<PAGE>
As filed with the Securities and Exchange Commission on December 3, 1999
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): DECEMBER 3, 1999
ERP OPERATING LIMITED PARTNERSHIP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
ILLINOIS 0-24920 36-3894853
(STATE OR OTHER JURISDICTION (COMMISSION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) FILE NUMBER) IDENTIFICATION NO.)
TWO NORTH RIVERSIDE PLAZA, SUITE 400
CHICAGO, ILLINOIS 60606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (312) 474-1300
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
===============================================================================
<PAGE>
ITEM 5: OTHER EVENTS
On October 1, 1999, Equity Residential Properties Trust, a Maryland real estate
investment trust ("EQR"), sole general partner of ERP Operating Limited
Partnership, an Illinois limited partnership ("ERP"), acquired Lexford
Residential Trust, a Maryland real estate investment trust ("Lexford"), through
the merger of Lexford with and into EQR (the "Merger"). Immediately following
the effectiveness of the Merger, EQR contributed substantially all of the assets
previously held by Lexford to ERP in exchange for units of limited partnership
interest in ERP. As of September 30, 1999, Lexford's portfolio of 402 properties
consisted of 36,609 units in 16 states.
In connection with the Merger, ERP is hereby filing additional financial
information of Lexford as of September 30, 1999 and for the three-month and
nine-month periods then ended.
2
<PAGE>
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 (UNAUDITED) AND
DECEMBER 31, 1998 (AUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
ASSETS
Rental Properties (Note 2)
Land $ 59,732 $ 59,732
Buildings, Improvements and Fixtures 550,953 544,897
---------------- ----------------
610,685 604,629
Accumulated Depreciation (46,277) (28,564)
---------------- ----------------
564,408 576,065
Investments in and Advances to Unconsolidated Partnerships, net of an
allowance of $1,615 at September 30, 1999 and December 31, 1998 (Note 1) 10,106 11,173
Cash 2,651 495
Accounts Receivable, Residents, Affiliates, Officers and Other, net of an allowance
of $1,000 and $550 at September 30, 1999 and December 31, 1998, respectively (Note 4) 2,185 1,920
Furniture, Fixtures and Other, Net 2,294 2,108
Funds Held in Escrow (Note 1) 22,763 22,747
Intangible Assets (Note 1) 7,169 6,891
Prepaids and Other (Note 1) 6,576 7,523
---------------- ----------------
$ 618,152 $ 628,922
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages and Revolving/Term Debt
Mortgages (Note 3) $ 494,429 $ 494,556
Revolving/Term Debt 28,650 33,186
---------------- ----------------
523,079 527,742
---------------- ----------------
Accounts Payable 716 1,389
Accrued Interest, Real Estate and Other Taxes 12,379 10,315
Other Accrued Expenses 3,667 6,196
Other Liabilities 6,773 7,451
Dividends Payable 3,364 4,122
Deferred Compensation (Note 1) 14,349 12,525
---------------- ----------------
Total Liabilities 564,327 569,740
---------------- ----------------
Shareholders' Equity (Note 1):
Preferred Shares, $.01 par value, 5,000,000 Shares Authorized, None Issued - -
Common Shares, $.01 par value, 50,000,000 Shares Authorized, 9,560,428
and 9,530,013 Shares Issued and Outstanding at September 30, 1999 and
December 31, 1998, respectively 96 95
Additional Paid-in Capital 66,281 65,833
Retained Earnings 1,706 7,482
Less Cost of Treasury Shares (Note 1) (14,258) (14,228)
---------------- ----------------
53,825 59,182
---------------- ----------------
$ 618,152 $ 628,922
================ ================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
--------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Rental and Other Property Revenues $ 38,602 $ 37,404 $ 114,239 $ 100,191
Fee Based 1,084 1,163 3,177 4,391
Income from Unconsolidated Partnerships 609 625 1,379 2,195
--------------- ------------- ------------- ------------
40,295 39,192 118,795 106,777
--------------- ------------- ------------- ------------
Expenses:
Property Operating and Maintenance 12,579 12,418 35,658 32,530
Real Estate Taxes and Insurance 3,277 3,130 9,672 8,228
Property Management 2,818 2,843 8,190 9,605
Administration 1,158 1,658 3,659 4,708
Merger Costs 2,464 - 2,464 -
Performance Equity Plan (Note 1) - 829 - 1,659
Non-recurring Costs (Note 1) - - - 1,808
Interest-Mortgages 10,665 11,155 32,041 30,264
Interest- Revolving/Term Debt 453 518 1,450 1,098
Depreciation and Amortization 6,461 5,919 19,087 15,925
Loss on Sale of Third Party Management Business (Note 1) - - - 6,300
--------------- ------------- ------------- ------------
39,875 38,470 112,221 112,125
--------------- ------------- ------------- ------------
Income/(Loss) Before Gain on Disposal of Assets, Extraordinary
Loss and Cumulative Effect of Change in Accounting Principle 420 722 6,574 (5,348)
Gain on Disposal of Assets - Net - 35 226 285
--------------- ------------- ------------- ------------
Income/(Loss) Before Extraordinary Loss and Cumulative Effect
of Change in Accounting Principle 420 757 6,800 (5,063)
Extraordinary Loss (Note 3) - - (248) -
Cumulative Effect of Change in Accounting Principle (Note 1) - - (700) -
--------------- ------------- ------------- ------------
Net Income/(Loss) $ 420 $ 757 $ 5,852 $ (5,063)
--------------- ------------- ------------- ------------
--------------- ------------- ------------- ------------
Basic Earnings Per Share:
Income/(Loss) Before Extraordinary Loss and Cumulative
Effect of Change in Accounting Principle $ 0.04 $ 0.08 $ 0.72 $ (0.57)
Extraordinary Loss - - (0.03) -
Cumulative Effect of Change in Accounting Principle - - (0.07) -
--------------- ------------- ------------- ------------
--------------- ------------- ------------- ------------
Net Income/(Loss) $ 0.04 $ 0.08 $ 0.62 $ (0.57)
--------------- ------------- ------------- ------------
--------------- ------------- ------------- ------------
Diluted Earnings Per Share:
Income/(Loss) Before Extraordinary Loss and Cumulative
Effect of Change in Accounting Principle $ 0.04 $ 0.08 $ 0.71 $ (0.57)
Extraordinary Loss - - (0.03) -
Cumulative Effect of Change in Accounting Principle - - (0.07) -
--------------- ------------- ------------- ------------
--------------- ------------- ------------- ------------
Net Income/(Loss) $ 0.04 $ 0.08 $ 0.61 $ (0.57)
--------------- ------------- ------------- ------------
--------------- ------------- ------------- ------------
--------------- ------------- ------------- ------------
--------------- ------------- ------------- ------------
Dividends Declared Per Common Share $ 0.3519 $ 0.4325 $ 1.2169 $ 0.4325
--------------- ------------- ------------- ------------
--------------- ------------- ------------- ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Less Cost of
Common Shares Paid - in Retained Treasury
---------------------------
Shares Amount Capital Earnings Shares Total
------------- ------------ -------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 9,530 $ 95 $ 65,833 $ 7,482 $ (14,228) $ 59,182
------------- ------------ -------------- ------------- ---------------- --------------
Exercise of options under non-
qualified stock option plan 11 98 98
Trustees restricted stock plan shares 2 35 (27) 8
Rabbi Trust dividends and other
investments in shares (355) (355)
Withdrawals from Rabbi Trust 668 668
1999 share compensation issued
to Rabbi Trust 17 1 315 (316) -
Dividends to common shareholders (11,628) (11,628)
Net Income for the period 5,852 5,852
------------- ------------ -------------- ------------- ---------------- --------------
Balance, September 30, 1999 9,560 $ 96 $ 66,281 $ 1,706 $ (14,258) $ 53,825
============= ============ ============== ============= ================ ==============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Cash Flows from Operating activities:
Net Income/(Loss) $ 5,852 $ (5,063)
---------------- ----------------
Adjustments to reconcile Net Income/(Loss) to Net Cash provided by
Operating Activities:
Depreciation 18,178 14,814
Amortization 909 1,111
Loss on Sale of Third Party Management Business - 6,300
Provision for Losses on Accounts Receivable 1,205 1,117
Gain on Disposal of Assets - net (226) (285)
Extraordinary Loss 248 -
Cumulative Effect of Change in Accounting Principle 700 -
Non-Cash Share Compensation 936 3,490
Changes in Operating Assets and Liabilities:
Investments in and Advances to Unconsolidated Partnerships 706 851
Accounts Receivable and Other Assets (1,239) (66)
Accounts Payable and Other Liabilities (403) (1,408)
---------------- ----------------
Net Cash provided by Operating activities 26,866 20,861
---------------- ----------------
Cash Flows from Investing activities:
Proceeds from Sale of Assets 226 335
Net Repayment of Advances to Unconsolidated Partnerships 361 8
Investments in Unconsolidated Partnerships and Other - (3,405)
Purchase of Unconsolidated Partnerships, Net of Cash Acquired - (25,506)
Capitalized Refinancing Costs (1,187) -
Capital Expenditures - Other (641) (928)
Capital Expenditures - Real Estate (6,066) (8,926)
---------------- ----------------
Net Cash (used in) Investing activities (7,307) (38,422)
---------------- ----------------
Cash Flows from Financing activities:
Proceeds from the exercise of Stock Options 98 1,823
Proceeds from Revolving Debt - net - 20,696
Principal Payments on Revolving/Term Debt and Other (4,536) (1,042)
Proceeds from Mortgage Debt 42,194 -
Payments on Mortgages - principal amortization (5,905) (4,977)
Payments on Mortgages - lump sum (36,868) (1,508)
Dividends Paid (12,386) -
---------------- ----------------
Net Cash provided by/(used in) Financing activities (17,403) 14,992
---------------- ----------------
Increase/(Decrease) in Cash 2,156 (2,569)
Cash at Beginning of Period 495 2,569
---------------- ----------------
Cash at End of Period $ 2,651 $ -
================ ================
Supplemental Disclosure of Cash Flow Information
Cash Payments for Interest $ 32,896 $ 30,668
================ ================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
LEXFORD RESIDENTIAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In the first half of 1998, the Company acquired the entire ownership
interest in 324 Unconsolidated Partnerships owning 326 apartment communities.
Such acquisitions resulted in the following increases (decreases) to the
Company's balance sheet (SEE NOTE 2):
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
NON-CASH EFFECTS:
Investments in and Advances to Unconsolidated Partnerships $ (47,335)
Land and Building $ 430,981
Accounts Receivable and Other Assets $ 19,409
Mortgages $ 362,610
Accounts Payable and Other Liabilities $ 14,939
CASH EFFECTS:
Cash Paid to Former Partner(s) $ (33,902)
Net Cash Acquired 8,396
-----------------
$ (25,506)
=================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
Lexford Residential Trust, a Maryland real estate investment trust,
together with its wholly owned and controlled partnerships, limited liability
companies and corporate subsidiaries (the "Company" or "Lexford"), is a fully
integrated, self-managed real estate investment trust ("REIT") which owns,
manages and invests in direct or indirect ownership interests in multifamily
apartment communities. The consolidated financial statements include the
accounts of Lexford Residential Trust and its wholly owned subsidiaries and
partnerships. The Company, for consolidated financial statement purposes,
includes corporations, limited partnerships and other legal entities which own
multifamily apartment communities (the "Rental Properties") in which the
Company, in turn, owns a 100% equity interest. The Company also holds equity
ownership as well as significant economic interests (i.e. mortgage loans,
accounts receivable and management contracts entitling the Company to a
substantial portion of an apartment community's net cash flow) in multifamily
apartment communities in its capacity as a partner and property manager,
respectively, in various limited partnerships (the "Unconsolidated
Partnerships"). The Rental Properties and the Unconsolidated Partnerships are
collectively referred to as the "Properties." The accounts of the Unconsolidated
Partnerships are not included within the Company's consolidated financial
statements but are accounted for under the equity method. All significant
intercompany balances and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements, except for the Consolidated
Balance Sheet as of December 31, 1998, are unaudited and have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and in accordance with the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for a complete financial statement presentation. The consolidated
financial statements, the notes hereto and the capitalized terms included herein
should be read in conjunction with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.
As of September 30, 1999, the Properties contained 36,609 apartment
units located at 402 geographic sites. At September 30, 1999, the Company
owned the entire equity interest in 428 Rental Properties and a partial
equity, together, in most instances, with a significant economic, interest in
80 Unconsolidated Partnerships. The difference in the number of geographic
sites compared to the number of Rental Properties results from separate legal
entities owning apartment communities constructed on contiguous parcels. As a
result of the Company's successful efforts in acquiring the entire equity
interest in a number of former Unconsolidated Partnerships (see Note 2), the
Company is combining legal entities owning contiguous apartment communities
as and when mortgage debt secured by such apartment communities are
refinanced with a single lender.
The Company has one reportable segment which is the ownership and
operation of residential apartment communities. The majority of the Properties
are located in the midwest and southeast United States, with the heaviest
concentrations in Florida, Ohio, Georgia, Indiana, Michigan and Kentucky. The
concentrations of Properties within these states is as follows: Ohio (136
Properties), Florida (126 Properties), Georgia (73 Properties), Indiana (70
Properties), Kentucky (33 Properties) and Michigan (25 Properties). The Company
is not dependent for its revenues on any particular Property or resident and the
loss of any Property would not be material
8
<PAGE>
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
to the Company's financial position. The Company's largest Property accounts for
only 1% of the Company's total revenues. The geographic diversity of the
Properties also minimizes the Company's exposure to local economic conditions.
The typical Property is comprised of multiple single story buildings with
studio, one and two bedroom apartments.
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, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.
BUSINESS OVERVIEW
The Company is a fully integrated REIT which owns, manages and
opportunistically acquires apartment communities. The Company's Properties
generally consist of relatively smaller apartment communities, averaging
approximately 91 units per site.
In addition, the Company provides ancillary services to the residents
at both the Rental Properties and Unconsolidated Partnerships, including
renter's insurance and telecommunication services. The Company also enters into
group buying, volume discount contracts with major vendors as agent for the
Properties enabling the Properties to purchase items at a discounted price and,
in the case of laundry equipment, receive rent based on resident usage.
MERGER AGREEMENT
On June 30, 1999, the Company entered into a definitive merger
agreement with Equity Residential Properties Trust ("EQR") that resulted in the
tax-free merger of the Company into EQR. The merger agreement was approved by
shareholders of Lexford and EQR on September 30, 1999. The merger provided for
Lexford shareholders to receive 0.463 of an EQR common share for each Lexford
common share upon completion of the merger. All merger related costs incurred by
the Company were expensed in the third quarter of 1999.
Subsequent to the dividend paid by the Company on July 15, 1999, the
merger agreement provided that, prior to the merger, the amount per share of
each subsequent quarterly dividend declared by the Company will not exceed an
amount equal to the dividend on a common share of EQR for such quarter
multiplied by 0.463.
The Company declared a dividend of $0.3519 per common share payable to
shareholders of record at the close of business on September 20, 1999. The
dividend was paid on October 8, 1999 following consummation of the merger and is
reflected in the Company's Consolidated Statements of Income for the three and
nine months ended September 30, 1999.
9
<PAGE>
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
SALE OF THIRD PARTY MANAGEMENT BUSINESS
In the first quarter of 1998 the Company was also engaged in providing
management services to third party owners of multifamily apartment communities
(the "Third Party Management Business"). Because of Internal Revenue Code
limitations on the nature and amount of non-qualified REIT income, the Company
contributed the majority of its assets related to the Third Party Management
Business to a newly formed corporation, Lexford Property Management, Inc.
("LPM"), in exchange for all of the preferred stock of such corporation on
February 20, 1998. Effective as of April 1, 1998, the Company sold all its
preferred equity interest in the Third Party Management Business. Due to the
reclassification of the Third Party Management Business as Held for Sale in the
first quarter of 1998, the Company recorded a $1.3 million reserve for
sale/disposal costs associated with this sale, as well as a $3.0 million charge
for the release of 300,000 contingent shares and a $2.0 million charge related
to an adjustment to the value of goodwill associated with the original
acquisition of the Third Party Management business. The above charges totaling
$6.3 million were classified as Loss on Sale of Third Party Management Business.
The Company received a promissory note in the principal amount of $1.8 million
payable over a ten year period which bears interest at 6% per annum until April
1, 2000 and 11% per annum thereafter, in exchange for all of the outstanding
preferred stock of LPM. The Company has retained its proprietary interest in
property management training programs and systems, and the rights to the name
"Lexford".
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 judicial plan of reorganization (the "Plan of Reorganization") of
the Company's predecessor, Cardinal Industries, Inc. The Company prepared
financial statements on the basis that a new reporting entity was created with
assets and liabilities recorded at their estimated fair values as of the
Effective Date. At the Effective Date, to the extent the non-recourse debt
secured by certain assets owned by the Company exceeded the estimated fair value
of the respective Rental Property, the Company reduced the contractual amount of
the related non-recourse mortgage debt by the amount of the deficiency (the
"Mortgage Deficiency"). The contractual mortgage balance net of any applicable
Mortgage Deficiency is referred to as the "Carrying Value" of the mortgage (see
Note 3).
FUNDS HELD IN ESCROW
Funds Held in Escrow at September 30, 1999 includes funds of $22.8
million escrowed by Rental Properties for improvements and deferred maintenance,
real estate taxes, insurance, resident security deposits and other funds held by
mortgage lenders.
10
<PAGE>
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
INTANGIBLE ASSETS
Intangible Assets at September 30, 1999 is comprised of approximately
$2.6 million of management contracts and approximately $433,000 of goodwill
related to the trade name, training programs and property management systems
retained from the Third Party Management Business. The management contracts and
goodwill are net of amortization of approximately $1.1 million. In addition,
Intangible Assets includes deferred financing costs of $4.2 million at September
30, 1999. The deferred financing costs relate to mortgage refinancings on the
Rental Properties and are amortized over the terms of the respective loans.
PREPAIDS AND OTHER ASSETS
Prepaids and Other assets at September 30, 1999 includes $3.7 million
of deferred offering costs related to the Company's Form S-3 "shelf"
registration statement filed with the SEC, and a $1.8 million note receivable
related to the sale of the Third Party Management Business. In addition,
Prepaids and Other assets consists of approximately $818,000 of prepaid rent,
insurance and real estate taxes, and approximately $261,000 of utility deposits
and other prepaid expenses.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED PARTNERSHIPS
Investments in and Advances to Unconsolidated Partnerships represent
the Company's general partners' interests in and advances to Unconsolidated
Partnerships. The carrying value represents the allocation of the estimated fair
value of the underlying real estate assets as of the Effective Date or, if
later, date of purchase or investment. The contractual amounts of the
receivables are significantly more than the recorded carrying values.
In the first quarter of 1998, the Company invested $3.4 million in a
joint venture with a developer for the construction of an apartment community in
the Dallas, Texas area, consisting of 276 units. The community commenced leasing
at the end of the first quarter of 1999.
The Company accounts for its investments on the equity method. The
Company's share of net loss of the Unconsolidated Partnerships amounted to
approximately $284,000 for the first nine months of 1999, and is included in
Income from Unconsolidated Partnerships in the Consolidated Statements of
Income.
11
<PAGE>
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
ACCOUNTING CHANGE - START UP COSTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, Reporting the Costs of Start-up
Activities. The SOP is effective beginning on January 1, 1999, and requires that
start-up costs capitalized prior to January 1, 1999 be written off and requires
that start-up costs be expensed as incurred. The definition of start-up costs
under the SOP includes organizational costs. Historically, the Company
capitalized and then amortized these costs over five years. The unamortized
balance of organizational costs, approximately $700,000 (as of December 31,
1998), was written off as the Cumulative Effect of Change in Accounting
Principle as of January 1, 1999.
PROVISION FOR INCOME TAXES
The Company has elected to be taxed as a REIT under sections 856
through 860 of the Internal Revenue Code, commencing with its taxable year
beginning January 1, 1998. As a REIT, the Company generally will not be subject
to Federal Income Tax on income it distributes to shareholders as long as it
distributes at least 95% of its REIT taxable income and satisfies a number of
organizational, ownership and operational requirements. In addition, primarily
due to its organization as a Maryland real estate investment trust, the Company
believes it will not be subject to state income taxes in jurisdictions where the
Properties are located. Therefore, the Consolidated Statements of Income for the
three and nine months ended September 30, 1999 and 1998 do not include a
provision for Federal or state income taxes.
NON-RECURRING COSTS
Non-recurring Costs were approximately $1.8 million for the nine months
ended September 30, 1998. Approximately $1.6 million of the charge related to
the retirement plan ("Trustee Retirement Plan") for four Trustees who retired
April 15, 1998. Each retiring Trustee received a package consisting of the right
to receive a cash payment of $225,000 (the "Retirement Payment"), vesting of all
non-vested common share awards and the opportunity to continue deferral of
receipt of common share awards as beneficiaries of the Company's Executive
Deferred Compensation Rabbi Trust (the "Rabbi Trust") for up to five years. The
retiring Trustees were also afforded the opportunity to defer receipt of all or
any portion of the Retirement Payment and direct that the deferred portion be
contributed to the Rabbi Trust and invested in the Company's common shares for
their benefit. In connection with their participation in the Trustee Retirement
Plan, two of the retiring Trustees elected to defer receipt of a total of
$400,000 of Retirement Payments in such manner. The majority of the remaining
$200,000 of Non-recurring Costs in 1998 relates to severance costs associated
with terminated employees.
12
<PAGE>
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (continued)
RABBI TRUST
The Company established the Rabbi Trust in 1996 to permit executive
officers and trustees to defer taxes on awards of Company shares. The Rabbi
Trust is currently restricted to holding Company shares or cash equivalents. In
1998, the Emerging Issues Task Force of the Financial Accounting Standards Board
("EITF") reached a consensus on Issue No. 97-14, Accounting for Deferred
Compensation Arrangements. The EITF concluded that the deferred compensation
liability and the securities issued to fund deferred compensation must be
consolidated by the Company and carried on the Company's balance sheet. Further,
the Company's common shares held in the Rabbi Trust should be accounted for as
treasury shares by the Company. The Company applied EITF No.
97-14 commencing with the first quarter of 1998.
EARNINGS PER SHARE
The following table shows the amounts used in computing basic and
diluted earnings per share as well as weighted average numbers of shares
outstanding and the effect on income of restricted common shares and stock
option dilutive potential (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator for Basic and Diluted Earnings Per Share
Net Income/(Loss) $ 420 $ 757 $ 5,852 $(5,063)
=========== ========== =========== ===========
Denominator
Denominator for Basic Earnings per Share
Weighted Average Shares 9,487 9,244 9,487 8,918
----------- ---------- ----------- -----------
Effect of Dilutive Securities
Stock options (1) 97 67 46 -
Time Vesting Restricted Share Awards 70 28 70 38
----------- ---------- ----------- -----------
Dilutive Potential Common Shares 167 95 116 38
----------- ---------- ----------- -----------
Denominator for Diluted Earnings per Share
Adjusted Weighted Average Shares 9,654 9,339 9,603 8,956
=========== ========== =========== ===========
Basic Earnings Per Share:
Net Income/(Loss) $ 0.04 $ 0.08 $ 0.62 $ (0.57)
=========== ========== =========== ===========
Diluted Earnings Per Share:
Net Income/(Loss) $ 0.04 $ 0.08 $ 0.61 $ (0.57)
=========== ========== =========== ===========
</TABLE>
(1) Stock Options for 166,196 shares were excluded from diluted earnings per
share for the nine months ended September 30, 1998 because including the
shares would be anti-dilutive as a result of the net loss the Company
recognized for the nine months ended September 30, 1998.
13
<PAGE>
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 PROPERTY ACQUISITIONS
In conjunction with its determination to elect REIT status, the Company
initiated a consolidation plan, the purpose of which was to minimize third party
equity interests in the Unconsolidated Partnerships owning apartment communities
(the "Consolidation Plan"). In the first quarter of 1998, the Company acquired
the entire equity ownership interest in 287 former Unconsolidated Partnerships.
The acquisition of the 287 former Unconsolidated Partnerships was effective as
of January 31, 1998. Effective as of April 1, 1998, the Company acquired the
entire ownership interest in an additional 37 Unconsolidated Partnerships that
owned 39 Properties, which were accounted for under the equity method in the
first quarter of 1998. The acquired former Unconsolidated Partnerships are now
classified as Rental Properties.
NOTE 3 MORTGAGE DEBT
As of the Effective Date, the mortgages on 13 Rental Properties were
restated to estimated fair value (the "Carrying Value") because the Fresh Start
value of the respective Rental Property was less than the outstanding principal
amount of its mortgage. The difference between the Carrying Value of each such
mortgage and the full unpaid principal amount thereof is characterized as a
"Mortgage Deficiency" for Fresh Start purposes. Interest expense is recorded
based on the Carrying Value of the mortgage using the effective interest rate
method. Mortgages which have been originated or assumed following the Effective
Date (including non-recourse mortgages on the 326 Properties acquired pursuant
to the Consolidation Plan) are recorded as liabilities on the Consolidated
Balance Sheets in their full principal amount. Typically, each Rental Property
is secured by a separate mortgage loan. The mortgage loans on a portfolio of 26
Rental Properties contain cross collateral and cross default provisions; and 32
Rental Properties are cross collateralized and cross defaulted within their
respective states, with no more than eight loans separately cross
collateralized. However, all but three of the mortgage loans secured by the
Rental Properties are non-recourse to the Company.
The outstanding mortgage debt on the Rental Properties, including the
non-recourse mortgage debt consolidated in relation to the acquisition of the
324 former Unconsolidated Partnerships, at September 30, 1999 and December 31,
1998 is as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
----------------------- ---------------------
<S> <C> <C>
Contractual Mortgage Payable $ 499,653 $ 500,688
Mortgage Deficiency (5,224) (6,132)
----------------------- ---------------------
$ 494,429 $ 494,556
====================== ======================
</TABLE>
Any prepayment of mortgage debt at the contractual value in excess of
its carrying value will result in an extraordinary charge equal to the amount of
Mortgage Deficiency associated with such debt.
14
<PAGE>
LEXFORD RESIDENTIAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 MORTGAGE DEBT (continued)
In the first nine months of 1999 the Company completed the refinancing
of the mortgage debt on 27 Rental Properties. Mortgage indebtedness on the 27
Rental Properties with a contractual amount of $35.1 million and a carrying
value of $34.4 million, was refinanced with mortgages amounting to $42.2 million
bearing a fixed rate of interest of 7.37% to 7.6%, with 25 year amortization and
ten year maturities. The new mortgage loans are non-recourse to the Company;
however, mortgage loans on seven Rental Properties located in Florida are cross
collateralized and cross defaulted. These transactions generated $6.5 million in
proceeds (in excess of the payoff amounts and transaction costs) which were
applied to the Company's revolving credit facility. An extraordinary gain of
approximately $189,000 was recognized in the first quarter of 1999 as a result
of the refinancing due to debt discounts received from the prior lenders. An
extraordinary loss of approximately $437,000 was recognized in the second
quarter of 1999 as a result of approximately $496,000 of prepayment premiums
paid to former lenders combined with the write-off of approximately $705,000 of
Mortgage Deficiencies related to mortgages repaid at the contractual amount.
These losses were partially offset by approximately $764,000 of debt discounts
obtained from the former lenders.
NOTE 4 RELATED PARTY TRANSACTIONS
The Company manages all but two of the Properties owned by the
Unconsolidated Partnerships. The Company earned fee based revenues from the
Unconsolidated Partnerships of approximately $709,000 and $443,000 for the three
months ended September 30, 1999 and 1998, respectively and $2.1 million and $2.2
million for the nine months ended September 30, 1999 and 1998, respectively. The
Company also earned a majority of its Income from Unconsolidated Partnerships in
the form of interest on receivables (including second mortgages). Approximately
$270,000 and $233,000 of the Company's Accounts Receivable (net of allowances)
were due from the Unconsolidated Partnerships as of September 30, 1999 and
December 31, 1998, respectively.
The Company received net principal repayment of advances from
Unconsolidated Partnerships of approximately $361,000 in the first nine months
of 1999 as compared to approximately $8,000 in the first nine months of 1998.
These principal repayments were credited to Investments in and Advances to
Unconsolidated Partnerships (see Note 1 -- "Investments in and Advances to
Unconsolidated Partnerships").
15
<PAGE>
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 hereunto duly authorized.
ERP OPERATING LIMITED PARTNERSHIP
By: EQUITY RESIDENTIAL PROPERTIES TRUST,
its general partner
Date: December 3, 1999 By:/s/ Michael J. McHugh
----------------------------------
Michael J. McHugh, Executive Vice
President and Chief Accounting
Officer
16
