================================================================================
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 MARCH 31, 1997
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 May 12, 1997 there were 4,486,592 shares of common stock issued.
Page 1 of 28 sequentially numbered pages
Exhibit Index on page 26
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<PAGE>
2
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1997
(Unaudited) and December 31, 1996 (Audited) 3
Consolidated Statements of Income for the
Three Months Ended March 31, 1997 and 1996 (Unaudited) 4
Consolidated Statement of Shareholders' Equity
for the Three Months Ended March 31, 1997 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996 (Unaudited) 6-7
Notes to Consolidated Financial Statements 8-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16-25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
2
<PAGE>
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 (UNAUDITED) AND DECEMBER 31, 1996 (AUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------------- ------------------
<S> <C> <C>
ASSETS
Operating Real Estate (Note 2):
Land $ 23,652,841 $ 23,652,841
Building and Improvements 138,087,242 137,917,083
----------------- ------------------
161,740,083 161,569,924
Accumulated Depreciation (5,628,264) (4,478,379)
----------------- ------------------
156,111,819 157,091,545
Interests in and Receivables from Syndicated Partnerships (Notes 1 and 4) 53,804,328 54,610,421
Cash (Note 1) 3,312,452 3,593,121
Accounts Receivable, Affiliates (less an allowance
of $2,063,514 at March 31, 1997 and $2,034,290 at
December 31, 1996), Residents and Officers (Note 4) 2,762,001 5,044,603
Furniture, Fixtures and Other, Net 1,105,316 1,167,579
Funds Held in Escrow (Note 1) 14,009,345 14,011,013
Prepaids and Other (Note 1) 9,697,452 9,849,497
----------------- ------------------
$ 240,802,713 $ 245,367,779
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages, Term Debt and Other Notes Payable:
Mortgages on Operating Real Estate (Notes 2 & 3) $ 147,423,118 $ 148,056,017
Term Debt 10,425,551 15,118,048
Other Notes Payable 119,994 145,220
----------------- ------------------
157,968,663 163,319,285
Accounts Payable 1,392,745 1,560,749
Accrued Interest, Real Estate and Other Taxes (Notes 2 & 3) 4,442,942 4,023,310
Other Accrued Expenses 6,529,450 8,531,031
Other Liabilities 5,804,191 5,424,226
----------------- ------------------
Total Liabilities 176,137,991 182,858,601
----------------- ------------------
Shareholders' Equity (Note 1):
Preferred Stock, 1,500,000 shares authorized, unissued 0 0
Common Stock 13,500,000 shares authorized with no stated value,
3,979,954 and 3,892,600 shares issued and outstanding
at March 31, 1997 and December 31, 1996, respectively 29,122,547 29,122,547
Additional Paid-in Capital 16,847,932 15,968,426
Retained Earnings 18,694,243 17,418,205
----------------- ------------------
64,664,722 62,509,178
----------------- ------------------
$ 240,802,713 $ 245,367,779
================= ==================
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
3
<PAGE>
4
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
March 31, 1997 March 31, 1996
------------------- -------------------
<S> <C> <C>
Revenues: (Note 4)
Rental and Other Revenues - Wholly Owned Properties $ 10,187,032 $ 10,190,141
Fee Based 3,903,495 2,821,035
Interest, Principally from Syndicated Partnerships 2,602,255 1,436,333
Income from Disposal of Non-Core Assets 68,445 168,889
Other 69,045 72,613
------------------- -------------------
16,830,272 14,689,011
------------------- -------------------
Expenses:
Rental Operating 4,935,895 5,251,290
Fee Based 3,173,928 1,488,552
Administration 1,296,526 971,946
Restructure Costs 250,000 0
Interest - Corporate Debt 169,929 299,860
Interest - Wholly Owned Property Debt 3,447,086 3,563,509
Depreciation and Amortization 1,465,070 1,327,904
------------------- -------------------
14,738,434 12,903,061
------------------- -------------------
Income before Income Taxes 2,091,838 1,785,950
Provision for Income Taxes
Credited to Additional Paid-in Capital 715,800 572,200
Current 100,000 122,400
------------------- -------------------
Net Income $ 1,276,038 $ 1,091,350
=================== ===================
Net Income per Common Share $ 0.31 $ 0.28
=================== ===================
Weighted Average Common Shares Outstanding 4,144,000 3,862,000
=================== ===================
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
4
<PAGE>
5
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------------ Paid-in Retained
Shares Amount Capital Earnings Total
----------- ---------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 3,892,600 $ 29,122,547 $ 15,968,426 $ 17,418,205 $ 62,509,178
Shares issued, in connection with
the claims resolution process 11,622
Exercise of options under non-qualified
stock option plan 4,690 12,288 12,288
Restricted Stock Compensation and Director
Restricted Stock Plan, net of 22,334 shares
subject to vesting restrictions (Note 1) 71,042 151,418 151,418
Credit from utilization of pre-confirmation
tax benefits 715,800 715,800
Net Income for the period 1,276,038 1,276,038
----------- ---------------- --------------- -------------- ---------------
Balance, March 31, 1997 (Note 1) 3,979,954 $ 29,122,547 $ 16,847,932 $ 18,694,243 $ 64,664,722
=========== ================ =============== ============== ===============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
5
<PAGE>
6
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
March 31, 1997 March 31, 1996
---------------------- -------------------
<S> <C> <C>
Cash Flows provided by Operating activities:
Management Services and Investment Management activities:
Cash received from Fee Based activities $ 5,783,797 $ 5,755,567
Cash received from Interests in and Receivables from Syndicated 3,385,002 1,329,164
Partnerships
Cash Receipts -- other 712,203 553,976
Cash paid to Vendors, Suppliers and Employees (6,107,631) (6,191,138)
Interest paid on Term Debt and Other Notes Payable (169,328) (327,198)
Income Taxes paid - City and State (48,541) (77,038)
Taxes paid, other than Income Taxes (35,872) (38,650)
Payments related to non-recurring items (108,387) (402,124)
---------------------- -------------------
3,411,243 602,559
---------------------- -------------------
Real Estate Asset activities:
Cash received from Rental activities 10,141,753 10,213,940
Payments on Rental activities (4,722,313) (5,572,884)
Interest paid on Mortgages (3,483,626) (3,326,627)
---------------------- -------------------
1,935,814 1,314,429
---------------------- -------------------
Net Cash provided by Operating activities 5,347,057 1,916,988
---------------------- -------------------
Cash flows provided by/(used in) Investing activities:
Management Services and Investment Management activities:
Proceeds from sale of Non-Core Assets and Other 64,031 47,564
Capital Expenditures (122,775) (71,021)
Repayment of Advances from Syndicated Partnerships 104,192 1,027,298
Real Estate Assets activities:
Funding of Escrows (232,282) (43,214)
Capital Expenditures (170,160) (62,017)
---------------------- -------------------
Net Cash provided by/(used in) Investing activities (356,994) 898,610
---------------------- -------------------
Cash Flows used in Financing activities:
Management Services and Investment Management activities:
Proceeds from the exercise of Stock Options 12,288 35,307
Redemption of Stock held by Syndicated Partnerships 0 (31,330)
Principal Payment on Term Debt and Other (4,778,044) (1,436,304)
Real Estate Asset activities:
Proceeds from Mortgage Debt 0 2,260,000
Payments on Mortgages - principal amortization (504,976) (553,593)
Payments on Mortgages - lump sum 0 (2,144,783)
---------------------- -------------------
Net Cash used in Financing Activities (5,270,732) (1,870,703)
---------------------- -------------------
(Decrease)/Increase in Cash (280,669) 944,895
Cash at Beginning of Year 3,593,121 2,751,986
---------------------- -------------------
Cash at End of Period $ 3,312,452 $ 3,696,881
====================== ===================
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
</TABLE>
6
<PAGE>
7
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
---------------- ----------------
<S> <C> <C>
Reconciliation of Net Income to
Net Cash provided by Operating activities:
Net Income $ 1,276,038 $ 1,091,350
Adjustments to reconcile Net Income to Net Cash
provided by Operating activities:
Depreciation and Amortization 1,465,070 1,327,904
Provision for losses on Accounts Receivable 29,225 26,364
Income from Disposal of Non-Core Assets (68,445) (168,889)
Provision for Income Taxes Credited to Paid-in Capital 715,800 572,200
Changes in Operating Assets and Liabilities:
Interests in and Receivables from Syndicated Partnerships 701,901 (25,925)
Accounts Receivable and Other Assets 2,458,240 3,451,520
Accounts Payable and Other Liabilities (1,230,772) (4,357,536)
----------------- ----------------
Net Cash provided by Operating activities $ 5,347,057 $ 1,916,988
================= ================
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In the first quarter of 1996, the Company granted deeds in lieu of foreclosure
for two Wholly Owned Properties. The Properties had an aggregate carrying value
of $2.5 million. No gain or loss was recognized on this transaction because the
assets and the non-recourse mortgages on the Properties had been recorded in
equal amounts.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
8
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.
The Company holds an ownership interest in apartment communities either as (i)
the sole owner of various limited partnerships or subsidiaries which own
apartment communities (the "Wholly Owned Properties"), or (ii) the general
partner in various limited partnerships which own apartment communities (the
"Syndicated Partnerships"), collectively referred to as the "Properties". 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, 1996, 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 for the fiscal year ended December 31,
1996.
The interim consolidated financial statements have been prepared in
accordance with the Company's customary accounting practices. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997.
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 ("Management Services"); and 2) activities related to the ownership of
multifamily residential real property, including provision of asset management
services to passive co-owners ("Investment Management").
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
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.
8
<PAGE>
9
NOTE 1 BASIS OF PRESENTATION (cont'd)
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.
Lexford succeeded to the operation of the Company's Management Services
division. Accordingly, the Company's property management business is conducted
through Lexford. 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 owned 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 the Syndicated Partnerships and also the leasing of
furniture and sale of renters insurance to residents at the Properties. In 1996
the Company contracted to outsource the parts and supply inventory previously
handled internally by the Company's Ancillary Services group. The Company
completed the outsourcing by the end of 1996. The Company's Ancillary Services
department currently provides assistance to most of the properties managed by
Lexford, 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 generates income by retaining some portion of
discounts earned.
Investment Management
---------------------
The objective of the Company's Investment Management division is to
maximize the value of its real estate holdings and its returns on real estate
investments. The Company 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 a 1% partnership interest in each of the Syndicated
Partnerships; though usually a 9% or a 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 Investment Management 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
Investment Management 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).
9
<PAGE>
10
NOTE 1 BASIS OF PRESENTATION (cont'd)
Fresh Start Accounting
- ----------------------
The Company adopted a method of accounting referred to as fresh start
("Fresh Start") reporting as of September 11, 1992 (the "Effective Date") as a
result of the Company's judicial plan of reorganization (the "Plan of
Reorganization"). The Company prepared financial statements on the basis that a
new reporting entity was created with assets and liabilities recorded at their
estimated fair values as of the Effective Date. At the Effective Date, to the
extent the non-recourse debt on certain assets owned by the Company exceeded the
estimated fair value of the respective Wholly Owned Property, the Company
reduced the contractual amount of the related non-recourse first mortgage debt
by the amount of the deficiency (the "Mortgage Deficiency"). The contractual
mortgage balance, net of any applicable Mortgage Deficiency, is referred to as
the "Carrying Value" of the mortgage.
Cash and Other Assets
- ---------------------
Cash at March 31, 1997 is comprised of approximately $3.3 million related
to Wholly Owned Properties and is held in separate property bank accounts. All
corporate cash was applied to the Company's credit facility.
Funds Held in Escrow at March 31, 1997 and December 31, 1996 include funds
of $7.2 million and $7.0 million, respectively, held in escrow for the benefit
of Wholly Owned Properties for improvements and deferred maintenance, real
estate taxes, insurance and resident security deposits. In addition, the Company
is holding $2.8 million and $3.0 million, at March 31, 1997 and December 31,
1996, respectively, as funds held primarily for payment of insurance premiums
which are collected on behalf of the Properties. At March 31, 1997 and December
31, 1996 the Company's Funds Held in Escrow also includes $4.0 million of funds
received from the settlement of termite litigation relating to certain
Properties. Distribution of those funds is pending the finalization of an
allocation of proceeds to the affected Properties. Applicable corresponding
liabilities have been recorded at March 31, 1997 and December 31, 1996.
Prepaids and Other assets of $9.7 million as of March 31, 1997 includes
$3.8 million of goodwill and $1.5 million of management contracts, net of
amortization, 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), $2.6
million of capitalized costs associated with refinancing mortgages on Wholly
Owned Properties and approximately $238,000 of 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 $624,000 and
approximately $911,000 of prepaid insurance and real estate taxes.
10
<PAGE>
11
NOTE 1 BASIS OF PRESENTATION (cont'd)
Recorded Values of Receivables from Syndicated Partnerships
- -----------------------------------------------------------
The Company owns general partner and, in some cases, nominal 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 March 31, 1997 and December 31, 1996, the contractual value of the
Company's Interests in and Receivables from Syndicated Partnerships amounted to
$239.0 million and $238.9 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
NOTE 1 BASIS OF PRESENTATION (cont'd)
Non-Core Assets
- ---------------
The Company also has interests in a motel property, 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 recorded value was fully recovered.
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 acquisition was accounted for as a purchase. The terms of the
Lexford Merger provided that the Company would succeed to the ownership of all
of the issued and outstanding stock of Lexford and the shareholders of Lexford
would receive 700,000 shares of restricted, newly issued common stock, without
par value ("Common Stock"), of the Company. 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 by
December 31, 1999. These shares are held in escrow pending release. At the time
the shares subject to forfeiture are released without contingency, the Company
will record the additional purchase price. The Lexford shareholders received
250,000 shares of Common Stock free of contingencies. The 450,000 shares subject
to forfeiture are not reflected in the Shareholders' Equity section of the
Company's Balance Sheet presented herein.
12
<PAGE>
13
NOTE 1 BASIS OF PRESENTATION (cont'd)
Net Income Per Share
- --------------------
Net income per share for the period is computed based on the total weighted
average number of shares of the Company's 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 if they are earned. The
Company expensed approximately $151,000 related to stock compensation in the
first quarter of 1997. For the three months ended March 31, 1997, the total
weighted average shares outstanding was approximately 4,144,000. In February
1997 the Company retired all treasury shares held by the Company and Wholly
Owned Properties.
Statement of Financial Accounting Standards No. 128 "Earning Per Share"
("SFAS No. 128") is effective for years ending after December 15, 1997. The
Company will adopt SFAS No. 128 as of December 31, 1997 (earlier adoption is not
permitted). The Company cannot presently determine the impact of the adoption of
SFAS No. 128 as the Company cannot anticipate its capital structure and stock
price at December 31, 1997.
Corporate Restructuring
- -----------------------
In the first quarter of 1997, the Company recorded a $250,000 charge due to
costs incurred related to the elimination of overlapping functions between the
Lexford operations and the Company's previous management services operations.
13
<PAGE>
14
NOTE 2 OPERATING REAL ESTATE ASSETS
Operating Real Estate Assets consist of the Wholly Owned Properties. At
March 31, 1997 and 1996, the Company owned 113 and 114 Wholly Owned Properties,
respectively.
Condensed combined balance sheets, with intercompany payables and
receivables eliminated, of the Company's Wholly Owned Properties as of March 31,
1997 and December 31, 1996 are as follows:
March 31, 1997 December 31, 1996
----------------- -----------------
Assets
Net Operating Real Estate Assets........ $ 156,111,819 $ 157,091,545
Cash.................................... 3,312,452 3,322,494
Accounts Receivable..................... 341,480 324,772
Funds Held in Escrow.................... 7,212,424 6,980,142
Prepaids and Other...................... 2,959,577 3,553,497
----------------- -----------------
$ 169,937,752 $ 171,272,450
================= =================
Liabilities and Equity
Mortgage Payable
Contractual........................ $ 156,699,277 $ 157,381,603
Mortgage Deficiency................ (9,276,159) (9,325,586)
----------------- -----------------
147,423,118 148,056,017
Accounts Payable........................ 1,250,665 1,160,426
Accrued Interest and Real Estate Taxes.. 3,244,869 2,961,795
Other Accrued Expenses.................. 1,305,050 1,337,083
Other Liabilities....................... 729,633 683,202
----------------- -----------------
153,953,335 154,198,523
Equity.................................. 15,984,417 17,073,927
----------------- -----------------
$ 169,937,752 $ 171,272,450
================= =================
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 respective asset was less
than the outstanding principal amount of its mortgage. 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. Interest expense is recorded
based on the Carrying Value of the mortgage using the effective interest rate
method. Mortgages which have been originated following the Effective Date, 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 on a portfolio of 26 Wholly Owned Properties
contain cross collateral and cross default provisions; however, all of the
mortgage loans secured by the Wholly Owned Properties are non-recourse to the
Company.
With respect to those Wholly Owned 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.
14
<PAGE>
15
NOTE 2 OPERATING REAL ESTATE ASSETS (cont'd)
Lexreit Properties, Inc., a newly formed wholly owned subsidiary of the
Company, filed a Form S-11 registration statement with the Securities and
Exchange Commission ("SEC") on May 1, 1997, registering shares of its common
stock issued and to be issued to the Company ("Lexreit Shares"). Subject to
obtaining shareholder approval, the Company intends to distribute 93% of the
Lexreit Shares to the Company's shareholders. Lexreit Properties, Inc. was
incorporated on April 4, 1997 and commenced business on April 24, 1997. Under
the contemplated transactions, the Company will complete certain transactions
including the contribution of certain partnership and limited liability company
member interests related to 66 Wholly Owned Properties, in exchange for common
and preferred stock of Lexreit Properties, Inc. and the formation of an
operating partnership that will be controlled by Lexreit Properties, Inc. and
will hold the partnership and member interests. The registration statement is
undergoing SEC review.
NOTE 3 MORTGAGE REFINANCINGS
In the first quarter of 1997, the Company completed the refinancing of the
mortgage and related accrued interest debt on six Syndicated Partnerships. The
new loans bear interest at a fixed rate of 8.7% per annum with a ten year
maturity. The Company advanced approximately $202,000 to facilitate these
refinancings and obtained discounts totaling approximately $738,000. Debt
service requirements for the affected Syndicated Partnerships decreased
approximately $6,200 per month as a result of these transactions.
In the first quarter of 1996, the Company completed the refinancing of the
mortgage and related interest debt on two Wholly Owned Properties. Mortgage and
related interest debt with a contractual and Carrying Value of $2.2 million was
refinanced with mortgages bearing interest at a fixed rate of approximately
8.0%, per annum with a 25 year amortization schedule and a ten year maturity.
These transactions funded improvement and deferred maintenance, tax and working
capital escrows of approximately $51,000.
NOTE 4 RELATED PARTY TRANSACTIONS
The Company manages 112 of the 113 Wholly Owned Properties and 404 of the
408 Syndicated Partnerships. The Company also provides various ancillary
services, including a preferred vendor purchasing program 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 $2.8 million for each of the three months ended
March 31, 1997 and 1996. The Company also earned a majority of its interest
income on its receivables (including second mortgages) from the Syndicated
Partnerships. Approximately $2.1 million and $4.1 million of the Accounts
Receivable were due from the Syndicated Partnerships as of March 31, 1997 and
December 31, 1996, 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 $104,000 from
the Syndicated Partnerships in the first three months of 1997 as compared to
$1.0 million in the first three months of 1996. These advance repayments were
applied to Interests in and Receivables from Syndicated Partnerships. The
advances bear interest at one percent over the prime rate of interest of The
Provident Bank (the "Bank"), which was 9.5% at March 31, 1997.
15
<PAGE>
16
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 months ended March 31, 1997 and 1996 and
significant developments affecting the Company's financial condition since the
end of 1996. The following discussion should be read in conjunction with the
historical financial statements of the Company.
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. Rental revenues decreased approximately
$3,000 for the three months ended March 31, 1997 as compared to the same period
in 1996. However on a comparable unit basis, revenues from the 112 Properties in
operation for both periods ("same units") increased approximately $106,000, or
1.1%, with average rent collected per unit increasing from $384 in 1996 to $388
in 1997. The average economic occupancy was 90.0% for the three months ended
March 31, 1997 as compared to 90.1% for the three months ended March 31, 1996.
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.
Fee Based Revenues are comprised of Management Services and Investment
Management revenues generated from services provided to Syndicated Partnerships,
third party owners 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). As of March 31, 1997, the Company had
an ownership interest in 521 apartment communities (consisting of an aggregate
of approximately 34,100 rental units) in 14 states. As of the same date, Lexford
managed 599 apartment communities (consisting of an aggregate of 51,458
apartment units) in 22 states. Lexford's management portfolio included 516
apartment communities (33,820 units) in which the Company has an ownership
interest and 83 apartment communities (17,638 units) managed for third party
owners. In the first quarter of 1997 Lexford lost the management of
approximately 3,000 third party owned units in a portfolio involved in
bankruptcy proceedings which resulted in a change of control of the ownership of
these units. The loss of this portfolio resulted in a decline in third party
management revenues of approximately $300,000 as compared to the fourth quarter
of 1996. Third party management revenues are subject to fluctuation from period
to period. Lexford also provides ancillary services to real estate owners,
including replacement parts, laundry services and maintenance supplies. In prior
years, the Company maintained a warehouse with an inventory of parts and
supplies, which were shipped to the apartment communities upon the receipt of
orders. In November 1996, the Company disposed of such inventory and Lexford
established a "Preferred Vendor" program that features discounts with major
vendors. The program allows Lexford clients to benefit from volume purchasing by
paying discounted prices for high-quality goods. By outsourcing the replacement
parts and supplies, Lexford eliminated its inventory and reduced overhead. The
program was made available to third-party clients effective December 1, 1996.
Lexford receives a rebate for every purchase made through the Preferred Vendor
program, as well as a rebate from residents' use of laundry equipment.
Investment Management 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).
The following are the major components of Management Services revenues and
Investment Management revenues for the three months ended March 31, 1997 as
compared to the same period in 1996:
16
<PAGE>
17
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
Management Services:
Property Management Services:
Controlled ........................................... $ 1,896,655 $ 1,929,276
Third Party........................................... 1,041,469 0
Other Management Service Fee Revenues................. 364,992 362,337
Ancillary Services:
Furniture Leasing and Renters Insurance............... 143,048 93,531
Preferred Vendor Purchasing Rebates................... 120,349 0
Replacement and Maintenance Material Revenues - Net... 0 116,568
------------------ -----------------
Total Management Services Revenues.......................... 3,566,513 2,501,712
------------------ -----------------
Investment Management:
Partnership Administration & Other Fees................... 287,918 292,756
Loan Refinancing and Restructuring Fees................... 49,064 26,567
------------------ -----------------
Total Investment Management Revenues........................ 336,982 319,323
------------------ -----------------
Total Fee Based Revenues.................................... $ 3,903,495 $ 2,821,035
================== =================
</TABLE>
Fee Based Revenues increased $1.1 million, or 38.4%, for the three months
ended March 31, 1997 as compared to the same period in 1996. The increase was
almost entirely due to increases in property management and accounting services
revenues from the operations of Lexford Properties, Inc., acquired effective
August 1, 1996. Ancillary Services Revenues increased approximately $53,000,
primarily due to the increase in renters insurance revenues. In addition,
Lexford has successfully converted from a maintenance parts supply warehouse
operation to a preferred vendor program where it earns rebates based on the
volume of purchases while providing competitive prices to the Properties.
Interest Income increased approximately $1.2 million, or 81.2%, for the
three months ended March 31, 1997 as compared to the same period in 1996.
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 OF NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -
RECORDED VALUES OF RECEIVABLES FROM SYNDICATED PARTNERSHIPS ). The increase in
Interest Income was due to increased net operating income and lower first
mortgage debt service requirements due to refinancings of Syndicated Partnership
mortgages. Although there can be no assurances, Interest Income should continue
to be favorably impacted in the future as a result of refinanced mortgage debt
and, possibly, increasing net operating income (SEE "NET OPERATING INCOME OF
SYNDICATED PARTNERSHIPS").
Income from Disposal of Non-Core Assets decreased approximately $100,000
for the three months ended March 31, 1997 as compared to the same period in
1996. 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 may be recognized in the future,
although such additional income is not expected to be material in amount. Income
from Disposal of Non-Core Assets is not a recurring, long term source of
revenue. (SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - NON-CORE
ASSETS).
Rental Operating Expense decreased approximately $315,000, or 6%, for the
three months ended March 31, 1997 as compared to the same period in 1996.
Improvement and replacement expenses, in the aggregate, decreased approximately
$105,000 due to the timing of maintenance work. This trend is not anticipated to
continue. In addition, a mild winter resulted in a decline in exterior
maintenance costs in the first quarter of 1997.
17
<PAGE>
18
Fee Based Expenses increased approximately $1.7 million for the three
months ended March 31, 1997 as compared to the same period in 1996. The increase
was primarily due to approximately $1.3 million of Fee Based Expenses related to
the third party management operation of Lexford Properties, which was acquired
effective August 1, 1996.
Administration Expenses increased approximately $324,000 for the three
months ended March 31, 1997 as compared to the same period in 1996. The increase
in administration expenses was due, in part, to the restructuring implemented at
the end of 1995 which resulted in lower payroll expense during the first quarter
of 1996 due to open positions, principally at the senior management level.
Restructure Costs of $250,000 were accrued in the first quarter of 1997 as
a one time charge related to costs incurred in connection with realignments to
its Management Services organization as part of the integration of the Lexford
operations with the pre-existing Management Services division of the Company.
Interest Expense for mortgages on the Wholly Owned Properties decreased
approximately $116,000 for the three months ended March 31, 1997 as compared to
the same period in 1996. The decrease is related to the refinancing transactions
completed in late 1996. Interest Expense on the Company's corporate lines of
credit decreased approximately $130,000 for the three month comparative periods.
This decrease is due primarily to the decline in the average debt outstanding on
the Company's credit facility: $10.4 million was outstanding at March 31, 1997
as compared to $20.4 million at March 31, 1996.
Depreciation and Amortization Expense increased approximately $137,000 for
the three months ended March 31, 1997 as compared to the same period in 1996.
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 and management contracts associated with the
Lexford acquisition.
Net Income amounted to approximately $1.3 million or $.31 per share, for
the three months ended March 31, 1997 as compared to approximately $1.1 million
or $.28 per share, for the same period in 1996.
Earnings before Interest, Taxes, Depreciation and Amortization
The Company believes that earnings before interest, income taxes,
depreciation, amortization and extraordinary items ("EBITDA"), Recurring EBITDA
(EBITDA adjusted for non recurring items) and Adjusted EBITDA (Recurring EBITDA
less interest on Wholly Owned Property mortgage debt) are 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 obligation, and
to finance capital and other expenditures, including expenditures for
acquisitions. EBITDA does not represent cash flow as defined by generally
accepted accounting principles ("GAAP") and does not necessarily represent
amounts of cash available to fund the Company's cash requirements. Unaudited
EBITDA and the computation of Recurring EBITDA and Adjusted EBITDA for the three
months ended March 31, 1997 and 1996 is as follows: (000s omitted)
1997 1996
------------ ------------
EBITDA $ 7,174 $ 6,977
- ------ ------------ ------------
Income from Disposal of Non Core Assets..... (68) (169)
Loan Fees................................... (49) (27)
Restructure ................................ 250 0
------------ ------------
Recurring EBITDA............................... 7,307 6,781
- ---------------- ------------ ------------
Interest on Wholly Owned Properties......... (3,447) (3,563)
------------ ------------
Adjusted EBITDA................................ $ 3,860 $ 3,218
- --------------- ============ ============
18
<PAGE>
19
Adjusted EBITDA increased approximately $642,000, or 20.0%, in 1997 as
compared to 1996. The increase was principally due to the increase in interest
income derived from Syndicated Partnerships.
Contribution to Profit by Business Activity
The unaudited net contribution to profit (revenues less direct
expenses) and Adjusted EBITDA by the two core business activities of the Company
for the three months ended March 31, 1997 and 1996, are as follows. Financial
information presented includes fee based revenue generated from the Wholly Owned
Properties which is eliminated in the Consolidated Financial Statements, and
does not include an allocation of general corporate overhead.
Management Services - Net Contribution to Profit
1997 1996
----------------- ----------------
Revenues
Controlled Contracts................. $ 2,927,351 $ 2,961,947
Third Party Contracts................ 1,041,469 0
Ancillary............................ 263,397 268,606
Other................................ 51,712 64,649
----------------- ----------------
4,283,929 3,295,202
----------------- ----------------
Direct Expenses........................... 3,170,755 1,502,249
----------------- ----------------
Net Contribution to Profit................ $ 1,113,174 $ 1,792,953
================= ================
Adjusted EBITDA........................... $ 1,113,174 $ 1,792,953
================= ================
The decline in Management Services Net Contribution to Profit is
primarily due to the loss of management of 3,000 units in the first quarter of
1997 as the result of an owner - client's bankruptcy proceedings. The loss of
third party fee revenues occurred while overhead costs related to third party
management remained constant.
Investment Management - Net Contribution to Profit
1997 1996
----------------- ----------------
Revenues
Interest Income......................... $ 2,745,589 $ 1,436,333
Fee Based Services
Administrative Fees............... 383,682 387,577
Loan Fees......................... 49,064 49,167
Income from Disposal of Non-Core Assets. 68,445 168,889
Other................................... 17,333 7,964
----------------- ----------------
3,264,113 2,049,930
----------------- ----------------
Direct Expenses........................... 558,200 474,022
----------------- ----------------
Net Equity/(Loss) in Wholly Owned
Properties................................ 218,061 (183,336)
----------------- ----------------
Net Contribution to Profit................ $ 2,923,974 $ 1,392,572
================= ================
Adjusted EBITDA........................... $ 4,042,684 $ 2,397,251
================= ================
19
<PAGE>
20
The increase in the Investment Management contribution was derived
principally from the improved financial operating performances and reduced debt
service requirements of the Syndicated Partnerships (reflected in Interest
Income) and the Wholly Owned Properties.
CONSOLIDATED SUMMARY
-------------------------------------
1997 1996
----------------- -----------------
Net Contribution to Profit:
Management Services.............. $ 1,113,174 $ 1,792,953
Investment Management............ 2,923,974 1,392,572
----------------- ----------------
4,037,148 3,185,525
----------------- ----------------
Other Expenses:
Administration................... 1,296,526 971,946
Restructure Costs................ 250,000 0
Interest - Corporate............. 169,929 299,860
Depreciation and Amortization.... 228,855 127,769
----------------- ----------------
1,945,310 1,399,575
----------------- ----------------
Income before Income Taxes $ 2,091,838 $ 1,785,950
================= ================
Adjusted EBITDA by Business
Activity
------------------------------------
1997 1996
----------------- ----------------
Adjusted EBITDA - Net Contribution:
Management Services.............. $ 1,113,174 $ 1,792,953
Investment Management ........... 4,042,684 2,397,251
Corporate Administration......... (1,296,526) (971,946)
----------------- ----------------
Adjusted EBITDA........................... $ 3,859,332 $ 3,218,258
================= ================
Funds from Operations of Wholly Owned Properties
The following table summarizes the unaudited operating results of the
Wholly Owned Properties for the three months ended March 31, 1997 and 1996:
March 31, March 31,
1997 1996
---------------- ----------------
Statistical information
- -----------------------
Properties at end of period............... 113 114
Average Units............................. 8,453 8,777
Ave Economic Occupancy.................... 90.0% 89.7%
Ave Rent Collected/Unit/Month ............ $388 $378
Property - Operating Expenses/Unit/Month.. $147 $144
Capital & Maintenance/Unit/Month.......... $28 $27
Real Estate Taxes/Unit/Month.............. $32 $32
Property - Operating Expense Ratio........ 36.7% 37.3%
20
<PAGE>
21
Wholly Owned Properties (cont'd)
March 31, March 31,
1997 1996
---------------- ----------------
Financial Information (000's) omitted
- -------------------------------------
Revenues
Rental Income........................... $ 9,831 $ 9,954
Other Property Income................... 356 236
---------------- ----------------
Total Revenues 10,187 10,190
---------------- ----------------
Expenses
Property Operating...................... 3,735 3,802
Real Estate Taxes....................... 803 842
---------------- ----------------
Operating Expenses.................. 4,538 4,644
---------------- ----------------
Net Operating Income................ 5,649 5,546
---------------- ----------------
Interest - Mortgage..................... 3,447 3,564
Interest - Corporate Advances........... 143 100
Major Maintenance ...................... 549 654
Non Operating........................... 56 211
Depreciation............................ 1,236 1,200
---------------- ----------------
Non Operating....................... 5,431 5,729
---------------- ----------------
Net Income/(Loss)......................... 218 (183)
================ ================
Capital Expenditures ..................... $ 170 $ 62
================ ================
As defined by the National Association of Real Estate Investment Trust
("NAREIT"), Funds From Operations ("FFO") represents net income/(loss) (computed
in accordance with generally accepted accounting principles, consistently
applied) before minority interest excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization (excluding amortization of deferred financing cost), and after
adjustment for unconsolidated partnerships and joint ventures. The FFO of the
Wholly Owned Properties for the three months ended March 31, 1997, as compared
to the same period in 1996, is as follows:
Funds From Operations
000s omitted
--------------------------------
1997 1996
--------------- ---------------
Net Income ............................... $ 218 $ (183)
Depreciation on Real Estate ............. 1,150 1,200
Deferred Maintenance Funded from Escrows. 0 199
--------------- ---------------
$ 1,368 $ 1,216
=============== ===============
The approximately $152,000, or 12.5%, increase in FFO is due to the factors
discussed in "Results of Operations".
21
<PAGE>
22
Net Operating Income of Syndicated Partnerships
The Company holds receivables from substantially all of the 408 Syndicated
Partnerships in which the Company had an ownership interest on March 31, 1997,
primarily in the form of second mortgages and general partner advances to the
Syndicated Partnerships. Interest payments on these receivables generate a
majority of the interest income recognized by the Company.
The following table summarizes certain unaudited aggregated operating
results of the Syndicated Partnerships for the three months ended March 31, 1997
and 1996. The financial information presented is based upon accrual accounting
at the partnership level. Certain transactions between the Company and the
Syndicated Partnerships are recorded at amounts at the partnership level that
will not necessarily correspond to amounts recorded at the Company level as
Interest Income due to "Fresh Start" accounting (SEE NOTE 1 TO NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS).
March 31, March 31,
1997 1996
-------------- --------------
Statistical information
- -----------------------
Properties at end of period..................... 408 414
Average Units................................... 25,661 26,197
Ave Economic Occupancy.......................... 90.3% 91.2%
Average Rent Collected/Unit/Month .............. $388 $377
Property - Operating Expenses/Unit/Month........ $151 $151
Capital & Maintenance/Unit/Month................ $27 $34
Real Estate Taxes/Unit/Month.................... $30 $30
Property - Operating Expense Ratio.............. 37.6% 39.1%
22
<PAGE>
23
Syndicated Partnerships (cont'd)
March 31, March 31,
1997 1996
-------------- --------------
Financial Information (000's) omitted
- -------------------------------------
Revenues
Rental Income................................. $ 29,832 $ 29,641
Other Property Income......................... 1,032 688
-------------- --------------
Total Revenues.................................. 30,864 30,329
-------------- --------------
Expenses
Property Operating............................ 11,617 11,857
Real Estate Taxes............................. 2,300 2,378
-------------- --------------
Operating Expenses........................ 13,917 14,235
-------------- --------------
Net Operating Income...................... 16,947 16,094
-------------- --------------
Interest - Mortgage........................... 9,777 9,920
Interest - General Partner.................... 3,197 3,035
Major Maintenance ............................ 1,371 2,484
Non Operating................................. 725 533
Depreciation.................................. 4,640 4,532
-------------- --------------
Non Operating............................. 19,710 20,504
-------------- --------------
Inc./(Loss) bef. extraordinary items............ (2,763) (4,410)
-------------- --------------
Extraordinary gain ............................. 785 0
-------------- --------------
Net Income/(Loss)............................... $ (1,978) $ (4,410)
============== ==============
Capital Expenditures ........................... $ 675 $ 215
============== ==============
Net Operating Income increased approximately $853,000, or 5.3%, for the
three months ended March 31, 1997 as compared to the same period in 1996.
Economic occupancy for the 408 Syndicated Partnerships was 90.3% for the three
months ended March 31, 1997 as compared to 91.2% for the same period in 1996.
The Syndicated Partnership performance for the first three months of 1997, as
compared to 1996, is comparable to the Wholly Owned Properties, and was
influenced by the same factors.
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
March 31, 1997 and December 31, 1996 and the Consolidated Statements of Cash
Flows for the three months ended March 31, 1997 and 1996.
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.
23
<PAGE>
24
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 $3.4 million for
the three months ended March 31, 1997 as compared to the same period in 1996.
The increase was due primarily to cash received from interests in and
receivables from Syndicated Partnerships which increased $2.1 million due to
improved net operating income and lower debt service requirements. Payments
(uses of cash) related to non-recurring items included in Operating Activities
reflects payments related to the corporate restructuring costs.
The Company's credit facility provides 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 Property debt restructuring (the "Acquisition Line")
due in March 2001 with monthly installments of principal and interests $139,435;
a $22.0 million reducing balance line of credit (the "Reducing Line") due in
August 2001 with interest, only, payable during the first year with quarterly
reductions in available credit of $750,000 commencing in October 1996
(collectively, the "Loans"). The credit facility initially 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 beginning in March 1996 in 60 equal monthly installments of
principal and interest. Excess corporate cash is applied to pay down the
Reducing Line and reborrowed as needed.
In July 1996, the Company received a commitment letter from the Bank for an
additional $10.0 million line of credit. The new line will bear interest at the
Bank's prime rate of interest minus 1% with interest only during the first year,
and will be due in six years. The Company has not needed to access this credit
commitment. On March 31, 1997, including the $10.0 million commitment, the
Company had unrestricted credit availability of approximately $30.6 million.
In addition, all of the Company and the majority of Property bank accounts
are maintained at the Bank. The banking relationship has increased cash flow at
the Properties as a result of reduced service charges and increased interest
income on the Property bank account balances. The Company benefits from a
portion of the improved cash flow at the Properties.
The Company's capital expenditures for the three months ended March 31,
1997 amounted to approximately $123,000 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 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 1997 (exclusive of capital expenditures for enhanced
software and information systems).
Capital Expenditures, combined with Improvement and Replacement Expense for
the Operating Real Estate Assets, was approximately $719,000 during the three
months ended March 31, 1997. These costs are funded from Wholly Owned Properties
cash flow and maintenance escrow funds. The 1997 budget for capital
expenditures, improvement and replacement expense for the Operating Real Estate
Assets is $4.6 million, as compared to annual actual expenditures in 1996 of
$3.5 million. Approximately $1.5 million of the $4.6 million relates to non
recurring deferred maintenance which principally will be funded from escrows
established in connection with mortgage refinancing transactions completed in
prior years.
24
<PAGE>
25
Lexford Acquisition
-------------------
Effective August 1, 1996, the Company acquired Lexford Properties, Inc., a
privately held, third-party multi-family management company headquartered in
Dallas, Texas (SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
BUSINESS OVERVIEW - MANAGEMENT SERVICES). As a result of the acquisition, the
Company derives Management Services fee income from apartment communities in
which it has no ownership interest. At March 31, 1997, Lexford's third party
management portfolio comprised approximately 17,600 units of the Company's
management portfolio of approximately 51,500 units. The Company intends to
maintain Lexford's Dallas office as headquarters for its combined property
management business, which is 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 15.0% of the Company's shares
outstanding as of March 31, 1997.
Financing And Debt Restructuring of the Properties
--------------------------------------------------
In the first quarter of 1997 the Company refinanced mortgages on six
Syndicated Partnerships. The new mortgages on four Properties were financed
through PaineWebber Incorporated ("PaineWebber") and the mortgages on two
Properties were financed through First Union Capital Markets Group ("First
Union"). The PaineWebber mortgages have fixed interest rates of approximately
8.6% with a 25 year principal amortization schedule beginning in year four, and
a ten year maturity. The new First Union mortgages have fixed interest rates of
8.7% with a 25 year principal amortization and a ten year maturity. The Company
advanced approximately $202,000 to certain of the Syndicated Partnership
borrowers to facilitate the refinancings. The Company was able to negotiate debt
discounts from the previous lenders of approximately $738,000 in the aggregate
on two of the Syndicated Partnerships. In addition, debt service at the
Syndicated Partnerships will decrease in the aggregate, approximately $6,200 per
month over the next three years as a result of these transactions.
25
<PAGE>
26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NO. DESCRIPTION SEQUENTIAL PAGE
- -------- -------------------------------- --------------------------------------
11.1 Statement re: computation of See Note 1 of Notes to Consolidated
Per Share Earnings Financial Statements
27 Financial Data Schedule Filed as an Exhibit to this Form 10-Q
on page 28.
26
<PAGE>
27
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: May 13, 1997 By: /s/ John B. Bartling, Jr.
---------------------------------------------------
John B. Bartling, Jr.
President and Chief Executive Officer
Dated: May 13, 1997 By: /s/ Mark D. Thompson
---------------------------------------------------
Mark D. Thompson
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Dated: May 13, 1997 By: /s/ Ronald P. Koegler
---------------------------------------------------
Ronald P. Koegler
Vice President and Controller
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
28
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,312
<SECURITIES> 0
<RECEIVABLES> 4,825
<ALLOWANCES> 2,063
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 162,845
<DEPRECIATION> 5,628
<TOTAL-ASSETS> 240,803
<CURRENT-LIABILITIES> 0
<BONDS> 157,969
0
0
<COMMON> 29,122
<OTHER-SE> 35,542
<TOTAL-LIABILITY-AND-EQUITY> 240,803
<SALES> 0
<TOTAL-REVENUES> 16,830
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,121
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,617
<INCOME-PRETAX> 2,092
<INCOME-TAX> 816
<INCOME-CONTINUING> 1,276
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,276
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
<FN>
THE REGISTRANT HAS A NON-CLASSIFIED BALANCE SHEET
</FN>
</TABLE>
