UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ------------
Commission File Number 1-12875
CORNERSTONE REALTY INCOME TRUST, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1589139
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
(Address of principal executive offices) (Zip Code)
(804) 643-1761
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At August 1, 2000, there were outstanding 35,737,982 shares of common
stock, no par value, of the registrant.
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
FORM 10-Q
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2000 3
and December 31, 1999
Consolidated Statements of Operations - 4
Three months ended June 30, 2000
and June 30, 1999
Six months ended June 30, 2000
and June 30, 1999
Consolidated Statement of Shareholders' Equity- 5
Six months ended June 30, 2000
Consolidated Statements of Cash Flows - 6
Six months ended June 30, 2000
and June 30, 1999
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about 14
Market Risk
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings (not applicable).
Item 2. Changes in Securities (not applicable).
Item 3. Defaults Upon Senior Securities (not applicable).
Item 4. Submission of Matters to a Vote of
Security Holders (not applicable). 15
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K 21
2
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Investment in rental property:
Land $ 124,771,398 $ 136,326,140
Buildings and property improvements 700,583,793 760,712,650
Furniture and fixtures 18,995,215 22,089,948
------------- -------------
844,350,406 919,128,738
Less accumulated depreciation (73,224,217) (77,538,085)
------------- -------------
771,126,189 841,590,653
Cash and cash equivalents 3,928,968 16,268,336
Prepaid expenses 1,147,590 2,803,488
Other assets 9,232,749 8,602,399
------------- -------------
Total Assets $ 785,435,496 $ 869,264,876
============= =============
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Notes payable-unsecured $ 115,000,000 $ 157,500,000
Notes payable-secured 104,756,659 105,045,682
Distributions payable 6,720,337 6,779,012
Accounts payable 1,421,262 11,670,338
Accrued expenses 5,465,287 11,387,531
Rents received in advance 220,129 613,214
Tenant security deposits 1,615,783 1,903,857
------------- -------------
Total Liabilities 235,199,457 294,899,634
Shareholders' equity
Preferred stock, no par value, authorized 25,000,000 shares;
$25 liquidation preference, Series A Cumulative Convertible Redeemable;
issued and outstanding 12,639,551 shares and 12,650,047 shares, respectively $ 264,784,591 263,656,281
Common stock, no par value, authorized 100,000,000
shares; issued and outstanding 35,855,390 shares
and 38,712,037 shares, respectively 352,573,676 383,969,899
Deferred compensation (60,927) (72,976)
Distributions greater than net income (67,061,301) (73,187,962)
------------- -------------
Total Shareholders' Equity 550,236,039 574,365,242
------------- -------------
Total Liabilities and Shareholders' Equity $ 785,435,496 $ 869,264,876
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Rental income $ 34,807,328 $ 23,955,059 $ 71,905,243 $ 47,422,150
Other income -- 2,680,480 -- 3,741,767
EXPENSES:
Property and maintenance 8,338,507 6,756,501 17,378,781 12,855,388
Taxes and insurance 3,788,958 1,813,692 7,816,954 3,876,058
Property management 761,229 545,861 1,453,711 1,095,229
General and administrative 520,897 1,680,931 1,007,219 2,129,527
Amortization expense -- -- -- 55,657
Other depreciation 5,740 5,746 11,482 11,488
Depreciation of rental property 8,254,160 5,907,842 17,319,770 11,710,213
Other -- 302,945 20,099 600,651
------------ ------------ ------------ ------------
Total expenses 21,669,491 17,013,518 45,008,016 32,334,211
------------ ------------ ------------ ------------
Income before interest and dividend income (expense) 13,137,837 9,622,021 26,897,227 18,829,706
Interest and dividend income 286,096 122,425 395,985 213,299
Interest expsnse (4,075,743) (3,517,687) (8,727,429) (6,933,135)
------------ ------------ ------------ ------------
Income before gains on sales of investments and
minority interest in operating partnership 9,348,190 6,226,759 18,565,783 12,109,870
Gains on sales of investments -- -- 23,406,233 --
------------ ------------ ------------ ------------
Income before minority interest in operating partnership 9,348,190 6,226,759 41,972,016 12,109,870
Minority Interest of unitholders in operating partnership -- 8,198 -- 58,899
------------ ------------ ------------ ------------
Net income $ 9,348,190 6,218,561 $ 41,972,016 $ 12,050,971
Distributions to preferred shareholders (7,418,770) -- (15,415,970) --
------------ ------------ ------------ ------------
Net income available to common shareholders $ 1,929,420 6,218,561 $ 26,556,046 $ 12,050,971
Net income per share-basic and diluted $ 0.05 $ 0.16 $ 0.72 $ 0.31
============ ============ ============ ============
Distributions per common share $ 0.28 $ 0.27 $ 0.55 $ 0.53
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Distributions
Preferred Stock Greater Total
Number Number of Deferred than Shareholders'
of Shares Amount Shares Amount Compensation Net Income Equity
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 38,712,037 $383,969,899 12,650,047 $263,656,281 ($72,976) ($73,187,962) $574,365,242
Net income -- -- -- -- -- 41,972,016 41,972,016
Cash distributions declared
to shareholders ($.55 per share) -- -- -- -- -- (20,429,385) (20,429,385)
Distributions for Series A
Convertible Preferred Stock -- -- -- -- -- (14,025,260) (14,025,260)
Imputed distributions on Series A
Convertible Preferred Stock -- -- -- 1,390,710 -- (1,390,710) --
Purchase of common stock (3,221,500) (34,879,071) -- -- -- -- (34,879,071)
Preferred stock converted to
common stock 16,602 262,400 (10,496) (262,400) -- -- --
Amortization of deferred
compensation -- -- -- -- 12,049 -- 12,049
Shares issued through dividend
reinvestment plan 348,251 3,220,448 -- -- -- -- 3,220,448
-----------------------------------------------------------------------------------------------
Balance at June 30, 2000 35,855,390 $352,573,676 12,639,551 $264,784,591 ($60,927) ($67,061,301) $550,236,039
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 41,972,016 $ 12,050,971
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sale of rental property (23,406,233) --
Depreciation and amortization 17,331,252 11,777,358
Minority interest of unitholders in operating partnership -- 58,899
Amortization of deferred compensation 12,049 23,047
Amortization of Apple Realty Group contract purchase -- 241,438
Amortization of deferred financing costs 224,654 113,664
Changes in operating assets and liabilities:
Operating assets 789,412 (554,002)
Operating liabilities (16,852,479) (731,347)
------------- -------------
Net cash provided by operating activities 20,070,671 22,980,028
Cash flow from investing activities:
Acquistions of rental property (35,603,411) --
Proceeds from the sale of land -- 764,668
Net proceeds from the sale of rental property 128,182,171 --
Capital improvements (16,027,833) (7,962,778)
------------- -------------
Net cash used in investing activities 76,550,927 (7,198,110)
Cash flow from financing activities:
Proceeds from short-term borrowings 93,862,000 23,887,000
Repayments of short-term borrowings (136,362,000) (20,280,000)
Repayment of mortgage notes (289,023)
Net proceeds from issuance of common shares 3,220,448 4,949,795
Purchase of common stock (34,879,071) --
Cash distributions to operating partnership unitholders (50,190) (98,520)
Cash distributions paid to preferred shareholders (14,033,745) --
Cash distributions paid to commom shareholders (20,429,385) (20,800,061)
------------- -------------
Net cash used in financing activities (108,960,966) (12,341,786)
Increase (decrease) in cash and cash equivalents (12,339,368) 3,440,132
Cash and cash equivalents, beginning of year 16,268,336 2,590,364
------------- -------------
Cash and cash equivalents, end of period $ 3,928,968 $ 6,030,496
============= =============
Supplemental information:
Interest paid $ 8,085,415 $ 5,500,152
Non-cash transactions associated with:
Accretion of preferred dividends $ 1,390,710 --
Preferred shares converted to common shares 262,400 --
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
required by generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ended December
31, 2000. These financial statements should be read in conjunction with
the Company's December 31, 1999 Annual Report on Form 10-K.
The Company did not have any items of comprehensive income requiring
separate reporting and disclosure for the periods presented.
(2) INVESTMENT IN RENTAL PROPERTY
Disposition of Investments
On March 10, 2000, the Company closed the sale of 16 properties containing
3,609 apartment units. The proceeds of the sale were used to pay down the
Company's existing line of credit and fund $35 million of tax free
exchanges.
Acquisition
On March 16, 2000, the Company purchased The Enclave at the Meadows
Apartments, a 168- unit apartment community, located in Asheville, North
Carolina for a purchase price of $8.8 million. On May 11, 2000 the Company
purchased Greystone Crossing Apartments, a 408-unit apartment community
located in Charlotte, North Carolina for $26.8 million. These purchases
completed the tax free exchange transaction using proceeds from the sale
described above.
(3) NOTES PAYABLE
Unsecured
The Company has a $185 million unsecured line of credit with the
consortium of six banks for which the maturity date is July 9, 2002. The
Company's unsecured line of credit bears interest at one month LIBOR plus
120 basis points. In connection with the sale of the 16 properties in
March 2000, the Company repaid $90 million of the Company's unsecured line
of credit. The Company had additional borrowings under its unsecured line
of credit of $55 million during 2000. At June 30, 2000, the Company had an
unused borrowing capacity of $70 million under the unsecured line of
credit. In addition, the Company is obligated to pay lenders a quarterly
commitment fee equal to 0.20% per annum of the unused portion of the line.
At June 30, 2000, total unsecured borrowings under this line of credit
were $115 million.
The Company's $7.5 million general corporate purpose line of credit bears
interest at LIBOR plus 120 basis points. The maturity date is October 31,
2000. At June 30, 2000, there were no outstanding borrowings under this
line of credit.
7
<PAGE>
(3) RELATED PARTIES
Mr. Glade M. Knight, Chairman and Chief Executive Officer of the Company,
also served as the Chairman and Chief Executive Officer of Apple
Residential Income Trust, Inc. ("Apple"). Prior to the merger the Company
provided advisory, property management, and asset acquisition services to
Apple. The services of the Company rendered to Apple terminated upon the
consummation of the merger.
The Company provided property management services and advisory services to
Apple. Property management fees were 5% of monthly gross revenues plus
certain expense reimbursements. Advisory fees were .1% to .25% of total
capital raised by Apple, depending on the financial performance of Apple.
The amount of fees received by the Company under the contracts described
above for the six months ended June 30, 1999 was $1,680,282.
Prior to the merger, the Company provided real estate acquisition and
disposal services for Apple. Under the terms of the contract, the Company
received a real estate commission equal to 2% of the purchase price of the
properties acquired. The Company amortized the purchase price of the
contract through the date of the merger. For the six months ended June 30,
1999, the Company received $561,484 in real estate commissions under this
contract and amortized $241,438 of the purchase price of this contract.
The Company received distributions on its investment in Apple through the
date of the merger. The Company recognized dividend income for the six
months ended June 30, 1999 of $170,030 on its investment in Apple.
8
<PAGE>
(5) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share in accordance with FAS 128:
<TABLE>
<CAPTION>
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
6/30/00 6/30/00 6/30/99 6/30/99
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income available to $ 1,929,420 $26,556,046 $6,218,561 $12,050,971
common shareholders
Numerator for basic
and diluted earnings per
share - income available
to common stockholders 1,929,420 26,556,046 6,218,561 12,050,971
afterassumed conversion
Denominator:
Denominator for basis
earningspershare
weighted-average shares 35,867,428 36,931,405 39,569,424 39,443,428
Effect of dilutive securities:
Stock options -- -- -- --
Series A Convertible
Preferred Stock* -- -- -- --
-------------------------------------------------------------------------------------------------------
Denominator for diluted
earnings per share-adjusted
weighted-averageshares and
assumed conversions 35,867,428 36,931,405 39,569,424 39,443,428
-------------------------------------------------------------------------------------------------------
Basic and diluted earnings
per common share $ .05 $ .72 $ .16 $ 0.31
-------------------------------------------------------------------------------------------------------
</TABLE>
*Series A Convertible Preferred Stock was not included in dilutive
earnings per common share calculation since its effect was
anti-dilutive.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1993, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. Such forward-looking
statements include, without limitation, statements concerning anticipated
improvements in financial operations from completed and planned property
renovations, and expected benefits from the Company's acquisition of Apple
Residential Income Trust ("Apple"). Such statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance, or achievement of the Company to be materially
different from the results of operations or plans expressed or implied by
such forward-looking statements. Such factors include, among other things,
unanticipated adverse business developments affecting the Company, the
possibility that the merger with Apple will not have the effects
anticipated by the Company, and adverse changes in the real estate markets
and general and local economies and business conditions. Although the
Company believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore there can be no assurance that such statements
included in this quarterly report will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded
as a representation by the Company or any other person that the results or
conditions described in such statements or the objectives and plans of the
Company will be achieved.
RESULTS OF OPERATIONS
INCOME AND OCCUPANCY
The Company's property operations for the six months ended June 30, 2000
include the results of operations, for the full two quarters from 71
properties acquired before 2000 and from the 2 properties acquired in 2000
from their respective acquisition dates. The operations of the 16
properties sold on March 10, 2000 are reflected through the sale date. The
increased rental income and operating expenses for the three and six months
ended June 30, 2000 over the same period in 1999 is primarily due to the
effect of the properties acquired through the Apple merger in July 1999
offset in part by dispositions in 2000.
Substantially all of the Company's income is from the rental operation of
apartment communities. Rental income for the six months ended June 30, 2000
increased to $71.9 million in 2000 from $47.4 million in 1999. For the
second quarter of 2000, the Company's rental income of $35 million
reflected an increase of $10.9 million, or 45%, compared to the same period
in 1999. Rental income is expected to continue to increase from the impact
of planned improvements, which are being made in an effort to improve the
properties' marketability, economic occupancies, and rental rates.
10
<PAGE>
Overall economic occupancy for the Company's properties averaged 93% and
91% for the six months ended June 30, 2000 and 1999, respectively. For the
second quarter of 2000 and 1999, economic occupancy averaged 93%. Overall
average rental rates for the portfolio increased 6% from $614 at June 30,
1999, to $650 at June 30, 2000. For the second quarter of 1999 and 2000
average rental rates increased 6% from $618 to $657, respectively. This
increase is due to a combination of increased rental rates from new leases,
property renovation, lower average rental rates on properties disposed of
in year 2000 as well as the acquisition of the properties of Apple which
had higher average rental rates than the Company's portfolio.
COMPARABLE PROPERTY OPERATIONS
The Company's "same-property" portfolio consists of 65 properties,
including 27 Apple properties, acquired prior to 1999, containing 16,207
apartment units owned by the Company or Apple since January 1, 1999. The 16
properties sold in March 2000 have been eliminated. On a comparative basis,
the 65 properties acquired prior to 1999 provided rental and operating
income of $61.7 million and $40 million, respectively during the six months
ended June 30, 2000 and $57.9 million and $37 million for the same period
in 1999. This represents an increase in rental and operating income from
the six months ended June 30, 1999 compared to the six months ended June
30, 2000 of 6.6% and 8%, respectively. During the second quarter of 2000
and 1999, these same community operations provided rental and operating
income of $31.6 million and $20.5 million and $29.7 million and $19
million, respectively. This represents an increase in rental and operating
income from the second quarter of 1999 compared to the second quarter of
2000 of 6.3% and 7.6%, respectively.
EXPENSES
Total expenses for the first six months increased 39% to $45 million in
2000 from $32 million in 1999. For the second quarter of 2000, total
expenses increased to $21.7 million from $17 million for the same period in
1999. The increase is due largely to full two quarters of expenses of the
properties acquired through the acquisition of Apple on July 23, 1999 and
offset slightly by year 2000 dispositions. The operating expense ratio (the
ratio of operating expenses, excluding depreciation, amortization, general
and administrative, and other expenses, to rental income) was 37% for the
three and six months ended June 30, 2000 and 38% for the same period in
1999.
Depreciation expense for the first six months has increased to $17 million
in 2000 from $11.7 million in 1999. For the second quarter of 2000 and 1999
depreciation expense was $8 million and $6 million, respectively. The
increase is directly attributable to the addition of the properties
acquired through the Apple merger.
General and administrative expenses totaled $1 million, or 1.4% of rental
income for the six months ended June 30, 2000 and $2.1 million, or 4% for
the same period in 1999. For the second quarter of 2000 and 1999, general
and administrative expenses totaled 1.5% and 7%, respectively, of rental
income. These expenses represent the administrative expenses of the Company
as distinguished from the operations of the Company's properties. The
Company continues to expand its internal administrative infrastructure to
keep pace with its growth.
INTEREST AND INVESTMENT INCOME AND EXPENSE
The Company's interest income increased to $395,985 for the six months
ended June 30, 2000 from $43,268 for the six months ended June 30, 1999 due
to the investment of its cash and cash reserves received from the sale of
properties pending tax free exchanges which was completed in
11
<PAGE>
May 2000. For the second quarter of 2000, interest income was $286,096 and
$35,944 for the same period in 1999. The Company incurred interest expense
of $8.7 million and $6.9 million during the first six months of 2000 and
1999. For the second quarter of 2000, interest expense was $4.1 million and
$3.5 million, respectively. The increase is due to debt assumed in the
Apple merger coupled with the increase in interest rates on the Company's
unsecured line of credit.
INCOME AND EXPENSE FROM RELATIONSHIP WITH APPLE RESIDENTIAL INCOME TRUST
Prior to the merger, the Company or affiliates provided property
management, advisory, and real estate brokerage services for Apple. The
fees received by the Company from service contracts with Apple terminated
upon consummation of the merger.
Property management fees charged to Apple were 5% of gross revenues.
Advisory fees charged to Apple were .1% to .25% of total capital raised by
Apple. Real estate commissions were generally 2% of the purchase price of
each property Apple acquired. The Company received $1,680,282 for the six
months ended June 30, 1999, for advisory and property management services
rendered to Apple. For the second quarter of 1999, the Company received
$932,480 for the same services. The Company received $561,485 for the
quarter ended June 30, 1999 in real estate commissions under separate
contract and amortized $241,438 as of June 30, 1999 of the purchase price
of this contract. During the second quarter of 1999, the Company received
$248,000 in real estate commissions and amortized $106,640 of the purchase
price of the contract.
The Company received distributions on its investment in Apple through the
date of the merger. The Company recognized dividend income for the three
and six months ended June 30, 1999 of $86,480 and $170,030, respectively,
on its investment in Apple.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are rental income generated from
the properties, proceeds from lines of credit, reinvestment of
distributions, and proceeds from secured debt.
The Company believes rental income generated from the properties and
borrowings on its line of credit will be sufficient to meet normal property
operating expenses, payment of distributions, capital improvements, and
payment of mortgage debt. At June 30, 2000, the Company had $3.9 million in
cash and cash equivalents and $70 million available under this unsecured
line of credit.
In September 1999, the Board of Directors authorized the repurchase of up
to $50 million of the Company's common shares. For the six months ended
June 30, 2000, the Company repurchased 3.2 million common shares at an
average price of $10.83 per share for $34.9 million.
CAPITAL REQUIREMENTS
The Company has an ongoing capital expenditure commitment to fund its
renovation program for recently acquired properties. In addition, the
Company is always assessing potential acquisitions and intends to acquire
additional properties during 2000. However, no material commitments existed
on August 1, 2000 for the purchase of additional properties. The expected
source to fund the improvements and acquisitions is from a variety of
sources including equity, excess flow from operations over distributions,
and debt, provided by its line of credit. The
12
<PAGE>
Company may seek to obtain additional debt financing to meet its
objectives. Given the Company's current debt level, the Company is
confident that it will be able to obtain debt financing from a variety of
sources, both secured and unsecured.
The Company capitalized $16 million of improvements to its various
properties during the first six months of 2000. It is anticipated that some
$25 million in additional capital improvements will be completed during the
next twelve months on the current portfolio.
Capital resources are expected to grow with the future sale of its shares
and from cash flow from operations. Approximately 16% of the 2000 common
stock divided distributions, or $3.2 million, were reinvested in additional
common shares. In general, the Company's liquidity and capital resources
are expected to be adequate to meet its cash requirements in 2000.
DISPOSITION OF INVESTMENTS
As part of its strategic repositioning, the Company has undertaken
proactive portfolio review analyses with the objective of identifying
properties that no longer meet the Company's long-term investment
objectives due to location, age and other factors. The disposition program
allows the Company to reduce the age of its existing portfolio and increase
shareholder value by capturing the hidden equity in the Company's mature
assets and will allow the Company to reinvest the net proceeds in assets
with higher growth potential. The proceeds from the sale paid down $90
million of the Company's existing line of credit and repurchased common
stock. The remaining amount of the proceeds from the sale was used to
complete tax free exchanges.
ACQUISITION
On March 16, 2000, the Company purchased The Enclave at the Meadows
Apartments, a 168-unit apartment community, located in Asheville, North
Carolina for a purchase price of $8.8 million. On May 11, 2000, the Company
purchased Greystone Crossing Apartments, a 408-unit apartment community
located in Charlotte, North Carolina for $26.8 million. These purchases
completed the previously funded tax free exchange transaction using
proceeds from the sale described above.
NOTES PAYABLE
The Company has a $185 million unsecured line of credit with the consortium
of six banks for which the maturity date is July 9, 2002. The line of
credit bears interest at one month LIBOR plus 120 basis points. At June 30,
2000, borrowings under the unsecured line of credit were $115 million. At
June 30, 2000, the Company had an unused borrowing capacity of $70 million
under the unsecured line of credit.
The Company has available a $7.5 million unsecured line of credit for
general corporate purposes. This line of credit bears interest at LIBOR
plus 120 basis points and the maturity date is October 31, 2000. At June
30, 2000, the Company's had no outstanding borrowings under this line of
credit.
13
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 1999. See the information
provided in the Company's Annual Report on Form 10-K under Item 7-Management's
Discussion and Analysis of Financial Condition and Results of Operations.
14
<PAGE>
Part II.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 25, 2000, the Company held an Annual Meeting of Shareholders for the
purpose of submitting four matters to a vote of common shareholders. The four
matters, which are described more fully below, related to the election of two
directors to the Company's Board of Directors and the consideration of three
proposals. The proposals were as follows: (i) proposal to amend the Company's
1992 Non-Employee Directors Stock Option Plan, (ii) proposal to approve the
Company's Share Purchase Loan Program, and (iii) proposal to amend the Company's
Bylaws.
ELECTION OF DIRECTORS.
The two nominees to the Company's Board of Directors were Stanley J. Olander,
Jr. and Martin Zuckerbrod. Each nominee was a current director of the Company
and was nominated for an additional three-year term on the Board of Directors.
The election of directors was uncontested and both nominees were elected. The
voting results are summarized at the end of this item.
PROPOSAL TO AMEND THE COMPANY'S 1992 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN.
Under the Company's 1992 Non-Employee Directors Stock Option Plan as it now
exists, each non-employee director is entitled to receive an automatic grant of
stock options on June 1 of each year through 1999. This proposal would extend
the grant period through 2001, so that each non-employee director would receive
an additional automatic grant, pursuant to the same formula, on June 1, 2000 and
June 1, 2001. Specifically, this proposal would amend section 7(a) (iii) of the
Company's 1992 Non-Employee Directors Stock Option Plan (the "Directors' Plan")
to read as follows:
(iii) As of each June 1 during the years 1994 through 2001
(inclusive), each Eligible Director shall automatically
receive an Option to purchase 0.02% of the total number of
shares of Common Stock issued and outstanding on that date.
This proposal was approved by the shareholders, and the voting results are
summarized at the end of this item.
PROPOSAL TO APPROVE THE COMPANY'S SHARE PURCHASE LOAN PROGRAM.
As of April 1, 2000, the Board of Directors adopted the Share Purchase Loan Plan
(the "Plan") subject to shareholder approval. The Plan is intended to attract
and retain directors and key officers through the availability of loans from the
Company to acquire its common shares. Common shares will be purchased under the
Plan in the open market. The maximum aggregate principal amount of new loans may
not exceed $2,000,000 in any one fiscal year.
The Plan will be administered by the Compensation Committee or another committee
of at least two persons appointed by the Board of Directors (the "Committee").
The Committee has the complete discretion to determine which directors and
officers will receive loans, when a loan will
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be made and, subject to the terms of the Plan, the terms, conditions, nature and
amount of a loan. The Committee will have the authority to impose any limitation
or condition upon a loan that the Committee deems appropriate to achieve the
objectives of the Plan. The Committee may, subject to such conditions as it may
determine, extend the time for repayment or otherwise modify the terms of an
outstanding loan but any such modification may not adversely affect a
participant's rights thereunder without his or her consent.
Loans may be made under the Plan to present and future directors and officers of
the Company (or any parent or subsidiary of the Company, whether now existing or
hereafter created or acquired). The Plan provides for individual limits on the
maximum aggregate principal amount of loans outstanding under the Plan to
individual participants. Those limits are as follows: $50,000 for each director,
200% of annual salary for officers determined by the Committee to be "executive
officers" for purposes of the Plan (currently three persons), 75% of annual
salary for officers determined by the Committee to be "senior officers" for
purposes of the Plan (currently six persons), and 25% of annual salary for all
other eligible officers (approximately 23 persons).
The Committee will establish as to each loan a minimum principal amount, the
interest rate, the terms of repayment and any other terms and conditions
consistent with the Plan. Each loan will be a full recourse obligation of the
participant and will be secured by those common shares acquired with the loan
proceeds (the "Shares"). At the time a loan is made, the Committee may impose
restrictions on the participant's ability to sell, encumber or otherwise dispose
of the Shares. The interest rate on a loan may not be less than the Applicable
Federal Rate in effect at the time the loan is made or, in the case of a
variable rate, at the time the interest rate is adjusted. Loans will have an
initial term of not more than ten years and unless otherwise determined by the
Committee at the time the loan is made, will become due and payable 90 days
following termination of the participant's status as a director (in the case of
a director-participant) or as an officer (in the case of an
officer-participant). A loan may provide for mandatory payments of principal and
interest at times and in amounts determined by reference to bonus and incentive
payments made by the Company to the participant.
As determined by the Committee, a loan may provide for forgiveness of (i) all or
a portion of the interest based upon Company performance and/or (ii) up to 25%
of the principal amount thereof based upon Company performance, continued
service as director or officer by the participant and/or retention of the Shares
by the participant. A loan may also provide for such forgiveness of interest and
up to 25% of the principal upon a termination of the participant's status as a
director or officer due to death, disability or normal retirement, or upon a
termination by the Company without cause (or a resignation by the participant
with good reason) following a change of control.
If the Committee determines that a loan will include provision for forgiveness
of interest or principal, based upon the Company's achievement of performance
goals, such goals will be established by the Committee prior to or during the
term of the loan utilizing one or more of the following criteria: "funds from
operations," expenses on either an individual property or Company-wide basis, or
Company total assets or total shareholders' equity. The performance goals may be
based on Company performance over individual fiscal years or over multiple
fiscal years (any such period, a "Performance Period") and will generally be
established within 90 days after the start of each Performance Period. At the
time the performance goals are established, the Committee will determine their
relative weight (if more than one criterion is used) and the
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portion of the interest which has accrued during such period and/or the
principal which will be forgiven based on the extent to which the performance
goals are achieved. Except as otherwise provided by the Plan or the loan
documents, a participant must be a director or officer of the Company at the end
of the Performance Period to be eligible for such forgiveness. All
determinations regarding the extent to which any performance goals have been
achieved will be made by the Committee and certified in writing prior to the
forgiveness of any interest or principal based on such performance.
As previously discussed, a loan may provide for forgiveness of interest and/or
up to 25% of principal upon termination of a participant's status as a director
or officer following a change of control. A "change of control" occurs when (i)
there is a change in the composition of a majority of the Board of Directors
when compared with those who are currently serving and any new members whose
nomination or election is approved by a majority of the current members of the
Board of Directors (including members of the Board of Directors previously so
approved), (ii) the shareholders approve a reorganization, merger or
consolidation which results in the shareholders of the Company immediately prior
to such transaction owning less than a majority of the outstanding common stock
or voting power of the corporation resulting from such transaction, (iii) the
shareholders approve the liquidation or dissolution of the Company or a sale or
other disposition of all or substantially all of the Company's assets, or (iv) a
person or group of persons acting in concert acquires 20% or more of the
outstanding common shares or the combined voting power of Company's outstanding
voting securities (but excluding for this purpose an acquisition by the Company,
a subsidiary or employee benefit plan of the Company, or any corporation with
respect to which, immediately following such acquisition, a majority of the
outstanding common shares and a majority of the combined voting power of the
outstanding voting securities are owned, directly or indirectly, by the persons
who were formerly the shareholders of the Company and such persons hold such
common stock and voting power in substantially the same proportion as they
previously held the Company's common shares.
If not sooner terminated by the Board of Directors, the Plan will terminate on
April 1, 2010, which means that no loans may be made under the Plan after its
termination. The Board of Directors may amend the Plan in such respects as it
deems advisable, provided that, if and to the extent required by Rule 16b-3 of
the Securities Exchange Act of 1934, the shareholders must approve any amendment
to the Plan which (i) materially increases the total amount of loans which may
be made under the Plan, (ii) materially modifies the requirements as to
eligibility to participate in the Plan, or (iii) materially increases the
benefits accruing to participants under the Plan.
This proposal was approved by the shareholders, and the voting results are
summarized at the end of this item.
PROPOSAL TO AMEND THE COMPANY'S BYLAWS.
The Company's Bylaws (in the current form, as amended through July 15, 1999)
were originally adopted at a time when the Company had essentially no assets and
was proposing to commence an initial best-efforts offering of its common shares.
As originally structured, the Company was "externally-advised," and
"externally-managed," rather than self-administered and self-managed. This meant
that administration and management were provided to the Company by external
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advisory and management companies. Further, at Company inception, the Company
adopted numerous Bylaw provisions that were required or recommended as a
condition to the registered sale in various states of its Common Shares. In
addition, it was originally proposed that the Company's common shares not be
traded in any active market.
Since inception, the Company has undergone numerous significant changes,
rendering various provisions in the Bylaws irrelevant, inappropriate or
unnecessary. In 1996, the Company converted from externally-advised and
externally-managed status to self-administered and self-managed status. In 1997,
the Company completed its first firm-commitment underwritten sale of its common
shares and simultaneously such common shares were listed for trading on the New
York Stock Exchange. As a result of these various changes, and related
developments, the Board of Directors believes it is appropriate to grant the
Board of Directors authority to amend the Bylaws so as to reflect the numerous
changes in the nature, structure and status of the Company.
Generally, the Bylaws are subject to amendment only with the consent of the
shareholders. After the action described below, the shareholders would retain
the right to amend the Bylaws, but the Board of Directors would have additional
rights to amend the Bylaws. Specifically, this proposal would result in the
following:
A. Add new Sections 11.11(c), (d) and (e) to the Bylaws to read as follows:
(c) The Board of Directors shall have full power and authority to
amend and revise these Bylaws or any portion hereof, which shall
expressly include the revision or amendment of existing Bylaw
provisions, the elimination of provisions of the Bylaws and the
addition of new Bylaw provisions, in each case to the full extent
that the Directors deem it necessary, advisable or convenient (i) to
reflect or implement the fact that the Company is no longer
externally-advised and externally-managed but is self-administered
and self-managed, and that provisions pertaining to the "Advisor"
and its "Affiliates" and provisions assuming the existence of the
Advisor or Affiliates or dependent for their meaning on the
existence of an Advisor or Affiliates are obsolete; without limiting
the generality of the foregoing, it is acknowledged and agreed that
the Board of Directors may amend the Bylaws so as to delete the
following: the definitions of "Acquisition Expenses," "Acquisition
Fees," "Advisor," "Average Invested Assets," "Competitive Real
Estate Commission," "Contract Price," "Net Income," "Offering and
Organization Expenses," "Operating Expenses," and "Sponsor," all
portions of the first paragraph of Section 5.1 of the Bylaws
following the first sentence, Section 5.15(a), Section 5.15(d),
Sections 8.1 through 8.7, Section 10.1, and all sections related to
or dependent upon any of the foregoing sections, and (ii) to
eliminate or revise those portions of the Bylaws which the Directors
determine, upon advise of counsel to the Company, were originally
included in the Bylaws because of a state securities regulation
applicable in connection with the Company's initial registration of
its Shares for sale to the public (including any NASAA Guidelines
pertaining to Real Estate Investment Trusts), or which otherwise
reflected the start-up nature of the Company, the fact that its
Shares were initially not proposed to be traded in any active market
or the fact, generally, that the Company had minimal assets upon
formation and no properties identified for acquisition, including,
without limitation the deletion of the following
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Sections: the definition of "Dividend Reinvestment Plan," "Initial
Investment" and "Liquidity Matching Program," Section 2.1, the
second to the last paragraph within Section 5.2 (dealing with
experience of Directors), the third sentence of Section 5.15
(dealing with experience of Directors), Section 7.5(h), Section 7.8,
and Section 11.15.
(d) The Board of Directors is specifically authorize and empowered
to delete the definition of "Independent Director" as it exists in
the Bylaws amended through July 15, 1999, insofar as it is dependent
upon the concept of an external "Advisor," and to replace such
definition with one or more successive definitions of "Independent
Director" (which shall be deemed to include any similar term)
promulgated or suggested for use by the New York Stock Exchange or
the rules of such other self-regulatory organization as are
applicable to the Company.
(e) The provisions of this Section 11.11 permitting the Board of
Directors to make amendments to the Bylaws shall be interpreted
liberally so as to give full effect to their purpose and intent.
Such amendments may be effective at any time and from time to time
by action of the Board, and any such action taken in actual good
faith of the Board of Directors shall be deemed duly taken and
adopted and a proper and binding amendment to these Bylaws.
B. Delete the last paragraph in Section 9.1 of the Bylaws, which currently
follows the paragraph lettered "(o)", and replace it with the following:
Notwithstanding anything to the contrary in this Article 9, any of
the investments or actions referred to in this Article 9 may be
approved, made or taken by the Company acting pursuant to its Board
of Directors if such investment or action is found by the Company to
be in the best interests of the Company or in furtherance of the
plans and objectives of the Company, if, in any event, such action
is not expressly prohibited by law and any Shareholder approval
required by law is obtained; provided, however, that if any portion
of any provision in such Article would require notice to the
Shareholders, such notice shall be given, but may be given either in
the indicated report to Shareholders or by a press release or
similar publication.
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This proposal was approved by the shareholders, and the voting results are
summarized at the end of this item.
RESULTS OF VOTING.
The total number of votes represented at the Annual Meeting of Shareholders was
36,106,699.
1. Election of Directors:
Stanley J. Olander, Jr. Votes For: 32,470,316 Votes Withheld: 819,516
---------- -------
Martin Zuckerbrod Votes For: 32,355,581 Votes Withheld: 934,251
---------- -------
2. Proposal to amend the Company's 1992 Non-Employee Directors Stock Option Plan
Approval 29,795,137 Disapproval 2,964,684 Abstain 530,010
---------- --------- -------
3. Proposal to approve the Company's Share Purchase Loan Program
Approval 14,497,429 Disapproval 3,290,316 Abstain 470,296
---------- --------- -------
4. Proposal to amend the Company's Bylaws
Approval 29,878,129 Disapproval 2,885,847 Abstain 525,856
---------- --------- -------
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27 - Financial Data Schedule and Exhibit 99.1 - Share
Purchase Loan Program
(b) The following table lists the reports on Form 8-K filed by the Company
during the quarter ended June 30, 2000, the items reported and the
financial statements included in such filings.
Type and Date
of Reports Items Reported Financials Statements Filed
Form 8-K dated 5,7 None
March 16, 2000 and filed
May 24, 2000
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cornerstone Realty Income Trust, Inc.
-------------------------------------
(Registrant)
DATE: 8-11-00 BY: /s/ Stanley J. Olander
------------------ ----------------------
Stanley J. Olander
Vice President and Chief Financial Officer
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