================================================================================
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 SEPTEMBER 30, 1996
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21670
------------------------------------
Cardinal Realty Services, Inc.
(Exact Name of Registrant as Specified in its Charter)
Ohio 31-4427382
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6954 Americana Parkway
Reynoldsburg, Ohio 43068
(Address of Principal Executive Offices including Zip Code)
(614) 759-1566
(Registrant's Telephone Number, including Area Code)
------------------------------------
Indicate by check X whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check X whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes X No
--- ---
As of November 8, 1996 there were 4,550,145 shares of common stock issued, of
which 210,321 shares were treasury shares.
Page 1 of 30 sequentially numbered pages
Exhibit Index on page 28.
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<PAGE>
2
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C>
Part I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1996
(Unaudited) and December 31, 1995 (Audited).............................................................3
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 1996 and 1995 (Unaudited)...........................................................4
Consolidated Statement of Shareholders' Equity
for the Nine Months Ended September 30, 1996 (Unaudited)................................................5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995 (Unaudited).............................................6-7
Notes to Consolidated Financial Statements...............................................................8-17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................................18-27
Part II - OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................................28
Item 2. Changes in Securities......................................................................................28
Item 3. Defaults upon Senior Securities............................................................................28
Item 4. Submission of Matters to a Vote of Security Holders........................................................28
Item 5. Other Information..........................................................................................28
Item 6. Exhibits and Reports on Form 8-K...........................................................................28
Signatures...............................................................................................................29
</TABLE>
2
<PAGE>
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 (AUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
================== ==================
<S> <C> <C>
ASSETS
Operating Real Estate (Note 2):
Land..................................................................... $ 23,756,532 $ 24,082,635
Building and Improvements................................................ 141,378,026 143,193,921
------------------ ------------------
165,134,558 167,276,556
Accumulated Depreciation................................................. (3,411,798) 0
------------------ ------------------
161,722,760 167,276,556
Interests in and Receivables from Syndicated Partnerships (Notes 1 and 4)... 50,326,958 52,591,444
Cash (Note 1)............................................................... 3,718,712 2,751,986
Accounts Receivable, Affiliates (less an allowance
of $2,315,672 at September 30, 1996 and $2,468,845 at
December 31, 1995), Residents and Officers (Note 4)...................... 3,897,965 5,088,478
Furniture, Fixtures and Other, Net.......................................... 1,477,276 1,312,228
Funds Held in Escrow (Note 1)............................................... 11,240,443 9,390,610
Prepaids and Other (Note 1)................................................. 9,272,600 3,930,099
------------------ ------------------
$ 241,656,714 $ 242,341,401
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages, Term Debt and Other Notes Payable:
Non-Recourse Mortgages on Operating Real Estate (Notes 2 and 3).......... $ 146,607,459 $ 151,130,612
Corporate Term Debt...................................................... 18,044,220 20,470,205
Other Notes Payable...................................................... 172,251 1,453,553
------------------ ------------------
164,823,930 173,054,370
Accounts Payable............................................................ 1,734,914 1,350,641
Accrued Interest, Real Estate and Other Taxes (Notes 2 and 3)............... 5,249,535 4,532,148
Other Accrued Expenses ..................................................... 6,949,878 9,716,866
Other Liabilities........................................................... 2,418,155 2,441,282
------------------ ------------------
Total Liabilities 181,176,412 191,095,307
------------------ ------------------
Shareholders' Equity (Note 1):
Preferred Stock, 1,500,000 shares authorized, no shares issued .......... 0 0
Common Stock 13,500,000 shares authorized with no stated value,
4,334,668 and 3,603,160 shares issued and outstanding
at September 30, 1996 and December 31, 1995, respectively............ 29,122,547 29,122,547
Additional Paid-in Capital (Note 1)...................................... 14,959,756 8,461,216
Retained Earnings........................................................ 16,397,999 13,662,331
------------------ ------------------
60,480,302 51,246,094
------------------ ------------------
$ 241,656,714 $ 242,341,401
================== ==================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
4
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
--------------- --------------- --------------- -----------------
(Restated - (Restated -
Notes 1 and 5) Notes 1 and 5)
<S> <C> <C> <C> <C>
Revenues:
Rental and Other Operating Real Estate Revenues............ $ 10,311,403 $ 30,755,215
Fee Based.................................................. 3,688,833 $ 3,826,131 9,272,256 $ 11,376,523
Interest, Principally from Syndicated Partnerships......... 1,680,081 1,075,307 4,626,766 3,038,013
Income from Disposal of Non-Core Assets-Net................ 7,181 610,758 281,873 2,425,945
Other...................................................... 21,543 235,827 173,198 596,305
--------------- --------------- --------------- ----------------
15,709,041 5,748,023 45,109,308 17,436,786
--------------- --------------- --------------- ----------------
Expenses:
Rental Operating........................................... 5,281,275 15,719,226
Fee Based.................................................. 2,627,882 2,078,650 5,723,834 6,330,588
Administration............................................. 1,151,715 1,044,007 3,273,449 3,195,286
Restructure Costs.......................................... 0 0 300,000 0
Interest - Wholly Owned Property Debt...................... 3,500,425 0 10,700,604 0
Interest - Corporate Debt.................................. 278,714 356,350 840,180 1,142,398
Depreciation and Amortization.............................. 1,418,696 141,489 4,071,047 388,898
--------------- --------------- --------------- ----------------
14,258,707 3,620,496 40,628,340 11,057,170
--------------- --------------- --------------- ----------------
Income Before Income Taxes................................... 1,450,334 2,127,527 4,480,968 6,379,616
Provision for Income Taxes (Note 1).......................... 563,300 825,000 1,745,300 2,474,000
--------------- --------------- --------------- ----------------
Income before Extraordinary Gain............................. 887,034 1,302,527 2,735,668 3,905,616
Extraordinary Gain, net of Income Taxes of
$510,000 (Note 3)......................................... 0 0 0 804,021
--------------- --------------- --------------- ----------------
Net Income $ 887,034 $ 1,302,527 $ 2,735,668 $ 4,709,637
=============== =============== =============== ================
Net Income per Common Share:
Income Before Extraordinary Item........................... $0.22 $0.34 $0.69 $1.02
Extraordinary Gain......................................... 0.00 0.00 0.00 0.21
--------------- --------------- --------------- ----------------
Net Income $0.22 $0.34 $0.69 $1.23
=============== =============== =============== ================
Weighted Average Common Shares Outstanding................... 4,093,000 3,850,000 3,953,000 3,850,000
=============== =============== =============== ================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
5
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
------------------------------ Additional Retained
Shares Amount Paid-in Capital Earnings Total
------------- --------------- ---------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996....................... 3,603,160 $ 29,122,547 $ 8,461,216 $ 13,662,331 $ 51,246,094
Shares issued in connection with the
Lexford Acquisition (Note 1).................. 250,000 5,000,000 5,000,000
Contingent shares issued in connection with
Lexford Acquisition (Note 1).................. 450,000
Shares issued, in connection with
the claims resolution process ................ 6,621
Exercise of options under non-qualified stock
option plan................................... 26,722 47,050 47,050
Vesting Restricted Stock
Compensation Awards........................... 174,220 174,220
Less: Treasury shares primarily from the
redemption of stock held by
Syndicated Partnerships.................. (1,835) (31,330) (31,330)
Credit from utilization of
pre-confirmation tax benefits (Note 1)........ 1,308,600 1,308,600
Net Income for the period ...................... 2,735,668 2,735,668
------------- --------------- ---------------- -------------- --------------
Balance, September 30, 1996 (Note 1)............ 4,334,668 $ 29,122,547 $ 14,959,756 $ 16,397,999 $ 60,480,302
============= =============== ================ ============== ==============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
6
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996, AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
---------------------- -------------------
<S> <C> <C>
Cash Flows provided by Operating activities:
Management and Advisory Service activities:
Cash received from Fee Based activities....................................... $ 16,989,544 $ 15,940,367
Cash received from Interests in and Receivables from Syndicated Partnerships.. 6,042,883 2,577,096
Cash Receipts -- other........................................................ 1,276,105 2,804,725
Cash paid to Vendors, Suppliers and Employees................................. (17,374,022) (15,805,350)
Interest paid on Term Debt and Other Notes Payable............................ (881,886) (1,408,508)
Income Taxes paid - City and State............................................ (189,919) (132,601)
Taxes paid, other than Income Taxes........................................... (55,186) (419,913)
Payments related to non-recurring items....................................... (1,891,525) (628,066)
---------------------- -------------------
3,915,994 2,927,750
---------------------- -------------------
Real Estate Asset activities:
Cash received from Rental activities.......................................... 30,923,763 0
Payments on Rental activities................................................. (17,105,705) 0
Interest paid on Mortgages.................................................... (10,178,201) 0
---------------------- -------------------
3,639,857 0
---------------------- -------------------
Net Cash provided by Operating activities........................................ 7,555,851 2,927,750
---------------------- -------------------
Cash Flow (used in) Investing activities:
Management and Advisory Service activities:
Proceeds from sale of Non-Core Assets and Other............................... 701,492 2,065,945
Capital Expenditures.......................................................... (528,748) (368,272)
Repayment from/(Advances to) Syndicated Partnerships.......................... 396,369 (6,846,810)
Acquisition of Real Estate Assets............................................. 0 (425,812)
Real Estate Asset activities:
Net cash flow provided by Rental activities during period
Held for Sale (net of Interest paid of $10,322,143 in 1995)............... 0 1,836,656
Funding of Escrows............................................................ (310,759) 0
Capital Expenditures ......................................................... (370,453) 0
---------------------- -------------------
Net Cash (used in) Investing activities.......................................... (112,099) (3,738,293)
---------------------- -------------------
Cash Flows (used in)/provided by Financing activities:
Management and Advisory Service activities:
Proceeds from the exercise of Stock Options................................... 47,050 0
Redemption of Stock held by Syndicated Partnerships........................... (31,330) 0
Net Proceeds from/(Principal Payments) on Term Debt and Other................. (3,996,623) 2,438,514
Real Estate Asset activities:
Proceeds from Mortgage Debt................................................... 13,365,000 0
Payments on Mortgages - principal amortization................................ (1,415,176) (1,618,009)
Payments on Mortgages - lump sum.............................................. (14,445,947) (392,070)
---------------------- -------------------
Net Cash (used in)/provided by Financing activities.............................. (6,477,026) 428,435
---------------------- -------------------
Increase/(Decrease) in Cash ..................................................... 966,726 (382,108)
Cash at Beginning of Year........................................................ 2,751,986 4,639,643
---------------------- -------------------
Cash at End of Period............................................................ $ 3,718,712 $ 4,257,535
====================== ===================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
7
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
--------------- ---------------
<S> <C> <C>
Reconciliation of Net Income to
Net Cash provided by Operating activities:
Net Income............................................................... $ 2,735,668 $ 4,709,637
Adjustments to reconcile Net Income to Net Cash
provided by Operating activities:
Depreciation and Amortization........................................ 4,071,047 388,898
Provision for losses on Accounts Receivable.......................... 74,069 525,326
Income from Disposal or Recovery of Non-Core Assets ................. (281,873) (2,425,945)
Gain on Debt Restructuring........................................... 0 (1,314,021)
Provision for Income Taxes Credited to Paid-In Capital............... 1,308,600 2,984,000
Changes in Operating Assets and Liabilities:
Interests in and Receivables from Syndicated Partnerships............ 1,617,714 (335,505)
Accounts Receivable and Other Assets................................. (6,183,344) 3,003,545
Accounts Payable and Other Liabilities............................... 4,213,970 (4,608,185)
--------------- ---------------
Net Cash provided by Operating activities..................................... $ 7,555,851 $ 2,927,750
=============== ===============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the first nine months of 1995, the Company (as defined in Note 1 to
Consolidated Financial Statements) acquired four apartment properties primarily
financed with $4,770,000 of first mortgages on the properties.
In June 1995, the Company purchased from a mortgage lender $8.8 million of
non-recourse mortgages on one Syndicated Partnership (as defined in Note 1 to
Consolidated Financial Statements) and four Wholly Owned Properties (as defined
in Note 1 to Consolidated Financial Statements) for $7.8 million. The Company
financed the acquisition with a $7.8 million note payable to the mortgage
lender. The note was repaid in June 1996.
In the first nine months of 1996, the Company granted deeds in lieu of
foreclosure for three Wholly Owned Properties to the mortgagee. The properties
had an aggregate carrying value of $3.9 million. During the first nine months of
1995 the Company granted a deed in lieu of foreclosure for one Wholly Owned
Property to the mortgagee. The property had an aggregate carrying value of $2.1
million. No significant gain or loss was recognized on these transactions
because the assets and the non-recourse mortgages on each of these Properties
(as defined in Note 1 to Consolidated Financial Statements) had been recorded in
equal amounts.
Effective August 1, 1996, the Company acquired Lexford Properties, Inc. through
a merger with a wholly owned subsidiary of the Company. The Company issued
700,000 shares of its Common Stock (valued at $14,000,000) in consideration of
the acquisition, however 450,000 of the shares issued (valued at $9,000,000) are
subject to forfeiture, in whole or in part, if the Company's combined property
management operations fail to achieve certain profitability criteria on or
before the end of the Company's 1999 fiscal year.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
8
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Cardinal
Realty Services, Inc. and its wholly owned subsidiaries (collectively the
"Company"). For consolidated financial statement purposes, the "Company" also
includes limited partnerships and other legal entities which own Operating Real
Estate Assets and in which the Company, in turn, owns a 100% equity interest.
All significant intercompany balances and transactions have been eliminated in
this consolidation. The accompanying consolidated financial statements, except
for the Consolidated Balance Sheet at December 31, 1995, are unaudited and have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The consolidated financial
statements, the notes hereto and the capitalized terms included herein should be
read in conjunction with the Company's Form 10-K.
The interim consolidated financial statements have been prepared in
accordance with the Company's customary accounting practices. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine month period ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996.
Business Overview
- -----------------
The Company engages in two core business activities: 1) management
of multifamily residential real property, including provision of management
services to owners of property in which the Company does not have an ownership
interest; and 2) activities related to the ownership of multifamily residential
real property (including provision of asset management services to passive
co-owners). In January 1996 the Company restructured along these business lines
by creating two business divisions: Advisory Services and Management Services.
The restructuring was implemented, in part, to cause the Company and its
management to focus attention on these two distinct, yet complementary,
business activities.
Management Services
-------------------
The Company's Management Services division is charged with the conduct
of the Company's property management business. The Company's property management
business involves all traditional elements of third party property management
including: day-to-day management and maintenance of multi-family residential
apartment properties, attracting and retaining qualified residents, collecting
rents and other receivables from residents, providing cash management services
for rental revenues, security deposits, taxes and insurance and deferred
maintenance escrows, and compiling and furnishing information to property
owners.
Effective August 1, 1996, the Company acquired Lexford Properties, Inc.
("Lexford") by merger of a wholly owned subsidiary of the Company with and into
Lexford. On that date, Lexford became a wholly owned subsidiary of the Company.
Lexford has been engaged in the business of third party property management
services to the owners of multifamily residential real property since commencing
business operations in June 1988. At the time the Company acquired Lexford,
Lexford managed approximately 22,000 apartment units for third party owners. The
Company currently intends that Lexford will continue to provide and expand its
third party property management services as well as to succeed to the operation
8
<PAGE>
9
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of the Company's Management Services division. Accordingly, the Company's
property management business will be conducted through its wholly owned
subsidiary, Lexford Properties, Inc. Management believes that the acquisition of
Lexford has enhanced the Company's property management capabilities and will
facilitate the Company's ability to acquire, as well as service, additional
multifamily residential properties in the future including properties not built
by the Company. (SEE "LEXFORD ACQUISITION").
The Company's Management Services division also operates an adjunct
business which the Company refers to as "Ancillary Services". The Company's
Ancillary Services include the sale of parts and supplies to both the Wholly
Owned Properties and Syndicated Partnerships and also the leasing of furniture
and sale of renters insurance to residents at the Properties. In June 1996, the
Company announced that it anticipated certain realignments in its current
organization. As part of this restructure, the Company has contracted to out
source the parts and supply inventory currently handled internally by the
Company's Ancillary Services function. The Company expects that the transition
to the out sourcing will be completed by the end of 1996. Thereafter, the
Company's Ancillary Services department will continue to provide assistance to
the Properties, in the acquisition of needed parts and supplies and the
management of a coordinated buying group enjoying substantial volume discounts.
In consideration of these services, the Company will generate income by
retaining some portion of discounts earned.
Advisory Services
-----------------
The objective of the Company's Advisory Services division is to
maximize the value of its real estate holdings and its returns on real estate
investments. The Company performs these functions both with respect to those
Properties in which it maintains the entire ownership interest (its "Wholly
Owned Properties") as well as those properties in which the Company maintains a
partial ownership interest (the "Syndicated Partnerships"; and, together with
the Wholly Owned Properties, the "Properties"). The Company strives to obtain
and maintain the best available financing for the Properties and to maximize the
Properties' operating performance. The Company evaluates the performance of all
real estate holdings to identify investment requirements under-performing
Properties or those that can be sold at an attractive price relative to their
performance. The Company maintains at least 1% partnership interest in each of
the Syndicated Partnerships; though usually 9% or 10% interest. Beyond its
equity investment in the Properties, the Company holds receivables from a
majority of the Syndicated Partnerships (SEE "RECORDED VALUES OF RECEIVABLES
FROM SYNDICATED PARTNERSHIPS" AND NOTE 4). The remaining partnership interests
are substantially all owned by unrelated third party limited partner investors.
The Company's Advisory Services division acting in the Company's
capacity as general partner of the Syndicated Partnerships provides asset
management services to the Syndicated Partnerships. In addition, the Company's
Advisory Services division performs the following services for the accounts of
the co-owners (limited partners) of the Syndicated Partnerships: informational
and financial reporting Services, (including tax return preparation and
provision of tax return information to the limited partners;) and capital and
financial planning, (including determination of reserves, funding of capital
requirements and administration of capital distributions to partners.)
Fresh Start Accounting
- ----------------------
The Company adopted a method of accounting referred to as fresh start
("Fresh Start") reporting as of September 11, 1992 (the "Effective Date"), the
effective date of the Company's Third Amended Plan of Reorganization (the
9
<PAGE>
10
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
"Plan of Reorganization") filed on June 22, 1992 with, and confirmed by, the
United States Bankruptcy Court for the Southern District of Ohio, Eastern
Division. The Company applied Fresh Start accounting as of the Effective Date
to prepare its balance sheet and establish the values of its assets and
liabilities (SEE "RECORDED VALUES OF RECEIVABLES FROM SYNDICATED PARTNERSHIPS").
From and after the Effective Date the Company has applied historical cost
account values of new assets in establishing book values in accordance with
generally accepted accounting principles.
Operating Real Estate Assets (previously Held for Sale)
- -------------------------------------------------------
During 1995 and prior years, the Company had attempted to market and
sell the Wholly Owned Properties on terms that were beneficial to the Company
and its shareholders. However, based upon mortgage debt that has since been
restructured with favorable amortization terms, combined with improved net
operating income and cash flow performance, management decided to retain the
Wholly Owned Properties for investment (SEE NOTE 2). Therefore, commencing
January 1, 1996, the operations, including a provision for depreciation, of the
Wholly Owned Properties have been fully consolidated in the Company's Statements
of Income. Further, the cash flows of the Wholly Owned Properties have been
reclassified as Cash Flows Provided by Operating Activities. While the Wholly
Owned Properties were held for sale, the results of operations from the Wholly
Owned Properties were credited to the carrying value of the real estate and no
revenues, operating expenses or depreciation were included in the Consolidated
Statements of Income. Cash flows from the Wholly Owned Properties prior to 1996
were classified as Cash Flow Provided by Investing Activities (SEE NOTE 5). The
Company will continue to monitor and evaluate any changes in circumstances
and/or economic conditions affecting its investment in the Wholly Owned
Properties. The Company is currently analyzing alternatives for its majority
interest in the Wholly Owned Properties, which may include a disposition to
third parties resulting in deconsolidation of the entities.
Cash and Other Assets
- ---------------------
Cash at September 30, 1996 of approximately $3.7 million is comprised
of approximately $3.4 million related to Wholly Owned Properties (which is held
in separate property bank accounts) and approximately $300,000 in corporate
funds.
As of September 30, 1996, Funds Held in Escrow of $11.2 million is
comprised of $7.4 million of restricted cash related to the Wholly Owned
Properties and $3.8 million in corporate funds. Wholly Owned Properties Funds
Held in Escrow relate to security deposit escrows, real estate tax escrows and
maintenance and replacement escrows required by mortgage lenders. Corporate
Funds Held in Escrow are primarily amounts set aside to pay insurance premiums
for the Properties.
Prepaids and Other assets of $9.3 million as of September 30, 1996
include $4.7 million of goodwill related to the Lexford acquisition (SEE
"LEXFORD ACQUISITION" AND ITEM 2, MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES
- -- LEXFORD ACQUISITION), $1.5 million of capitalized costs associated with
refinancing mortgages on Wholly Owned Properties and $382,000 of prepaid
expenses and loan costs associated with the refinancing of the Company's
corporate lines of credit which are amortized based upon the maturity date of
the new loan. In addition, Prepaids and Other assets consists of a leasehold
interest in land of approximately $636,000, approximately $774,000 of prepaid
insurance and real estate taxes, $131,000 of inventory of replacement parts and
supplies for sale to Properties and approximately $1.0 million of advances to
Properties to cover costs incurred in litigation with the Properties' former
10
<PAGE>
11
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
insurance carrier involving a claim for termite damage at certain of
the Properties, which was settled in the third quarter 1996. These advances were
recovered from settlement proceeds in the fourth quarter 1996.
Recorded Values of Receivables from Syndicated Partnerships
- -----------------------------------------------------------
The Company owns general partner and/or limited partner interests in,
and holds second mortgage loans and other receivables from, Syndicated
Partnerships. The majority of these receivables arose prior to the Effective
Date as a result of agreements related to the syndication of the Syndicated
Partnerships. Advances made to Syndicated Partnerships since the Effective Date
primarily were for supplemental financing for debt restructuring or refinancing
transactions as described in Notes 3 and 4. Interests in and Receivables from
Syndicated Partnerships were recorded at their estimated fair value as of the
Effective Date based upon Fresh Start accounting. The contractual amounts of
receivables are significantly greater than the recorded values. At September 30,
1996 and December 31, 1995, the contractual value of the Company's Interests in
and Receivables from Syndicated Partnerships amounted to $238.0 million and
$237.1 million, respectively. There can be no assurance that the Company will
collect any amounts above the recorded Fresh Start value of these receivables.
The Fresh Start values were established as of the Effective Date
utilizing an estimation of value based upon a capitalization rate of 10.5%
applied to the net operating income of the respective Syndicated Partnership.
The estimated value was then adjusted by the Syndicated Partnership's mortgage
debt and the Syndicated Partnership's other assets and liabilities to determine
an estimated net fair value. The Company then calculated its share of the
estimated net fair value for each Syndicated Partnership, without regard to the
possibility that payments to limited partners might be required in order to
effectuate sales of the real estate by certain of the Syndicated Partnerships.
Interest is accrued on the recorded Fresh Start values of second
mortgages and certain other receivables based upon contractual interest rates.
Allowances are provided for estimated uncollectible interest based upon the
underlying Syndicated Partnerships' abilities to generate net cash flow
sufficient to pay accrued interest. In certain instances, payments made to the
Company by individual Syndicated Partnerships in excess of carrying amounts of
accrued interest on the recorded values of second mortgages is recorded as
interest income. Any such payments in excess of amounts recorded as accrued
interest normally still represent contractual interest payable from the
Syndicated Partnerships to the Company and is representative of interest which
accrues on the excess of the contractual balance of the second mortgage or other
receivable above that of the recorded Fresh Start value on the Company's balance
sheet. The Company is also entitled to receive incentive management fees and
supplemental second mortgage interest from certain of the underlying Syndicated
Partnerships if certain specified amounts of net operating income are achieved.
Also, in the event the underlying Properties are sold or refinanced, the Company
is generally entitled to a participation interest in the net proceeds, if
available, as a second mortgage holder and on account of its partnership
interest(s).
The Company accounts for its partnership interests in Syndicated
Partnerships by the cost method; no significant recorded value has been ascribed
to these interests. The realization of the Interests in and Receivables from
Syndicated Partnerships is dependent on the future operating performance of the
Syndicated Partnerships generating sufficient net operating income and net
proceeds upon ultimate disposition.
11
<PAGE>
12
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Non-Core Assets
- ---------------
The Company also has interests in motel properties, investor notes
receivable and certain other assets (collectively the "Non-Core Assets"). The
Company valued these Non-Core Assets as of the Effective Date based on previous
and current purchase offers, previous sales activity and independent appraisals.
In 1994, the Company recovered the remaining recorded value of Non-Core Assets
from the collection of receivables and proceeds from disposals of such assets.
The Company began recognizing income from sale proceeds and collections, net
of collection and closing costs, after the carrying value was fully recovered.
By September 30, 1996 the Company had successfully disposed of a substantial
portion of its Non-Core Assets. Those Non-Core Assets remaining are not
significant.
Lexford Acquisition
- -------------------
Effective August 1, 1996 the Company acquired Lexford by way of a
merger (the "Lexford Merger") of a wholly owned subsidiary of the Company with
and into Lexford. The terms of the Lexford Merger provided that the Company
would succeed to the ownership of all of the issued and outstanding stock of
Lexford and the shareholders of Lexford would receive 700,000 shares of
restricted, newly issued Common Stock. For purposes of the Lexford Merger, the
Common Stock was valued at $20 per share. Approximately $9.0 million, or 450,000
shares, of the purchase price is subject to forfeiture in whole or in part in
the event Lexford does not achieve certain profitability criteria within three
fiscal years. The Lexford shareholders received 250,000 shares of Common Stock
free of contingencies.
Net Income Per Share
- --------------------
Net income per share for a specified period is computed based on the
total weighted average number of shares of the Company's Common Stock, without
par value ("Common Stock"), outstanding during the subject period and those
contingent shares estimated to be issued to officers, employees and directors in
accordance with the Company's 1992 Incentive Equity Plan, as amended (the
"Incentive Equity Plan"). In August 1996, the Company issued 700,000 shares of
Common Stock in connection with the Lexford merger, 450,000 shares of which
remain subject to forfeiture in whole or in part. The 450,000 shares subject to
forfeiture are excluded from the weighted average shares outstanding because the
shares are not dilutive. For the three months ended September 30, 1996, the
total weighted average shares outstanding was approximately 4,093,000, including
the weighted average of approximately 273,000 estimated to be issued in the
future pursuant to the Incentive Equity Plan. For the nine months ended
September 30, 1996, the total weighted average shares outstanding was
approximately 3,953,000 including the weighted average of approximately 245,000
shares estimated to be issued pursuant to the Incentive Equity Plan. At
September 30, 1996, there were approximately 210,000 treasury shares.
Restatement -- Provision for Income Taxes
- -----------------------------------------
The net income previously reported in the September 30, 1995
Consolidated Statement of Income has been adjusted in order to comply with
Statement of Position 90-7 "Reorganization Under the Bankruptcy Code" ("SOP
90-7") pertaining to accounting for deferred income taxes. SOP 90-7 requires
that benefits realized from pre-confirmation net operating loss carryforwards be
reported as an increase to Additional Paid-in Capital. For the period ending
September 30, 1995 the Company reported net income, but was not required to pay
taxes on such income, as the result of having the benefit of net operating loss
carryforwards to offset the income. The financial statements as adjusted,
reflect a non-cash charge in the form of an increase in the provision for income
12
<PAGE>
13
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
taxes in the Consolidated Statements of Income. Net deferred tax assets (which
have been fully reserved against and therefore are not reflected on the
Company's September 30, 1996 and December 31, 1995 Consolidated Balance Sheets)
have been reduced by an amount equivalent to the non-cash charge with a
corresponding increase being made to Additional Paid-in Capital. The adjustment
does not affect the Company's cash flows or total Shareholders' Equity. The
effect of the adjustment is as follows:
<TABLE>
<CAPTION>
As Previously Adjustment for As
Reported Tax Provision Adjusted
----------------- ------------------ ----------------
<S> <C> <C> <C>
Three Months Ended September 30, 1995
Income before Extraordinary Gain.................... $ 2,127,527 $ (825,000) $ 1,302,527
Extraordinary Gain.................................. 0 0 0
----------------- ------------------ ----------------
Net Income.......................................... $ 2,127,527 $ (825,000) $ 1,302,527
================= ================== ================
Per Share of Common Stock:
Income before Extraordinary Gain................ $0.55 ($0.21) $0.34
Extraordinary Gain.............................. 0.00 0.00 0.00
----------------- ------------------ ----------------
Net Income...................................... $0.55 ($0.21) $0.34
================= ================== ================
Nine Months Ended September 30, 1995
Income before Extraordinary Gain................... $ 6,379,616 $ (2,474,000) $ 3,905,616
Extraordinary Gain................................. 1,314,021 (510,000) 804,021
---------------- ------------------ ----------------
Net Income......................................... $ 7,693,637 $ (2,984,000) $ 4,709,637
================ ================== ================
Per Share of Common Stock:
Income before Extraordinary Gain............... $1.66 ($0.64) $1.02
Extraordinary Gain............................. .34 (0.13) 0.21
---------------- ------------------ ----------------
Net Income..................................... $2.00 ($0.77) $1.23
================ ================== ================
</TABLE>
Reclassification
- ----------------
The Statements of Income, the Statements of Cash Flows and certain
financial information in the notes to the financial statements for the period
ended September 30, 1995 have been reclassified to conform to the 1996
presentation.
Corporate Restructuring
- -----------------------
In June 1996, as a result of management's continued evaluation of the
Company's Ancillary Services, corporate finance and Management Services
operations, the Company announced a staff restructuring totaling 13 employees.
The June 1996 restructuring has resulted in a one time $300,000 restructure
expense for the nine months ended September 30, 1996. The June 1996
restructuring is expected to result in annual expense savings of approximately
$400,000 and, along with the corporate restructuring recorded in the fourth
13
<PAGE>
14
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
quarter of 1995, are expected to result in combined annual expense savings of
approximately $1,400,000 (SEE "BUSINESS OVERVIEW"). The June 1996 restructuring
reduced the number of corporate employees dedicated to financial reporting and
management duties and also resulted in the outsourcing of the parts and supplies
inventory component of the Company's Ancillary Services operations.
The foregoing forward looking statements of potential cost savings
are estimates and actual results may differ. Differences could develop if
perceived efficiencies are not obtained.
NOTE 2 OPERATING REAL ESTATE ASSETS
Operating Real Estate Assets consist of the Wholly Owned Properties.
During the first nine months of 1996, lenders accepted deeds in lieu of
foreclosure on three Wholly Owned Properties. The principal and accrued interest
on the mortgage loans secured by the Wholly Owned Properties aggregated
approximately $3.1 million. The deeds on two of these Properties were granted
pursuant to an overall agreement with the lender to restructure certain
mortgages in 1995. In the third quarter of 1996, the Company purchased the
entire limited partnership interest in a Syndicated Partnership for $17,500.
This purchase caused the reclassification of the Syndicated Partnership to a
Wholly Owned Property. In the fourth quarter of 1995 the Company granted a deed
in lieu of foreclosure on one Wholly Owned Property. No significant gain or loss
was recognized on this transaction. The Company acquired three Wholly Owned
Properties in the fourth quarter of 1995 and also effected a combination of
three Wholly Owned Properties into one Wholly Owned Property during such period.
As a result of these transactions, at September 30, 1996 there were 114 Wholly
Owned Properties as compared to 116 at September 30, 1995.
Condensed combined balance sheets, with intercompany payables and
receivables eliminated, of the Company's Wholly Owned Properties as of September
30, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------------ ------------------------
Assets
<S> <C> <C>
Net Operating Real Estate Assets..................... $ 161,722,760 $ 167,276,556
Cash................................................. 3,446,790 2,699,924
Accounts Receivable.................................. 1,071,889 1,043,069
Funds Held in Escrow................................. 7,407,920 7,097,162
Prepaids and Other................................... 2,270,837 2,487,494
------------------------ ------------------------
$ 175,920,196 $ 180,604,205
======================== ========================
Liabilities and Equity
Mortgage Payable..................................... $ 146,607,459 $ 151,130,612
Accounts Payable..................................... 882,792 953,076
Accrued Interest and Real Estate Taxes............... 3,836,147 3,577,547
Other Accrued Expenses............................... 1,322,332 1,315,132
Other Liabilities.................................... 1,206,922 1,094,800
------------------------ ------------------------
153,855,652 158,071,167
Equity............................................... 22,064,544 22,533,038
------------------------ ------------------------
$ 175,920,196 $ 180,604,205
======================== ========================
</TABLE>
14
<PAGE>
15
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of the Effective Date, in accordance with Fresh Start reporting, the
mortgages on the Wholly Owned Properties were restated to estimate fair value
(the "Carrying Value") if the Fresh Start value of the assets was less than the
outstanding principal amount of the mortgages. Although the value of the assets
may have increased since the Effective Date, the Carrying Value of the mortgages
and the assets has not been adjusted. The mortgages on the Wholly Owned
Properties had contractual principal balances of approximately $155.7 million
and $163.8 million at September 30, 1996 and December 31, 1995, respectively,
compared to Carrying Values of $146.6 million and $151.1 million at such dates.
Interest expense is recorded based on the Carrying Value unless the contractual
balance is being paid, in which case, the amount paid is expensed. During the
period from the Effective Date through September 30, 1996 the Company has
refinanced 102 mortgage loans secured by the Wholly Owned Properties and has
acquired five Wholly Owned Properties. Mortgages which have been originated
following the Effective Date, as a result of an acquisition, are recorded as
liabilities on the Consolidated Balance Sheets in their full principal amount.
Typically, each Wholly Owned Property is secured by a separate mortgage loan.
The mortgage loans secured by the Wholly Owned Properties are non-recourse in
nature, except for one mortgage loan of approximately $900,000.
With respect to those Properties and other assets which the Company
has acquired, and will acquire, after the Effective Date, the recorded values
are established on the basis of acquisition cost, in accordance with generally
accepted accounting principles.
NOTE 3 MORTGAGE REFINANCINGS
During the first nine months of 1996, the Company completed the
refinancing of mortgages on nine Wholly Owned Properties and 23 Syndicated
Partnerships. Mortgage indebtedness on the Wholly Owned Properties, with a
contractual value of $15.1 million and a Carrying Value of $14.7 million, was
refinanced with mortgages bearing interest ranging from approximately 8.0% to
9.1%, with 25 year amortization and seven to ten year maturities. Annual debt
service on the affected Wholly Owned Properties decreased from $1.3 million to
$1.1 million in the aggregate as a result of the refinancing. These transactions
funded improvement and deferred maintenance, tax and working capital escrows of
approximately $570,000.
The refinancing of the mortgages on 11 of the 23 Syndicated
Partnerships generated excess cash proceeds of $1.5 million in the third quarter
of 1996. Such proceeds were utilized by the respective Syndicated Partnerships
to pay down obligations owed by such Syndicated Partnerships to the Company. The
refinancing of these 11 Syndicated Partnerships was the initial closing of a
portfolio of approximately 80 Syndicated Partnerships expected to be refinanced
by the end of 1996. In the third quarter of 1996, the Company recorded a reserve
for the estimated expenditures associated with refinancing that portfolio. Since
the reserve is not material and results from the overall refinancing
transaction, it is recorded against the loan fee and interest income generated
from the excess proceeds received by the Company from the initial closing. The
remaining Syndicated Partnerships included in this portfolio are not expected to
generate excess proceeds as significant as the initial 11 Syndicated
Partnerships.
Through September 30, 1995, the Company completed modification or
refinancing transactions involving 111 Properties. These transactions resulted
in the modification of mortgage loans on 27 Wholly Owned Properties and the
modification or refinancing of mortgage loans on 84 Syndicated Partnerships.
These transactions resulted in an extraordinary gain on discharge of
indebtedness on the Wholly Owned Properties, net of closing costs, reserves and
taxes, of approximately $804,000.
15
<PAGE>
16
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
While there can be no assurance, the Company expects to refinance a
significant number of mortgages on the Properties during the fourth quarter of
1996.
NOTE 4 RELATED PARTY TRANSACTIONS
The Company manages 112 of the 114 Wholly Owned Properties and 409 of
the 413 Syndicated Partnerships. The Company also provides various Ancillary
Services, including the sale of maintenance supplies and replacement parts to
the Properties, and furniture rentals and insurance to residents (SEE NOTE 1 -
BUSINESS OVERVIEW - MANAGEMENT SERVICES). The Company earned fee based revenues
from the Syndicated Partnerships of approximately $2.9 million and $3.1 million
for the three months ended September 30, 1996 and 1995, respectively, and $8.4
million and $8.9 million for the nine months ended September 30, 1996 and 1995,
respectively. The Company also earned a majority of its interest income on its
receivables (including second mortgages) from the Syndicated Partnerships.
Approximately $2.3 million and $3.9 million of the Accounts Receivable were due
from the Syndicated Partnerships as of September 30, 1996 and December 31, 1995,
respectively. The decline in the accounts receivable is cyclical in nature due
to the timing of the billing and collection of the annual insurance premiums
collected and paid by the Company on behalf of the Syndicated Partnerships. Fee
Based Revenues and Accounts Receivable related to the Wholly Owned Properties
are eliminated in consolidation.
The Company received repayment of advances of approximately $396,000
from the Syndicated Partnerships in the first nine months of 1996 as compared to
making net advances of $6.8 million in the first nine months of 1995 principally
related to refinancing of mortgages. These advances are included in Interests in
and Receivables from Syndicated Partnerships. The advances in 1995 provided
supplemental financing to facilitate satisfaction of indebtedness owed to former
lenders and/or to fund transaction costs and escrows. These advances bear
interest at one percent over the prime rate of interest of The Provident Bank
(the "Bank"), 8.25% at September 30, 1996.
NOTE 5 COMPARATIVE INCOME STATEMENTS
Prior to 1996 the operations of the Wholly Owned Properties were
excluded from the Company's Statements of Income (SEE NOTE 1 - OPERATING REAL
ESTATE ASSETS (PREVIOUSLY HELD FOR SALE)). In order to facilitate the comparison
of operations in 1996 to 1995, the following "proforma" Income Statement (the
"Proforma Income Statement") has been prepared for the three and nine months
ended September 30, 1995 as if the Wholly Owned Properties were previously
consolidated. All intercompany transactions have been eliminated. Depreciation
expense for the Operating Real Estate Assets has been estimated for 1995.
Management expects that the discernible trends which have developed
from and after January 1, 1996, namely reduction in the amounts of income
received attributable to the disposal of Non-Core Assets and increases in income
recognized from Operating Real Estate Assets and the Company's Interests in and
Receivables from Syndicated Partnerships will continue. For these reasons, the
Company has supplementally disclosed earnings before interest, income taxes,
depreciation, amortization and extraordinary items ("EBITDA"), recurring EBITDA,
recurring EBITDA reduced for Interest - Wholly Owned Property Debt ("Adjusted
EBITDA") and Funds from Operations of its Wholly Owned Properties. Management
believes that these supplemental disclosures are meaningful measures for
analysis of the Company's results of operations both taken alone and when
compared to the Company's counterparts in the multi-family residential real
property ownership and management business.
16
<PAGE>
17
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
----------------------------------- ----------------------------------
1996 1995 1996 1995
---------------- ---------------- --------------- ----------------
Proforma Proforma
<S> <C> <C> <C> <C>
Revenues:
Rental and Other Operating Real Estate Revenues......... $ 10,311,403 $ 9,949,673 $ 30,755,215 $ 29,239,531
Fee Based............................................... 3,688,833 3,066,242 9,272,256 8,946,860
Interest, Principally from Syndicated Partnerships...... 1,680,081 1,075,306 4,626,766 3,038,013
Income from Disposal of Non-Core Assets-Net............. 7,181 610,758 281,873 2,425,945
Other................................................... 21,543 235,828 173,198 596,305
---------------- ---------------- --------------- ----------------
15,709,041 14,937,807 45,109,308 44,246,654
---------------- ---------------- --------------- ----------------
Expenses:
Rental Operating........................................ 5,281,275 6,143,713 15,719,226 16,711,718
Fee Based............................................... 2,627,882 1,578,619 5,723,834 4,775,640
Administration.......................................... 1,151,715 1,036,036 3,273,449 3,168,669
Restructure Costs....................................... 0 0 300,000 0
Interest - Wholly Owned Property Debt................... 3,500,425 3,601,271 10,700,604 10,747,268
Interest - Corporate Debt............................... 278,714 356,350 840,180 1,142,398
Depreciation and Amortization........................... 1,418,696 1,388,838 4,071,047 3,923,897
---------------- ---------------- --------------- ----------------
14,258,707 14,104,827 40,628,340 40,469,590
---------------- ---------------- --------------- ----------------
Income Before Income Taxes................................. 1,450,334 832,980 4,480,968 3,777,064
Provision for Income Taxes (Note 1)........................ 563,300 329,000 1,745,300 1,465,000
---------------- ---------------- --------------- ----------------
Income before Extraordinary Gain........................... 887,034 503,980 2,735,668 2,312,064
Extraordinary Gain, net of Income Taxes (Note 3)........... 0 0 0 804,021
---------------- ---------------- --------------- ----------------
Net Income................................................. $ 887,034 $ 503,980 $ 2,735,668 $ 3,116,085
================ ================ =============== ================
EBITDA.................................................. $ 6,648,169 $ 6,179,439 $ 20,092,799 $ 19,590,627
================ ================ =============== ================
Recurring EBITDA........................................ $ 6,462,974 $ 5,405,418 $ 19,883,785 $ 16,571,202
================ ================ =============== ================
Adjusted EBITDA (Recurring EBITDA reduced by
Interest - Wholly Owned Property Debt).............. $ 2,962,549 $ 1,804,147 $ 9,183,181 $ 5,823,934
================ ================ =============== ================
Net Income per Common Share:
Income Before Extraordinary Item........................ $0.22 $0.13 $0.69 $0.60
Extraordinary Gain...................................... 0.00 0.00 0.00 0.21
---------------- ---------------- --------------- ---------------
Net Income.............................................. $0.22 $0.13 $0.69 $0.81
================ ================ =============== ===============
</TABLE>
17
<PAGE>
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion explains material changes in the Company's
results of operations, comparing the three and nine months ended September 30,
1996 and 1995 and significant developments affecting the Company's financial
condition since the end of 1995. The following discussion should be read in
conjunction with the historical financial statements of the Company.
The financial statements for the three and nine months ended September
30, 1995 do not include the results of operations (revenues, expenses or
depreciation) attributable to the Operating Real Estate Assets, formerly
classified as Real Estate Assets Held for Sale. Commencing January 1, 1996 the
results of operations, including depreciation of the Operating Real Estate
Assets, have been included in the Consolidated Statements of Income (SEE ITEM 1
- - NOTE 1 - OPERATING REAL ESTATE ASSETS (PREVIOUSLY HELD FOR SALE) AND NOTE 5 OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). Therefore, the Consolidated
Statements of Income for the three and nine months ended September 30, 1996 are
not comparable to the same periods in 1995. In order to facilitate the
comparison of operations, the notes to the financial statements include a
"proforma" consolidated income statement for the three and nine months ended
September 30, 1995, prepared as if the Wholly Owned Properties were previously
consolidated (SEE ITEM 1 - NOTE 5 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS). The following discussion of results of operations is based upon the
Proforma Income Statement included in the Notes to the Consolidated Financial
Statements.
RESULTS OF OPERATIONS
Rental and Other Operating Real Estate Revenues are derived from the
Wholly Owned Properties which own and operate apartment communities that
comprise the Company's Operating Real Estate Assets. Revenues increased
approximately $362,000 and $1.5 million, or 3.6% and 5.2%, respectively, for the
three and nine months ended September 30, 1996, as compared to the same periods
in 1995. The increase was primarily due to the 4.9% increase in average rent per
unit from $369 in 1995 to $387 in 1996. The average economic occupancy of the
109 Wholly Owned Properties in operation at all times during the comparable
periods was 92.7% for the nine months ended September 30, 1996, as compared to
91.8% for the nine months ended September 30, 1995. Economic occupancy is
defined as the amount of revenue collected from residents as a percentage of the
revenue a property could generate if full rents for all units were collected.
(SEE ITEM 1 - NOTES 1 AND 5 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS).
Fee Based Revenues are comprised of Management Services and Advisory
Services revenues generated from services provided to Syndicated Partnerships
and residents at the Properties. Management Services revenues principally relate
to property management and accounting services provided to the Syndicated
Partnerships and, from and after August 1, 1996, property management services
provided to third party property owners (SEE LIQUIDITY AND CAPITAL RESOURCES --
LEXFORD ACQUISITION). Ancillary Services (a department of Management Services)
revenues consist principally of revenue generated from the sale of replacement
and maintenance material to the Syndicated Partnerships. In addition, Ancillary
Services revenues include revenue generated from furniture leasing and renter's
insurance products provided to residents of the Properties. Advisory Services
revenues consist of partnership administration fees as well as fees generated
from loan refinancing and restructuring. (SEE ITEM 1 - NOTE 1 - BUSINESS
OVERVIEW OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS).
18
<PAGE>
19
The following are the major components of Management Services revenues
and Advisory Services revenues for the three and nine months ended September 30,
1996 as compared to the same periods in 1995:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------- ------------------------------------
1996 1995 1996 1995
-------------- ------------------ ---------------- --------------
Proforma Proforma
<S> <C> <C> <C> <C>
Management Services:
Property Management Services:
Property Management and
Accounting Services ................... $ 2,770,949 $ 1,838,566 $ 6,645,476 $ 5,528,348
Other Management Service
Fee Revenues........................... 349,571 400,563 1,114,941 1,157,450
Ancillary Services:
Furniture Leasing and
Renters Insurance...................... 51,629 65,079 213,063 267,483
Replacement and Maintenance
Material Revenues - Net 71,341 291,681 222,144 521,727
-------------- ------------------ ---------------- --------------
Total Management Services Revenues.............. 3,243,490 2,595,889 8,195,624 7,475,008
-------------- ------------------ ---------------- --------------
Advisory Services:
Partnership Administration & Other Fees....... 267,329 307,090 849,491 878,372
Loan Refinancing and Restructuring Fees....... 178,014 163,263 227,141 593,480
-------------- ------------------ ---------------- --------------
Total Advisory Services Revenues................ 445,343 470,353 1,076,632 1,471,852
-------------- ------------------ ---------------- --------------
Total Fee Based Revenues........................ $ 3,688,833 $ 3,066,242 $ 9,272,256 $ 8,946,860
============== ================== ================ ==============
</TABLE>
Fee Based Revenues increased approximately $623,000 and $325,000 or
20.3% and 3.6%, respectively, for the three and nine months ended September 30,
1996, respectively, as compared to the same periods in 1995. The increase was
primarily due to approximately $932,000 and $1.1 million increases in property
management and accounting services revenues for the three and nine months ended
September 30, 1996, respectively, as compared to the same periods in 1995.
Increases were principally due to the two months of operations of Lexford
Properties, acquired effective August 1, 1996. Lexford contributed approximately
$835,000 in property management and accounting services revenues in the third
quarter of 1996. The increase in property management and accounting services
revenues was partially offset by a decrease of approximately $234,000 and
$354,000 in Ancillary Revenues for the three and nine months ended September 30,
1996, respectively, as compared to the same periods in 1995. This decrease
related primarily to a decline in the net revenues of replacement and
maintenance materials sales to Syndicated Partnerships. In addition, replacement
and material sales volumes may be impacted in the future as the Company is
currently evaluating product lines and has decided to out source warehousing
operations. In addition, loan refinancing and restructuring fees were comparable
for the three months ended September 30, 1996 and 1995, but decreased
approximately $366,000 for the nine months ended September 30, 1996, as compared
to the same period in 1995. Loan refinancing and restructuring fees ("Loan
Fees") are subject to significant fluctuation from period to period based upon
the volume of loans maturing in a given year and the ability to refinance based
on the current interest rate environment and the Syndicated Partnerships'
abilities to pay the fees. Although there can be no assurance, the Company
anticipates additional loan fees in the fourth quarter related to refinancing
activity currently under negotiation. (SEE LIQUIDITY AND CAPITAL RESOURCES --
FINANCING AND DEBT RESTRUCTURING OF THE PROPERTIES.)
Interest Income increased approximately $605,000 and $1.6 million or
56.2% and 52.3%, respectively, for the three and nine months ended September 30,
1996 as compared to the same periods in 1995. Interest Income is primarily
derived from the interest collected or accrued on the recorded value of
interests in, and receivables from, Syndicated Partnerships (SEE NOTE 1 -
19
<PAGE>
20
RECORDED VALUES OF RECEIVABLES FROM SYNDICATED PARTNERSHIPS - OF NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS). The increase in Interest Income was
primarily due to increased net operating income, lower first mortgage debt
service requirements and excess proceeds from refinancing of Property mortgages.
Although there can be no assurances, Interest Income should continue to be
favorably impacted in the future as a result of mortgage refinancings and,
possibly, increasing net operating income as well (SEE "NET OPERATING INCOME OF
SYNDICATED PARTNERSHIPS").
Income from Disposal of Non-Core Assets decreased approximately
$604,000 and $2.1 million for the three and nine months ended September 30,
1996, respectively, as compared to the same periods in 1995. This income is
derived from the net disposition proceeds of Non-Core Assets in excess of the
aggregate recorded value of these assets. Additional income from the disposal of
Non-Core Assets and recovery of investor notes receivable may be recognized in
the future, although at significantly lower levels than recognized in 1995.
Income from Disposal of Non-Core Assets is not a recurring, long term source of
revenue. (SEE NOTE 1 - NON-CORE ASSETS - OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS).
Other Revenues decreased approximately $214,000 and $423,000 for the
three and nine months ended September 30, 1996, respectively, as compared to the
same periods in 1995. The decrease was principally due to collection of fully
reserved receivables due from certain Syndicated Partnerships in 1995.
Rental Operating Expense decreased approximately $862,000 and $992,000
for the three and nine months ended September 30, 1996, respectively, as
compared to the same periods in 1995. Improvement and replacement expenses, in
the aggregate, decreased approximately $534,000 and $621,000, respectively.
Fee Based Expenses increased approximately $1.0 million for both the
three and nine months ended September 30, 1996, respectively, as compared to the
same periods in 1995. The increase was primarily due to approximately $815,000
of Fee Based Expenses related to the third party management operation of Lexford
Properties, which was acquired effective August 1, 1996. In addition,
approximately, $100,000 of the increase was related to an increase in the
estimated bonus accrual based upon the improved property performance year to
date.
Administration Expenses increased approximately $116,000 and $105,000
for the three and nine months ended September 30, 1996, respectively, as
compared to the same periods in 1995. The increase in administration expenses
was primarily related to outside consulting costs incurred for corporate
strategic planning, technology evaluation, legal and relocation costs.
Restructure Costs of $300,000 were accrued for in the second quarter of
1996 as a one time charge related to costs anticipated to be incurred in
connection with realignments to its organization due to overlapping
responsibilities. Management anticipates that this realignment should result in
annual savings of approximately $400,000 primarily related to reductions in
payroll and related fringe benefit costs. The realignment was implemented in the
third quarter of 1996. (SEE NOTE 1 - CORPORATE RESTRUCTURING - OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS)
Interest Expense for mortgages on the Wholly Owned Properties decreased
approximately $101,000 and $47,000 for the three and nine months ended September
30, 1996, respectively, as compared to the same periods in 1995. Interest
Expense on the Company's corporate lines of credit decreased approximately
$78,000 and $302,000 for the three and nine month comparative periods. This
decrease is due primarily to the Company's refinancing of its corporate credit
facility with The Provident Bank (the "Bank"), at the Bank's prime rate of
interest minus 1.0%, as compared to an interest rate of prime plus 0.5% with the
Company's previous lender (SEE "LIQUIDITY AND CAPITAL RESOURCES").
Depreciation and Amortization Expense increased approximately $30,000
and $147,000 for the three and nine months ended September 30, 1996,
respectively, as compared to the same periods in 1995. The increase is primarily
due to the amortization of loan costs capitalized in connection with the
refinancing of corporate debt and real estate mortgages and the amortization of
goodwill associated with the Lexford acquisition.
20
<PAGE>
21
Income before Extraordinary Gain amounted to approximately $887,000, or
$.22 per share, for the three months ended September 30, 1996, as compared to
approximately $504,000, or $.13 per share, for the same period in 1995. Income
before Extraordinary Gain amounted to $2.7 million and $2.3 million for the nine
month periods ended September 30, 1996 and 1995, respectively, or $.69 and $.60
per share, respectively. The extraordinary gain of approximately $804,000 for
the nine months ended September 30, 1995 was due to debt forgiveness related to
first mortgage refinancings for certain Wholly Owned Properties. Net Income was
approximately $887,000 and $2.7 million, or $.22 and $.69 per share, for the
three and nine months ended September 30, 1996, respectively, as compared to
approximately $504,000 and $3.1 million, or $.13 and $.81 per share, for the
same periods in 1995.
Earnings before Interest, Taxes, Depreciation and Amortization
The Company believes that earnings before interest, income taxes,
depreciation, amortization and extraordinary items ("EBITDA"), recurring EBITDA,
and adjusted EBITDA are the most significant indicators of the strength of its
results. EBITDA is a measure of a company's ability to generate cash to service
its obligations, including debt service obligations, and to finance capital and
other expenditures, including expenditures for acquisitions. EBITDA does not
represent cash flow as defined by generally accepted accounting principles and
does not necessarily represent amounts of cash available to fund the Company's
cash requirements. EBITDA increased 7.5% for the three months ended September
30, 1996, as compared to the same period in 1995. EBITDA for the nine months
ended September 30, 1996 increased 2.6%, as compared to the same period in 1995.
The Company views "Recurring EBITDA" as a more meaningful measurement of the
Company's current performance. Recurring EBITDA excludes non-recurring items,
such as income from disposal of Non-Core Assets, Loan Fees and corporate
restructuring costs. Recurring EBITDA increased 19.6% from $5.4 million for the
three months ended September 30, 1995 to $6.5 million for the same period in
1996. Recurring EBITDA increased 20.0% from $16.6 million for the nine months
ended September 30, 1995 to $19.9 million for the same period in 1996. Adjusted
EBITDA increased 64.2% and 57.7% for the three and nine months ended September
30, 1996 as compared to the same periods in 1995.
Funds from Operations of Wholly Owned Properties
Funds from Operations ("FFO") is a financial statistic used to measure
real estate operating results. FFO, as applied to the Company, represents income
from the Wholly Owned Properties excluding depreciation, extraordinary gains and
funding from escrows for deferred maintenance. FFO for the three and nine months
ended September 30, 1996, as compared to the same periods in 1995 without
intercompany eliminations of Fee Based Revenues of approximately $914,400 and
$760,000 for the three months ended September 30, 1996 and 1995, respectively,
and $2.6 million and $2.4 million for the nine month periods ended September 30,
1996 and 1995, respectively, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------- ---------------------------------------
1996 1995 1996 1995
--------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Rental Revenues............................. $ 10,311,403 $ 9,949,673 $ 30,755,215 $ 29,239,531
Operating Expenses.......................... 4,656,975 4,666,120 13,851,295 13,349,292
--------------- ----------------- ---------------- ----------------
Net Operating Income........................ 5,654,428 5,283,553 16,903,920 15,890,239
Improvement and Replacement Expense......... 668,220 1,202,735 2,163,956 2,785,937
Interest Expense............................ 3,500,425 3,601,271 10,700,604 10,747,268
Other....................................... 416,870 526,745 858,070 1,424,587
Depreciation and Amortization............... 1,242,307 1,247,349 3,625,714 3,534,999
--------------- ----------------- ---------------- ----------------
Loss before Income Taxes.................... (173,394) (1,294,547) (444,424) (2,602,552)
--------------- ----------------- ---------------- ----------------
Add: Improvements and Replacements
funded from Deferred Escrows......... 0 520,989 523,025 1,345,011
Depreciation and Amortization........ 1,242,307 1,247,349 3,625,714 3,534,999
--------------- ----------------- ---------------- ----------------
Funds from Operations....................... $ 1,068,913 $ 473,791 $ 3,704,315 $ 2,277,458
=============== ================= ================ ================
</TABLE>
21
<PAGE>
22
The approximate $595,000 or 125% and $1.4 million or 63% increases in
FFO for the three and nine months ended September 30, 1996, respectively, as
compared to the same periods in 1995 is reflective of the same factors discussed
in "Results of Operations."
Net Operating Income of Syndicated Partnerships
The following table summarizes unaudited comparable revenues, operating
expenses and net operating income ("NOI") for the 413 Syndicated Partnerships in
operation for the three and nine months ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
----------------------------------------- ----------------------------------------
1996 1995 1996 1995
------------------ ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Rental Revenues....................... $ 31,680,581 $ 30,070,176 $ 93,211,099 $ 88,692,824
Operating Expenses.................... 14,247,376 14,346,242 42,305,020 41,400,001
------------------ ----------------- ---------------- ------------------
Net Operating Income.................. $ 17,433,205 $ 15,723,934 $ 50,906,079 $ 47,292,823
================== ================= ================ ==================
Improvement and
Replacement Expense................ $ 2,620,076 $ 2,617,507 $ 7,227,885 $ 10,714,992
================== ================= ================ ==================
Interest Expense...................... $ 9,940,331 $ 10,257,413 $ 29,877,866 $ 30,384,859
================== ================= ================ ==================
Income and Cash Flow to the Company from the Syndicated Partnerships:
Cash Received from Interests in
and Receivables from
Syndicated Partnerships........ $ 3,316,647 $ 899,904 $ 6,042,883 $ 2,577,096
================== ================= ================ ==================
Interest Income.................... $ 1,680,081 $ 1,058,465 $ 4,580,759 $ 2,990,307
================== ================= ================ ==================
</TABLE>
NOI increased approximately 10.9% and 7.6%, for the three and nine
months ended September 30, 1996, respectively, as compared to the same periods
in 1995. Economic occupancy for the 413 Syndicated Partnerships was 92.7% and
92.1% for the three and nine months ended September 30, 1996, respectively, as
compared to 91.9% and 92.1% for the same periods in 1995. The Syndicated
Partnership performance for the first nine months of 1996, as compared to 1995,
is comparable to the Wholly Owned Properties, and was influenced by the same
factors. In the third quarter of 1996, the Company collected $1.5 million from
Syndicated Partnerships refinanced during the period. The funds for these
repayments were made available to the Syndicated Partnerships from excess
proceeds derived from the refinancing of the Syndicated Partnerships' mortgage
loans. (SEE "LIQUIDITY AND CAPITAL RESOURCES -- FINANCING AND DEBT RESTRUCTURING
OF THE PROPERTIES".)
Net Income, Excluding Non-Recurring Items
The Company generated non-recurring revenues for the periods ended
September 30, 1996 and 1995, that obscure the recurring earnings performance of
the Company. Recurring earnings from operations are derived from the Company's
investments of equity in the Properties as well as its Fee Based Revenues. Net
Income, Excluding Non-Recurring Items reflects net income as adjusted to
eliminate revenues, expenses and extraordinary gains which are subject to
significant fluctuation, occur on a one-time basis or are not forecast as long
term sources of income to the Company, such as income from disposal of Non-Core
Assets, Loan Fees and extraordinary gains from debt restructurings.
22
<PAGE>
23
Net Income, Excluding Non-Recurring Items increased approximately
$744,000, or 2,483%, and $2.1 million, or 461%, for the three and nine months
ended September 30, 1996, respectively, as compared with the same periods in
1995. The revenue and expenses eliminated in determining Net Income, Excluding
Non-Recurring Items and the significant factors contributing to this increase,
as adjusted for non-recurring items, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- --------------------------------
1996 1995 1996 1995
-------------- --------------- ---------------- -------------
Proforma Proforma
<S> <C> <C> <C> <C>
Net Income........................................ $ 887,034 $ 503,980 $ 2,735,668 $ 3,116,085
-------------- --------------- ---------------- -------------
Non-Recurring Items:
Extraordinary Gain, net of Income Taxes....... 0 0 0 (804,021)
Income from Disposal of
Non-Core Assets .......................... (7,181) (610,758) (281,873) (2,425,945)
Loan Fees..................................... (178,014) (163,263) (227,141) (593,480)
Restructure Costs............................. 0 0 300,000 0
Income Taxes related to Non-Recurring Items... 72,000 300,000 81,000 1,172,000
-------------- --------------- ---------------- -------------
Total Non-Recurring Items.......................... (113,195) (474,021) (128,014) (2,651,446)
-------------- --------------- ---------------- -------------
Net Income, Excluding Non-Recurring Items.......... $ 773,839 $ 29,959 $ 2,607,654 $ 464,639
============== =============== ================ =============
</TABLE>
<TABLE>
<CAPTION>
Increase/Decrease in Net Income--
Excluding Non-Recurring Items
----------------------------------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1996
--------------------- -------------------
<S> <C> <C>
Increase in Rental Revenues............................................. $ 361,730 $ 1,515,684
Increase in Interest Income............................................. 604,775 1,588,753
Increase in Fee Based Revenues (Excluding Loan Fees).................... 607,840 691,735
(Decrease) in Other Income.............................................. (214,285) (423,107)
Decrease in Rental Operating Expenses................................... 862,438 992,492
(Increase) in Fee Based and Administration Expenses..................... (1,164,942) (1,052,974)
Decrease in Interest and Depreciation Expense........................... 148,624 201,732
Income Tax Effect....................................................... (462,300) (1,371,300)
--------------------- -------------------
$ 743,880 $ 2,143,015
===================== ===================
</TABLE>
23
<PAGE>
24
See "RESULTS OF OPERATIONS" for specific discussion of non-recurring
items as well as the explanations for the changes in recurring revenues and
expenses which generated the increase in Net Income, Excluding NonRecurring
Items. Although there can be no assurance, management believes that Net Income,
Excluding NonRecurring Items will continue to be favorably impacted by (i)
continued increases in Interest Income as first mortgage loans on certain of the
Syndicated Partnerships are refinanced, (ii) continuing improvement in overall
operating performance at the Properties and (iii) the acquisition of Lexford.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The following discussion regarding liquidity and capital resources
should be read in conjunction with the Company's Consolidated Balance Sheets as
of September 30, 1996 and December 31, 1995 and the Consolidated Statements of
Cash Flows for the nine months ended September 30, 1996 and 1995.
The Company anticipates that cash flow from its operations and
borrowings available under the Company's credit facility should be adequate to
meet the foreseeable capital and liquidity needs of the Company. If the Company
is successful in implementing potential future growth plans, it may be necessary
to seek alternative sources of debt or equity capital.
In August 1995, the Bank and the Company entered into a new credit
facility that retired the Company's credit facility with The Huntington National
Bank ("HNB") as well as provided additional borrowing capacity with more
flexible terms. The new credit facility has lower interest rates than the
previous facility with HNB and also reduced or eliminated certain restrictive
covenants. On September 30, 1996, the Company had unrestricted credit
availability of approximately $13.2 million. In July 1996, the Company received
a commitment letter from the Bank for a new $10.0 million acquisition line of
credit, which will increase total credit availability to $23.2 million. The new
line will bear interest at the Bank's prime rate of interest minus 1% with
interest, only, payable during the first year, and will be due in six years. The
Company intends to borrow under the new acquisition line to facilitate
refinancing of mortgages on the Properties and/or to acquire new Wholly Owned
Properties.
The new credit facility originally provided credit up to $32.0 million,
and is comprised of: a $3.0 million revolving line of credit for operating needs
subject to annual review and extension by the Bank; a $7.0 million line of
credit for acquisitions and to facilitate refinancing of mortgages on the
Properties (the "Acquisition Line") due in six years with interest only, payable
in the first year; and a $22.0 million reducing balance line of credit (the
"Reducing Line") due in six years with interest, only, payable during the first
year (collectively, the "Loans"). The Reducing Line was used to retire the HNB
credit facility. The credit facility provided that the interest rate on the
Loans would be the Bank's prime rate of interest minus 1%, however, in February
1996, the Company entered into an agreement with the Bank to fix the interest
rate on the Acquisition Line at 7.25% with principal amortization in 60 equal
monthly installments beginning in March 1996. Excess corporate cash is applied
to pay down the Reducing Line and may be reborrowed as needed subject to the
maximum available credit under the reducing balance terms. The Bank's prime rate
of interest averaged 8.25% during the first nine months of 1996 as compared to
an average HNB prime rate of interest of 9.0% in the first nine months of 1995.
The principal sources of liquidity for the Company are cash flow from
its operations and borrowing available under the Company's credit facility. The
Company's Net Cash Provided by Operating Activities increased $4.6 million for
the nine months ended September 30, 1996 as compared to the same period in 1995.
The increase was due primarily to $3.6 million of operating cash flow from
Operating Real Estate Assets. This operating cash flow was formerly treated as
cash flow from investing activity while the Operating Real Estate Assets were
classified as Real Estate Assets Held for Sale (SEE NOTE 1- OPERATING REAL
ESTATE ASSETS (PREVIOUSLY HELD FOR SALE) AND NOTE 2 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS). In addition, cash received from interests in and
receivables from Syndicated Partnerships increased $3.5 million, including $1.5
million funded from excess proceeds generated from refinancing transactions.
(SEE "FINANCING AND DEBT RESTRUCTURING OF THE PROPERTIES.")
24
<PAGE>
25
Payments (uses of cash) related to non-recurring items included in Operating
Activities reflects payments related to the Company's Plan of Reorganization,
the 1996 corporate restructuring and tender offer costs incurred in 1995. These
costs increased approximately $1.2 million, primarily due to corporate
restructuring costs paid in 1996 (SEE NOTE 1 - CORPORATE RESTRUCTURING - OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). The expenses associated with $1.5
million of these cash payments was accrued in December 1995.
The Company's capital expenditures for the nine months ended September
30, 1996 amounted to approximately $529,000 funded from cash flow and the
Company's credit facility. The Company anticipates that its capital needs in the
future can be satisfied out of cash flow from operations or the Company's credit
facility. The Company is upgrading its software systems in order to obtain
optimal efficiencies from technology. In the third quarter of 1996, the Company
upgraded its computer hardware and accounting and financial reporting software
for approximately $583,000, financed with an operating lease. In addition, over
the course of 1997, the Company intends to lease personal computers and new
property management software for use at the Properties. The total cost to
implement this new system is estimated to be approximately $2.0 million. The
cost will be financed with an operating lease, with each Property absorbing its
pro rata share of the rental costs. Although there can be no assurance,
management believes this enhanced technology should improve property performance
and provide operational efficiencies which should offset the increased costs
associated with the new system. The Company currently forecasts normal recurring
capital expenditures of approximately $400,000 in 1996 (exclusive of capital
expenditures for enhanced software and information systems and the Lexford
merger) as compared to actual annual expenditures in 1995 of approximately
$398,000.
Capital Expenditures, combined with Improvement and Replacement Expense
for the Operating Real Estate Assets, were approximately $2.5 million during the
nine months ended September 30, 1996. These costs are funded from Wholly Owned
Properties cash flow and maintenance escrow funds. The 1996 budget for capital
expenditures, improvement and replacement expense for the Operating Real Estate
Assets is $4.3 million, or $489 per unit, as compared to annual actual
expenditures in 1995 of $4.0 million, or $454 per unit. Approximately $2.5
million, or $284 per unit, of the $4.3 million relates to non-recurring deferred
maintenance which principally will be funded from escrows established in
connection with mortgage refinancing and restructuring transactions completed in
1994 and 1995.
Lexford Acquisition
-------------------
Effective August 1, 1996, the Company acquired Lexford, a privately
held, third-party multi-family management company headquartered in Dallas, Texas
(SEE NOTE 1 - BUSINESS OVERVIEW - MANAGEMENT SERVICES OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS). The acquisition adds approximately 22,000 apartment units
to the Company's management portfolio which now totals approximately 55,000
units. Based on 1996 rankings by the National Multi Housing Council, the Company
has become the nation's sixth largest manager of multi-family real estate. The
Company intends to maintain Lexford's Dallas office as headquarters for its
combined property management business, which will be conducted under the Lexford
name.
To acquire Lexford, the Company issued 700,000 shares of Common Stock
valued, for acquisition purposes, at $20 per share representing a maximum
purchase price of $14 million. Approximately $9 million of the purchase price
(450,000 shares) is subject to forfeiture in the event the Company's combined
property management operations do not achieve certain profitability criteria.
Lexford shareholders received 250,000 shares of the Company's Common Stock free
of contingencies. The remaining 450,000 contingent shares will cease to be
subject to risk of forfeiture if and when specified increases in the
profitability of the Company's property management operations are achieved
during the three full fiscal years following the merger (i.e. on or before the
end of the Company's 1999 fiscal year). If, during the specified period, profit
from property management operations increases $1.8 million or more from 1995
levels, the former Lexford shareholders would own 150,000 of the contingent
shares free of contingencies, and if the increase is $4.0 million or more from
1995 levels, the former Lexford shareholders would own the entire 700,000 shares
free of contingencies, or approximately 15.4% of the Company's shares
outstanding as of September 30, 1996.
25
<PAGE>
26
Selected proforma, unaudited financial information relating to Lexford
third party management operations for the nine months ended September 30, 1996
and 1995, is as follows:
<TABLE>
<CAPTION>
Lexford Proforma
Nine Months Ended September 30,
-----------------------------------------------
1996 1995
-------------------- ---------------------
<S> <C> <C>
Fee Based Revenues............................. $ 4,287,981 $ 3,323,049
-------------------- ---------------------
Fee Based Expenses............................. 3,717,559 3,146,380
Amortization and Depreciation.................. 98,501 97,377
-------------------- ---------------------
3,816,060 3,243,757
-------------------- ---------------------
Income Before Taxes............................ 471,921 79,292
-------------------- ---------------------
Provision for Taxes............................ 184,000 31,000
-------------------- ---------------------
Net Income..................................... $ 287,921 $ 48,292
==================== =====================
EBITDA......................................... $ 570,422 $ 176,669
==================== =====================
</TABLE>
The acquisition of Lexford was accounted for as a purchase, with a
substantial portion of the purchase price ($4.7 million) being recorded as
goodwill (to the extent that the purchase price exceeds the fair market value of
Lexford's net tangible assets). The portion of the purchase subject to
forfeiture (450,000 shares or $9.0 million) will not be recorded until the
shares become free of contingencies.
Financing And Debt Restructuring of the Properties
--------------------------------------------------
During the first nine months of 1996, the Company refinanced first
mortgages on nine Wholly Owned Properties (SEE NOTE 3 OF NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS) and 23 Syndicated Partnerships. The new
mortgages on five Properties were obtained through Donaldson, Lufkin & Jenrette
Securities Corporation, the mortgages on 15 properties were financed through
First Union Capital Markets Group ("First Union") and the mortgages on 11
Properties were financed through PaineWebber Incorporated ("PaineWebber"). First
Union was retained to provide mortgage loans for approximately 15 to 20
properties. The new First Union mortgages bear a fixed rate of interest ranging
from 8.0% to 9.1% with 25 year amortization and 10 year maturity. The Company,
in its capacity as general partner of, and as agent for, certain Properties has
entered into two commitment letters with PaineWebber in connection with the
proposed refinancing of approximately 28 mortgage loans outstanding to the
Wholly Owned Properties and approximately 80 mortgage loans outstanding to the
Syndicated Partnerships. The Company anticipates that it will continue to effect
mortgage refinancing transactions during the fourth quarter of 1996 with
PaineWebber and other sources, subject to, among other things, movement in
interest rates and satisfactory completion of due diligence. The new PaineWebber
mortgages that closed in the third quarter 1996, are interest only for three
years, with a fixed interest rate of 9.0%, 25 year amortization and 10 year
maturity.
Aggregate mortgage debt and related interest on 23 of the Syndicated
Partnerships of approximately $23.4 million was refinanced with debt discounts
obtained of approximately $840,000. The refinancing funded improvement and
replacement, tax and working capital escrows of approximately $1.7 million.
Annual debt service requirements decreased to approximately $678,000 from
approximately $694,000 as a result of these transactions. Although there can be
no assurance, management expects that these Syndicated Partnerships will
26
<PAGE>
27
increase their payment of accrued interest to the Company due to lower debt
service requirements achieved with the reduction in debt. In addition, the 11
Syndicated Partnership mortgages refinanced through PaineWebber generated
excess, net proceeds of $1.5 million. Such proceeds were utilized to pay down
obligations owed by such Syndicated Partnerships to the Company. The Company
does not anticipate subsequent refinancings through PaineWebber to generate net
proceeds as significant as the initial 11 Syndicated Partnership mortgages.
In June 1995, the Company purchased mortgages amounting to $8.8 million
in the aggregate, related to one Syndicated Partnership and four Wholly Owned
Properties, financed with a $7.8 million note payable. As of June 30, 1996, the
Company had obtained permanent non-recourse mortgages on these five Properties.
The proceeds of the refinancing were applied to the Company's note payable.
27
<PAGE>
28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company reached a settlement in The Estate of Harold Murphy, et
al v. Cardinal Realty Services, Inc. et al., pending in the United
States District Court for the Southern District of Indiana. The
settlement resulted in the judgment entered against the Company being
vacated, the withdrawal of the pending action and a release of all
claims against the Company in consideration of the Company's payment
of $370,000 to the Plaintiffs. Pursuant to the terms of the proposed
settlement, there was no admission of liability by the Company. The
$370,000 settlement amount was paid in the second quarter of 1996.
The Company reached a settlement in Cardinal Industries, Inc. v.
National Union Fire Insurance Company of Pittsburgh, PA et al.,
pending in the United States District Court for the Southern District
of Ohio, Eastern Division. The settlement provides for payment of
$7.5 million to the Company, for the benefit of the affected
Properties, and certain other parties to be paid in two installments.
The first installment of $4.0 million was received in October 1996,
with the balance due in November 1996. The settlement provides for
the release of all claims between the Company and National Union Fire
Insurance Company. Pursuant to the terms of the settlement, there was
no admission of liability by either party.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page
- ----------- ----------------------------------------------------- ------------------------------------------
<S> <C> <C>
11.1 Statement re: computation of Per Share Earnings See Note 1 of Notes to Consolidated
Financial Statements
27 Financial Data Schedule Filed as an Exhibit to this Form 10-Q on
page 30.
</TABLE>
28
<PAGE>
29
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.
CARDINAL REALTY SERVICES, INC.
(Registrant)
Dated: November 12, 1996 By: /s/ John B. Bartling, Jr.
-------------------------------------
John B. Bartling, Jr.
President and Chief Executive Officer
Dated: November 12, 1996 By: /s/ Mark D. Thompson
-------------------------------------
Mark D. Thompson
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Dated: November 12, 1996 By: /s/ Ronald P. Koegler
-------------------------------------
Ronald P. Koegler
Vice President and Controller
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
30
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE BALANCE SHEET AND THE STATEMENT
OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,719
<SECURITIES> 0
<RECEIVABLES> 6,214
<ALLOWANCES> 2,316
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 166,612
<DEPRECIATION> 3,412
<TOTAL-ASSETS> 241,657
<CURRENT-LIABILITIES> 0
<BONDS> 164,824
0
0
<COMMON> 29,122
<OTHER-SE> 31,358
<TOTAL-LIABILITY-AND-EQUITY> 241,657
<SALES> 0
<TOTAL-REVENUES> 45,109
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 29,087
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,541
<INCOME-PRETAX> 4,481
<INCOME-TAX> 1,745
<INCOME-CONTINUING> 2,736
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,736
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
<FN>
THE REGISTRANT HAS A NON-CLASSIFIED BALANCE SHEET
</FN>
</TABLE>
