<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
-----------------------------------------------
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 1-10660
----------------------------------------
Berkshire Realty Company, Inc.
- --------------------------------------------------------------------------------
Delaware 04-3086485
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
One Beacon Street, Boston, Massachusetts 02108
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(617) 646-2300
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
1
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
----------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1999 1998
-------------- -------------
(Unaudited)
<S> <C> <C>
Real estate assets: (Note 2)
Multifamily apartment complexes, net of
accumulated depreciation $ 924,163,691 $ 919,486,703
Mortgage loans, net of purchase discounts 2,401,911 2,376,227
Land and construction-in-progress 21,136,620 10,974,377
Land held for future development 5,838,950 5,657,038
-------------- --------------
Total real estate assets 953,541,172 938,494,345
Cash and cash equivalents 20,085,674 12,366,880
Mortgage-backed securities, net ("MBS") -- 4,936,979
Note receivable 3,999,000 7,500,000
Escrows 16,188,849 16,305,255
Deferred charges and other assets 15,677,082 19,854,353
Workforce and other intangible assets,
net of accumulated amortization 5,263,863 9,449,030
-------------- --------------
Total assets $1,014,755,640 $1,008,906,842
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Credit agreement (Note 3) $ 180,000,000 $ 135,100,000
Construction loan (Note 3) 11,440,613 11,362,891
Mortgage notes payable (Note 3) 423,992,282 426,236,427
Tenant security deposits and prepaid rents 8,642,498 8,309,738
Accrued real estate taxes, insurance, other
liabilities and accounts payable 21,788,272 25,218,826
-------------- --------------
Total liabilities 645,863,665 606,227,882
-------------- --------------
Minority interest in operating partnership 62,376,944 69,661,451
Commitments and contingencies (Note 2 and 7) --
Shareholders' equity:
Preferred stock ("Preferred Shares"),
$0.01 par value; 60,000,000 shares
authorized, 2,737,000 shares issued 27,370 27,370
Common stock ("Shares"), $0.01 par value;
140,000,000 Shares authorized and 37,261,249
and 37,219,897 Shares issued, respectively 372,613 372,199
Additional paid-in capital 357,103,602 375,186,299
Accumulated deficit (47,032,979) (38,550,284)
Loans receivable - officers (2,212,500) (2,275,000)
Less common stock in treasury, at cost
(506,497 Shares) (1,743,075) (1,743,075)
-------------- --------------
Total shareholders' equity 306,515,031 333,017,509
-------------- --------------
Total liabilities and shareholders' equity $1,014,755,640 $1,008,906,842
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral
part of the Consolidated Financial Statements.
2
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
-----------------
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------------- ----------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Rental $49,179,324 $42,414,414 $ 97,994,395 $81,633,079
Interest from mortgage loan
and note receivable 197,009 298,659 431,003 593,458
Interest income from MBS 89,798 160,884 201,077 326,939
Management fees and reimbursements 912,009 939,450 1,709,514 1,891,254
Other interest income 294,024 298,604 618,655 682,179
----------- ----------- ------------ -----------
Total revenue 50,672,164 44,112,011 100,954,644 85,126,909
----------- ----------- ------------ -----------
Expenses:
Property operating 11,008,171 9,346,781 22,077,681 18,499,624
Repairs and maintenance 3,787,277 3,092,433 7,198,608 5,275,703
Real estate taxes 4,810,169 4,260,836 9,648,163 8,111,839
Property management operations 1,761,950 1,876,665 4,153,315 3,923,594
General and administrative 1,390,251 1,685,403 2,880,864 3,365,288
Interest (Note 4) 11,256,225 9,156,018 22,473,503 17,167,408
Costs associated with
strategic alternatives 1,523,870 -- 4,572,243 --
Amortization of acquired
workforce and intangible assets 1,509,851 3,258,048 4,185,167 6,516,097
Depreciation and amortization 15,766,806 13,631,235 31,645,643 26,126,769
----------- ----------- ------------ -----------
Total expenses 52,814,570 46,307,419 108,835,187 88,986,322
----------- ----------- ------------ -----------
Loss from operations before joint
venture income, gain
on sales of assets, minority
interest and extraordinary items (2,142,406) (2,195,408) (7,880,543) (3,859,413)
Joint venture income -- 80,506 -- 132,454
Gain on sales of assets 195,718 874,515 195,718 1,387,247
Minority interest in
Operating Partnership 729,327 552,697 2,281,255 1,023,472
----------- ----------- ----------- ------------
Income (loss) before
extraordinary items (1,217,361) (687,690) (5,403,570) (1,316,240)
Extraordinary items, net of
minority interest -- (94,613) -- (94,613)
----------- ----------- ----------- -----------
Net loss (1,217,361) (782,303) (5,403,570) (1,410,853)
Income allocated to
preferred shareholders (1,539,562) (1,556,669) (3,079,125) (3,096,232)
----------- ----------- ----------- -----------
Net loss allocated
to common shareholders $(2,756,923) $(2,338,972) $(8,482,695) $(4,507,085)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Earnings per common share (basic and diluted):
Loss before extraordinary item $ (.08) $ (.06) $ (.23) $ (.12)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net loss $ (.08) $ (.06) $ (.23) $ (.12)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Weighted average shares 36,747,444 36,738,176 36,730,987 36,677,369
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral
part of the Consolidated Financial Statements.
3
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Series 1997-A Convertible
Preferred Stock at Par Common Stock at Par Additional
-------------------------- -------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1998 2,737,000 $27,370 36,713,400 $372,199 $375,186,299 $(38,550,284)
Net loss -- -- -- -- -- (5,403,570)
Stock issuance costs -- -- -- -- (58,709) --
Preferred dividends -- -- -- -- -- (3,079,125)
Conversion of Units
to Common Shares -- -- 35,752 358 268,043 --
Proceeds from the
exercise of stock
options -- -- 5,600 56 61,544 --
Stock purchase loans -
forgiveness -- -- -- -- -- --
Adjustment for minority
interest ownership of
Operating Partnership -- -- -- -- (262,829) --
Common dividends -- -- -- -- (18,090,746) --
--------- ------- ----------- --------- -------------- -------------
Balance,
June 30, 1999 2,737,000 $27,370 36,754,752 $372,613 $357,103,602 $(47,032,979)
--------- ------- ----------- --------- -------------- --------------
--------- ------- ----------- --------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
Loans Treasury
Receivable- Stock
Officers at Cost Total
------------ ----------- ---------
<S> <C> <C> <C>
Balance,
December 31, 1998 $(2,275,000) $(1,743,075) $333,017,509
Net loss -- -- (5,403,570)
Stock issuance costs -- -- (58,709)
Preferred dividends -- -- (3,079,125)
Conversion of Units
to Common Shares -- -- 268,401
Proceeds from the
exercise of stock
options -- -- 61,600
Stock purchase loans -
forgiveness 62,500 -- 62,500
Adjustment for minority
interest ownership of
Operating Partnership -- -- (262,829)
Common dividends -- -- (18,090,746)
------------ ----------- -------------
Balance,
June 30, 1999 $(2,212,500) $(1,743,075) $306,515,031
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral
part of the Consolidated Financial Statements.
4
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Operating activities:
Net loss $(5,403,570) $(1,410,853)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 31,645,643 26,126,769
Amortization of workforce and
intangible assets 4,185,167 6,516,097
Joint venture income -- (132,454)
Gain on sales of assets (195,718) (1,387,247)
Stock purchase loan forgiveness 62,500 125,414
Amortization of purchase discounts (78,978) (75,932)
Minority interest in Operating Partnership (2,281,255) (1,023,472)
Amortization of deferred financing costs 832,789 766,410
(Increase) decrease in operating escrows
and other assets 3,357,440 (1,574,580)
Increase (decrease) in accrued real estate
taxes, insurance, other liabilities and
accounts payable (3,700,554) 6,544,399
Increase in tenant security deposits,
prepaid rents and escrows 332,760 1,688,724
------------ -----------
Net cash provided by operating activities 28,756,224 36,163,275
------------ -----------
Investing activities:
Cost to acquire properties (25,727,754) (85,471,045)
Proceeds from sale of properties -- 17,209,116
Recurring capital expenditures (6,268,221) (2,763,546)
Rehabilitation and non-recurring
capital expenditures (4,174,525) (12,354,208)
Land acquisition and construction in progress (10,344,957) (9,801,096)
Distributions received from joint venture
in excess of earnings -- 774,151
Distribution from sale of joint venture asset, net -- 14,883,968
Principal collections on MBS 1,002,310 1,380,861
Proceeds from sale of MBS 4,140,071 --
Principal collections on note receivable 3,501,000 --
Principal collections on mortgage loan 43,610 40,440
Escrow established at acquisition of properties -- (1,991,498)
----------- -----------
Net cash used for investing activities (37,828,466) (78,092,857)
------------ -----------
</TABLE>
Continued
5
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
---------------
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------------------
1999 1998
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Financing activities:
Advances under credit agreement $ 44,900,000 $ 84,000,000
Advances under construction loan 77,722 7,433,984
Payment of financing costs (47,881) (1,591,119)
Costs associated with issuance of stock (58,709) (276,042)
Dividends to preferred stockholders (3,079,125) (3,096,232)
Principal payments on mortgage notes payable (2,244,145) (1,967,692)
Payoff of mortgage notes payable -- (17,433,697)
Proceeds from the exercise of stock options 61,600 31,126
Proceeds from exercise of employee
stock options -- --
Dividends to common shareholders (18,090,746) (17,432,027)
Distributions to minority unitholders (4,727,680) (3,719,662)
------------ ------------
Net cash provided by financing activities 16,791,036 45,948,639
------------ -------------
Net increase in cash and cash equivalents 7,718,794 4,019,057
Cash and cash equivalents, beginning of period 12,366,880 9,859,110
------------ ------------
Cash and cash equivalents, end of period $ 20,085,674 $ 13,878,167
------------ ------------
------------ ------------
Supplemental cash flow disclosure:
Cash paid for interest during period $ 23,040,570 $ 18,430,663
------------ ------------
------------ ------------
Interest capitalized during period $ 756,665 $ 853,259
------------ ------------
------------ ------------
Supplemental disclosure of non-cash financing and investing activities:
Property acquisitions $(25,727,754) $(142,394,383)
Debt assumed in property acquisitions -- 38,582,860
Units issued for property acquisitions -- 18,340,478
------------- -------------
Cash to acquire property $(25,727,754) $ (85,471,045)
------------ ------------
------------ ------------
Conversion of Units to Shares $ 268,401 $ 960,202
------------ ------------
------------ ------------
Shares issued in satisfaction of note payable $ -- $ 2,130,000
------------ ------------
------------ ------------
Shares issued for stock purchase loans $ -- $ 1,500,000
------------ ------------
------------ ------------
Reclassification of construction in progress
to multifamily apartment complexes $ -- $ 6,406,064
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral
part of the Consolidated Financial Statements.
6
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-----------------
1. ORGANIZATION
Berkshire Realty Company, Inc. and Subsidiaries (the "Company") was
formed on April 26, 1990 as an equity real estate investment trust
("REIT") and commenced operations on June 27, 1991. The Company
reorganized as an Umbrella Partnership ("UPREIT") on May 1, 1995 when the
Company contributed substantially all of its assets subject to all
liabilities to BRI OP Limited Partnership. The Company has an infinite
life; however, the Company's Restated Certificate of Incorporation, as
amended, requires the Company's Board of Directors (the "Board") to
prepare and submit on or before December 31, 1998, a Plan of Liquidation
and Dissolution (the "Plan") to the shareholders, together with the
Board's recommendation whether to adopt or reject the Plan. As a result,
in May, 1998, the Company engaged two investment banking firms, Lazard
Freres & Co. LLC and Lehman Brothers Inc., to assist the Company in the
exploration and evaluation of strategic alternatives. These alternatives
included (but were not limited to) potential sale or merger of the
Company or the adoption of the Plan. The Board of Directors recommended
that the shareholders not approve the Plan. On July 21, 1999, at a
Special Meeting of Stockholders, the shareholders voted to reject the
Plan.
On April 13, 1999, the Company and Berkshire Realty Holdings, L.P., a
partnership formed by the Company's Chairman of the Board, Douglas Krupp,
and affiliates of Blackstone Real Estate Advisors and Whitehall Street
Real Estate Limited Partnership XI (an affiliate of Goldman, Sachs &
Co.), entered into a definitive merger agreement ("Merger Agreement").
The Company's Board of Directors has approved the Merger Agreement based
on a recommendation from a special committee of the Board comprised of
four independent directors. Pursuant to the terms of the agreement, if
the merger is consummated, shareholders of Berkshire will receive $12.25
in cash per share of common stock. If the merger is consummated, limited
partners in BRI OP Limited Partnership ("Operating Partnership"),
Berkshire's operating partnership, will be able to elect to (i) receive
$12.25 per Operating Partnership unit ("Unit" or "OP Unit") or (ii)
become limited partners of the acquiring partnership. The transaction
must be approved by a majority of shareholders. In June, 1999, the
Company filed preliminary proxy materials with the Securities and
Exchange Commission related to the Merger Agreement. The transaction, if
approved, is scheduled to close in the fourth quarter of 1999.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements reflect the consolidated financial position,
results of operations, changes in shareholders' equity and cash flows of
the Company, using the historical cost of assets, liabilities and results
of operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this report on
Form 10-Q pursuant to the Rules and Regulations of the Securities and
Exchange Commission. In the opinion of management, the disclosures
contained in this report are adequate to make the information presented
not misleading. See Notes to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1998 for additional information relevant to significant
accounting policies followed by the Company.
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments necessary to present fairly the
Company's financial position as of June 30, 1999 and the results of its
operations for the three and six months ended June 30, 1999 and 1998 and
cash flows for the six months ended June 30, 1999 and 1998.
Continued
-7-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-----------------
3. MULTIFAMILY AND RETAIL PROPERTY
The results of operations for the three and six months ended June 30,
1999 are not necessarily indicative of the results which may be expected
for the full year. See Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this report.
As of June 30, 1999, the Company had investments in 82 apartment
communities in eight states totaling 24,387 units. The Company was also
engaged in the development of apartment communities and currently has 655
units under construction.
The following summarizes the carrying value of the Company's multifamily
apartment complexes (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ----------
<S> <C> <C>
Land $ 153,897 $ 151,282
Buildings and improvements 789,861 768,270
Appliances, carpeting and equipment 181,775 169,812
---------- ----------
Total multifamily property 1,125,533 1,089,364
Accumulated depreciation (201,369) (169,877)
---------- ----------
$ 924,164 $ 919,487
---------- ----------
---------- ----------
</TABLE>
ACQUISITIONS
On January 7, 1999, the Company acquired Granite Run Apartments, a
264-unit apartment community located in Baltimore, Maryland, for $25.7
million. The Company paid cash to acquire the property. Granite Run was
the second of four properties that the Company was contractually
obligated to acquire from Questar Builders, Inc., an affiliate of a
former officer and current shareholder and OP Unitholder of the Company.
The Company is obligated, upon satisfaction of certain conditions, to
acquire two additional newly-developed properties totaling 405 units for
an approximate cost of $58.9 million from Questar Builders, Inc. The
properties were in various stages of development as of June 30, 1999. It
is expected that the first property will be completed in the third or
fourth quarter of 1999 and the remaining property will be completed in
2000.
DISPOSITIONS
Subsequent to June 30, 1999, the Company contracted with unaffiliated
parties to sell four multifamily assets, British Woods, Highland Ridge,
Windover and Essex House, at an aggregate price of approximately $41.7
million which is expected to result in a gain of approximately $16.5
million. The transactions are scheduled to close in the third or fourth
quarter of 1999.
DEVELOPMENT
In December 1997, the Company purchased a 60-acre parcel of land in
Atlanta, Georgia for approximately $5.8 million for the development of
Berkshires at Deerfield, a 478 unit apartment community. Construction
began in the third quarter of 1998. The total cost of the project to date
is approximately $10.9 million.
Continued
-8-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNaudited)
-----------------
3. MULTIFAMILY AND RETAIL PROPERTY - Continued
On April 29, 1998, the Company acquired 12.6 acres located near Clemson,
South Carolina for approximately $571,000. Construction of Berkshire
Commons, a 177-unit student housing development, began in the third
quarter of 1998 on this site. The total cost of the project to date is
approximately $10.3 million.
The Company also owns two other parcels of land located in Greenville,
South Carolina.
Subsequent to June 30, 1999, the Company contracted with unaffiliated
parties to sell the development projects, Berkshires at Deerfield and
Berkshire Commons. Additionally, the Company contracted to sell one of
the parcels of land. The sales of the development assets and the land
parcel are expected to result in a gain of approximately $800,000 and are
scheduled to close in the third or fourth quarter of 1999.
4. DEBT AGREEMENTS
As of June 30, 1999, the Company had a credit agreement with nine
participating commercial banks for a $180 million unsecured revolving
line of credit ("Credit Agreement"). The following summarizes the
Company's borrowings on the Credit Agreement as of June 30, 1999:
<TABLE>
<CAPTION>
Contract Contract Principal
Borrowings Start Date End Date Interest Rate Amount
---------- ---------- -------- ------------- ------------
<S> <C> <C> <C> <C>
LIBOR contract 06/11/99 08/10/99 6.3313% $ 53,000,000
LIBOR contract 07/01/99 08/30/99 6.5500% 127,000,000
------------
$180,000,000
------------
------------
</TABLE>
Subsequent to June 30, 1999 the Company repriced the $53,000,000 contract
due August 10, 1999 at an interest rate of 6.4875% with a contract end
date of September 9, 1999.
The Company has a construction loan commitment of $13.1 million with two
commercial banks to fund the completed development of Berkshires at
Crooked Creek ("Construction Loan"). The agreement requires monthly
interest payments at a variable rate set at 150 basis points over LIBOR.
The outstanding principal balance will be due December 31, 1999. As of
June 30, 1999, the Company's borrowings on the Construction Loan totaled
$11,440,613 and had an interest rate of 6.5625% with a contract end date
of August 17, 1999. Subsequent to June 30, 1999, the Company borrowed an
additional $1,100,000 on the Construction Loan at an interest rate of
6.6875% with a contract end date of August 23, 1999.
Continued
-9-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
-----------------
5. PRO-FORMA RESULTS (UNAUDITED)
The following unaudited pro-forma operating results for the Company have
been prepared as if the 1999 and 1998 property acquisitions, dispositions
and equity transactions had occurred on January 1, 1998. Unaudited
pro-forma financial information is presented for informational purposes
only and may not be indicative of what the actual results of operations
of the Company would have been had the events occurred as of January 1,
1998, nor does it purport to represent the results of operations for
future periods. (Dollars in thousands except per share amounts).
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
1999 1998
-------- ---------
<S> <C> <C>
Revenue $101,200 $ 96,832
Expenses including depreciation $110,372 $103,338
-------- ---------
Net loss allocated to
common shareholders $ (9,172) $ (6,506)
-------- ---------
-------- ---------
Net loss per weighted
average common share $(.25) $(.18)
-------- ---------
-------- ---------
</TABLE>
6. SEGMENT REPORTING
The Company has adopted Statement of Financial Accounting Standards No.
131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information", which establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and require that those enterprises report
selected information about operating segments in interim reports issued
to shareholders.
The Company operates and develops apartment communities in Florida, Texas
and the Mid-Atlantic and Southeast regions of the United States which
generate rental income through the leasing of apartment units. The
Company separately evaluates the performance of each of its apartment
communities. However, because each of the apartment communities has
similar economic characteristics, facilities, services and tenants, the
apartment communities have been aggregated into a single real estate
segment.
The Company evaluates performance based upon net operating income ("NOI")
from the combined properties in the segment. NOI is defined by the
Company as rental revenue less property operating expenses, including
repairs and maintenance and real estate taxes. Accordingly, NOI excludes
non-property revenue and expenses included in the determination of net
income. NOI for the combined properties in the segment for the six month
periods ended June 30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Rental Revenue
Multifamily $97,994,395 $81,629,710
Retail (a) -- 3,369
------------ -----------
Total 97,994,395 81,633,079
Operating Expenses
Multifamily 38,924,452 31,786,095
Retail (a) -- 101,071
------------ -----------
Total 38,924,452 31,887,166
------------ -----------
Net Operating Income $59,069,943 $49,745,913
------------ -----------
------------ -----------
</TABLE>
-10-
<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
-----------------
6. SEGMENT REPORTING - Continued
The following is a reconciliation of net operating income to loss from
operations before joint venture income, gain on sale of assets and
minority interest:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net operating income ................... $ 59,069,943 $ 49,745,913
Revenue:
Management fees and
reimbursements ..................... 1,709,514 1,891,254
Interest ............................. 1,250,735 1,602,576
Expenses:
Depreciation and
Amortization ....................... (35,830,810) (32,642,866)
General and
administrative ..................... (2,880,864) (3,365,288)
Property management
operations ......................... (4,153,315) (3,923,594)
Interest ............................. (22,473,503) (17,167,408)
Costs associated with
strategic alternatives ............. (4,572,243) --
------------ ------------
Loss from operations
before joint venture
income, gain on sales
of assets and
minority interest .................... $ (7,880,543) $ (3,859,413)
------------ ------------
</TABLE>
(a) The Company completed the liquidation of the retail portfolio in
1998.
7. CONTINGENCIES
On June 18, 1999, a purported class action lawsuit, FIELDS V. BERKSHIRE
REALTY COMPANY, INC., ET AL., was initiated by a shareholder against the
Company and each of the Directors (including the Chairman of the Board,
Douglas Krupp) alleging, among other things, that the defendants breached
their fiduciary duties to the shareholders in connection with various
actions taken by the defendants with respect to the approval of the
proposed merger transaction whereby Berkshire Realty Holdings, L.P. (the
"Potential Acquiror"), an entity formed by Mr. Krupp and affiliates of
Blackstone Real Estate Advisors and Whitehall Street Real Estate Limited
Partnership XI may acquire ownership of the Company ("Merger
Transaction"). The complaint further alleges that the price offered by
the Potential Acquiror for the shares of the Company's stock was
inadequate. The lawsuit was filed in the Chancery Court of the State of
Delaware in and for New Castle County. The complaint seeks, among other
things, injunctive relief and unspecified money damages. The Company
believes that it and the directors have meritorious defenses to the
allegations made in the complaint and intends to contest the lawsuit
vigorously.
On July 9, 1999 a purported class action lawsuit, PERTON V. BERKSHIRE
REALTY COMPANY, INC., ET AL., was initiated by a shareholder against the
Company, each of the Company's Directors (including the Chairman of the
Board, Douglas Krupp), Berkshire Realty Holdings, L.P., and BRI
Acquisition, LLC, alleging, among other things, that the defendants
breached their fiduciary duties to the Company stockholders in connection
with various actions taken by them with respect to the Merger
Transaction. The lawsuit was filed in the Chancery Court of the State of
Delaware in and for New Castle County. The complaint seeks, among other
things, injunctive relief and unspecified money damages. The Company
believes that it and the individual defendants have meritorious
-11-
<PAGE>
defenses to the allegations made in the complaint and intends to contest
the lawsuit vigorously.
On July 22, 1999, Berkshire Apartments, Inc. ("Apartments"), in its
capacity as general partner of BRI OP Limited Partnership (the "Operating
Partnership"), and the Company commenced an action seeking declaratory
relief in the United States District Court for the District of
Massachusetts against Stephen M. Gorn, Morton Gorn, and John B. Colvin in
response to claims recently raised by these individuals. Messrs. Gorn,
Gorn and Colvin are each shareholders in the Company, OP Unitholders and
former employees or consultants to the Company, and have recently claimed
that they and their affiliates were fraudulently induced to exchange
certain properties for OP Units, that their employment and consulting
relationships with the Company were wrongly terminated, and that the
Company and Apartments breached their fiduciary duties to these
individuals in connection with various actions taken with respect to the
Merger Transaction. The Company and Apartments have sought a declaration
that these claims are without merit, and, do not support monetary or
injunctive relief. In response to this action, on August 3, 1999, Messrs.
Gorn, Gorn and Colvin, and their affiliated entity Questar Properties,
Inc., commenced their own action against the Company, the Operating
Partnership, Mr. Krupp as Chairman of the Board of Directors of the
Company, David F. Marshall as President and Chief Executive Officer of
the Company, and David J. Olney as Executive Vice President of the
Company in the United States District Court for the District of Maryland
and moved to dismiss or transfer the Company's suit in favor of the
newly-filed Maryland case. The new Maryland suit is factually similar to
the Company's action. The new suit does not, however, raise any claim
with respect to the Merger Transaction or the employment and consulting
agreements, and it does not, at this time, seek injunctive relief
relative to the Merger Transaction, although Messrs. Gorn, Gorn and
Colvin claim to have reserved their purported rights to assert such
claims and seek such relief at a later time. The Company believes that it
and the Company's officers and directors have meritorious defenses to the
allegations made in the Maryland complaint and intends to contest the
lawsuit vigorously.
Due to the early stage of the above mentioned claims the Company has not
recorded any reserves for potential adverse outcomes.
8. SUBSEQUENT EVENTS
The Company's Certificate of Incorporation, as amended, has required the
Board of Directors to submit a Plan of Liquidation and Dissolution (the
"Plan") to the stockholders prior to the end of 1998, together with the
Board's recommendation whether to adopt or reject the Plan. The Board of
Directors recommended that the shareholders not approve the Plan. On July
21, 1999, at a Special Meeting of Stockholders, the shareholders voted to
reject the Plan.
Subsequent to June 30, 1999, the Company contracted to sell four
multifamily assets, both development projects and one parcel of land. The
sales, which have an aggregate sales price of approximately $70 million,
are expected to result in a gain of approximately $17.3 million.
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<PAGE>
BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
A. OVERVIEW:
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere
herein and the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1998. Capitalized terms used herein and not otherwise
defined have the meanings ascribed to them in the Notes to the
Consolidated Financial Statements included elsewhere herein.
The Company is a real estate investment trust ("REIT") whose operations
consist primarily of the acquisition, renovation, rehabilitation,
development and operation of apartment communities located in Florida,
Texas, the Mid-Atlantic and Southeast regions of the United States. As of
June 30, 1999, the Company owned 82 apartment communities consisting of
24,387 units. The Company has commenced construction on 655 multifamily
units and owns two parcels of land for future development. The Company
has also contracted to acquire two additional newly-developed properties
from an affiliate of Questar Builders, Inc. totaling 405 units. The
Company also entered into a Development Acquisition Agreement with
Questar Builders, Inc. which grants the Company an exclusive right to
acquire all apartment projects developed in the Mid-Atlantic Region by
such affiliates which meet the Company's acquisition and development
criteria.
Subsequent to June 30, 1999, the Company contracted to sell four
multifamily assets, both development projects and one parcel of land. The
sales, which have an aggregate sales price of approximately $70 million,
are expected to result in a gain of approximately $17.3 million.
COMPANY STRATEGY:
Since the organization of the Company in 1990, the Company's Certificate
of Incorporation, as amended, has required the Board of Directors to
submit a Plan of Liquidation and Dissolution (the "Plan") to the
stockholders prior to the end of 1998, together with the Board's
recommendation whether to adopt or reject the Plan. As a result, the
Company engaged two investment banking firms to assist in the exploration
and evaluation of strategic alternatives. Among others, these
alternatives included the potential sale or merger of the Company or the
adoption of the Plan of Liquidation and Dissolution. The Board of
Directors recommended that the shareholders not approve the Plan. On July
21, 1999, at a Special Meeting of Stockholders, the shareholders voted to
reject the Plan.
On April 13, 1999, the Company and Berkshire Realty Holdings, L.P., a
partnership formed by the Company's Chairman of the Board, Douglas Krupp,
and affiliates of Blackstone Real Estate Advisors and Whitehall Street
Real Estate Limited Partnership XI (an affiliate of Goldman, Sachs &
Co.), entered into a definitive merger agreement ("Merger Agreement").
The Company's Board of Directors has approved the Merger Agreement based
on a recommendation from a special committee of the Board comprised of
four independent directors. Pursuant to the terms of the agreement, if
the merger is consummated, shareholders of Berkshire will receive $12.25
in cash per share of common stock. If the merger is consummated, limited
partners in Berkshire's operating partnership can elect to (i) receive
$12.25 per OP Unit or (ii) become limited partners of the acquiring
partnership. The transaction must be approved by a majority of
shareholders. In June, 1999, the Company filed preliminary proxy
materials with the Securities and Exchange Commission related to the
Merger Agreement. The transaction, if approved, is scheduled to close in
the fourth quarter of 1999.
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<PAGE>
B. RESULTS OF OPERATIONS:
The results of operations from period to period are impacted by
acquisition and disposition activity within the portfolio. Comparisons
will be made with respect to the overall portfolio and same-store
properties. The Company defines same-store apartment communities as those
assets that were owned and operated in each of the two most recent years.
The following analysis compares the results of operations for the three
and six month periods ended June 30, 1999 and 1998.
NET LOSS for the three months ended June 30, 1999 increased approximately
$.4 million compared to the same period in 1998 as a result of a decrease
in gain on sales of assets. Net loss for the six months ended increased
$4.0 million as a result of an increase in loss from operations of $4.0
million and a decrease in gain on sales of assets of $1.2 million which
was offset by an increase in the loss allocation to minority interest of
$1.3 million.
INCOME AND EXPENSES:
RENTAL INCOME AND PROPERTY OPERATING EXPENSES, including repairs and
maintenance and real estate taxes, increased for the three and six month
periods ended June 30, 1999 as a result of the increase in weighted
average apartment units and increased revenue and expenses generated by
the same-store communities (see additional discussion in Funds from
Operations). Rental revenue for the three months ended June 30, 1999
increased to $6.8 million or 16% and property operating expenses
increased $2.9 million or 17%, over the prior year period. Rental revenue
for the six months ended June 30, 1999 increased $16.4 million or 20% and
property operating expenses increased $7.0 million or 22%, over the prior
year period. Average apartment units increased 7% and 14% for the three
and six month periods ended June 30, 1999 over the prior year periods.
Detail of the Company's apartment unit growth for the six months ended
June 30 is set forth below:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Apartments Units:
Beginning of period 24,123 18,773
Acquired 264 3,978
Sold -- --
Completed development units -- 112
-------- ------
End of period 24,387 22,863
-------- ------
-------- ------
Weighted average apartment units 24,378 21,314
for period
Percent increase over same period 14% 69%
of prior year
</TABLE>
MANAGEMENT FEES AND REIMBURSEMENTS remained stable for the three months
ended June 30, 1999 compared to the prior year period and decreased
$182,000 for the six months ended June 30, 1999 when compared to the same
period in 1998 due to a reduction in the number of third party management
contracts as a result of sales by third party owners.
PROPERTY MANAGEMENT OPERATIONS decreased $115,000 for the three months
ended June 30, 1999 compared to the prior year period as a result of
reduced salaries due to a reduction of administrative personnel in the
national operating headquarters. Property management operations increased
$230,000 for the six months ended June 30, 1999 compared to the same
period in 1998 as a result of increased operating costs in the
Mid-Atlantic and Texas regions due to growth in the number of properties
in those regions and severance payments incurred in the first quarter as
a result of a reduction in administrative personnel located in the
national operating headquarters.
GENERAL AND ADMINISTRATIVE EXPENSES, decreased $295,000 and $484,000 for
the three and six month periods ended June 30, 1999, respectively,
compared to the same periods in 1998 primarily due to decreased employee
salaries, benefits, administrative and office related expenses resulting
from reductions in administrative and executive personnel located in the
Boston and Baltimore offices.
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<PAGE>
INTEREST EXPENSE
Interest expense has increased for the three and six month periods ended
June 30, 1999 compared to the same periods in 1998 primarily from
increased average borrowings. The following is an analysis of weighted
average debt outstanding and interest rates for the three and six month
periods ended June 30 (dollars in thousands).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted Average
Debt Outstanding
Fixed Rate $412,536 $391,239 $413,062 $380,928
Variable Rate 200,450 78,404 195,416 69,943
-------- -------- -------- --------
Total $612,986 $469,643 $608,478 $450,871
-------- -------- -------- --------
-------- -------- -------- --------
Weighted Average
Interest Rates
Fixed Rate 7.71% 7.66% 7.76% 7.72%
Variable Rate 6.22% 6.81% 6.25% 6.80%
</TABLE>
Weighted average debt increased approximately $143 million and $158
million for the three and six months ended June 30, 1999 compared to the
same periods in 1998 primarily due to increased weighted average
borrowings on the credit agreement to fund rehabilitations and
renovations on the newly acquired multifamily communities and increased
fixed rate debt as a result of mortgage notes assumed in property
acquisitions.
COSTS ASSOCIATED WITH STRATEGIC ALTERNATIVES represent appraisal costs,
investment banking fees, legal, accounting and consulting fees related to
the Company's preparation of the Plan and evaluation of other strategic
alternatives. See Note 1 to the Consolidated Financial Statements for
additional information.
AMORTIZATION OF ACQUIRED WORKFORCE AND INTANGIBLE ASSETS associated with
the Advisor Transaction in 1996 and Property Manager Transaction in 1997
decreased $1.7 million for the three month period ended June 30, 1999 and
$2.3 million for the six month period ended June 30, 1999 when compared
to the same periods in 1998 as the costs related to the Advisor
Transaction were fully amortized by February of 1999.
DEPRECIATION AND AMORTIZATION increased for the three and six month
periods ended June 30, 1999 compared to the same periods in 1998 due to
an increased property asset base.
GAIN ON SALES OF ASSETS for the three and six month periods ended June
30, 1999 resulted from the sale of the MBS portfolio in June, 1999. Gain
on sales of assets for the three and six month periods ended June 30,
1998 resulted from the sales of three retail assets in the first quarter
of 1998 and one parcel of land in the second quarter of 1998.
C. FUNDS FROM OPERATIONS (FFO):
Management and industry analysts generally consider Funds from Operations
("FFO"), to be an appropriate measure of the performance of an equity
REIT, along with net income and cash flows from operating activities,
financing activities and investing activities. The Company's FFO is
presented to assist investors in analyzing the Company's ongoing
operating cash flows which support dividends and recurring capital
expenditures. However, FFO should not be considered by the reader as a
substitute to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. The Company
believes that in order to facilitate a clear understanding of the
operating results of the Company, FFO should be analyzed in conjunction
with net income (loss) as presented in the Consolidated Financial
Statements and information presented elsewhere. FFO is determined in
accordance with a resolution adopted by the Board of Governors of the
National Association of Real Estate Investment Trusts
-15-
<PAGE>
C. FUNDS FROM OPERATIONS (FFO): - Continued
("NAREIT"), and is defined as net income (loss) (computed in accordance
with generally accepted accounting principles), excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation
and amortization on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. The methodology used by
the Company when calculating FFO may differ from that of other equity
REIT's and, therefore, may not be comparable to such other REIT's. In
addition, FFO does not represent amounts available for management's
discretionary use for needed capital replacement or expansion, debt
service obligations or other commitments.
The following table presents the Company's FFO for the periods ended
June 30:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -----------------------------
1999 1998 1999 1998
------------ -------------- ------------ -------------
<S> <C> <C> <C> <C>
Loss from operations before
joint venture income,
gain on sales of assets,
and minority interest $(2,142,406) $(2,195,408) $(7,880,543) $(3,859,413)
Joint venture net operating
income -- 6,452 -- 82,018
Amortization of
intangible assets 1,509,851 3,258,048 4,185,167 6,516,097
Costs associated with
strategic alternatives 1,523,870 -- 4,572,243 --
Depreciation 15,690,306 13,555,484 31,494,314 26,005,184
Income allocated to
preferred shareholders (1,539,562) (1,556,669) (3,079,125) (3,096,232)
----------- ----------- ----------- -------------
Funds from Operations $15,042,059 $13,067,907 $29,292,056 $25,647,654
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Cash flows provided by (used for):
Operating activities 18,577,033 21,689,751 28,756,224 36,163,275
Investing activities (7,080,369) (27,101,341) (37,828,466) (78,092,857)
Financing activities (7,368,013) 7,993,106 16,791,036 45,948,639
</TABLE>
SAME-STORE MULTIFAMILY COMMUNITIES
The Net Operating Income ("NOI") of the 65 same-store communities
aggregating 18,773 units which are considered same-store is summarized
below (dollars in thousands).
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
1999 1998 % Change 1999 1998 % Change
------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenue $38,380 $36,475 5.2% $76,369 $72,923 4.7%
Expenses 15,205 13,886 9.5% 30,239 28,498 6.1%
------- ------- ------- -------
Net operating income $23,175 $22,589 2.6% $46,130 $44,425 3.8%
------- ------- ------- -------
Average monthly rent $704 $681 $701 $681
per unit
Average physical 95.5% 94.8% 95.4% 94.5%
occupancy
</TABLE>
NOI for the same-store communities increased 2.6% for the three months
ended June 30, 1999 compared to the same period in 1998. Growth in
same-store multifamily revenue was 5.2% for the three months ended June
30, 1999 and 4.7% for the six months ended June 30, 1999 compared to the
prior year periods. Rent increases accounted for the majority of the
increase and the remaining revenue gain was generated from increased
occupancy. The increase in expenses was primarily due to a reduction of
insurance expense in the second quarter of 1998 which was the result of
the Company's improved loss history.
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<PAGE>
D. LIQUIDITY AND CAPITAL RESOURCES:
The Company's net cash provided by operating activities decreased $7.3
million for the six month period ended June 30, 1999 when compared to the
same period in 1998 due to the costs associated with strategic
alternatives of $4.6 million and the decrease in accrued expenses and
other liabilities of $10.2 million. These decreases in operating cash
flow were partially offset by the increased cash flow generated by
decreases in operating escrows and other assets of $5.0 million and
increased net operating income generated by same-store multifamily
communities of $1.7 million.
Net cash used for investing activities decreased $40.2 million for the
six month period ended June 30, 1999 when compared to the same period in
1998. The decrease was due to a decrease in acquisitions of $59.7
million, a decrease in rehabilitation and non-recurring capital
expenditures of $8.2 million and increased principal collections on the
note receivable of $3.5 million. These were offset by decreased proceeds
from sale of properties of $13.1 million and decreased distributions from
joint venture assets of $15.7 million.
Net cash provided by financing activities decreased $29.2 million due to
reduced borrowings under the credit agreement and construction loan of
$46.5 million. The decrease in cash flows due to reduced borrowings was
partially offset by reduced payoffs of mortgage notes payable of $17.4
million.
Cash flows from operations, debt financing and sales of assets are the
primary sources of liquidity employed by the Company. In addition, in
1997, the Company raised additional capital through a private placement
of preferred stock and a public offering of common stock, the proceeds of
which were used to acquire multifamily properties and to pay down
variable rate debt. Operating cash flows are earmarked for the payment of
dividends as well as capital expenditures of a recurring nature. Debt
financing, proceeds from asset sales and equity offerings have been used
to finance the acquisition, renovation, rehabilitation and development of
apartment communities.
In each of the previous three years, the Company has paid between
81% and 86% of FFO in dividends, retaining the rest for recurring
capital expenditures and working capital.
The Company has a policy to maintain leverage at or below 50% of the
reasonably estimated value of assets. By employing moderate leverage
ratios, the Company expects it can continue to generate sufficient cash
flows to operate its business as well as sustain dividends to
shareholders.
The Company conservatively manages both interest rate risk and maturity
risk. Through the use of a swap, the Company has hedged interest rate
risk on $40 million of its outstanding variable rate debt as of June 30,
1999. Additionally, the Company has spread its maturities on long-term
debt and has weighted average maturities of approximately 14 years.
The Company has adequate sources of liquidity to meet its current cash
flow requirements, including dividends and debt service. In order to fund
ongoing renovation, rehabilitation and development activities, the
Company will utilize operating cash flows, and, will generate net
proceeds from the sale of certain real estate assets.
E. BUSINESS CONDITIONS/RISKS:
The Company believes that favorable economic conditions exist in
substantially all of its real estate markets. For the Company's
same-store apartment communities, physical occupancy was 97.4% as of June
30, 1999 which generally represents current market occupancies. In
addition, the Company has generated competitive rental rates at its
properties. The Company expects to produce consistent performance from
its real estate assets; however, no assurances can be made in this
regard.
The Company's real estate investments are subject to some seasonal
fluctuations resulting from changes in utility consumption and seasonal
maintenance expenditures. Future performance of the Company may be
impacted by unpredictable factors which include
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<PAGE>
E. BUSINESS CONDITIONS/RISKS: - Continued
general and local economic and real estate market conditions, variable
interest rates, environmental concerns, energy costs, government
regulations and federal and state income tax laws as well as the matters
set forth below in Paragraph H under the caption "Risk Factors". The
requirements for compliance with federal, state and local regulations to
date have not had an adverse effect on the Company's operations, and no
adverse effects are anticipated in the future.
The merger agreement the Company has entered into contains certain
restrictions on the conduct of the Company's business during the term of
the agreement.
The Company is also involved in certain legal actions and claims in the
ordinary course of its business. It is the opinion of management and its
legal counsel that such litigation and claims should be resolved without
any material effect on the Company's financial position.
In addition to the legal action and claims in the ordinary course of
business the Company is involved in the following litigation:
On June 18, 1999, a purported class action lawsuit, FIELDS V. BERKSHIRE
REALTY COMPANY, INC., ET AL., was initiated by a shareholder against the
Company and each of the Directors (including the Chairman of the Board,
Douglas Krupp) alleging, among other things, that the defendants breached
their fiduciary duties to the shareholders in connection with various
actions taken by the defendants with respect to the approval of the
proposed merger transaction whereby Berkshire Realty Holdings, L.P. (the
"Potential Acquiror"), an entity formed by Mr. Krupp and affiliates of
Blackstone Real Estate Advisors and Whitehall Street Real Estate Limited
Partnership XI may acquire ownership of the Company ("Merger
Transaction"). The complaint further alleges that the price offered by
the Potential Acquiror for the shares of the Company's stock was
inadequate. The lawsuit was filed in the Chancery Court of the State of
Delaware in and for New Castle County. The complaint seeks, among other
things, injunctive relief and unspecified money damages. The Company
believes that it and the directors have meritorious defenses to the
allegations made in the complaint and intends to contest the lawsuit
vigorously.
On July 9, 1999 a purported class action lawsuit, PERTON V. BERKSHIRE
REALTY COMPANY, INC., ET AL., was initiated by a shareholder against the
Company, each of the Company's Directors (including the Chairman of the
Board, Douglas Krupp), Berkshire Realty Holdings, L.P., and BRI
Acquisition, LLC, alleging, among other things, that the defendants
breached their fiduciary duties to the Company stockholders in connection
with various actions taken by them with respect to the Merger
Transaction. The lawsuit was filed in the Chancery Court of the State of
Delaware in and for New Castle County. The complaint seeks, among other
things, injunctive relief and unspecified money damages. The Company
believes that it and the individual defendants have meritorious defenses
to the allegations made in the complaint and intends to contest the
lawsuit vigorously.
On July 22, 1999, Berkshire Apartments, Inc. ("Apartments"), in its
capacity as general partner of BRI OP Limited Partnership (the "Operating
Partnership"), and the Company commenced an action seeking declaratory
relief in the United States District Court for the District of
Massachusetts against Stephen M. Gorn, Morton Gorn, and John B. Colvin in
response to claims recently raised by these individuals. Messrs. Gorn,
Gorn and Colvin are each shareholders in the Company, OP Unitholders and
former employees or consultants to the Company, and have recently claimed
that they and their affiliates were fraudulently induced to exchange
certain properties for OP Units, that their employment and consulting
relationships with the Company were wrongly terminated, and that the
Company and Apartments breached their fiduciary duties to these
individuals in connection with various actions taken with respect to the
Merger Transaction. The Company and Apartments have sought a declaration
that these claims are without merit, and, do not support monetary or
injunctive relief. In response to this action, on August 3, 1999, Messrs.
Gorn, Gorn and Colvin, and their affiliated entity Questar Properties,
Inc., commenced their own action against the Company, the Operating
Partnership, Mr. Krupp as Chairman of the Board of Directors of the
Company, David F. Marshall as
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<PAGE>
E. BUSINESS CONDITIONS/RISKS: - Continued
President and Chief Executive Officer of the Company, and David J. Olney
as Executive Vice President of the Company in the United States District
Court for the District of Maryland and moved to dismiss or transfer the
Company's suit in favor of the newly-filed Maryland case. The new
Maryland suit is factually similar to the Company's action. The new suit
does not, however, raise any claim with respect to the Merger Transaction
or the employment and consulting agreements, and it does not, at this
time, seek injunctive relief relative to the Merger Transaction, although
Messrs. Gorn, Gorn and Colvin claim to have reserved their purported
rights to assert such claims and seek such relief at a later time. The
Company believes that it and the Company's officers and directors have
meritorious defenses to the allegations made in the Maryland complaint
and intends to contest the lawsuit vigorously.
F. YEAR 2000
The Year 2000 compliance issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after
1999. This could result in a system failure or miscalculations causing
disruptions of operations. The Year 2000 issue affects virtually all
companies and all organizations. The Company has conducted an assessment
of its core internal and external computer information systems and has
taken the further necessary steps to understand the nature and extent of
the work required to make its systems Year 2000 compliant in those
situations in which the Company is required to do so.
In this regard, the Company began a computer systems project in 1997 to
significantly upgrade its existing hardware and software. The Company
completed the testing and conversion of the financial accounting and
property operating systems in February, 1998. As a result, the Company
has generated operating efficiencies and believes it has remedied the
programming issues associated with the Year 2000. The Company incurred
hardware costs as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to complete the
upgrade and prepare for the Year 2000. The Company's cost of the systems
conversion was approximately $600,000 and has been capitalized and is
being amortized over five years.
The Company continues to evaluate and, where appropriate, remedy Year
2000 compliance issues with respect to its non-financial systems, such as
computer controlled elevators, boilers, chillers and other miscellaneous
systems. The Company does not believe that the future efforts to achieve
its Year 2000 compliance in non-financial systems will result in material
cost to the Company or significantly interrupt services or operations.
The Company surveyed material third-party service providers (including
but not limited to its banks and telecommunications providers) and
significant vendors and received assurances that such providers and
vendors are to be Year 2000 ready. However, if any of the third-party
service providers or vendors ceases to conduct business due to Year 2000
related problems, the Company expects to be able to contract with
alternate providers without experiencing any material adverse effect on
the Company's financial condition and results of operations.
The most reasonably likely worst case scenario that could affect the
Company's operating results and financial condition would be a power
failure resulting in an interruption in utilities services (i.e.
electricity, natural gas, telephone and water) provided by third-party
vendors to the Company and its residents, affecting a substantial number
of the geographic regions in which the Company's properties are located.
Additionally, despite the Company's current efforts to be Year 2000
compliant, elevators, boilers, chillers and other miscellaneous systems
may read incorrect dates and operate according to incorrect schedules.
Although such scenarios would be disruptive to residents, they are not
business critical and would not have a material adverse effect on the
Company's operating results or financial condition.
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<PAGE>
F. YEAR 2000 - Continued
Accordingly, management does not believe that the Year 2000 problems will
have a material adverse effect on the Company's financial condition or
results of operations. Such belief is based on our analysis of the risks
to the Company related to its potential Year 2000 problems and its
assessment of the Year 2000 problems of our third party service
providers. In any event, the Company will continue to evaluate the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result, in a worst case scenario, from the failure
by the Company and certain third party service providers to achieve Year
2000 compliance on its non-financial systems on a timely basis. To date,
a contingency plan has not been completed for dealing with the most
reasonably likely worst case scenario, however, the Company plans to
complete such analysis and contingency planning.
G. RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 133 ("FAS 133")
"Accounting for Derivatives" is effective for fiscal years beginning
after June 15, 1999. FAS 133 establishes standards related to the
accounting and disclosure requirements of derivative financial
instruments.
H. RISK FACTORS
The Company's business is subject to various risks including the
following:
Development and Acquisition
We acquire new properties from time to time, and those acquisitions may
reduce the value of your investment.
Berkshire regularly considers acquiring additional apartment communities.
Acquisitions involve several risks, including the following:
- Acquired properties may not perform as well as Berkshire
expected before acquiring them.
- Improvements to the properties may cost more than Berkshire
had estimated.
- The costs of evaluating properties that are not acquired
cannot be recovered.
- Berkshire has acquired properties by issuing units and has had
to agree with the sellers not to sell the properties or
refinance the debt on them for various periods of time. These
restrictions may keep us from taking actions that would
otherwise be in the best interests of the shareholders.
Berkshire may in the future acquire apartment communities for
units and may have to agree to similar restrictions.
We develop new apartment communities from time to time, and these
activities may reduce the value of your investment.
Berkshire plans to continue developing new apartment communities as
opportunities arise in the future. Development and construction
activities entail a number of risks, including the following:
- We may abandon a project after spending time and money
determining its feasibility.
- Construction costs may exceed the original estimates.
- The revenue from a new project may not be enough to make it
profitable.
- Berkshire may not be able to obtain financing on favorable
terms for development of a property.
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<PAGE>
- We may not complete construction and lease up on schedule,
resulting in increased costs.
- Berkshire may not be able to obtain, or may be delayed in
obtaining, necessary governmental permits.
- Even successful projects require a substantial portion of
management's time and attention.
The industry we operate in has risks that may cause your investment to
decline in value.
Owning real estate involves a variety of risks, including the risks
described below:
Realizing a profit from owning apartment communities depends on many
factors.
Berkshire invests in apartment communities and therefore is subject to
the various risks generally related to owning and developing real
property. The value of Berkshire's apartment communities and our ability
to distribute cash to shareholders will depend on how well we operate and
develop our properties. These are some of the things that may adversely
affect our results:
- Changes in national and local economic conditions, such as
oversupply of apartment units or reduction in demand for
apartment units in our markets.
- The attractiveness of our apartments to tenants.
- Changes in interest rates and the availability, cost and terms
of mortgage financings.
- The ongoing need for capital improvements in our properties,
particularly in older structures.
- Changes in real estate tax rates and other operating expenses.
- Changes in governmental rules and fiscal policies and changes
in zoning laws.
- Civil unrest, acts of God, including natural disasters which
may result in uninsured losses, acts of war and other factors
beyond our control.
Our business depends on the performance of four markets.
We have made almost all of our investments in Florida, Texas and the
Mid-Atlantic and Southeastern United States. Therefore, Berkshire's
results will depend to a great extent on the economic conditions in these
markets as well as the market for apartment communities generally.
Regulations may cause our costs to increase or limit our ability to
increase our revenue.
Many federal, state and local zoning, subdivision, planning, building,
environmental and other land use laws and regulations govern real estate.
These laws and regulations may place significant restrictions on our
ability to develop or improve our real estate. Even unintentional
violations of these laws and regulations by us or by our tenants may
force us to take corrective action or pay substantial penalties. In
particular, various laws and regulations may restrict the amount and
process by which we may raise rents, as well as our right to convert a
property to other uses, such as condominiums or cooperatives.
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<PAGE>
We may lose some of our property to casualties or takings.
Conditions existing on real property may result in injury to people. BRI
Partnership may incur liability as a result of such injuries. Such
liability may be uninsurable in some circumstances or may exceed the
limits of insurance maintained at typical amounts for the type and
conditions of the property. In addition, our properties may suffer loss
in value due to causalities such as fire or hurricanes. These losses may
be uninsurable in some circumstances or may exceed the limits of
insurance maintained at typical amounts for the type and condition of the
property. Should an uninsured loss occur, Berkshire could lose both its
investment in and anticipated profits and cash flow from a property. Real
estate may also be taken, in whole or in part, by public authorities for
public purposes in eminent domain proceedings. Awards resulting from such
proceedings may not adequately compensate Berkshire for the value lost.
We may not be able to sell our assets at the optimal time.
Real estate investments are relatively illiquid. Our ability to vary our
portfolio in response to changes in economic and other conditions will
therefore be limited. If we must sell an investment, we may not be able
to sell the investment in the time period we desire or at a price that
will recoup or exceed the amount of our cost for the investment.
Our expenses may increase, resulting in a decrease of the funds available
to pay dividends to shareholders.
BRI Partnership must pay the expenses associated with operating its
apartment communities. These expenses include:
- cleaning
- electricity
- heating, ventilation and air conditioning
- elevator repair and maintenance
- insurance and administrative costs
- other general costs associated with security, landscaping,
repairs and maintenance
If these expenses increase, the local rental market may limit the extent
to which we may increase rents to meet these increased operating expenses
without decreasing occupancy rates. If these operating expenses increase
faster than rental rates, our results of operations, financial condition
and ability to pay distributions to shareholders could be adversely
affected.
We may incur costs if we do not comply with the Fair Housing Amendments
Act and Americans with Disabilities Act.
The Fair Housing Amendments Act imposes requirements related to access by
physically handicapped persons on multifamily properties first occupied
after March 13, 1991 or for which construction permits were obtained
after June 15, 1990. If Berkshire does not comply with this statute, we
might have to pay fines to the United States government or damages to
private litigants.
All of our properties must comply with the Americans with Disabilities
Act to the extent such properties are "public accommodations" or
"commercial facilities," as defined by this statute. The law requires
that facilities, including leasing offices, open to the general public be
made accessible to people with disabilities. Individual apartment units
are not considered public accommodations for these purposes. Compliance
with this law's requirements could require removal of access barriers and
other capital improvements to the public areas of Berkshire's properties.
Noncompliance could result in imposition of fines by the United States
government or an award of damages to private litigants. If any changes to
our properties subsequently are required that involve material
expenditures, our results of operation, financial condition and ability
to make expected distributions to shareholders could be adversely
affected.
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Our joint venture partners may have different interests than we do,
resulting in a loss of value of some of our properties or an inability to
take advantage of favorable opportunities.
Any of our investments in a joint venture partnership which owns property
may involve risks which would not be present in a direct investment in
real estate. For example, our joint venture partner may experience
financial difficulties and may at any time have economic or business
interests or goals which are inconsistent with our business interests and
goals or contrary to our policies or objectives. Our partner might take
actions that would subject the property owned by the joint venture to
liabilities in excess of those contemplated by the terms of the joint
venture agreement. In addition, we might reach an impasse with our
partner since either party may disagree with a proposed transaction
involving the property owned by the joint venture and impede any proposed
action.
Financings
We may not be able to make the required payments on our debt.
As of June 30, 1999, we had approximately $615,433,000 of total debt.
Payments of principal and interest on mortgage borrowings may leave us
with insufficient cash resources to operate our apartment communities or
pay distributions required to be paid in order for us to maintain our
qualification as a REIT.
If we cannot make payments on a loan secured by a mortgage, the lender
could foreclose on the property securing the loan. If this happens,
Berkshire will lose the income from the property and any value the
property had. Even if a loan is nonrecourse, the lender might have the
right to recover deficiencies arising from fraud, environmental
liabilities or other circumstances. Foreclosure could also create taxable
income without producing any cash, thereby reducing our cash available
for distribution and hindering our ability to meet the tax requirements
for a REIT.
In connection with acquiring 39 properties in exchange for units, we
agreed to maintain prescribed levels of nonrecourse debt on these
properties. The purpose of these agreements was to minimize the tax
consequences of the acquisitions to the unit recipients. If we do not
maintain the required level of debt, we would be in default under these
agreements and could be liable to the holders of the units.
We may not be able to refinance our debt when it comes due.
When any of our debt secured by real property comes due, we will have to
refinance the debt or sell the property that secures the debt. If the
interest rate on the new debt is higher than the rate on the old debt,
our costs will increase. Our ability to refinance any of this debt and
the terms on which we might refinance will depend upon economic
conditions in general and specifically on conditions in the capital
markets. We cannot guarantee that we could refinance or repay any of
these mortgage loans at maturity.
We do not have a limit on how much debt we can incur.
We currently have a policy of incurring debt only if upon such incurrence
the ratio of Berkshire's debt to the value of its assets would be 50% or
less. Although we have adopted this policy, Berkshire's governing
documents contain no limitation on the amount of indebtedness Berkshire
may incur. Accordingly, the Board of Directors could alter or eliminate
this policy and would do so, for example, if it were necessary for
Berkshire to continue to qualify as a REIT.
The interest rates of our credit facility may increase, which would
result in a reduction of funds available to pay dividends to
shareholders.
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<PAGE>
Outstanding advances under our credit facility bears interest at a
variable rate. As of June 30, 1999, this credit facility had an
outstanding balance of $180,000,000. We may incur additional variable
rate indebtedness in the future. Accordingly, increases in interest rates
could increase Berkshire's interest expense, which could adversely affect
Berkshire's results of operations, financial condition and ability to pay
expected distributions to shareholders. An increase in interest expense
could also cause us to be in default under our credit facilities.
Potential Environmental Liability - Our properties may have environmental
contamination, which could reduce the value of your investment.
Various federal, state and local environmental laws, ordinances and
regulations subject property owners or operators to liability for the
costs of removal or remediation of hazardous or toxic substances on the
property. These laws often impose liability without regard to whether the
owner or operator knew of, or was responsible for, the presence of the
hazardous or toxic substances. The presence of, or the failure to
properly remediate, such substances may adversely affect our ability to
sell or rent the property or to borrow using the property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of
such substances at a disposal or treatment facility, whether or not such
facility is owned or operated by such person. Third parties may seek
recovery from owners or operators of such properties or persons who
arranged for the disposal or treatment of hazardous or toxic substances.
Therefore, owners and operators are potentially liable for removal or
remediation costs, as well as other related costs, including governmental
fines and injuries to persons and property, related to such facilities.
Anti-Takeover Provisions - Because our governing documents contain
provisions that may inhibit a takeover of Berkshire, you may not have the
opportunity to realize a premium on your investment.
Our charter places restrictions on the accumulation of shares in excess
of 9.8% of the number of outstanding shares of common stock, subject to
exceptions permitted with the approval of the Board of Directors to allow
(1) underwritten offerings, or (2) the sale of equity securities in
circumstances where the Board of Directors determines Berkshire's REIT
federal tax status will not be jeopardized. This ownership limitation
may:
- discourage a change in control of Berkshire.
- deter tender offers for the common stock, which offers may be
advantageous to shareholders.
- limit the opportunity for shareholders to receive a premium
for their shares of common stock that might otherwise exist.
Under Berkshire's charter, the election of directors is staggered such
that approximately one-third of the directors are elected to three-year
terms each year. This provision may discourage a change in control of
Berkshire. In addition, the governing documents require a supermajority
vote to amend those portions of the governing documents which concern:
- the definition of "supermajority".
- the requirements for amending the governing documents.
- the requirements regarding excess share ownership.
- the actions which require a supermajority vote.
- the requirements regarding business combinations.
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<PAGE>
Additional provisions of the governing documents restrict the
shareholders' ability to nominate candidates for election as directors.
In addition, Berkshire is subject to Section 203 of the Delaware General
Corporation Law, which restricts business combinations between Berkshire
and its shareholders.
Any of the provisions discussed above may have the effect of delaying,
deferring or preventing a transaction or change in control of Berkshire
that might involve a premium price for the shares of common stock or that
otherwise might be in the best interest of our shareholders.
Berkshire has an authorized class of 60,000,000 shares of preferred
stock. Currently Berkshire has approximately 2.7 million shares of its
1997 Series-A Preferred Stock outstanding. The Board of Directors may
issue the remaining 57.3 million shares on such terms and with such
rights, preferences and designations as the Board may determine. Issuance
of such preferred stock, depending on its rights, preferences, and
designations, may have the effect of delaying, deterring, or preventing a
change in control of Berkshire.
Our governing documents contain no restrictions on the types of
investments we may make, which may result in a portfolio significantly
different from the one in existence at the time you elect to convert your
units.
Berkshire's Board of Directors may change its investment policies without
a vote of the shareholders. Consequently, shareholders will have no
direct control over the kinds of investments Berkshire makes.
Tax
We may fail to qualify as a REIT, which would result in a reduction of
funds available to distribute to shareholders.
To maintain our status as a REIT, we must continually meet specified
criteria concerning, among other things, our common stock ownership, the
nature of our assets, the sources of our income and the amount of
distributions we make to shareholders.
If we fail to qualify as a REIT, we would not be allowed a deduction for
distributions to shareholders in computing our taxable income and would
be taxed on our income at regular corporate tax rates. If our status as a
REIT were terminated, we might not be able to elect to be treated as a
REIT for the following five-year period. Therefore, if we lose our REIT
status, the funds available for distribution to you would be reduced
substantially for each of the years involved.
Because the tax laws require us to distribute most of our taxable income,
we may have to borrow additional funds or forgo other uses of our
capital.
To qualify as a REIT, we generally are required each year to distribute
to our shareholders at least 95% of our taxable income, excluding any net
capital gain. In addition, Berkshire is subject to a 4% nondeductible
excise tax on the amount, if any, by which distributions paid by it with
respect to any calendar year are less than the sum of:
- 85% of its ordinary income for that year,
- 95% of its capital gain net income for that year, and
- 100% of its undistributed taxable income from prior years.
We may have to borrow funds on a short-term basis to meet the 95%
distribution requirement and to avoid the nondeductible excise tax. The
requirement to distribute a substantial portion of our net taxable income
could cause us to distribute amounts that otherwise would be spent on
future acquisitions, capital expenditures or repayment of debt. In that
event, we might have to borrow funds or sell assets to fund the costs of
such items.
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If BRI Partnership fails to qualify as a partnership, we will have less
cash available for distribution to stockholders.
We have not requested, and do not expect to request, a ruling from the
Internal Revenue Service that BRI Partnership and each of its
noncorporate operating subsidiaries will be classified as partnerships
for federal income tax purposes. If the agency were to successfully
challenge the tax status of BRI Partnership or any noncorporate operating
subsidiary as a partnership for federal income tax purposes, BRI
Partnership or the noncorporate subsidiary would be taxed as a
corporation. If that happened, Berkshire would likely cease to qualify as
a REIT for a variety of reasons. Furthermore, the imposition of a
corporate income tax on BRI Partnership would reduce substantially the
amount of cash available for distribution from BRI Partnership to
Berkshire and its shareholders.
Changes in tax law may affect the value of our assets and your
investment.
The current federal income tax treatment of an investment in Berkshire
may be modified, prospectively or retroactively, by legislative, judicial
or administrative action at any time. In addition to any direct effects
which such changes might have, such changes might also indirectly affect
the market value of all real estate investments and, consequently, our
ability to realize our business objectives.
I. FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements, estimates
or plans. There are a number of factors that could cause the Company's
actual results to differ materially from those indicated by such
forward-looking statements. These factors include the matters set forth
above in Paragraph E under the caption "Business Conditions/Risks" and
Paragraph H under the caption "Risk Factors." 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 objectives and
plans of the Company will be achieved.
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BERKSHIRE REALTY COMPANY, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
----------------
Item 1. Legal proceedings
Response: See discussion in Part I, Item 2 Section E.
Business Conditions/Risks
Item 2. Change in securities
Response: None
Item 3. Defaults upon senior securities
Response: None
Item 4. Submission of matters to a vote of security holders
Response:
On July 21, 1999, a Special Meeting of the Company's Stockholders
was held to vote upon the approval of the Plan of Liquidation and
Dissolution pursuant to which the Company's assets would be
liquidated, known liabilities satisfied, reserves established and
remaining proceeds distributed to the shareholders. A quorum was
present at the Special Meeting, as the holders of a majority of
the aggregate of the shares of Common Stock and Preferred Stock
(voting on a converted basis) issued, outstanding and entitled to
vote at the Special Meeting (collectively, the "Voting
Securities") were present in person or represented by proxy.
The Plan of Liquidation and Dissolution (the "Plan") was rejected
by the shareholders as the vote for approval did NOT receive the
required affirmative vote of the holders of a majority of the
Voting Securities issued and outstanding as of the record date,
May 25, 1999. Of 42,433,757 shares entitled to vote at the
Special Meeting: (i) 2,135,778 votes were cast for approval of
the Plan, (ii) 23,700,944 votes were cast against approval of the
Plan and (iii) 1,091,344 shares abstained from voting on approval
of the Plan.
Item 5. Other information
Response: None
Item 6. Exhibits and reports on Form 8-K:
EXHIBITS:
27.1 Financial Data Schedule - June 30, 1999 +
REPORTS ON FORM 8-K
On July 21, 1999, the Company filed a Current Report on Form 8-K
announcing that its stockholders rejected the Plan of Liquidation
and Dissolution presented to them at the Company's Special
Meeting of Stockholders held on July 21, 1999.
+ Filed herein.
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<PAGE>
SIGNATURE
---------
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.
BERKSHIRE REALTY COMPANY, INC.
(Registrant)
BY: /s/ MARIANNE PRITCHARD
-------------------------------------
Marianne Pritchard, Executive Vice
President and Chief Financial Officer
of Berkshire Realty Company, Inc.
(Principal Financial Officer)
BY: /s/ DAVID F. MARSHALL
-------------------------------------
David F. Marshall, President,
Chief Executive Officer and Director
of Berkshire Realty Company, Inc.
DATE: August 16, 1999
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
BERKSHIRE REALTY COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 20,085,674
<SECURITIES> 6,400,911<F1>
<RECEIVABLES> 16,188,849<F2>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,940,945<F3>
<PP&E> 951,139,261<F4>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,014,755,640
<CURRENT-LIABILITIES> 30,430,770
<BONDS> 615,432,895<F5>
62,376,944<F6>
0
<COMMON> 310,470,606<F7>
<OTHER-SE> (3,955,575)<F8>
<TOTAL-LIABILITY-AND-EQUITY> 1,014,755,640
<SALES> 0
<TOTAL-REVENUES> 100,954,644<F9>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 86,361,684<F10>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,473,503
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,880,543)
<DISCONTINUED> 2,281,255<F11>
<EXTRAORDINARY> 195,718<F12>
<CHANGES> (3,079,125)<F13>
<NET-INCOME> (8,482,695)
<EPS-BASIC> (.23)
<EPS-DILUTED> (.23)
<FN>
<F1>INCLUDES MORTGAGE LOANS AND NOTES RECEIVABLE.
<F2>INCLUDES ESCROWS HELD.
<F3>INCLUDES INTANGIBLE ASSET AND WORKFORCE ACQUIRED OF 5,263,863 AND OTHER
ASSETS OF 15,677,082.
<F4>INCLUDES PROPERTIES HELD LESS DEPRECIATION.
<F5>INCLUDES CREDIT AGREEMENTS, MORTGAGES PAYABLE AND CONSTRUCTION LOAN.
<F6>INCLUDES MINORITY INTEREST.
<F7>INCLUDES PREFERRED STOCK, COMMON STOCK, ADDITIONAL PAID-IN CAPITAL AND
ACCUMULATED DEFICIT.
<F8>INCLUDES LOAN RECEIVABLE TO OFFICER AND TREASURY STOCK.
<F9>INCLUDES ALL REVENUE OF THE COMPANY.
<F10>INCLUDES ALL EXPENSES OF THE COMPANY.
<F11>INCLUDES MINORITY INTEREST INCOME.
<F12>INCLUDES GAIN ON SALE OF MBS PORTFOLIO.
<F13>INCLUDES INCOME ALLOCATED TO PREFERRED SHAREHOLDERS.
</FN>
</TABLE>
