Properties 3,190
Ansley Oaks O'Fallon O'Fallon IL 69
--------------
1 Property 69
Acadia Court Bloomington Bloomington IN 97
Annhurst Indianapolis Indianapolis IN 83
Applegate Columbus Columbus IN 58
Applegate Delaware Cty Muncie IN 53
Ashgrove Indianapolis Indianapolis IN 57
Beckford Place New Castle New Castle IN 41
Brandon Court Bloomington Bloomington IN 78
Cambridge Commons Indianapolis Indianapolis IN 86
Cambridge Commons Indianapolis II Indianapolis IN 75
Cedargate Bloomington Bloomington IN 68
</TABLE>
F-72
<PAGE> 173
CONSOLIDATING PROPERTIES
NOTES TO COMBINED STATEMENTS OF
REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
NOTE 2 -- DESCRIPTION OF PROPERTIES -- (CONTINUED)
<TABLE>
<CAPTION>
PARTNERSHIP/PROPERTY NAME LOCATION STATE RENTABLE UNITS
- ------------------------------------------------------ ---------------- ----- --------------
<S> <C> <C> <C>
Cedargate Bloomington II Bloomington IN 58
Cedargate Michigan City Michigan City IN 53
Cedarwood Goshen Goshen IN 43
Cedarwood Goshen II Goshen IN 47
Clearview Greenwood Greenwood IN 71
Clearview Greenwood II Greenwood IN 80
Concord Square Kokomo Kokomo IN 49
Concord Square Lawrenceburg Lawrenceburg IN 48
Dogwood Glen Marion Cty II Indianapolis IN 77
Hampshire Bluffton Bluffton IN 45
Hartwick Tipton Tipton IN 44
Heathmoore Evansville Evansville IN 74
Heathmoore Indianapolis Indianapolis IN 55
Laurelwood Court Bedford Bedford IN 50
Meadowood Crawfordsville Crawfordsville IN 64
Meadowood Franklin Franklin IN 51
Meadowood Logansport Logansport IN 42
Meadowood Warrick Cty Newburgh IN 65
Olivewood Indianapolis Indianapolis IN 62
Olivewood Indianapolis II Indianapolis IN 67
Parkville Gas City Gas City IN 49
Plumwood Chesterfield Chesterfield IN 39
Plumwood Ft. Wayne Fort Wayne IN 55
Princeton Court Evansville Evansville IN 62
Ridgewood Bedford Bedford IN 48
Rosewood Commons Indianapolis Indianapolis IN 96
Slate Run Indianapolis Indianapolis IN 90
Slate Run Lebanon Lebanon IN 61
Springwood New Haven New Haven IN 48
Stonehenge Indianapolis Indianapolis IN 60
Stonehenge Jasper Jasper IN 40
Stonehenge Richmond Richmond IN 59
Waterbury Greenwood Greenwood IN 44
Westwood Rochester Rochester IN 42
Willow Run New Albany New Albany IN 64
</TABLE>
F-73
<PAGE> 174
CONSOLIDATING PROPERTIES
NOTES TO COMBINED STATEMENTS OF
REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
NOTE 2 -- DESCRIPTION OF PROPERTIES -- (CONTINUED)
<TABLE>
<CAPTION>
PARTNERSHIP/PROPERTY NAME LOCATION STATE RENTABLE UNITS
- ------------------------------------------------------ ---------------- ----- --------------
<S> <C> <C> <C>
Willowood Columbus Columbus IN 51
Willowood East Indianapolis II Indianapolis IN 60
--------------
47 Properties 2,809
Ashgrove Jefferson Cty Louisville KY 60
Camellia Court Carrollton Carrollton KY 55
Cedargate Bowling Green Bowling Green KY 59
Cedargate Shelby Cty Shelbyville KY 58
Forsythia Court Jefferson Cty Louisville KY 98
Heathmoore Jefferson Cty Louisville KY 62
Longwood Lexington Lexington KY 60
Meadowood Flatwoods Flatwoods KY 52
Meadowood Lexington Lexington KY 50
Meadowood Nicholasville Nicholasville KY 67
Ridgewood Lexington Lexington KY 62
Ridgewood Russelville Russellville KY 52
Rosewood Jefferson Cty Louisville KY 77
Slate Run Bardstown Bardstown KY 54
Slate Run Hopkinsville Hopkinsville KY 57
Slate Run Jefferson Cty Louisville KY 65
Slate Run Jefferson Cty II Louisville KY 63
Stonehenge Glasgow Glasgow KY 54
Stonehenge Jefferson Cty Louisville KY 61
Valleyfield Lexington Lexington KY 83
Willow Run Madisonville Madisonville KY 71
Willowood Frankfort Frankfort KY 57
Willowood Frankfort II Frankfort KY 53
Willowood Owensboro Owensboro KY 55
Winthrop Court Frankfurt Frankfort KY 77
Woodlands Franklin Franklin KY 56
--------------
26 Properties 1,618
Forsythia Court Of Harford Cty Abingdon MD 76
--------------
1 Property 76
Amberidge Roseville Roseville MI 45
</TABLE>
F-74
<PAGE> 175
CONSOLIDATING PROPERTIES
NOTES TO COMBINED STATEMENTS OF
REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
NOTE 2 -- DESCRIPTION OF PROPERTIES -- (CONTINUED)
<TABLE>
<CAPTION>
PARTNERSHIP/PROPERTY NAME LOCATION STATE RENTABLE UNITS
- ------------------------------------------------------ ---------------- ----- --------------
<S> <C> <C> <C>
Apple Run Hillsdale Hillsdale MI 39
Ashgrove Calhoun Cty Marshall MI 51
Ashgrove Sterling Heights Sterling Hts. MI 115
Ashgrove Sterling Heights II Sterling Hts. MI 89
Foxton Monroe Cty Monroe MI 51
Heathmoore Macomb Cty Clinton Twp. MI 72
Heathmoore Wayne Cty II Canton MI 51
Meadowood Jackson Cty Jackson MI 47
Meadowood Monroe Cty Temperance MI 57
Montgomery Court Ingham Cty Haslett MI 59
Newberry Eaton Cty Lansing MI 62
Ridgewood Westland Westland MI 56
Roanoke Oakland Cty Rochester Hills MI 88
Sterling Heights Olivewood Sterling Hts. MI 151
Stonehenge Tecumseh Tecumseh MI 48
Waterbury Westland Westland MI 100
Wentworth Roseville Roseville MI 75
--------------
18 Properties 1,256
--------------
Amhurst Dayton OH 73
Amhurst Dayton II Dayton OH 74
Amhurst Toledo Toledo OH 58
Andover Court Mt. Vernon Mt. Vernon OH 51
Apple Ridge Circleville III Circleville OH 30
Apple Run Columbus II Columbus OH 50
Apple Run Trumbull Cty Warren OH 48
Applegate Chillicothe II Chillicothe OH 41
Applegate Lordstown Lordstown OH 39
Ashgrove Franklin Franklin OH 63
Beckford Place North Canton North Canton OH 60
Beckford Place North Canton II North Canton OH 60
Beckford Place The Plains The Plains OH 60
Beckford Place Wapakoneta Wapakoneta OH 40
Berea Tabor Ridge Berea OH 97
Camellia Court Columbus Columbus OH 64
Camellia Court Columbus II Columbus OH 40
</TABLE>
F-75
<PAGE> 176
CONSOLIDATING PROPERTIES
NOTES TO COMBINED STATEMENTS OF
REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
NOTE 2 -- DESCRIPTION OF PROPERTIES -- (CONTINUED)
<TABLE>
<CAPTION>
PARTNERSHIP/PROPERTY NAME LOCATION STATE RENTABLE UNITS
- ------------------------------------------------------ ---------------- ----- --------------
<S> <C> <C> <C>
Camellia Court Dayton Dayton OH 58
Camellia Court Dayton II Dayton OH 53
Camellia Court Washington Ch Washington C.H. OH 40
Cedargate Englewood Clayton OH 61
Cedargate Lancaster Lancaster OH 47
Cedarwood Belpre Belpre OH 44
Cedarwood Sabina Sabina OH 31
Charing Cross Bowling Green Bowling Green OH 67
Chelsea Court Sandusky Sandusky OH 62
Concord Square Ontario Ontario OH 41
Concord Square Ontario II Ontario OH 31
Daniel Court Clermont Cty Cincinnati OH 114
Dartmouth Place Kent Kent OH 53
Dogwood Terrace Lancaster Lancaster OH 110
Dover Place Eastlake Eastlake OH 64
Dover Place Eastlake II Eastlake OH 65
Dover Place Eastlake III Eastlake OH 30
Dover Place Eastlake IV Eastlake OH 72
Forest Park Meadowood Cincinnati OH 106
Foxton Dayton II Dayton OH 79
Greenglen Allen Cty II Lima OH 54
Greenglen Dayton Dayton OH 76
Greenglen Toledo II Toledo OH 59
Hampshire Elyria II Elyria OH 56
Hickory Mill Columbus Hilliard OH 60
Independence Village Reynoldsburg OH 124
Ketwood Kettering OH 94
Larkspur Columbus Hilliard OH 60
Larkspur Moraine Moraine OH 29
Larkspur Moraine II Moraine OH 16
Laurel Court Fremont Fremont OH 69
London Lamplight London OH 53
Meadowood Columbus Columbus OH 60
Meadowood Columbus II Columbus OH 23
Meadowood Cuyahoga Falls Cuyahoga Falls OH 59
Meadowood Mansfield Mansfield OH 49
Meldon Place Toledo Toledo OH 127
</TABLE>
F-76
<PAGE> 177
CONSOLIDATING PROPERTIES
NOTES TO COMBINED STATEMENTS OF
REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
NOTE 2 -- DESCRIPTION OF PROPERTIES -- (CONTINUED)
<TABLE>
<CAPTION>
PARTNERSHIP/PROPERTY NAME LOCATION STATE RENTABLE UNITS
- ------------------------------------------------------ ---------------- ----- --------------
<S> <C> <C> <C>
Millburn Dayton II Centerville OH 51
Millburn Stow Stow OH 52
Millston Aberdeen Aberdeen OH 54
Millston Aberdeen II Aberdeen OH 39
Montgomery Court Columbus Dublin OH 60
Montgomery Court Columbus II Dublin OH 57
Parkville Columbus OH 100
Parkville Englewood Englewood OH 48
Pickerington Meadows Pickerington Pickerington OH 60
Plumwood Columbus OH 109
Plumwood Columbus III Columbus OH 34
Red Deer Fairborn Fairborn OH 68
Ridgewood Columbus Columbus OH 60
Ridgewood Columbus II Columbus OH 58
Rosewood Columbus Columbus OH 90
Sandalwood Toledo Toledo OH 50
Sherbrook Columbus Columbus OH 60
Slate Run Miamisburg Miamisburg OH 48
Springwood Austingtown II Austintown OH 43
Springwood Columbus Columbus OH 64
Stonehenge Montgomery Cty Dayton OH 69
Stonehenge Ottawa Ottawa OH 36
Stonehenge Stark Cty Massillon OH 60
Suffolk Grove Grove City Grove City OH 71
The Birches Of Lima Lima OH 58
The Willows Delaware II Delaware OH 41
Timbercreek Toledo Toledo OH 77
Waterbury Clermont Cty Cincinnati OH 70
West Of Eastland Columbus Columbus OH 124
Westwood Newark Newark OH 13
Willow Run Willard Willard OH 61
Willowood Grove City Grove City OH 46
Willowood Grove City II Grove City OH 26
Willowood Wooster Wooster OH 51
Willowood Wooster II Wooster OH 53
Woodbine Cuyahoga Falls Cuyahoga Falls OH 55
Woodbine Portsmouth Portsmouth OH 41
</TABLE>
F-77
<PAGE> 178
CONSOLIDATING PROPERTIES
NOTES TO COMBINED STATEMENTS OF
REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
NOTE 2 -- DESCRIPTION OF PROPERTIES -- (CONTINUED)
<TABLE>
<CAPTION>
PARTNERSHIP/PROPERTY NAME LOCATION STATE RENTABLE UNITS
- ------------------------------------------------------ ---------------- ----- --------------
<S> <C> <C> <C>
Woodlands Columbus Columbus OH 88
Woodlands Columbus II Columbus OH 70
Woodlands Columbus III Columbus OH 93
Woodlands Streetsboro Streetsboro OH 60
Woodlands Streetsboro II Streetsboro OH 60
--------------
96 Properties 5,772
Allegheny Co. Valleyfield Bridgeville PA 77
Annhurst Allegheny Cty Clairton PA 97
Carleton Court Erie Cty Erie PA 60
Northrup Court Allegheny Cty Coraopolis PA 60
Northrup Court Allegheny Cty II Coraopolis PA 49
Woodlands Zelienople Zelienople PA 50
--------------
6 Properties 393
Knox Landing Of Knoxville Knoxville TN 85
Waterbury Clarksville Clarksville TN 54
Wycliffe Court Murfreesboro Murfreesboro TN 63
--------------
3 Properties 202
Brunswick Monongalia Cty Morgantown WV 101
Carleton Court Kanawha Cty Cross Lanes WV 73
Hickory Mill Hurrican Hurricane WV 48
Parkville Parkersburg Parkersburg WV 49
--------------
4 Properties 271
--------------
326 Properties Total 20,668
==============
</TABLE>
F-78
<PAGE> 179
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Issued , 1998
11,000,000 Shares
Lexford Residential Trust
COMMON SHARES OF BENEFICIAL INTEREST
------------------------
Of the Common Shares being offered hereby, 2,200,000 are being offered initially
outside the United States and Canada by the International Underwriters and
8,800,000 are being offered initially in the United States and Canada by
the U.S. Underwriters. See "Underwriters." All of the Common Shares
offered hereby are being sold by the Company. The Common Shares are
listed on the NYSE under the symbol "LFT." On May 18, 1998, the
last reported sale price of the Common Shares on the NYSE was
$23 3/16.
------------------------
THE COMPANY IS SELF-ADMINISTERED AND EXPECTS TO QUALIFY AS A REIT FOR FEDERAL
INCOME TAX PURPOSES. IN ORDER TO MAINTAIN ITS REIT STATUS, THE COMPANY HAS
PLACED RESTRICTIONS ON THE ACCUMULATION OF COMMON SHARES, WHICH
RESTRICTIONS MAY AFFECT THE TRANSFERABILITY OF A SHAREHOLDER'S
COMMON SHARES TO CERTAIN POTENTIAL PURCHASERS. SEE "DESCRIPTION
OF COMMON SHARES -- RESTRICTIONS ON TRANSFER."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
RELATING TO AN INVESTMENT IN THE COMMON SHARES, INCLUDING:
- Risks associated with the Company's business and the apartment industry in
general, including operating risks, the illiquidity of real estate
investments, acquisition risks, financing risks, the risk of uninsured and
underinsured losses, the application of various Federal, state and local
laws, renovation and capital improvement requirements and the risk of
environmental liability.
- The risks relating to investment in a single industry since the Federal
income tax laws and Maryland law limit the types of assets that a REIT may
own and risks associated with the Company's focus on a single segment within
the apartment industry.
- The risk that the price of the Common Shares will decrease due to an
increase in interest rates or a downturn in general market conditions, the
Company's operating performance or the market liquidity of the Common
Shares.
- The anti-takeover effect of the Company's ability to limit ownership of the
Common Shares to 9.2% of the outstanding Common Shares, the Company's
ability to issue Preferred Shares and provisions in the Company's
Declaration of Trust as well as Maryland laws inhibiting certain business
combinations and control share acquisitions.
- The possibility that third parties may attempt to rescind or challenge the
Company's acquisition of certain Properties previously partially owned by
the Company or third party equity interests in the entities which own such
Properties or to assert liability against the Company for an alleged breach
of the Company's fiduciary duties in connection with its acquisition of such
Properties or interests.
- Taxation of the Company as a corporation if it fails to qualify as a REIT
for Federal income tax purposes and the resulting potential decrease in Cash
Available for Distribution.
- The requirement to distribute 95% of REIT taxable income which will limit
the ability of the Company to rely on cash from operations to finance
acquisitions or other growth opportunities, remodeling and renovation of the
Company's Properties, or operating activities in the event of future
operating losses, and which may cause the Company to rely on third party
sources of capital.
- The ability of the Company's Board to amend or revise the Company's
investment, debt capitalization and distribution policies and to issue
Common and Preferred Shares without approval of its Shareholders.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
-------- --------------- -----------
<S> <C> <C> <C>
Per Share................................ $ $ $
Total(3)................................. $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
1,650,000 additional Common Shares at the price to public less underwriting
discounts and commissions for the purpose of covering over-allotments, if
any. If the U.S. Underwriters exercise such option in full, the total price
to public, underwriting discounts and commissions and proceeds to Company
will be $ , $ and $ , respectively. See "Underwriters."
The Common Shares are offered, subject to prior sale, when, as and if
accepted by the Underwriters, and subject to approval of certain legal matters
by Shearman & Sterling, counsel for the Underwriters. It is expected that
delivery of the Common Shares will be made on or about , 1998 at the
office of Morgan Stanley & Co. Incorporated, New York, New York against payment
therefor in immediately available funds.
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INTERNATIONAL
SALOMON SMITH BARNEY INTERNATIONAL
J.C. BRADFORD & CO.
WHEAT FIRST UNION
, 1998
<PAGE> 180
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities offered hereby other than
underwriting discounts and commissions. Except for the SEC registration fee and
NASD filing fee all amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 82,099
NASD filing fee............................................. 28,330
New York Stock Exchange listing fee......................... 50,000
Accounting fees and expenses................................ 1,640,000
Legal fees and expenses..................................... 1,700,000
Blue Sky fees and expenses (including counsel fees)......... 15,000
Printing and engraving expenses............................. 650,000
Miscellaneous expenses...................................... 104,571
----------
Total....................................................... $4,270,000
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to Title 8 and the Declaration of Trust, the liability of Trustees
and officers of the Company to the Company or to any Shareholder for money
damages has been eliminated, except for (a) actual receipt of an improper
personal benefit in money, property or services and (b) for active and
deliberate dishonesty established by a final judgment as being material to the
cause of action.
Under the Declaration of Trust, the Company is required to indemnify any
Trustee or officer (a) against reasonable expenses incurred by him in the
successful defense (on the merits or otherwise) of any proceeding to which he is
made a party by reason of such status or (b) against judgments, penalties,
fines, settlements, and reasonable expenses actually incurred in connection with
a proceeding that be may become subject to by reason of such status unless it is
established that (i) the act or omission was material to the matter giving rise
to the claim and was committed in bad faith or was the result of the active and
deliberate dishonesty, (ii) he actually received an improper personal benefit in
money, property or services or (iii) in the case of a criminal proceeding, he
had reasonable cause to believe that his act or omission was unlawful. The
Company is also required by the Declaration of Trust to pay or reimburse, in
advance of a final disposition, reasonable expenses of a Trustee or officer, and
may choose to do so for an employee or agent, who is made a party to a
proceeding by reason of his status as such upon receipt of a written affirmation
by the Trustee, officer, employee, or agent of his good faith belief that he has
met the applicable standard for indemnification under the Declaration of Trust
and a written undertaking to repay such expenses if it is ultimately be
determined that the applicable standard was not met. Under the Declaration of
Trust, indemnification is determined to be proper by (i) a majority vote of a
quorum made up of disinterested Trustees, (ii) special legal counsel, or (iii) a
majority vote of Shareholders entitled to vote on the matter at a meeting called
for such purpose, voting as a single class. The Company has purchased Trustees'
and officer's liability insurance for the benefit of its Trustees and officers.
The Underwriting Agreement provides for indemnification by the Underwriters
of Trustees, officers and controlling persons of the Company for certain
liabilities, including certain liabilities under the Securities Act, under
certain circumstances. The Underwriting Agreement provides for indemnification
by the Company of the Underwriters and controlling persons of the Underwriters
for certain liabilities, including certain liabilities under the Securities Act,
under certain circumstances.
II-1
<PAGE> 181
ITEM 16. EXHIBITS
<TABLE>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
2.1 Agreement and Articles of Merger (incorporated by reference
to Annex A to the Prospectus filed pursuant to Rule 424(b)
under the Securities Act as part of the Company's
Registration Statement on Form S-4 filed on January 20,
1998; Registration Statement No. 333-44521 (the "424(b)
Prospectus"))
4.1 See Articles IV, VI and VII and Sections 5.1 and 5.2 of the
Declaration of Trust of the Registrant (incorporated by
reference to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997)
4.2 See Articles I and V and Section 2.2 of the Bylaws of the
Registrant (incorporated by reference to Annex C to the
424(b) Prospectus)
5.1 Opinion of Shaw Pittman Potts & Trowbridge regarding the
legality of Common Shares being registered
8.1 Opinion of Willkie Farr & Gallagher regarding certain tax
matters
23.1 Consent of Ernst & Young LLP
23.2 Consent of Shaw Pittman Potts & Trowbridge (included in its
opinion filed as Exhibit 5.1)
23.3 Consent of Willkie Farr & Gallagher (included in its opinion
filed as Exhibit 8.1)
24.1* Power of Attorney
99.1* Operating Partnership Agreement dated April 29, 1998 between
the Registrant and Lexford Partner L.L.C.
</TABLE>
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, may be permitted to Trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933, shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 182
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment no. 2 to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Columbus, State of Ohio, on May 19,
1998.
LEXFORD RESIDENTIAL TRUST
By: /s/ MARK D. THOMPSON
------------------------------------
Mark D. Thompson
Chief Financial Officer and
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chief Executive Officer, May 19, 1998
- ------------------------------------------ President and Trustee
John B. Bartling, Jr. (Principal Executive Officer)
/s/ MARK D. THOMPSON Chief Financial Officer and May 19, 1998
- ------------------------------------------ Executive Vice President
Mark D. Thompson (Principal Financial and
Accounting Officer)
* Trustee May 19, 1998
- ------------------------------------------
Stanley R. Fimberg
* Trustee May 19, 1998
- ------------------------------------------
Patrick M. Holder
* Chairman of the Board and Trustee May 19, 1998
- ------------------------------------------
Joseph E. Madigan
* Trustee May 19, 1998
- ------------------------------------------
Glenn C. Pollack
* Trustee May 19, 1998
- ------------------------------------------
H. Jeffrey Schwartz
* Trustee May 19, 1998
- ------------------------------------------
Robert J. Weiler
* By: /s/ MARK D. THOMPSON
------------------------------------
Mark D. Thompson
attorney in fact
</TABLE>
II-3
<PAGE> 1
11,000,000 SHARES
LEXFORD RESIDENTIAL TRUST
COMMON SHARES OF BENEFICIAL INTEREST, PAR VALUE $0.01 PER SHARE
UNDERWRITING AGREEMENT
__________, 1998
<PAGE> 2
_____________, 1998
Morgan Stanley & Co. Incorporated
PaineWebber Incorporated
Smith Barney Inc.
J.C. Bradford & Co.
Wheat First Securities, Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
PaineWebber International (U.K.) Ltd.
Smith Barney Inc.
J.C. Bradford & Co.
Wheat First Securities, Inc.
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
Lexford Residential Trust, a Maryland real estate investment
trust (the "COMPANY"), proposes to issue and sell to the several Underwriters
(as defined below) 11,000,000 common shares of beneficial interest, par value
$0.01 per share, of the Company (the "FIRM SHARES").
It is understood that, subject to the conditions hereinafter
stated, 8,800,000 Firm Shares (the "U.S. FIRM SHARES") will be sold to the
several U.S. Underwriters named in Schedule I hereto (the "U.S. UNDERWRITERS")
in connection with the offering and sale of such U.S. Firm Shares in the United
States and Canada to United States and Canadian Persons (as such terms are
defined in the Agreement Between U.S. and International Underwriters of even
date herewith), and 2,200,000 Firm Shares (the "INTERNATIONAL SHARES") will be
sold to the several International Underwriters named in Schedule II hereto (the
"INTERNATIONAL UNDERWRITERS") in connection with the offering and sale of such
International Shares outside the United States and Canada to persons other than
United States and Canadian Persons. Morgan Stanley & Co. Incorporated,
PaineWebber Incorporated, Smith Barney Inc., J.C.
<PAGE> 3
2
Bradford & Co., and Wheat First Securities, Inc. shall act as representatives
(the "U.S. REPRESENTATIVES") of the several U.S. Underwriters, and Morgan
Stanley & Co. International Limited, PaineWebber International (U.K.) Ltd.,
Smith Barney Inc., J.C. Bradford & Co., and Wheat First Securities, Inc. shall
act as representatives (the "INTERNATIONAL REPRESENTATIVES") of the several
International Underwriters. The U.S. Underwriters and the International
Underwriters are hereinafter collectively referred to as the "UNDERWRITERS".
The Company also proposes to issue and sell to the several
U.S. Underwriters not more than an additional 1,650,000 common shares of
beneficial interest, par value $0.01 per share, of the Company (the "ADDITIONAL
SHARES") if and to the extent that the U.S. Representatives shall have
determined to exercise, on behalf of the U.S. Underwriters, the right to
purchase such common shares granted to the U.S. Underwriters in Section 2
hereof. The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the "SHARES". The common shares of beneficial interest, par value
$0.01 per share, of the Company to be outstanding after giving effect to the
sales contemplated hereby are hereinafter referred to as the "COMMON SHARES".
Prior to the execution of this Agreement and the purchase and
public offering of the Shares by the several Underwriters, (i) the Company and
Lexford, Inc., an Ohio corporation (the "PREDECESSOR COMPANY"), have entered
into an Agreement and Articles of Merger dated January 29, 1998, (the "MERGER
AGREEMENT") pursuant to which the Predecessor Company was merged into the
Company (the "MERGER") and thereupon the Company has succeeded to the business
conducted by the Predecessor Company and now possesses any and all purposes and
powers of the Predecessor Company, and all leases, licenses, property, rights,
privileges and powers of whatever nature and description of the Predecessor
Company were transferred to, vested in and devolved upon the Company, without
further act or deed, subject to all debts and obligations of the Predecessor
Company, except for such limitations as are necessary to maintain the Company's
status as a real estate investment trust under Title 8 of the Corporations and
Associations Article of the Annotated Code of Maryland (the "MARYLAND REIT
STATUTE") and the Internal Revenue Code of 1986, as amended (the "CODE"), and
the (ii) the Company and the Predecessor Company have caused a Certificate of
Merger to be executed, acknowledged and filed with the Secretary of State of
Ohio as provided in Section 1701.81 of Chapter 1701 of the Ohio Revised Code,
the Ohio General Corporation Law (the "OGCL"), and an Articles of Merger to be
executed, acknowledged and filed with the State Department of Assessments and
Taxation of Maryland as provided in Section 8-501.1 of the Maryland REIT
Statute. The term "Company", unless the context otherwise requires, includes the
Predecessor Company.
The Company has filed with the Securities and Exchange
Commission (the "COMMISSION") a registration statement on Form S-3 (File No.
333-49269) relating to the Shares. The registration statement contains two
prospectuses to be used in connection with the
<PAGE> 4
3
offering and sale of the Shares: the U.S. prospectus, to be used in connection
with the offering and sale of Shares in the United States and Canada to United
States and Canadian Persons, and the international prospectus, to be used in
connection with the offering and sale of Shares outside the United States and
Canada to persons other than United States and Canadian Persons. The
international prospectus is identical to the U.S. prospectus except for the
outside front cover page. The registration statement as amended at the time it
becomes effective, including the exhibits thereto and the information (if any)
deemed to be part of the registration statement at the time of effectiveness
pursuant to Rule 430A under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), is hereinafter referred to as the "REGISTRATION STATEMENT";
the U.S. prospectus and the international prospectus in the respective forms
first used to confirm sales of Shares are hereinafter collectively referred to
as the "PROSPECTUS". If the Company has filed an abbreviated registration
statement to register additional Common Shares pursuant to Rule 462(b) under the
Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference
herein to the term "Registration Statement" shall be deemed to include such Rule
462 Registration Statement. As used herein, the terms "Registration Statement",
"Prospectus", "Rule 462 Registration Statement" and "preliminary prospectus"
shall include in each case the documents incorporated by reference therein. The
terms "supplement", "amendment" and "amend" as used herein shall include all
documents deemed to be incorporated by reference in the Prospectus that are
filed subsequent to the date of the Prospectus by the Company with the
Commission pursuant to the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT").
At or prior to the Closing Date (as hereinafter defined), the
Company will complete a series of transactions (the "CONSOLIDATION
TRANSACTIONS") described in the Prospectus under the heading "Company History --
Consolidation Plan". As part of these transactions, the Company will acquire
direct or indirect interests in 326 partnerships that own apartment communities.
1. Representations and Warranties. The Company represents and
warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or
threatened by the Commission.
(b) (i) Each document filed or to be filed pursuant to the
Exchange Act and incorporated by reference in the Prospectus complied
or will comply when so filed in all material respects with the
requirements of the Exchange Act and the applicable rules and
regulations of the Commission thereunder, (ii) the Registration
Statement, when it became effective, did not contain and each such
part, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a
<PAGE> 5
4
material fact required to be stated therein or necessary to make the
statements therein not misleading, (iii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iv)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities Act
and the applicable rules and regulations of the Commission thereunder.
(d) The Company has been duly organized, is validly existing
as a real estate investment trust in good standing under the laws of
the State of Maryland, has the power and authority to own its property
and to conduct its business as described in the Prospectus and to enter
into and perform its obligations under this Agreement, the Merger
Agreement and the contracts, documents and other agreements executed in
connection with the Consolidation Transactions (the "CONSOLIDATION
DOCUMENTS") to which it is a party. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries taken as a whole.
(e) Each subsidiary of the Company has been duly incorporated
or organized, is validly existing as a partnership, corporation or
limited liability company in good standing under the laws of its
respective jurisdiction of organization, has the partnership, corporate
or other power and authority to own its property and to conduct its
business as described in the Prospectus and to enter into and perform
its obligations under the Consolidation Documents to which it is a
party. Each subsidiary of the Company is duly qualified to transact
business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole;
all of the issued shares of capital stock or other
<PAGE> 6
5
ownership interests of each subsidiary of the Company have been duly
and validly authorized and issued, are fully paid and non-assessable,
except for liabilities of a general partner existing under applicable
law, and, except as set forth in the Prospectus, are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities and claims, except for encumbrances which may be created
pursuant to the Company's existing $40.0 million revolving credit
facility with The Provident Bank. The subsidiaries listed on Schedule
III (the "SUBSIDIARIES") are all the active and direct subsidiaries of
the Company (other than any limited liability company or limited
partnership that owns apartment communities).
(f) This Agreement and the Merger Agreement have been duly
authorized, executed and delivered by the Company.
(g) On the Closing Date, each of the Consolidation Documents
to which the Company or any of its subsidiaries is a party pursuant to
the Consolidation Transactions will have been duly and validly
authorized, executed and delivered by such parties, and will be a valid
and binding agreement of such parties, enforceable in accordance with
its terms; provided, however, that the enforceability of each of the
foregoing documents may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting creditors' rights
generally and by general principles of equity.
(h) The authorized shares of the Company conform as to legal
matters to the description thereof contained in the Prospectus.
(i) The Common Shares outstanding prior to the issuance of the
Shares have been duly authorized, are validly issued, fully paid and
non-assessable, and have been offered and sold on or prior to Closing
Date in compliance with all applicable laws (including, without
limitation, federal and state securities laws) and are not subject to
preemptive or other similar rights arising by operation of Maryland law
or under the declaration of trust or by-laws of the Company or any
agreement or other instrument. The authorized, issued and outstanding
Common Shares of the Company are as set forth or incorporated by
reference in the Prospectus.
(j) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
(k) The Shares have been approved for listing on the New York
Stock Exchange, subject to official notice of issuance.
<PAGE> 7
6
(l) Neither the execution, delivery and performance of the
Merger Agreement, each of the Consolidation Documents and this
Agreement by the Company, nor the consummation of the transactions
contemplated hereby or thereby nor the sale of the Shares will conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any material indenture,
mortgage, deed of trust, loan agreement, limited liability company
agreement or any other material agreement or instrument to which the
Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries is bound or to which any of the property or
assets of the Company or any of its subsidiaries is subject, nor will
such actions result in any violation of the provisions of the
declaration of trust, charter, by-laws, certificate of limited
partnership, partnership agreement or other organizational documents of
the Company or any of its subsidiaries, as the case may be, or any
statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any of its
subsidiaries or any of the properties, assets or businesses to be owned
by them after the Consolidation Transactions. No consent, approval,
authorization or order of, or qualification with, any governmental body
or agency is required for the performance by the Company or any of its
subsidiaries of its obligations under the Merger Agreement, this
Agreement and the Consolidation Documents and the consummation of the
transactions contemplated hereby and thereby, except as have been
obtained or such as may be required by the securities or Blue Sky laws
of the various states in connection with the offer and sale of the
Shares.
(m) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(n) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party
or to which any of the properties of the Company or any of its
subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or
any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required.
(o) Upon completion of the Consolidation Transactions and the
sale of the Shares, the Company will be organized in conformity with
the requirements for qualification as a real estate investment trust
under Sections 856 through 860 of the Code, and its assets, income and
proposed method of operation will enable it to meet
<PAGE> 8
7
the requirements for taxation as a real estate investment trust under
the Code for its taxable periods beginning with its first taxable year
which includes the Closing Date and for subsequent taxable periods.
(p) The conditions for use of registration statements on Form
S-3 set forth in the General Instructions on Form S-3 have been
satisfied and the Company is entitled to use such form for the
transaction contemplated herein.
(q) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended.
(r) Except with respect to the registration rights of Stanley
R. Fimberg and Patrick M. Holder obtained in connection with the
acquisition of Lexford Properties, Inc. or as otherwise disclosed in
the Prospectus, there are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares
registered pursuant to the Registration Statement.
(s) Except as otherwise disclosed in the Prospectus: (i) all
apartment communities described in the Prospectus as owned by the
Company or any of its subsidiaries (the "WHOLLY OWNED PROPERTIES") are
owned with good and marketable title by the Company or the
subsidiaries; (ii) all apartment communities described in the
Prospectus as owned by entities (the "SYNDICATED PARTNERSHIPS") in
which the Company or one of its subsidiaries have minority equity
interests (the "SYNDICATED PROPERTIES" and, together with the Wholly
Owned Properties, the "PROPERTIES"), are owned with good and marketable
title by the Syndicated Partnerships; (iii) all liens, charges,
encumbrances, claims or restrictions on or affecting any of the
Properties and the assets of the Company or any of its subsidiaries
which are required to be disclosed in the Prospectus are disclosed
therein; (iv) any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting
and enforceable leases with such exceptions as are not material and do
not interfere with the use made and the proposed to be made of such
property and buildings by the Company and its subsidiaries; (v) no
person has an option or right of first refusal to purchase all or part
of any Wholly Owned Property or any interest therein; (vi) each of the
Properties complies in all material respects with all applicable codes,
laws and regulations (including, without limitation, building and
zoning codes, laws and regulations and laws relating to access to the
properties); and (vii) the Company has no knowledge of any pending or
threatened condemnation proceedings, zoning change, or
<PAGE> 9
8
other similar proceeding or action that will in any manner affect the
size of, use of, improvements on, construction on or access to any of
the properties except, in the case of clauses (vi) and (vii) above, as
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(t) Each of the partnership agreements to which any of the
Company and its subsidiaries is a party, and which relates to the
Properties, has been duly authorized, executed and delivered by the
Company or the subsidiary and constitutes the valid agreement thereof,
enforceable in accordance with its terms against the Company or the
subsidiary, provided, however, that the enforceability of each of the
foregoing documents may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting creditors's rights
generally and by general principles of equity; and the execution,
delivery and performance of any of such agreements did not, at the time
of execution and delivery, and does not constitute a breach of, or
default under, the declaration of trust of the Company or the
certificate of incorporation, partnership agreement or similar
agreement or by-laws of such party or any material contract, lease or
other instrument to which such party is a party or by which it or any
of its properties may be bound or any law, administrative regulation or
administrative or court decree, except for such breaches and defaults
that do not have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(u) The Company and its subsidiaries (i) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS") (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are
in compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(v) Neither the Company nor any of its subsidiaries have
knowledge of (a) the unlawful presence of any hazardous substances,
hazardous materials, toxic substances or waste materials (collectively,
"HAZARDOUS MATERIALS") on any of the Properties as of the date hereof
or any properties owned by the Company or any entity controlled by the
Company prior to the date hereof with respect to the period prior to
the sale of such property by the Company or entity controlled by the
Company, or (b) any unlawful spills, releases, discharges or disposal
of Hazardous Materials that have occurred or are presently occurring on
such properties as a result of any construction on
<PAGE> 10
9
or operation and use of such properties; which presence or occurrence
would have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(w) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(x) Neither the Company nor any of its subsidiaries is
required to own or possess any trademarks, service marks, trade names
or copyrights in order to conduct the business now operated by it,
other than those which it has a valid right to use or other than those
the failure to possess or own would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole.
(y) Ernst & Young LLP, who have certified certain financial
statements in the Registration Statement, whose report appears in the
Prospectus, are independent public accountants as required by the
Securities Act and the rules and regulations of the Commission
thereunder during the periods covered by the financial statements on
which they reported contained in the Prospectus.
(z) The Company and its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in
which they are engaged and the geographic area thereof; neither the
Company nor any of its subsidiaries has any reason to believe that it
will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that
would not result in a material adverse effect on the Company and its
subsidiaries, taken as a whole, except as described in the Prospectus.
(aa) Except as described in the Prospectus, the Company and
its subsidiaries possess all licenses, consents, authorizations,
approvals, orders, certificates and permits of and from, and has made
all declarations and filings with, all federal, state, local, foreign
and other governmental authorities, all self-regulatory organizations
and all courts and other tribunals, to own, lease, license and use its
properties and assets and to conduct its business in the manner
described in the Prospectus, and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation, modification or non-renewal of any such license, consent,
authorization, approval, order, certificate or permit which, singly or
in the aggregate, if the subject of
<PAGE> 11
10
an unfavorable decision, ruling or finding, would have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(bb) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(cc) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliate located in Cuba.
(dd) Each of the Company and its subsidiaries has filed all
federal, state and local income tax returns which have been required to
be filed and has paid all taxes required to be paid and any other
assessment, fine or penalty levied against it, to the extent that any
of the foregoing is due and payable, except, in all cases, for any such
tax, assessment, fine or penalty that is being contested in good faith
(and except in any case in which the failure to so file or pay would
not have a material adverse effect on the Company and its subsidiaries,
taken as a whole).
(ee) The financial statements (including the notes thereto)
included in the Registration Statement and the Prospectus present
fairly the financial position of the respective entity or entities
presented therein at the respective dates indicated and the results of
their operations for the respective periods specified, and except as
otherwise stated in the Registration Statement, said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis. The
supporting schedules included in the Registration Statement present
fairly the information required to be stated therein. The financial
information and data included in the Registration Statement and the
Prospectus present fairly the information included therein and have
been prepared on a basis consistent with that of the books and records
of the respective entities presented therein. Pro forma financial
information included in the Prospectus has been prepared in accordance
with the applicable requirements of Rules 11-01 and 11-02 of Regulation
S-X under the Securities Act, and the necessary pro forma adjustments
have been properly applied to the historical amounts in the compilation
of such information, and, in the opinion of the Company, the
assumptions used in the preparation thereof are reasonable and the
<PAGE> 12
11
adjustments used therein are appropriate to give effect to the
transactions and circumstances referred to therein.
(ff) Upon the Merger, the Predecessor Company was merged into
the Company, and, thereupon the Company has succeeded to the business
conducted by the Predecessor Company and now possesses any and all
purposes and powers of the Predecessor Company, and all leases,
licenses, property, rights, privileges and powers of whatever nature
and description of the Predecessor Company were transferred to, vested
in and devolved upon the Company, without further act or deed, subject
to all debts and obligations of the Predecessor Company, except for
such limitations as are necessary to maintain the Company's status as a
real estate investment trust under the Maryland REIT Statute and the
Code. Each share of the Predecessor Company's common stock was
converted into two Common Shares, without the necessity of any action
on the part of the holder thereof.
(gg) The Merger was approved by holders of at least a majority
of shares of common stock of the Predecessor Company.
(hh) The Certificate of Merger was properly authorized,
executed and filed with the Secretary of State of Ohio as provided by
Section 1701.81 of the OGCL and the Articles of Merger were properly
authorized, executed and filed with the State Department of Assessments
and Taxation of Maryland as provided in Section 8-501.1 of the Maryland
REIT Statute.
(ii) Any certificate signed by any officer of the Company and
delivered to the Underwriters, or to counsel for the Underwriters shall
be deemed a representation and warranty by the Company to each
Underwriter as to the matters covered thereby.
2. Agreements to Sell and Purchase. The Company hereby agrees
to sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedules I and II
hereto opposite its name at U.S.$_____ a share ("PURCHASE PRICE").
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, the Company agrees
to sell to the U.S. Underwriters the Additional Shares, and the U.S.
Underwriters shall have a one-time right to purchase, severally and not jointly,
up to 1,650,000 Additional Shares at the Purchase Price. If the U.S.
Representatives, on behalf of the U.S. Underwriters, elect to exercise such
option, the U.S. Representatives shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be
<PAGE> 13
12
purchased by the U.S. Underwriters and the date on which such shares are to be
purchased. Such date may be the same as the Closing Date (as defined below) but
not earlier than the Closing Date nor later than ten business days after the
date of such notice. Additional Shares may be purchased as provided in Section 4
hereof solely for the purpose of covering overallotments made in connection with
the offering of the Firm Shares. If any Additional Shares are to be purchased,
each U.S. Underwriter agrees, severally and not jointly, to purchase the number
of Additional Shares (subject to such adjustments to eliminate fractional shares
as the U.S. Representatives may determine) that bears the same proportion to the
total number of Additional Shares to be purchased as the number of U.S. Firm
Shares set forth in Schedule I hereto opposite the name of such U.S. Underwriter
bears to the total number of U.S. Firm Shares.
The Company hereby agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it
will not, during the period ending 180 days after the date of the Prospectus,
(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 or exercisable
or exchangeable for Common Shares or (ii) enter into any swap or 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. The foregoing sentence
shall not apply to (A) the Shares to be sold hereunder, (B) the issuance by the
Company of Common Shares upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof of which the
Underwriters have been advised in writing, (C) the issuance of partner interests
in Lexford Properties, L.P., as long as such partner interests are not
exchangeable for or convertible into Common Shares during the period ending 180
days after the date of the Prospectus, or (D) recurring issuances of Common
Shares under existing employment agreements or arrangements, provided, however,
that prior to the receipt of any such Common Shares, the recipient thereof shall
have executed a "lock-up" agreement in the form of Exhibit A hereto.
3. Terms of Public Offering. The Company is advised by you
that the Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable. The Company is
further advised by you that the Shares are to be offered to the public initially
at U.S.$_____ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of $____ a
share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of U.S.$____ a share, to
any Underwriter or to certain other dealers.
<PAGE> 14
13
4. Payment and Delivery. Payment for the Firm Shares shall be
made to the Company in Federal or other funds immediately available in New York
City against delivery of such Firm Shares for the respective accounts of the
several Underwriters at 10:00 a.m., New York City time, on ____________, 1998,
or at such other time on the same or such other date, not later than _________,
1998, as shall be designated in writing by you. The time and date of such
payment are hereinafter referred to as the "CLOSING DATE".
Payment for any Additional Shares shall be made to the Company
in Federal or other funds immediately available in New York City against
delivery of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than _______, 1998, as shall be designated in
writing by the U.S. Representatives. The time and date of such payment are
hereinafter referred to as the "OPTION CLOSING DATE".
Certificates for the Firm Shares and Additional Shares shall
be in definitive form and registered in such names and in such denominations as
you shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The
obligations of the Company to sell the Shares to the Underwriters and the
several obligations of the Underwriters to purchase and pay for the Shares on
the Closing Date are subject to the condition that the Registration Statement
shall have become effective not later than 2:00 p.m. (New York City time) on the
date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading,
nor shall any notice have been given of any intended or
potential downgrading or of any review for a possible change
that does not indicate the direction of the possible change,
in the rating accorded any of the Company's securities by any
<PAGE> 15
14
"nationally recognized statistical rating organization", as
such term is defined for purposes of Rule 436(g)(2) under the
Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a
whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of
this Agreement) that, in your judgment, is material and
adverse and that makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated
in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer
of the Company, to the effect set forth in Section 5(a)(i) above and to
the effect that the representations and warranties of the Company
contained in this Agreement are true and correct as of the Closing Date
and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or
satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely
upon the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date
an opinion of Bradley A. Van Auken, General Counsel of the Company,
dated the Closing Date, to the effect that:
(i) the Company is duly qualified to transact
business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole;
(ii) each of the Consolidation Documents to which the
Company or any of its subsidiaries is a party pursuant to the
Consolidation Transactions has been duly and validly
authorized, executed and delivered by such parties, and is a
valid and enforceable agreement of such parties, enforceable
in accordance with its terms; provided however that the
enforceability of the foregoing documents may be limited by
bankruptcy, insolvency, reorganization or other similar laws
affecting creditors' rights generally and by general
principles of equity;
<PAGE> 16
15
(iii) neither the execution, delivery and performance
of each of the Consolidation Documents by the Company nor the
consummation of the transactions contemplated thereby (A) will
contravene any provision of the Maryland REIT statute, (B)
will result in any violation of the provisions of the
declaration of trust or by-laws of the Company or (C) will, to
the best of such counsel's knowledge, result in any violation
of any statute or any order, rule or regulation issued under
or pursuant to the Maryland REIT statute and applicable to the
Company or any of its subsidiaries or any of the properties,
assets or businesses to be owned by them after the
Consolidation Transactions;
(iv) neither the Company nor any Subsidiary is
required to own or possess any trademarks, service marks,
trade names or copyrights in order to conduct the business now
operated by it, other than those which it has a valid right to
use or other than those the failure to possess or own would
not have a material adverse effect on the Company and its
subsidiaries taken as a whole;
(v) after due inquiry, such counsel does not know of
any legal or governmental proceedings pending or threatened to
which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its
subsidiaries is subject that are required to be described in
the Registration Statement or the Prospectus and are not so
described or of any statutes, regulations, contracts or other
documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described
or filed as required; and
(vi) such counsel (A) is of the opinion that the
Registration Statement and Prospectus (except for financial
statements and schedules and other financial and statistical
data included therein as to which such counsel need not
express any opinion) comply as to form in all material
respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder, (B) has no reason to
believe that (except for financial statements and schedules
and other financial and statistical data as to which such
counsel need not express any belief) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading and (C) has no reason to
believe that (except for financial statements and schedules
and other financial and statistical data as to which such
counsel need not express any belief) the Prospectus when
issued contained or as of the date such opinion is issued
contains any untrue statement of a material fact or omitted or
omits to state a
<PAGE> 17
16
material fact necessary in order to make the statements
therein, in the light of the circumstances under which they
were made, not misleading.
(d) The Underwriters shall have received on the Closing Date
an opinion of Benesch, Friedlander, Coplan & Aronoff, outside counsel
for the Company, dated the Closing Date to the effect that:
(i) the Registration Statement has become effective
under the Securities Act based upon oral communications with
the Commission on ______, 1998; no stop order suspending the
effectiveness of the Registration Statement is in effect, and,
to such counsel's knowledge, no proceedings for such purpose
are pending before or threatened by the Commission;
(ii) each Subsidiary has been duly incorporated or
organized, is validly existing as a partnership, corporation
or limited liability company in good standing under the laws
of its respective jurisdiction of organization, has the
partnership, corporate or other power and authority to own its
property and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under
the Consolidation Documents to which it is a party. Each
Subsidiary is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a
whole;
(iii) all of the issued shares of capital stock or
other ownership interests of each Subsidiary have been duly
authorized and validly issued, are fully paid and
non-assessable, except for liabilities in connection with
general partnership interests pursuant to applicable law and,
except as set forth in the Prospectus, are, to such counsel's
knowledge, owned directly or indirectly by the Company, free
and clear of all liens, encumbrances, equities and claims,
except for encumbrances which may be created pursuant to the
Company's existing $40.0 million revolving credit facility
with The Provident Bank;
(iv) neither the execution, delivery and performance
of the Merger Agreement, each of the Consolidation Documents
and this Agreement by the Company, nor the consummation by the
Company of the transactions contemplated hereby and thereby
nor the sale of the Shares by the Company (A) will conflict
with or result in a breach or violation of, or constitute a
default under, any material indenture, mortgage (in the case
of mortgages to be prepaid with the proceeds of the offering
and sale of the Shares as described under "Use
<PAGE> 18
17
of Proceeds" in the Prospectus, assuming such prepayment),
deed of trust, loan agreement, limited liability company
agreement or any other material agreement or instrument known
to such counsel to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the
Subsidiaries is bound or to which any of the properties or
assets of the Company or any of the Subsidiaries is subject;
(B) will result in any violation of the provisions of the
declaration of trust, charter, by-laws, certificate of limited
partnership, partnership agreement or other organizational
documents of any Subsidiary and (C) will, to such counsel's
knowledge, result in the violation of any statute or any
order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company or any of the
Subsidiaries or any of the properties, assets or businesses to
be owned by them after the Consolidation Transactions. No
consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the
performance by the Company of its obligations under the Merger
Agreement, this Agreement and the Consolidation Documents,
except such as have been obtained or as may be required by the
securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares by the
Underwriters;
(v) the statements (A) in the Prospectus under the
captions "Operating Partnership Agreement" and "ERISA
Considerations" and (B) in the Registration Statement in Item
15, in each case insofar as such statements constitute
summaries of the legal matters, documents or proceedings
referred to therein, fairly present the information called for
with respect to such legal matters, documents and proceedings
and fairly summarize in all material respects the matters
referred to therein;
(vi) after due inquiry, such counsel does not know of
any legal or governmental proceedings pending or threatened to
which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its
subsidiaries is subject that are required to be described in
the Registration Statement or the Prospectus and are not so
described or of any statutes or regulations that are required
to be described in the Registration Statement or the
Prospectus that are not so described;
(vii) the Company is not and, after giving effect to
the offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be
an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended;
<PAGE> 19
18
(viii) each of the written partnership agreements to
which any of the Company and the Subsidiaries is a party, and
which relates to the Properties, has been duly authorized,
executed and delivered by the Company or such Subsidiary and
constitutes the valid agreement thereof, enforceable in
accordance with its terms against the Company or such
Subsidiary, provided, however, that the enforceability of each
of the foregoing documents may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting
creditors's rights generally and by general principles of
equity; and the performance of any of such agreements does not
constitute a breach of, or default under, the declaration of
trust of the Company or the certificate of incorporation,
partnership agreement or similar agreement of any of the
Subsidiaries or the by-laws of the Company or any of the
Subsidiaries or any material contract, lease or other
instrument to which the Company or any of the Subsidiaries is
a party or by which it or any of its properties may be bound
or any law, administrative regulation or, to such counsel's
knowledge, administrative or court decree, except for such
breaches and defaults that do not have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
Such counsel is not aware of any verbal partnership agreement
relating to any of the Properties;
(ix) the Certificate of Merger was properly
authorized, executed and filed with the Secretary of State of
Ohio as provided by Section 1701.81 of the OGCL;
(x) the Common Shares issued in connection with the
Merger were offered and sold in compliance with all applicable
laws, including, without limitation, federal and state
securities laws;
(xi) such counsel (A) is of the opinion that the
Registration Statement and Prospectus (except for financial
statements and schedules and other financial and statistical
data included therein as to which such counsel need not
express any opinion) comply as to form in all material
respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder, (B) has no reason to
believe that (except for financial statements and schedules
and other financial and statistical data as to which such
counsel need not express any belief) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading and (C) has no reason to
believe that (except for financial statements and schedules
and other financial and statistical data as to which such
counsel need not express any belief) the
<PAGE> 20
19
Prospectus when issued contained or as of the date such
opinion is issued contains any untrue statement of a material
fact or omitted or omits to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and
(xii) the opinions expressed in subparagraphs (iv)
and (vii) above as to compliance with any law, statute, rule
or regulation applicable to the Company or any Subsidiary and
the obtaining or performing of authorizations, consents,
approvals or filings required thereby are based upon a review
of, and are limited to, those laws, statutes, rules or
regulations that are applicable to the transactions
contemplated herein, in the Merger Agreement and in the
Prospectus.
(e) The Underwriters shall have received on the Closing Date
an opinion of Shaw Pittman Potts & Trowbridge, special Maryland counsel
for the Company, dated the Closing Date, to the effect that:
(i) the Company has been duly organized, is validly
existing as a real estate investment trust in good standing
under the laws of the State of Maryland, has the power and
authority to own its property and to conduct its business as
described in the Prospectus and to enter into and perform its
obligations under this Agreement and the Merger Agreement;
(ii) this Agreement and the Merger Agreement have
been duly authorized, executed and delivered by the Company;
(iii) the description of authorized shares of the
Company in the Prospectus conforms as to legal matters to the
declaration of trust and bylaws of the Company;
(iv) the Common Shares outstanding prior to the
issuance of the Shares have been duly authorized and are
validly issued, fully paid and non-assessable and are not
subject to preemptive or other similar rights arising by
operation of Maryland law or under the declaration of trust or
by-laws of the Company or any agreement or other instrument
known to such counsel. The authorized, issued and outstanding
Common Shares are as set forth or incorporated by reference in
the Prospectus;
(v) the Shares have been duly authorized and, when
issued and delivered in accordance with the terms of this
Agreement, will be validly issued,
<PAGE> 21
20
fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights;
(vi) neither the execution, delivery and performance
of the Merger Agreement and this Agreement by the Company nor
the consummation of the transactions contemplated hereby and
thereby nor the sale of the Shares (A) will contravene any
provision of the Maryland REIT Statute, (B) will result in any
violation of the provisions of the declaration of trust or
by-laws of the Company or (C) will, to the best of such
counsel's knowledge, result in any violation of any order,
rule or regulation issued under or pursuant to the Maryland
REIT Statute and applicable to the Company;
(vii) no consent, approval, authorization, order of or
qualification with any court or governmental agency or
authority or other entity is required to be obtained by the
Company or any of its subsidiaries under the Maryland REIT
Statute in connection with the offering, issuance or sale of
the Shares under this Agreement except for such as have been
obtained;
(viii) upon the Merger, the Predecessor Company was
merged into the Company, and, thereupon, the Company possesses
any and all purposes and powers of the Company as it existed
prior to the Merger and all assets the Predecessor Company
were transferred to, vested in, and devolved upon the Company,
without further act or deed, subject to all of the debts and
obligations of the Predecessor Company. Each share of the
Predecessor Company's common stock was converted into two
Common Shares, without the necessity of any action on the part
of the holder thereof;
(ix) the form of certificate used to evidence the
Shares is in due and proper form and complies with all
applicable statutory requirements under the laws of the State
of Maryland;
(x) the statements (A) in the Prospectus under the
captions "Risk Factors -- Risks Related to the Declaration of
Trust and Bylaws of the Company and Maryland Law" and "-- Risk
Related to REIT Conversion and REIT Status", "Policies and
Objectives with Respect to Certain Activities" and
"Description of Common Shares", and (B) in the Registration
Statement in Item 15, in each case insofar as such statements
constitute matters of Maryland law, summaries of the legal
matters, documents or proceedings referred to therein, fairly
present the information called for with respect to such legal
matters,
<PAGE> 22
21
documents and proceedings and fairly summarize the matters
referred to therein; and
(xi) The Articles of Merger were properly authorized,
executed and filed with the State Department of Assessments
and Taxation of Maryland as provided in Section 8-501.1 of the
Maryland REIT Statute.
(f) The Underwriters shall have received on the Closing Date
an opinion of Willkie Farr & Gallagher, special tax counsel for the
Company, dated the Closing Date, to the effect that:
(i) upon completion of the Consolidation Transactions
and the sale of the Shares, the Company will be organized in
conformity with the requirements for qualification as a real
estate investment trust under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, and its assets,
income and proposed method of operation will enable it to meet
the requirements for taxation as a real estate investment
trust under the Code for its taxable periods beginning with
its 1998 taxable year and for subsequent taxable periods; and
(ii) the statements in the Prospectus under the
captions "Description of Common Shares", "Risk Factors --
Risks Related to REIT Conversion and REIT Status" and "-- Tax
Risks of REIT Status", "Distribution Policy" and "Federal
Income Tax Considerations", in each case insofar as such
statements constitute summaries of the federal tax matters
referred to therein, fairly present the information called for
with respect to such federal tax matters and accurately
summarize the matters referred to therein.
(g) The Underwriters shall have received on the Closing Date
an opinion of Shearman & Sterling, counsel for the Underwriters, dated
the Closing Date, with respect to the Registration Statement and the
Prospectus and such other related matters as the Underwriters may
reasonably request.
With respect to Sections 5(c)(vi) and 5(d)(xi) above, Bradley
A. Van Auken and Benesch, Friedlander, Coplan & Aronoff, respectively,
may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check
or verification, except as specified.
The opinions of Benesch, Friedlander, Coplan & Aronoff, Shaw
Pittman Potts & Trowbridge and Willkie, Farr & Gallagher described in
Sections 5(d), 5(e) and 5(f)
<PAGE> 23
22
above shall be rendered to the Underwriters at the request of the
Company and shall so state therein.
(h) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from Ernst & Young LLP, independent public
accountants, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a
"cut-off date" not earlier than the date hereof.
(i) The "lock-up" agreements, each substantially in the form
of Exhibit D hereto, between you and the officers and trustees of the
Company relating to sales and certain other dispositions of Common
Shares or certain other securities, delivered to you on or before the
date hereof, shall be in full force and effect on the Closing Date.
(j) You shall have received such other documents and
certificates as are reasonably requested by you or your counsel.
(k) The several obligations of the U.S. Underwriters to
purchase Additional Shares hereunder are subject to the delivery to the
U.S. Representatives on the Option Closing Date of such documents as
they may reasonably request with respect to the good standing of the
Company, the due authorization and issuance of the Additional Shares
and other matters related to the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, twelve signed copies of
the Registration Statement (including documents incorporated by
reference therein and exhibits thereto) and for delivery to each other
Underwriter a conformed copy of the Registration Statement (without
documents incorporated by reference therein and exhibits thereto) and
to furnish to you in New York City, without charge, prior to 10:00 a.m.
New York City time on the business day next succeeding the date of this
Agreement and during the period mentioned in Section 6(c) below, as
many copies of the Prospectus and any supplements and amendments
thereto or to the Registration Statement as you may reasonably request.
<PAGE> 24
23
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file
with the Commission within the applicable period specified in Rule
424(b) under the Securities Act any prospectus required to be filed
pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall
occur or condition exist as a result of which it is necessary to amend
or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the
Commission and furnish, at its own expense, to the Underwriters and to
the dealers (whose names and addresses you will furnish to the Company)
to which Shares may have been sold by you on behalf of the Underwriters
and to any other dealers upon request, either amendments or supplements
to the Prospectus so that the statements in the Prospectus as so
amended or supplemented will not, in the light of the circumstances
when the Prospectus is delivered to a purchaser, be misleading or so
that the Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earning statement covering
the twelve month period ending June 30, 1999 that satisfies the
provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
(f) Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or
cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the fees,
disbursements and expenses of the Company's counsel and the Company's
accountants in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in
connection with the preparation and filing of the Registration
Statement, any preliminary prospectus, the Prospectus and amendments
and supplements to any of the foregoing, including all printing costs
associated therewith, and the mailing and delivering of copies thereof
to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and
<PAGE> 25
24
expenses related to the transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon,
(iii) the cost of printing or producing any Blue Sky or Legal
Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with
the qualification of the Shares for offer and sale under state
securities laws as provided in Section 6(d) hereof, including filing
fees and the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection
with the Blue Sky or Legal Investment memorandum, (iv) all filing fees
and the reasonable fees and disbursements of counsel to the
Underwriters incurred in connection with the review and qualification
of the offering of the Shares by the National Association of Securities
Dealers, Inc., (v) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A
relating to the Common Shares and all costs and expenses incident to
listing the Shares on the New York Stock Exchange, (vi) the cost of
printing certificates representing the Shares, (vii) the costs and
charges of any transfer agent, registrar or depositary, (viii) the
costs and expenses of the Company relating to investor presentations on
any "road show" undertaken in connection with the marketing of the
offering of the Shares, including, without limitation, expenses
associated with the production of road show slides and graphics, fees
and expenses of any consultants engaged in connection with the road
show presentations with the prior approval of the Company, travel and
lodging expenses of the representatives and officers of the Company and
any such consultants, and the cost of any aircraft chartered in
connection with the road show, (ix) all expenses in connection with any
offer and sale of the Shares outside of the United States, including
filing fees and reasonable fees and disbursements of counsel for the
Underwriters in connection with offers and sales outside of the United
States, and (x) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which
provision is not otherwise made in this Section. It is understood,
however, that except as provided in this Section, Section 7 entitled
"Indemnity and Contribution", and the last paragraph of Section 9
below, the Underwriters will pay all of their costs and expenses,
including fees and disbursements of their counsel, stock transfer taxes
payable on resale of any of the Shares by them and any advertising
expenses connected with any offers they may make.
(g) To use the net proceeds received by the Company from the
sale of the Shares hereunder in the manner set forth in the Prospectus.
(h) To ensure, as promptly as possible, that the company will
be duly qualified to transact business and in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification.
7. Indemnity and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating
<PAGE> 26
25
any such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
amendment thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its trustees, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
such Underwriter, but only with reference to information relating to such
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to Section 7(a) or 7(b), such person (the
"INDEMNIFIED PARTY") shall promptly notify the person against whom such
indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated, in the case of
parties indemnified pursuant to Section 7(a), and by the Company, in the case of
parties indemnified pursuant to Section 7(b). The indemnifying party shall not
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such
<PAGE> 27
26
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel as contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
(d) To the extent the indemnification provided for in Section
7(a) or 7(b) is unavailable to an indemnified party or insufficient in respect
of any losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause 7(d)(i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
7(d)(i) above but also the relative fault of the Company on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover of the Prospectus, bear to the aggregate Public
Offering Price of the Shares. The relative fault of the Company on the one hand
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Underwriters' respective obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective number of Shares they have purchased hereunder, and not joint.
<PAGE> 28
27
(e) The Company and the Underwriters agree that it would not
be just or equitable if contribution pursuant to this Section 7 were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in Section 7(d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in
this Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by or on behalf of the Company, its officers or trustees or
any person controlling the Company and (iii) acceptance of and payment for any
of the Shares.
8. Termination. This Agreement shall be subject to termination
by notice given by you to the Company, if (a) after the execution and delivery
of this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 8(a)(i) through 8(a)(iv), such event, singly or
together
<PAGE> 29
28
with any other such event, makes it, in your judgment, impracticable to market
the Shares on the terms and in the manner contemplated in the Prospectus.
9. Effectiveness; Defaulting Underwriters. This Agreement
shall become effective upon the execution and delivery hereof by the parties
hereto.
If, on the Closing Date or the Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares that it has or they have agreed to purchase hereunder on such
date, and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I or Schedule
II bears to the aggregate number of Firm Shares set forth opposite the names of
all such non-defaulting Underwriters, or in such other proportions as you may
specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to this Agreement be increased pursuant to this Section 9 by
an amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If, on the Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you and the Company for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. If, on the
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
Additional Shares or (ii) purchase not less than the number of Additional Shares
that such non-defaulting Underwriters would have been obligated to purchase in
the absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or
any of them, because of any failure or refusal on the part of the Company to
comply with the terms or to fulfill any of the conditions of this Agreement, or
if for any reason the Company shall be unable to perform its obligations under
this Agreement, the Company will reimburse the
<PAGE> 30
29
Underwriters or such Underwriters as have so terminated this Agreement with
respect to themselves, severally, for all out-of-pocket expenses (including the
fees and disbursements of their counsel) reasonably incurred by such
Underwriters in connection with this Agreement or the offering contemplated
hereunder.
10. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
<PAGE> 31
30
12. Headings. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
Very truly yours,
LEXFORD RESIDENTIAL TRUST
By:_______________________
Name:
Title:
<PAGE> 32
31
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
PaineWebber Incorporated
Smith Barney Inc.
J.C. Bradford & Co.
Wheat First Securities, Inc.
Acting severally on behalf of themselves
and the several U.S.Underwriters
named in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By: ___________________________
Name:
Title:
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
PaineWebber International (U.K.) Ltd.
Smith Barney Inc.
J.C. Bradford & Co.
Wheat First Securities, Inc.
Acting severally on behalf of themselves
and the several International Underwriters
named in Schedule II hereto.
By: Morgan Stanley & Co. International Limited
By: ______________________________
Name:
Title:
<PAGE> 33
SCHEDULE I
U.S. UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
<S> <C>
Morgan Stanley & Co. Incorporated
PaineWebber Incorporated
Smith Barney Inc.
J.C. Bradford & Co.
Wheat First Securities, Inc.
[NAMES OF OTHER U.S. UNDERWRITERS]
--------------
Total U.S. Firm Shares.................................
==============
</TABLE>
<PAGE> 34
SCHEDULE II
INTERNATIONAL UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
<S> <C>
Morgan Stanley & Co. International Limited
PaineWebber International (U.K.) Ltd.
Smith Barney Inc.
J.C. Bradford & Co.
Wheat First Securities, Inc.
[NAMES OF OTHER INTERNATIONAL UNDERWRITERS]
-------------
Total International Firm Shares..........................
=============
</TABLE>
<PAGE> 35
SCHEDULE III
SUBSIDIARIES
Lexford Properties, Inc.
Lexford Properties, L.P.
Lexford Partners, L.L.C.
Cardinal Industries Development Corporation
Cardinal Ancillary Insurance Agency, Inc. (Ohio)
Cardinal Ancillary Insurance Agency, Inc. (Delaware)
<PAGE> 36
EXHIBIT A
FORM OF LOCK-UP LETTER
____________, 1998
Morgan Stanley & Co. Incorporated
PaineWebber Incorporated
Smith Barney Inc.
J.C. Bradford & Co.
Wheat First Securities, Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Morgan Stanley & Co. International Limited
PaineWebber International (U.K.) Ltd.
Smith Barney Inc.
J.C. Bradford & Co.
Wheat First Securities, Inc.
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co.
Incorporated ("MORGAN STANLEY") and Morgan Stanley & Co. International Limited
("MSIL") propose to enter into an Underwriting Agreement (the "UNDERWRITING
AGREEMENT") with Lexford Residential Trust, a Maryland real estate investment
trust (the "COMPANY") providing for the public offering (the "PUBLIC OFFERING")
by the several Underwriters, including Morgan Stanley and MSIL (the
"UNDERWRITERS") of 11,000,000 shares (the "SHARES") of the common shares of
beneficial interest of the Company (the "COMMON SHARES").
To induce the Underwriters that may participate in the Public
Offering to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees
<PAGE> 37
that, without the prior written consent of Morgan Stanley on behalf of the
Underwriters, it will not, [and it will not permit FSC Realty, LLC to] during
the period commencing on the date hereof and ending 180 days after the date of
the final prospectus relating to the Public Offering (the "PROSPECTUS"), (1)
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 or exercisable or exchangeable
for Common Shares, or (2) enter into any swap or 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
(1) or (2) above is to be settled by delivery of Common Shares or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (a)
the sale of any Shares to the Underwriters pursuant to the Underwriting
Agreement, (b) transactions relating to Common Shares or other securities
acquired in open market transactions after the completion of the Public
Offering or (c) the pledge of Common Shares in order to finance the purchase of
Common Shares [or, in the case of FSC Realty, LLC, to obtain commercial credit
loans.] In addition, the undersigned agrees that, without the prior written
consent of Morgan Stanley on behalf of the Underwriters, it will not, [and will
not permit FSC Realty, LLC to] during the period commencing on the date hereof
and ending 180 days after the date of the Prospectus, make any demand for or
exercise any right with respect to, the registration of any Common Shares or any
security convertible into or exercisable or exchangeable for Common Shares.
Whether or not the Public Offering actually occurs depends on
a number of factors, including market conditions. Any Public Offering will only
be made pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
-------------------------
(Name)
-------------------------
(Address)
<PAGE> 1
Exhibit 5.1
Shaw Pittman Potts & Trowbridge
A Partnership Including Professional Corporations
2300 N Street, N.W.
Washington, DC 20037-1128
May 15, 1998
Lexford Residential Trust
The Huntington Center
41 South High Street, Suite 2410
Columbus, Ohio 43215
Ladies and Gentlemen:
We have acted as special Maryland counsel to Lexford Residential Trust, a
real estate investment trust organized under the laws of the State of Maryland
(the "Trust"), in connection with the registration of 12,650,000 common shares
(the "Shares") of beneficial interest, par value $.01 per share, of the Trust,
pursuant to a registration statement on Form S-3 under the Securities Act of
1933, as amended (File No. 333-49269) (the "Registration Statement").
In connection with this opinion, we have examined the following:
1. the Declaration of Trust of the Trust, dated January 16, 1998, as
certified by the Maryland State Department of Assessments and
Taxation, a copy of the Articles of Amendment to the Declaration of
Trust of the Trust, certified by the Department of Assessments on
February 2, 1998, and a copy of the Articles of Amendment to the
Declaration of Trust, certified by the Department of Assessments on
April 1, 1998;
<PAGE> 2
Lexford Residential Trust
May 15, 1998
Page 2
2. the Bylaws of the Trust, dated January 16, 1998, as certified to us
by the Secretary of the Trust;
3. the form of Prospectus that constitutes a part of the Registration
Statement;
4. the form of underwriting agreement filed as exhibit 1.1 to the
Registration Statement;
5. resolutions of the Board of Trustees of the Trust, dated February 19,
1998, March 26, 1998 and May 15, 1998, as certified to us by the
Secretary of the Trust; and
6. such certificates of the Trust as we have deemed necessary or
appropriate as a basis for this opinion.
Based upon and subject to the foregoing, and further subject to the
assumptions and qualifications set forth below, it is our opinion that the
Shares have been duly authorized for issuance by the Trust and, upon issuance
and delivery of and payment for such Shares in accordance with the Registration
Statement and the terms of the underwriting agreement referred to therein, such
Shares will be validly issued, fully paid and non-assessable.
In our examination, we have assumed and relied on, without independent
investigation, the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies and the authenticity of the originals of such copies, and
that certificates of the Trust are true and complete.
The opinion expressed in this letter concerns only the effect of the laws
(excluding the principles of conflicts of laws) of the State of Maryland, and
we express no opinion with respect to the laws of any other jurisdiction. We
assume no obligation to update this letter if any applicable laws or facts, or
our knowledge of applicable facts, changes in any manner. Our opinion is
limited to the matters set forth in this letter, and no other opinions should
be inferred beyond the matters expressly stated.
We are furnishing this opinion to you solely in connection with the
Registration Statement. This opinion is solely for your benefit and is not to
be used, circulated, quoted or otherwise referred to for any other purpose or
relied upon by any other person without our express written permission.
<PAGE> 3
Lexford Residential Trust
May 15, 1998
Page 3
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to our firm under the caption
"Legal Matters" in the Prospectus that constitutes a part of the Registration
Statement.
Sincerely,
/s/ Shaw Pittman Potts & Trowbridge
SHAW PITTMAN POTTS & TROWBRIDGE
<PAGE> 1
Exhibit 8.1
[WILLKIE FARR & GALLAGHER LETTERHEAD]
May 15, 1998
Lexford Residential Trust
41 South High Street
24th Floor
Columbus, OH 43215
Ladies and Gentlemen:
You have requested our opinion as special tax counsel to Lexford
Residential Trust and its predecessor by merger, Lexford, Inc. (collectively,
the "Company"), concerning certain of the federal income tax consequences in
connection with the filing on Form S-3, No. 333-49269, filed with the Securities
and Exchange Commission on April 2, 1998 and as amended on May 1, 1998 and May
15, 1998 (the "Registration Statement"). Except as otherwise provided,
capitalized terms referred to herein have the meanings ascribed to them in the
Registration Statement. All section references are to the Internal Revenue Code
of 1986, as amended (the "Code").
In rendering the opinions expressed herein, we have examined and, with
your consent, relied upon (without any independent investigation thereof)
statements and representations in the following documents (including all
schedules, exhibits and amendments): (i) the Registration Statement; (ii) the
organizational documents of the Company, the Property Partnerships and the
affiliated entities to the extent we deemed them relevant; and (iii) such other
instruments, documents and records as we have deemed necessary in order to
enable us to render the opinions expressed herein.
In our examination of the foregoing documents, we have assumed, with
your consent: (i) that original documents (including signatures) are authentic,
documents submitted to us as copies conform to the original documents, and there
has been (or will be by the Closing Date) due execution and delivery of all
documents where due execution and delivery are prerequisites to the
effectiveness thereof; (ii) that all representations and statements set forth in
such documents are true and correct; (iii) that any representation or statement
made as a belief or made "to the knowledge of" or similarly qualified is correct
and accurate without such qualification; (iv) that
<PAGE> 2
Lexford Residential Trust
May 15, 1998
Page 2
all obligations imposed by any such documents on the parties thereto have been
or will be performed or satisfied in accordance with their terms; and (v) that
the Company, the Property Partnerships and the affiliated entities have at all
times been organized and operated in accordance with the terms of their
respective organizational documents and in accordance with all applicable laws.
For purposes of rendering the opinions expressed herein, we have also
assumed, and relied upon, with your consent, the accuracy of the representations
contained in the letter from the Company addressed to us dated May 15, 1998.
These representations relate to factual matters relevant to the classification
and operation of the Company as a real estate investment trust and the
organization of and operation of the Property Partnerships and the affiliated
entities.
Based on such facts, assumptions and representations and subject to the
qualifications stated in the next paragraph below, as of the date hereof, we are
of the opinion that, for federal income tax purposes under current law:
(1) commencing with the Company's taxable year beginning January 1,
1998 and assuming that the actions described in the discussion of "Federal
Income Tax Considerations" in the Registration Statement and generally
throughout the Registration Statement are completed as described therein and in
a timely fashion, the Company will be organized in conformity with the
requirements for qualification as a real estate investment trust and its
proposed method of operation will enable it to meet the requirements for
qualification and taxation as a real estate investment trust under the Code;
(2) the Operating Partnership and each of the Property Partnerships
will either be disregarded for federal income tax purposes or classified as a
partnership, and will not be classified as (a) an association taxable as a
corporation, or (b) as a "publicly traded partnership" subject to Section
7704(a) of the Code; and
(3) the summary of federal income tax matters and consequences
described under "Federal Income Tax Considerations" in the Registration
Statement relating to the Company and its taxation as a real estate investment
trust accurately summarizes all tax consequences likely to be material to a
Shareholder.
These opinions are given as of the date hereof and are based on various
statutory provisions, regulations promulgated thereunder and interpretations
thereof by the Internal Revenue Service and the courts having jurisdiction over
such matters, all of which are subject to change either prospectively or
retroactively. Further, any variation or difference in the facts from those set
forth in the Registration Statement
<PAGE> 3
Lexford Residential Trust
May 15, 1998
Page 3
or representation referred to above may affect the conclusions stated herein.
Moreover, the Company's qualification and taxation as a real estate investment
trust depend upon the Company's ability to meet -- through actual annual
operating and other results -- certain requirements under the Code regarding the
receipt of income, asset ownership, distributions and diversity of stock
ownership. As Willkie Farr & Gallagher will not review annually whether the
Company has fulfilled those requirements, no assurance can be given that the
actual results of the Company's operational and other activities for any one or
more taxable years will satisfy the tests necessary to qualify as or be taxed as
a real estate investment trust under the Code.
No opinion is expressed as to any matter not discussed herein.
This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the filing of this opinion as an
Exhibit to the Registration Statement, to the use of our name under the caption
"Federal Income Tax Considerations," and to the other references to this firm in
the Registration Statement and the prospectus included therein.
Very truly yours,
/s/ WILLKIE FARR & GALLAGHER
-----------------------------
WILLKIE FARR & GALLAGHER
Attachment: Lexford Residential Trust letter dated May 15, 1998 to Willkie
Farr & Gallagher
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated (a) February 16, 1998 (except for Note 14, as to which
the date is March 18, 1998) with respect to the consolidated financial
statements of Lexford Residential Trust (formerly Lexford, Inc. and Cardinal
Realty Services, Inc.) and Subsidiaries and (b) dated April 1, 1998 with respect
to the combined statements of revenue and certain expenses of the Consolidating
Properties in Amendment No. 2 to the Registration Statement (Form S-3 No.
333-49269) and related Prospectus of Lexford Residential Trust for the
registration of 11,000,000 of its common shares of beneficial interest.
/s/ ERNST & YOUNG LLP
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Ernst & Young LLP
Columbus, Ohio
May 19, 1998
