SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/ X / Quarterly Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the quarterly
period ended June 30, 1996
or
/ / Transition Report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
Commission File Number 0-21670
Cardinal Realty Services, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-4427382
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6954 Americana Parkway, Reynoldsburg, Ohio 43068
- ------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
(614) 759-1566
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark 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 August 9, 1996 there were 4,543,408 shares of common stock issued, of
which 210,321 shares were treasury shares.
Page 1 of 152 sequentially numbered pages
Exhibit Index on page 28.
2
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1996
(Unaudited) and December 31, 1995 (Audited) 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1996 and 1995 (Unaudited) 4
Consolidated Statement of Shareholders' Equity
for the Six Months Ended June 30, 1996 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 (Unaudited) 6-7
Notes to Consolidated Financial Statements 8-17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18-26
Part II OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 (AUDITED)
June 30, December 31,
1996 1995
================= ==================
ASSETS
Operating Real Estate (Note 2):
Land $ 23,756,734 $ 24,082,635
Building and Improvements 141,041,101 143,193,921
----------------- ------------------
164,797,835 167,276,556
Accumulated Depreciation (2,295,860) 0
----------------- ------------------
162,501,975 167,276,556
Interests in and Receivables from Syndicated Partnerships (Notes 1 and 4) 51,536,323 52,591,444
Cash (Note 1) 3,568,629 2,751,986
Accounts Receivable, Affiliates (less an allowance
of $2,295,007 at June 30, 1996 and $2,468,845 at
December 31, 1995), Residents and Officers (Note 4) 2,753,920 5,088,478
Furniture, Fixtures and Other, Net 1,255,189 1,312,228
Funds Held in Escrow (Note 1) 10,069,609 9,390,610
Prepaids and Other (Note 1) 4,395,359 3,930,099
----------------- ------------------
$ 236,081,004 $ 242,341,401
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages, Term Debt and Other Notes Payable:
Mortgages on Operating Real Estate (Notes 2 and 3) $ 147,286,196 $ 151,130,612
Term Debt 20,117,307 20,470,205
Other Notes Payable 111,116 1,453,553
----------------- ------------------
167,514,619 173,054,370
Accounts Payable 1,352,847 1,350,641
Accrued Interest, Real Estate and Other Taxes (Notes 2 and 3) 4,293,955 4,532,148
Other Accrued Expenses 6,374,035 9,716,866
Other Liabilities 2,447,942 2,441,282
----------------- ------------------
Total Liabilities 181,983,398 191,095,307
----------------- ------------------
Shareholders' Equity (Note 1):
Preferred Stock, 1,500,000 shares authorized, no shares issued
Common Stock, 13,500,000 shares authorized with no stated value,
3,634,384 and 3,603,160 shares issued and outstanding
at June 30, 1996 and December 31, 1995, respectively 29,122,547 29,122,547
Additional Paid-in Capital (Note 1) 9,464,094 8,461,216
Retained Earnings 15,510,965 13,662,331
----------------- ------------------
54,097,606 51,246,094
----------------- ------------------
$ 236,081,004 $ 242,341,401
================= ==================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
4
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
Three Months Ended Six Months Ended
------------------------------- -----------------------------------
June 30, 1996 June 30 ,1995 June 30, 1996 June 30, 1995
--------------- --------------- --------------- ---------------
(Restated - (Restated -
Notes 1 and 5) Notes 1 and 5)
Revenues:
Rental and Other Operating Real Estate Revenues-Net $ 10,253,671 $ 20,443,812
Fee Based 2,762,388 $ 3,940,293 5,583,423 $ 7,550,392
Interest, Principally from Syndicated Partnerships 1,510,352 1,007,536 2,946,685 1,962,706
Income from Disposal or Recovery of Non-Core Assets-Net 105,803 1,006,663 274,692 1,815,187
Other 79,042 193,257 151,655 360,478
--------------- --------------- --------------- ---------------
14,711,256 6,147,749 29,400,267 11,688,763
--------------- --------------- --------------- ---------------
Expenses:
Rental Operating 5,186,661 10,437,951
Fee Based 1,607,400 2,138,769 3,095,952 4,251,938
Administration 1,149,788 1,025,660 2,121,734 2,151,279
Restructure Costs 300,000 0 300,000 0
Interest - Wholly Owned Property Debt 3,636,670 0 7,200,179 0
Interest - Corporate Debt 261,606 418,280 561,466 786,048
Depreciation 1,324,447 123,756 2,652,351 247,409
--------------- --------------- --------------- ---------------
13,466,572 3,706,465 26,369,633 7,436,674
--------------- --------------- --------------- ---------------
Income Before Income Taxes 1,244,684 2,441,284 3,030,634 4,252,089
Provision for Income Taxes (Note 1) 487,400 947,000 1,182,000 1,649,000
--------------- --------------- --------------- ---------------
Income before Extraordinary Gain 757,284 1,494,284 1,848,634 2,603,089
Extraordinary Gain, net of Income Taxes of
$343,000 and $510,000, respectively (Note 3) 0 540,070 0 804,021
--------------- --------------- --------------- ---------------
Net Income $ 757,284 $ 2,034,354 $ 1,848,634 $ 3,407,110
=============== =============== =============== ===============
Net Income per Common Share:
Income Before Extraordinary Item $0.19 $0.39 $0.47 $0.68
Extraordinary Gain 0.00 0.14 0.00 0.21
--------------- --------------- --------------- ---------------
Net Income $0.19 $0.53 $0.47 $0.89
=============== =============== =============== ===============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
5
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
Common Stock
------------------------------ Additional Retained
Shares Amount Paid-in Capital Earnings Total
------------ ---------------- --------------- ---------------- ---------------
Balance, January 1, 1996 3,603,160 $ 29,122,547 $ 8,461,216 $ 13,662,331 $ 51,246,094
Shares issued, in connection with
the claims resolution process (Note 1) 7,432
Exercise of options under non-qualified
stock option plan and restricted stock awards
compensation 25,519 67,050 67,050
Less: Treasury shares from the redemption
of stock held by Syndicated Partnerships (1,727) (31,330) (31,330)
Credit from utilization of pre-confirmation tax
benefits (Note 1) 967,158 967,158
Net Income for the period 1,848,634 1,848,634
----------- ---------------- --------------- ---------------- ----------------
Balance, June 30, 1996 (Note 1) 3,634,384 $ 29,122,547 $ 9,464,094 $ 15,510,965 $ 54,097,606
=========== ================ =============== ================ ===============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
6
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996, AND 1995
(UNAUDITED)
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
---------------------- -------------------
Cash Flows provided by Operating activities:
Management and Advisory Service activities:
Cash received from Fee Based activities $ 10,845,158 $ 10,748,928
Cash received from Interests in and Receivables from Syndicated Partnerships 2,726,236 1,677,192
Cash Receipts -- other 853,392 2,269,908
Cash paid to Vendors, Suppliers and Employees (11,298,566) (10,782,381)
Interest paid on Term Debt and Other Notes Payable (576,211) (769,656)
Income Taxes paid - City and State (151,844) (121,425)
Taxes paid, other than Income Taxes (19,183) (234,939)
Payments related to non-recurring items (899,465) (565,367)
Real Estate Asset activities:
Cash received from Rental activities 20,479,614 0
Payments on Rental activities (10,752,429) 0
Interest paid on Mortgages (6,807,110) 0
---------------------- -------------------
Net Cash provided by Operating activities 4,399,592 2,222,260
---------------------- -------------------
Cash Flows provided by/(used in) Investing activities:
Management and Advisory Service activities:
Proceeds from sale of Non-Core Assets and Other 528,172 1,355,184
Capital Expenditures (202,628) (251,763)
Other 49,788
Repayment from/(Advances to) Syndicated Partnerships 559,601 (3,617,965)
Acquisition of Real Estate Assets 0 (425,812)
Real Estate Asset activities:
Net cash flow provided by Rental activities during period
Held for Sale (net of Interest paid of $6,757,328) 0 1,178,012
Funding of Escrows (337,782) 0
Capital Expenditures (235,799) 0
---------------------- -------------------
Net Cash provided by/(used in) Investing activities 361,352 (1,762,344)
---------------------- -------------------
Cash Flows (used in) Financing activities:
Management and Advisory Service activities:
Proceeds from the exercise of Stock Options 47,050 0
Redemption of Stock held by Syndicated Partnerships (31,330) 0
Net Proceeds from/(Principal Payments) on Term Debt and Other (1,847,121) (189,759)
Real Estate Asset activities:
Proceeds from Mortgage Debt 9,291,000 0
Payments on Mortgages - principal amortization (989,553) (971,138)
Payments on Mortgages - lump sum (10,414,347) (256,000)
---------------------- -------------------
Net Cash (used in) Financing Activities (3,944,301) (1,416,897)
---------------------- -------------------
Increase/(Decrease) in Cash 816,643 (956,981)
Cash at Beginning of Year 2,751,986 4,639,643
---------------------- -------------------
Cash at End of Period $ 3,568,629 $ 3,682,662
====================== ===================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
7
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
June 30, 1996 June 30, 1995
---------------- ----------------
Reconciliation of Net Income to
Net Cash provided by Operating activities:
Net Income $ 1,848,634 $ 3,407,110
Adjustments to reconcile Net Income to Net Cash
provided by Operating activities:
Depreciation and Amortization 2,652,351 247,409
Provision for losses on Accounts Receivable 43,207 556,232
Income from Disposal or Recovery of Non-Core Assets (274,692) (1,815,187)
Gain on Debt Restructuring 0 (1,314,021)
Provision for Income Taxes not payable in Cash 967,158 2,159,000
Changes in Operating Assets and Liabilities:
Interests in and Receivables from Syndicated Partnerships 252,550 (251,009)
Accounts Receivable and Other Assets 1,296,220 1,698,792
Accounts Payable and Other Liabilities (2,385,836) (2,466,066)
---------------- ----------------
Net Cash provided by Operating activities $ 4,399,592 $ 2,222,260
================ ================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In the first quarter of 1995, the Company (as defined in Note 1 to Consolidated
Financial Statements) acquired an apartment property financed in part with a
$920,000 first mortgage on the property.
In June 1995, the Company purchased from a mortgage lender $8.8 million of
non-recourse mortgages on one Syndicated Partnership (as defined in Note 1 to
Consolidated Financial Statements) and four Wholly Owned Properties (as defined
in Note 1 to Consolidated Financial Statements) for $7.8 million. The Company
financed the acquisition with a $7.8 million note payable to the mortgage
lender. The note was repaid in June 1996.
In the first quarter of 1996, the Company granted deeds in lieu of foreclosure
for two Wholly Owned Properties to the mortgagee. The properties had an
aggregate carrying value of $2.5 million. In the first half of 1995 the Company
granted a deed in lieu of foreclosure for one Wholly Owned Property to the
mortgagee. The property had an aggregate carrying value of $2.1 million. No gain
or loss was recognized on these transactions because the assets and the
non-recourse mortgages on the Properties (as defined in Note 1 to Consolidated
Financial Statements) had been recorded in equal amounts.
Effective August 1, 1996, the Company acquired Lexford Properties, Inc. through
a merger with a wholly owned subsidiary of the Company. The Company issued
700,000 shares of its Common Stock (valued at $14,000,000) in consideration of
the acquisition, however 450,000 of the shares issued (valued at $9,000,000) are
subject to forfeiture through the end of fiscal 1999 or until certain
profitability criteria are met, whichever occurs first.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
8
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Cardinal
Realty Services, Inc. and its wholly owned subsidiaries (collectively the
"Company") for consolidated financial statement purposes, the "Company" also
includes limited partnerships and other legal entities which own Operating Real
Estate Assets and in which the Company, in turn, owns a 100% equity interest.
All significant intercompany balances and transactions have been eliminated in
this consolidation. The accompanying consolidated financial statements, except
for the Consolidated Balance Sheet at December 31, 1995, are unaudited and have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The consolidated financial
statements, the notes hereto and the capitalized terms included herein should be
read in conjunction with the Company's Form 10-K.
The interim consolidated financial statements have been prepared in
accordance with the Company's customary accounting practices. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six month period ended June 30, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996.
Business Overview
- -----------------
The Company engages in two core related business activities: first,
activities in connection with the ownership of multifamily residential real
property (including provision of management services to passive co-owners); and,
second, 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. In January 1996 the Company effected a restructuring
along these business lines by creating two business divisions Advisory Services
and Management Services. The restructuring was implemented, in part, to cause
the Company and its management to become more focused with respect to these two
distinct, yet complementary, groups of business activities.
Advisory Services
-----------------
The objective of the Company's Advisory Services division is to
maximize the value of its real estate holdings and its returns on real estate
investments. The Company performs these functions both with respect to those
Properties in which it maintains the entire ownership interest (its "Wholly
Owned Properties") as well as those properties in which the Company maintains a
partial ownership interest (the "Syndicated Partnerships"; and, together with
the Wholly Owned Properties, the "Properties"). The Company strives to obtain
and maintain the best available financing for the Properties and maximize the
Properties' operating performance. The Company is also committed to continually
evaluate and reevaluate the performance of all such properties, and identify
under-performing Properties or those Properties which 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, usually a 9% or
10% interest. The remaining partnership interests are substantially all owned by
unrelated third party investors as limited partners.
8
9
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company's Advisory Services division performs asset management
services on behalf of the Syndicated Partnerships in the Company's capacity as
general partner of the Syndicated Partnerships. In addition, the Company's
Advisory Services division performs the following additional services for the
accounts of the co-owners (limited partners) of the Syndicated Partnerships: the
provision of informational and financial reporting services, including tax
accounting 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 determinations and effecting
capital distributions to partners.
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).
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 the third party property
management services business, including, without limitation, day to day
management and maintenance of all the multifamily residential apartment
Properties, securing residents and entering into leases for apartment units at
the Properties, collecting rents and other amounts owing from residents
providing cash management services for revenues, security deposits, taxes and
insurance and deferred maintenance escrows, and assembling, compiling and
furnishing information regarding each of the Properties to their respective
owners.
Effective August 1, 1996 the Company acquired Lexford Properties, Inc.
("Lexford") by merger of a wholly owned subsidiary of the Company with and into
Lexford. As of such 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 its business operations in June 1988. At the time the Company
acquired Lexford, Lexford managed approximately 22,000 residential units under
management contracts with their third party owners. The Company currently
intends to cause Lexford to continue to provide and expand such third party
property management services as well as to succeed to the operation of the
Company's Management Services division. Accordingly, the Company's property
management business will ultimately be conducted through its wholly owned
subsidiary, Lexford Properties, Inc. Management believes that the Company's
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 (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 acquisition and furnishing of parts and supplies
to both the Wholly Owned Properties and Syndicated Partnerships and also the
rental of furniture and sale of renters insurance to residents at the
Properties. In June 1996 the Company announced that it anticipated certain
realignments in its current organization. The Company expects that one of such
realignments will result in the outsourcing of the parts and supplies inventory
currently handled internally by the Company's ancillary services function. The
Company is currently studying various alternatives to maintaining the inventory,
such as enrollment in cooperative buying groups (SEE "RESTRUCTURING").
9
10
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Fresh Start Accounting
- ----------------------
The Company adopted a method of accounting referred to as fresh start
("Fresh Start") reporting as of September 11, 1992 (the "Effective Date"), the
effective date of the Company's Third Amended Plan of Reorganization (the "Plan
of Reorganization") filed on June 22, 1992 with, and confirmed by, the United
States Bankruptcy Court for the Southern District of Ohio, Eastern Division. The
Company applied Fresh Start Accounting as of the Effective Date to prepare its
balance sheet and establish the values of its assets and liabilities (SEE
"RECORDED VALUES OF RECEIVABLES FROM SYNDICATED PARTNERSHIPS"). From and after
the Effective Date the Company has applied historical cost account values of new
assets in establishing book values in accordance with generally accepted
accounting principles.
Operating Real Estate Assets (previously Held for Sale)
- -------------------------------------------------------
During 1995 and prior years, the Company had attempted to market and
sell the Wholly Owned Properties on terms that were beneficial to the Company
and its shareholders. However, based upon mortgage debt that has since been
restructured with favorable amortization terms, combined with improved net
operating income and cash flow performance, management believes that a sale of
all or substantially all of the Wholly Owned Properties would be less beneficial
than retaining the Wholly Owned Properties for investment at the present time
(SEE NOTE 2). The Company will continue to monitor and evaluate any changes in
circumstances and/or economic conditions affecting its continued investment in
the Wholly Owned Properties. Commencing January 1, 1996, the operations,
including a provision for depreciation, of the Wholly Owned Properties have been
fully consolidated in the Company's Statements of Income. Further, the cash
flows of the Wholly Owned Properties have been reclassified as Cash Flows
Provided by Operating Activities. While the Wholly Owned Properties were held
for sale, the results of operations from the Wholly Owned Properties were
credited to the carrying value of the real estate and no revenues, operating
expenses or depreciation were included in the Consolidated Statements of Income.
Cash flows from the Wholly Owned Properties prior to 1996 were classified as
Cash Flow Provided by Investing Activities (SEE NOTE 5).
Cash and Other Assets
- ---------------------
Cash at June 30, 1996 of approximately $3.6 million is comprised of
approximately $3.3 million related to Wholly Owned Properties (which is held in
separate property bank accounts) and approximately $241,000 in corporate funds.
As of June 30, 1996, Funds Held in Escrow of $10.1 million is comprised
of $7.4 million of restricted cash related to the Wholly Owned Properties and
$2.7 million in corporate funds. Wholly Owned Properties Funds Held in Escrow
relate to security deposit escrows, real estate tax escrows and maintenance and
replacement escrows required by mortgage lenders. Corporate Funds Held in Escrow
are primarily amounts set aside to pay insurance premiums for the Properties.
Prepaids and Other assets of $4.4 million as of June 30, 1996 include
$1.6 million of capitalized costs associated with refinancing mortgages on
Wholly Owned Properties and $369,000 of prepaid expenses and loan costs
associated with the refinancing of the Company's corporate lines of credit which
are amortized based upon the maturity date of the new loan. In addition,
Prepaids and Other assets consists of a leasehold interest in land of
approximately $642,000, approximately $323,000 of prepaid insurance and real
estate taxes, $306,000 of inventory of replacement parts and supplies for sale
to Properties and approximately $600,000 of costs incurred in litigation with
10
11
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the Company's former insurance carrier involving a claim for termite damage at
certain of the Properties.
Recorded Values of Receivables from Syndicated Partnerships
- -----------------------------------------------------------
The Company owns general partner and/or limited partner interests in,
and holds second mortgage loans and other receivables from, Syndicated
Partnerships. The majority of these receivables arose prior to the Effective
Date as a result of agreements related to the syndication of the Syndicated
Partnerships. Advances made to Syndicated Partnerships since the Effective Date
primarily were for supplemental financing for debt restructuring or refinancing
transactions as described in Notes 3 and 4. Interests in and Receivables from
Syndicated Partnerships were recorded at their estimated fair value as of the
Effective Date. The contractual amounts of receivables are significantly more
than the recorded values. At June 30, 1996 and December 31, 1995, the
contractual value of the Company's Interests in and Receivables from Syndicated
Partnerships amounted to $239.6 million and $237.1 million, respectively. There
can be no assurance that the Company will collect any amounts above the recorded
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 individual 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.
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.
Non-Core Assets
- ---------------
The Company also has interests in motel properties, investor notes
receivable and certain other assets (collectively the "Non-Core Assets"). The
Company valued these Non-Core Assets as of the Effective Date based on previous
and current purchase offers, previous sales activity and independent appraisals.
In 1994, the Company recovered the remaining recorded value of Non-Core Assets
from the collection of receivables and proceeds from disposals of such assets.
11
12
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company began recognizing income from sale proceeds and collections, net of
collection and closing costs, after the carrying value was fully recovered. By
June 30, 1996 the Company had successfully disposed of a substantial portion of
its Non-Core Assets. Those Non-Core Assets remaining are not significant.
Net Income Per Share
- --------------------
Net income per share for a specified period is computed based on the
total weighted average number of shares of the Company's Common Stock, without
par value ("Common Stock"), outstanding during the subject period and those
contingent shares estimated to be issued to officers, employees and directors in
accordance with the Company's 1992 Incentive Equity Plan, as amended (the
"Incentive Equity Plan"). For the three months ended June 30, 1996, the total
weighted average shares outstanding was approximately 3,913,000, including the
weighted average of approximately 259,000 shares estimated to be issued in the
future pursuant to the Incentive Equity Plan. For the six months ended June 30,
1996, the total weighted average shares outstanding was approximately 3,897,000
including the weighted average of approximately 243,000 shares estimated to be
issued pursuant to the Incentive Equity Plan.
Lexford Acquisition
- -------------------
Effective August 1, 1996 the Company acquired Lexford by way of a
merger (the "Lexford Merger") of the Company's wholly owned subsidiary with and
into Lexford. The terms of the Lexford Merger provided that the Company would
succeed to the ownership of all of the issued and outstanding stock of Lexford
and the shareholders of Lexford would receive 700,000 shares of restricted,
newly issued Common Stock. For purposes of the Lexford Merger, the Common Stock
was valued at $20 per share. Approximately $9.0 million, or 450,000 shares, of
the purchase price is subject to forfeiture in the event Lexford does not
achieve certain profitability criteria within three fiscal years. Lexford
shareholders will initially receive 250,000 shares of Common Stock free of
contingencies.
Restatement
- -----------
The net income previously reported in the June 30, 1995 Consolidated
Statement of Income has been adjusted in order to comply with Statement of
Position ("SOP") 90-7 "Reorganization Under the Bankruptcy Code" pertaining to
accounting for deferred income taxes. SOP 90-7 requires that benefits realized
from pre-confirmation net operating loss carryforwards be reported as an
increase to Additional Paid-in Capital. For the period ending June 30, 1995 the
Company reported net income, but was not required to pay taxes on such income,
as the result of having the benefit of net operating loss carryforwards to
offset the income. The financial statements as adjusted, reflect a non-cash
charge in the form of an increase in the provision for income taxes in the
Consolidated Statements of Income. Net deferred tax assets (which have been
fully reserved against and therefore are not reflected on the Company's June 30,
1996 and December 31, 1995 Consolidated Balance Sheets) have been reduced by an
amount equivalent to the non-cash charge with a corresponding increase being
made to Additional Paid-in Capital. The adjustment does not affect the Company's
cash flows or total Shareholders' Equity. The effect of the adjustment is as
follows:
12
13
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As Previously Adjustment for As
Reported Tax Provision Adjusted
----------------- ------------------ ----------------
Three Months Ended June 30, 1995
- ---------------------------------------------
Income before Extraordinary Gain $ 2,441,284 $ (947,000) $ 1,494,284
Extraordinary Gain 883,069 (342,999) 540,070
----------------- ------------------ ----------------
Net Income $ 3,324,353 $ (1,289,999) $ 2,034,354
================= ================== ================
Per Share of Common Stock:
Income before Extraordinary Gain $.64 ($0.25) $0.39
Extraordinary Gain 0.23 (0.09) 0.14
----------------- ------------------ ----------------
Net Income $.87 ($0.34) $0.53
================= ================== ================
Adjustment
As Previously for Tax As
Reported Provision Adjusted
----------------- ------------------ ----------------
Six Months Ended June 30, 1995
- ---------------------------------------------
Income before Extraordinary Gain $ 4,252,089 $(1,649,000) $ 2,603,089
Extraordinary Gain 1,314,021 (510,000) 804,021
----------------- ------------------ ----------------
Net Income $ 5,566,110 $ (2,159,000) $ 3,407,110
================= ================== ================
Per Share of Common Stock:
Income before Extraordinary Gain $1.11 ($0.43) $0.68
Extraordinary Gain 0.34 (0.13) 0.21
----------------- ------------------ ----------------
Net Income $1.45 ($0.56) $0.89
================= ================== ================
Reclassification
- ----------------
The Statements of Income, the Statements of Cash Flows and certain
financial information in the notes to the financial statements for the period
ended June 30, 1995 have been reclassified to conform to the 1996 presentation.
Corporate Restructuring
- -----------------------
In June 1996, as a result of management's continued evaluation of the
Company's Ancillary Services and Management Services operations, the Company
announced a staff restructuring totaling 13 employees. The June 1996
restructuring has resulted in a one time $300,000 restructure expense for the
three and six months ended June 30, 1996. The June 1996 restructuring is
expected to result in annual expense savings of approximately $400,000 and,
along with the corporate restructuring recorded in the fourth quarter of 1995,
are expected to result in combined annual expense savings of approximately
$1,400,000 (SEE "BUSINESS OVERVIEW"). The June 1996 restructuring will reduce
13
14
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the number of corporate employees dedicated to financial reporting and
management duties and will also result in the outsourcing of the parts and
supplies inventory component of the Company's Ancillary Services operations.
The foregoing forward looking statements of potential cost savings are
estimates and actual results may differ. Any differences, which could develop if
perceived efficiencies are not obtainable and/or if outsourcing opportunities
are not available.
NOTE 2 OPERATING REAL ESTATE ASSETS
Operating Real Estate Assets consist of the Wholly Owned Properties. In
the first quarter of 1996 a lender accepted deeds in lieu of foreclosure on two
Wholly Owned Properties. The principal and accrued interest on the mortgage
loans secured by the Wholly Owned Properties aggregated approximately $2.5
million. The deeds were granted pursuant to an overall agreement with the lender
to restructure certain mortgages in 1995. In the second half of 1995 the Company
granted deeds in lieu of foreclosure on two Wholly Owned Properties. No gain or
loss was recognized on these transactions. The Company acquired three Wholly
Owned Properties in the second half of 1995 and also effected a combination of
three Wholly Owned Properties into one Wholly Owned Property during such period.
As a result of these transactions, at June 30, 1996 there were 114 Wholly Owned
Properties as compared to 117 at June 30, 1995.
Condensed combined balance sheets, with intercompany payables and
receivables eliminated, of the Company's Wholly Owned Properties as of June 30,
1996 and December 31, 1995 are as follows.
June 30, 1996 December 31, 1995
-------------------- ---------------------
Assets
Operating Real Estate Assets $ 164,797,835 $ 167,276,556
Accumulated Depreciation (2,295,860) 0
-------------------- ---------------------
Net Operating Real Estate Assets 162,501,975 167,276,556
Cash 3,327,350 2,699,924
Accounts Receivable 1,074,254 1,043,069
Funds Held in Escrow 7,363,144 7,097,162
Prepaids and Other 2,205,747 2,487,494
-------------------- ---------------------
$ 176,472,470 $ 180,604,205
==================== =====================
Liabilities and Equity
Mortgage Payable $ 147,286,196 $ 151,130,612
Accounts Payable 1,233,029 953,076
Accrued Interest and Real Estate Taxes 3,340,731 3,577,547
Other Accrued Expenses 1,324,369 1,315,132
Other Liabilities 1,045,286 1,094,800
-------------------- ---------------------
154,229,611 158,071,167
Equity 22,242,859 22,533,038
-------------------- ---------------------
$ 176,472,470 $ 180,604,205
==================== =====================
14
15
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of the Effective Date, in accordance with Fresh Start reporting, the
mortgages on the Wholly Owned Properties were restated to estimate fair value
(the "Carrying Value") if the Fresh Start value of the assets was less than the
outstanding principal amount of the mortgages. Although the value of the assets
may have increased since the Effective Date, the Carrying Value of the mortgages
has not been adjusted. The mortgages on the Wholly Owned Properties had
contractual principal balances of approximately $156.5 million and $163.8
million at June 30, 1996 and December 31, 1995, respectively, compared to
Carrying Values of $147.3 million and $151.1 million at such dates. Interest
expense is recorded based on the Carrying Value unless the contractual balance
is being paid, in which case, the amount paid is expensed. During the period
from the Effective Date through June 30, 1996 the Company has refinanced 100
mortgage loans secured by the Wholly Owned Properties and has acquired four
Wholly Owned Properties. 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. All but one of the mortgage loans secured by the
Wholly Owned Properties are non-recourse in nature.
With respect to those Properties and other assets which the Company has
acquired, and will acquire, after the Effective Date, the recorded values are
established on the basis of acquisition cost, net of accumulated depreciation,
in accordance with generally accepted accounting principles.
NOTE 3 MORTGAGE REFINANCINGS
In the first six months of 1996, the Company completed the refinancing
of mortgages on seven Wholly Owned Properties and six Syndicated Partnerships.
Mortgage indebtedness on the Wholly Owned Properties, with a contractual value
of $12.4 million and a Carrying Value of $12.0 million, was refinanced with
mortgages bearing interest ranging from approximately 8.0% to 9.1%, with 25 year
amortization and 10 year maturities. Annual debt service on the affected Wholly
Owned Properties decreased from $1.3 million to $1.1 million in the aggregate as
a result of the refinancing. These transactions funded improvement and deferred
maintenance, tax and working capital escrows of approximately $429,000.
In the first six months of 1995, the Company completed modification or
refinancing transactions involving 87 Wholly Owned Properties and Syndicated
Partnerships. These transactions resulted in the modification of mortgage loans
on 25 Wholly Owned Properties and the modification or refinancing of mortgage
loans on 62 Syndicated Partnerships. These transactions resulted in an
extraordinary gain on discharge of indebtedness on the Wholly Owned Properties,
net of closing costs, reserves and taxes, of approximately $804,000.
While there can be no assurance, the Company expects to refinance a
significant number of mortgages on the Properties during the remainder of 1996.
NOTE 4 RELATED PARTY TRANSACTIONS
The Company manages all but one of the Wholly Owned Properties and 412
of the 414 Syndicated Partnerships. The Company also provides various ancillary
services, including the sale of maintenance supplies and replacement parts to
the Properties, and furniture rentals and insurance to residents (SEE NOTE 1
BUSINESS OVERVIEW - MANAGEMENT SERVICES). The Company earned fee based revenues
from the Syndicated Partnerships of approximately $2.8 million and $3.1 million
for the three months ended June 30, 1996 and 1995, respectively, and $5.6
million and $5.9 million for the six months ended June 30, 1996 and 1995,
respectively. The Company also earned a majority of its interest income on its
receivables (including second mortgages from the Syndicated Partnerships).
15
16
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Approximately $1.7 million and $3.9 million of the Accounts Receivable were due
from the Syndicated Partnerships as of June 30, 1996 and December 31, 1995,
respectively. The decline in the accounts receivable is cyclical in nature due
to the timing of the billing and collection of the annual insurance premiums
collected and paid by the Company on behalf of the Syndicated Partnerships. Fee
Based Revenues and Accounts Receivable related to the Wholly Owned Properties
are eliminated in consolidation.
The Company received repayment of advances of approximately $600,000
from the Syndicated Partnerships in the first six months of 1996 as compared to
making net advances of $3.6 million in the first six months of 1995 principally
related to refinancing of mortgages. These advances are included in Interests in
and Receivables from Syndicated Partnerships. The advances in 1995 provided
supplemental financing to facilitate satisfaction of indebtedness owed to former
lenders and/or to fund transaction costs and escrows. These advances bear
interest at one percent over the prime rate of interest, 8.25% at June 30, 1996,
of The Provident Bank (the "Bank").
NOTE 5 COMPARATIVE INCOME STATEMENTS
Prior to 1996 the operations of the Wholly Owned Properties were
excluded from the Company's Statements of Income (SEE NOTE 1 - OPERATING REAL
ESTATE ASSETS (PREVIOUSLY HELD FOR SALE)). In order to facilitate the comparison
of operations in 1996 to 1995, the following "proforma" Income Statement (the
"Proforma Income Statement") has been prepared for the three and six months
ended June 30, 1995 as if the Wholly Owned Properties were previously
consolidated. All intercompany transactions have been eliminated. Depreciation
expense for the Operating Real Estate Assets has been estimated for 1995.
Management expects that the discernible trends which have developed
from and after January 1, 1996, namely reduction in the amounts of income
received attributable to the disposal of Non-Core Assets and increases in income
recognized from Operating Real Estate Assets and the Company's interests in and
receivables from Syndicated Partnerships will continue. For these reasons, the
Company has supplementally disclosed earnings before interest, income taxes,
depreciation, amortization and extraordinary items ("EBITDA"), recurring EBITDA
and Funds from Operations of its Wholly Owned Properties. Management believes
that these supplemental disclosures are meaningful measures for analysis of the
Company's results of operations both taken alone and when compared to the
Company's counterparts in the multi-family residential real property ownership
and management business.
16
17
Three Months Ended June 30 Six Months Ended June 30
---------------------------------- ---------------------------------
1996 1995 1996 1995
--------------- ---------------- --------------- ---------------
Revenues: Proforma Proforma
Rental and Other Operating Real Estate Revenues-Net $ 10,253,671 $ 9,737,529 $ 20,443,812 $ 19,289,858
Fee Based 2,762,388 3,101,655 5,583,423 5,880,618
Interest, Principally from Syndicated Partnerships 1,510,352 1,007,537 2,946,685 1,962,707
Income from Disposal or Recovery of Non-Core Assets-Net 105,803 1,006,663 274,692 1,815,187
Other 79,042 193,256 151,655 360,477
--------------- ---------------- --------------- ---------------
14,711,256 15,046,640 29,400,267 29,308,847
--------------- ---------------- --------------- ---------------
Expenses:
Rental Operating 5,186,661 5,692,798 10,437,951 10,568,005
Fee Based 1,607,400 1,624,473 3,095,952 3,197,021
Administration 1,149,788 1,017,732 2,121,734 2,132,633
Restructure Costs 300,000 0 300,000 0
Interest - Wholly Owned Property Debt 3,636,670 3,611,195 7,200,179 7,145,997
Interest - Corporate Debt 261,606 418,280 561,466 786,048
Depreciation 1,324,447 1,267,581 2,652,351 2,535,059
--------------- ---------------- --------------- ---------------
13,466,572 13,632,059 26,369,633 26,364,763
--------------- ---------------- --------------- ---------------
Income Before Income Taxes 1,244,684 1,414,581 3,030,634 2,944,084
Provision for Income Taxes (Note 1) 487,400 543,000 1,182,000 1,136,000
--------------- ---------------- --------------- ---------------
Income before Extraordinary Gain 757,284 871,581 1,848,634 1,808,084
Extraordinary Gain, net of Income Taxes (Note 3) 0 540,070 0 804,021
--------------- ---------------- --------------- ---------------
Net Income $ 757,284 $ 1,411,651 $ 1,848,634 $ 2,612,105
=============== ================ =============== ===============
EBITDA $ 6,467,407 $ 6,711,637 $ 13,444,630 $ 13,411,188
=============== ================ =============== ===============
Recurring EBITDA $ 6,661,604 $ 5,704,974 $ 13,469,938 $ 11,596,001
=============== ================ =============== ===============
Net Income per Common Share:
Income Before Extraordinary Item $0.19 $0.23 $0.47 $0.47
Extraordinary Gain 0.00 0.14 0.00 0.21
--------------- --------------- --------------- ---------------
Net Income $0.19 $0.37 $0.47 $0.68
=============== =============== =============== ===============
17
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
INTRODUCTION
The following discussion explains material changes in the Company's
results of operations, comparing the three and six months ended June 30, 1996
and 1995 and significant developments affecting the Company's financial
condition since the end of 1995. The following discussion should be read in
conjunction with the historical financial statements of the Company.
The financial statements for the three and six months ended June 30,
1995 do not include the results of operations (revenues, expenses or
depreciation) attributable to the Operating Real Estate Assets, formerly
classified as Real Estate Assets Held for Sale. Commencing January 1, 1996 the
results of operations, including depreciation of the Operating Real Estate
Assets, have been included in the Consolidated Statements of Income (SEE ITEM 1
- - NOTE 1 - OPERATING REAL ESTATE ASSETS (PREVIOUSLY HELD FOR SALE) AND NOTE 5 OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). Therefore, the Consolidated
Statements of Income for the three and six months ended June 30, 1996 are not
comparable to the same periods in 1995. In order to facilitate the comparison of
operations, the notes to the financial statements include a "proforma"
consolidated income statement for the three and six months ended June 30, 1995,
prepared as if the Wholly Owned Properties were previously consolidated (SEE
ITEM 1 - NOTE 5 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). The following
discussion of results of operations is based upon the Proforma Income Statement
included in the Notes to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Rental and Other Operating Real Estate Revenues - Net are derived from
the Wholly Owned Properties which own and operate apartment communities that
comprise the Company's Operating Real Estate Assets. Revenues increased
approximately $516,000 and $1.1 million or 5.3% and 6.0%, respectively, for the
three and six months ended June 30, 1996, as compared to the same periods in
1995. The increase was primarily due to the increase in average rent per unit
from $365 in 1995 to $384 in 1996. The average economic occupancy of the 110
Wholly Owned Properties in operation at all times during the comparable periods
was 92.0% for the six months ended June 30, 1996, as compared to 90.9% for the
three months ended March 31, 1996 and 91.9% for the six months ended June 30,
1995. Economic occupancy is defined as the amount of revenue collected from
residents as a percentage of the revenue a property could generate if full rents
for all units were collected. (SEE ITEM 1 - NOTES 1 AND 5 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS).
Fee Based Revenues are comprised of Management Services and Advisory
Services revenues generated from services provided to Syndicated Partnerships
and residents at the Properties. Management Services revenues principally relate
to property management and accounting services provided to the Syndicated
Partnerships. Ancillary Services (a department of Management Services) revenues
consist principally of revenue generated from the sale of replacement and
maintenance material to the Syndicated Partnerships. In addition, Ancillary
Services revenues include revenue generated from furniture leasing and renter's
insurance products provided to residents of the Properties. Advisory Services
Revenues consist of partnership administration fees as well as fees generated
from loan refinancing and restructuring. (SEE ITEM 1 - NOTE 1 - BUSINESS
OVERVIEW OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS).
18
19
The following are the major components of Management Services revenues
and Advisory Services revenues for the three and six months ended June 30, 1996
as compared to the same periods in 1995:
Three Months Ended June 30 Six Months Ended June 30
----------------------------------- -----------------------------------
1996 1995 1996 1995
---------------- ---------------- -------------- ---------------
Management Services: Proforma Proforma
Property Management Services:
Property Management and Accounting Services $ 1,945,251 $ 1,881,370 $ 3,874,527 $ 3,689,782
Other Management Service Fee Revenues 403,033 384,164 765,370 756,887
Ancillary Services:
Furniture Leasing and Renters Insurance 67,903 78,368 161,434 202,404
Replacement and Maintenance Material Revenues-net 34,235 148,873 150,803 230,046
---------------- ---------------- -------------- ---------------
Total Management Services Revenues 2,450,422 2,492,775 4,952,134 4,879,119
---------------- ---------------- -------------- ---------------
Advisory Services:
Partnership Administration & Other Fees 289,406 286,233 582,162 571,282
Loan Refinancing and Restructuring Fees 22,560 322,647 49,127 430,217
---------------- ---------------- -------------- ---------------
Total Advisory Services Revenues 311,966 608,880 631,289 1,001,499
---------------- ---------------- -------------- ---------------
Total Fee Based Revenues $ 2,762,388 $ 3,101,655 $ 5,583,423 $ 5,880,618
================ ================ ============== ===============
Fee Based Revenues decreased approximately $339,000 and $297,000 for
the three and six months ended June 30, 1996, respectively, as compared to the
same periods in 1995. The decrease was primarily due to a decrease of
approximately $300,000 and $381,000 in loan refinancing and restructuring fees
for the three and six months ended June 30, 1996, respectively, as compared to
the same periods in 1995. Loan refinancing and restructuring fees are subject to
significant fluctuation from period to period based upon the volume of loans
maturing in a given year, ability to refinance based on the current interest
rate environment and the Syndicated Partnerships' abilities to pay the fees.
Ancillary Services revenues decreased $125,000 and $120,000 for the three and
six months ended June 30, 1996, respectively, as compared to the same periods in
1995. This decrease was primarily due to a decline in replacement and material
sales to Syndicated Partnerships in the second quarter of 1996. In addition,
replacement and material sales volumes may be impacted in the future as the
Company is currently evaluating product lines to be carried and outsourcing
warehousing operations (SEE NOTE 1 - BUSINESS OVERVIEW - MANAGEMENT SERVICES
AND RESTRUCTURING OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS).
The declines in Fee Based Revenues were offset in part by increases in
Property Management Services revenues of approximately $83,000 and $193,000 for
the three and six months ended June 30, 1996, respectively, as compared to the
same periods in 1995. The increases are attributable to a 5% aggregate increase
in revenues received by the Syndicated Partnerships for both the three and six
months ended June 30, 1996 as compared to the same periods in 1995.
Interest Income increased approximately $503,000 and $984,000 for the
three and six months ended June 30, 1996 as compared to the same periods in
1995. Interest Income is primarily derived from the interest collected or
accrued on the recorded value of interests in, and receivables from, Syndicated
Partnerships (SEE NOTE 1 RECORDED VALUES OF RECEIVABLES FROM SYNDICATED
PARTNERSHIPS - OF NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS). The increase
in Interest Income was primarily due to increased net operating income and lower
first mortgage debt service requirements. Although there can be no assurances,
Interest Income should continue to be favorably impacted in the future as a
result of mortgage refinancings and, possibly, increasing net operating income
as well (SEE "NET OPERATING INCOME OF SYNDICATED PARTNERSHIPS").
19
20
Income from Disposal or Recovery of Non-Core Assets decreased
approximately $901,000 and $1.5 million for the three and six months ended June
30, 1996, respectively, as compared to the same periods in 1995. This income is
derived from the net disposition proceeds of Non-Core Assets in excess of the
aggregate recorded value of these assets. Additional income from the disposal of
Non-Core Assets and recovery of investor notes receivable may be recognized in
the future, although at significantly lower levels than recognized in 1995.
Income from Disposal of Non-Core Assets is not a recurring, long term source of
revenue (SEE NOTE 1 - NON-CORE ASSETS - OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS).
Other Revenues decreased approximately $114,000 and $209,000 for the
three and six months ended June 30, 1996, respectively, as compared to the same
periods in 1995. The decrease was principally due to collection of fully
reserved receivables due from certain Syndicated Partnerships in 1995.
Rental Operating Expense decreased approximately $506,000 and $130,000
for the three and six months ended June 30, 1996, respectively, as compared to
the same periods in 1995. Improvement and replacement expenses, in the
aggregate, decreased approximately $205,000 and $87,000, respectively. The
decrease for the three month period ended June 30, 1996 was due to the seasonal
nature of expenditures related to exterior grounds maintenance and repairs.
Fee Based Expenses decreased approximately $17,000 and $101,000 for the
three and six months ended June 30, 1996, respectively, as compared to the same
periods in 1995. The decrease in Fee Based Expenses reflects the ongoing staff
reductions and realignments implemented by the Company (SEE NOTE 1 - CORPORATE
RESTRUCTURING - OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS).
Administration Expenses increased approximately $132,000 in the three
months ended June 30, 1996 as compared to the same period in 1995.
Administration expenses decreased approximately $11,000 for the six months ended
June 30, 1996 as compared to the same period in 1995. The increase in
administration expenses in the second quarter of 1996 was primarily related to
outside consulting costs incurred for corporate strategic planning, technology
evaluation and legal. This increase was partially offset by savings generated by
staff reductions and realignments effected in connection with the Company's
January 1996 corporate restructuring.
Restructure Costs of $300,000 were accrued for in the second quarter of
1996 as a one time charge related to costs anticipated to be incurred with
realignments to its organization due to overlapping responsibilities. Management
anticipates that this realignment should result in annual savings of
approximately $400,000 primarily related to reductions in payroll and related
fringe benefit costs. The realignment will be implemented in the third quarter
of 1996. (SEE NOTE 1 - CORPORATE RESTRUCTURING - OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS)
Interest Expense for mortgages on the Wholly Owned Properties and the
Company's corporate lines of credit decreased approximately $131,000 and
$170,000 for the three and six months ended June 30, 1996, respectively, as
compared to the same periods in 1995. Interest Expense on the Company's
corporate lines of credit decreased approximately $156,000 and $225,000 for the
three and six month periods. This decrease is due primarily to the Company's
refinancing of its corporate credit facility with The Provident Bank (the
"Bank"), at the Bank's prime rate of interest minus 1.0%, as compared to an
interest rate of prime plus 0.5% with the Company's previous lender (SEE
"LIQUIDITY AND CAPITAL RESOURCES"). Interest Expense related to mortgages on
Operating Real Estate Assets increased approximately $25,000 and $54,000.
Depreciation Expense increased approximately $57,000 and $117,000 for
the three and six months ended June 30, 1996, respectively, as compared to the
same periods in 1995. The increase is primarily is due to the amortization of
loan costs capitalized in connection with the refinancing of corporate debt and
real estate mortgages.
Income before Extraordinary Gain amounted to approximately $757,000, or
$.19 per share, for the three months ended June 30, 1996 as compared to
approximately $872,000, or $.23 per share, for the same period in 1995. Income
before Extraordinary Gain amounted to $1.8 million for the six month periods
ended June 30, 1996 and 1995 or $.47 per share for both periods. The
extraordinary gains of approximately $540,000 and $804,000 for the three
20
21
and six months ended June 30, 1995, respectively, were due to debt forgiveness
related to first mortgage refinancings for certain Wholly Owned Properties. Net
Income was approximately $757,000 and $1.8 million, or $.19 and $.47 per share,
for the three and six months ended June 30, 1996, respectively, as compared to
$1.4 million and $2.6 million or $.37 and $.68 per share, for the same periods
in 1995.
Earnings before Interest, Taxes, Depreciation and Amortization
The Company believes that earnings before interest, income taxes,
depreciation, amortization and extraordinary items ("EBITDA") is a significant
indicator of the strength of its results. EBITDA is a measure of a company's
ability to generate cash to service its obligations, including debt service
obligations, and to finance capital and other expenditures, including
expenditures for acquisitions. EBITDA does not represent cash flow as defined by
generally accepted accounting principles and does not necessarily represent
amounts of cash available to fund the Company's cash requirements. EBITDA
decreased 3.6% for the three months ended June 30, 1996 as compared to the same
period in 1995. EBITDA for the six months ended June 30, 1996 remained constant
as compared to the same period in 1995. The Company views "Recurring EBITDA" as
a more meaningful measurement of the Company's current performance. Recurring
EBITDA excludes non-recurring items, such as income from disposal of Non-Core
Assets and corporate restructuring costs. Recurring EBITDA increased 16.8% from
$5.7 million for the three months ended June 30, 1995 to $6.7 million for the
same period in 1996. Recurring EBITDA increased 16.2% from $11.6 million for the
six months ended June 30, 1995 to $13.5 million for the same period in 1996.
Funds from Operations of Wholly Owned Properties
Funds from Operations ("FFO") is a financial statistic used to measure
real estate operating results. FFO, as applied to the Company, represents income
from the Wholly Owned Properties excluding depreciation, extraordinary gains and
funding from escrows for deferred maintenance. FFO for the three and six months
ended June 30, 1996, as compared to the same periods in 1995 without
intercompany eliminations of Fee Based Revenues of approximately $874,000 and
$839,000 for the three months ended June 30, 1996 and 1995, respectively, and
$1.7 million for each of the six month periods ended June 30, 1996 and 1995,
respectively, is as follows:
Three Months Ended June 30 Six Months Ended June 30
--------------------------------------- ------------------------------------------
1996 1995 1996 1995
----------------- ---------------- ----------------- ------------------
Rental Revenues $ 10,253,671 $ 9,737,529 $ 20,443,812 $ 19,289,858
Operating Expenses 4,549,692 4,581,405 9,194,320 8,683,172
----------------- ---------------- ----------------- ------------------
Net Operating Income 5,703,979 5,156,124 11,249,492 10,606,686
Improvement and Replacement Expense 842,133 1,047,052 1,495,736 1,583,202
Interest Expense 3,636,670 3,611,195 7,200,179 7,145,997
Other 129,598 380,755 441,200 897,842
Depreciation and Amortization 1,183,272 1,143,825 2,383,407 2,287,650
----------------- ---------------- ----------------- ------------------
Loss before Income Taxes (87,694) (1,026,703) (271,030) (1,308,005)
----------------- ---------------- ----------------- ------------------
Add: Improvements and Replacements
funded from Deferred Escrows 324,303 493,300 523,025 824,022
Depreciation and Amortization 1,183,272 1,143,825 2,383,407 2,287,650
----------------- ---------------- ----------------- ------------------
Funds from Operations $ 1,419,881 $ 610,422 $ 2,635,402 $ 1,803,667
================= ================ ================= ==================
21
22
The approximate $809,000 and $831,000 increases in FFO for the three
and six months ended June 30, 1996, respectively, as compared to the same
periods in 1995 is reflective of the same factors discussed in "RESULTS OF
OPERATIONS."
Net Operating Income of Syndicated Partnerships
The following table summarizes unaudited comparable revenues, operating
expenses and net operating income ("NOI") for the 414 Syndicated Partnerships in
operation for the three and six months ended June 30, 1996 and 1995.
Three Months Ended June 30 Six Months Ended June 30
----------------------------------------- -------------------------------------------
1996 1995 1996 1995
------------------ ---------------- ------------------ -------------------
Rental Revenues $ 31,201,598 $ 29,726,781 $ 61,530,518 $ 58,622,648
Operating Expenses 13,830,973 14,249,131 28,057,644 27,053,759
------------------ ---------------- ------------------ -------------------
Net Operating Income $ 17,370,625 $ 15,477,650 $ 33,472,874 $ 31,568,889
================== ================ ================== ===================
Income and Cash Flow to the Company
from the Syndicated Partnerships
Interest Income $ 1,495,484 $ 998,668 $ 2,900,678 $ 1,931,842
================== ================ ================== ===================
Operating Cash Flow $ 1,397,072 $ 952,610 $ 2,726,236 $ 1,677,192
================== ================ ================== ===================
NOI increased approximately 12.2% and 6.0%, for the three and six
months ended June 30, 1996, respectively, as compared to the same periods in
1995. Economic occupancy for the 414 Syndicated Partnerships was 92.4% and 91.8%
for the three and six months ended June 30, 1996, respectively, as compared to
92.5% and 92.2% for the same periods in 1995. The Syndicated Partnership
performance for the first half of 1996, as compared to 1995, is comparable to
the Wholly Owned Properties, and was influenced by the same factors.
Net Income, Excluding Non-Recurring Items
The Company generated non-recurring revenues for the periods ended June
30, 1996 and 1995, that obscure the recurring earnings performance of the
Company. Recurring earnings from operations are derived from the Company's
investments of equity in the Properties as well as its Fee Based Revenues. Net
Income, Excluding Non-Recurring Items reflects net income as adjusted to
eliminate revenues, expenses and extraordinary gains which occur on a one-time
basis or are not forecast as long term sources of income to the Company, such as
income from disposal of Non-Core Assets and extraordinary gains from debt
restructurings.
Net Income, Excluding Non-Recurring Items increased approximately
$624,000, or 248%, and $1.2 million, or 169%, for the three and six months ended
June 30, 1996, respectively, as compared with the same periods in 1995. The
revenue and expenses eliminated in determining Net Income, Excluding
Non-Recurring Items and the significant factors contributing to this increase,
as adjusted for non-recurring items, are as follows:
22
23
Three Months Ended June 30 Six Months Ended June 30
---------------------------------- ------------------------------
1996 1995 1996 1995
----------------- -------------- ------------- --------------
Proforma Proforma
Net Income $ 757,284 $ 1,411,651 $ 1,848,634 $ 2,612,105
----------------- -------------- ------------- --------------
Non-Recurring Items:
Extraordinary Gain, net of Income Taxes 0 (540,070) 0 (804,021)
Income from Disposal or Recovery of Non-Core Assets (105,803) (1,006,663) (274,692) (1,815,187)
Restructure Costs 300,000 0 300,000 0
Income Taxes related to Non-Recurring Items (75,600) 387,000 (9,900) 700,400
----------------- -------------- ------------- --------------
Total Non-Recurring Items 118,597 (1,159,733) 15,408 (1,918,808)
----------------- -------------- ------------- --------------
Net Income, Excluding Non-Recurring Items $ 875,881 $ 251,918 $ 1,864,042 $ 693,297
================= ============== ============= ==============
Increase/(Decrease) in Net Income--
Excluding Non-Recurring Items
------------------------------------------------------
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
-------------------------- ----------------------
Increase in Rental Revenues $ 516,142 $ 1,153,954
Increase in Interest Income 502,815 983,978
(Decrease) in Fee Based Revenues (339,267) (297,195)
(Decrease) in Other Income (114,214) (208,822)
Decrease in Rental Operating Expenses 506,137 130,054
(Increase)/Decrease in Fee Based and Administration Expenses (114,983) 111,968
Decrease in Interest and Depreciation Expense 74,333 53,108
Income Tax Effect (407,000) (756,300)
-------------------------- ----------------------
$ 623,963 $ 1,170,745
========================== ======================
See "RESULTS OF OPERATIONS" for specific discussion of non-recurring
items as well as the explanations for the changes in recurring revenues and
expenses which generated the increase in Net Income, Excluding NonRecurring
Items. Although there can be no assurance, management believes that Net Income,
Excluding NonRecurring Items will continue to be favorably impacted by (i)
continued increases in Interest Income as first mortgage loans on certain of the
Syndicated Partnerships are refinanced and (ii) continuing improvement in
overall operating performance at the Properties.
23
24
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 June 30, 1996 and December 31, 1995 and the Consolidated Statements of Cash
Flows for the six months ended June 30, 1996 and 1995.
The Company anticipates that cash flow from its operations and
borrowings available under the Company's credit facility should be adequate to
meet the foreseeable capital and liquidity needs of the Company. The Company is
exploring alternative financing sources to provide bridge or supplemental
funding for the refinancing of mortgages on certain Properties (SEE ITEM 5 -
OTHER INFORMATION). If the Company is successful in implementing potential
future growth plans, it may be necessary to seek alternative sources of debt or
equity capital.
In August 1995, the Bank and the Company entered into a new credit
facility that retired the Company's credit facility with The Huntington National
Bank ("HNB") as well as provided additional borrowing capacity with more
flexible terms. The new credit facility has lower interest rates than the
previous facility with HNB and also reduced or eliminated certain restrictive
covenants. On June 30, 1996, the Company had unrestricted credit availability of
approximately $11.1 million.
The new credit facility originally provided credit up to $32.0 million,
and is comprised of: a $3.0 million revolving line of credit for operating needs
subject to annual review and extension by the Bank; a $7.0 million line of
credit for acquisitions and to facilitate refinancing of mortgages on the
Properties (the "Acquisition Line") due in six years with interest only, payable
in the first year; and a $22.0 million reducing balance line of credit (the
"Reducing Line") due in six years with interest, only, payable during the first
year (collectively, the "Loans"). The Reducing Line was used to retire the HNB
credit facility. The credit facility provided that the interest rate on the
Loans would be the Bank's prime rate of interest minus 1%, however, in February
1996, the Company entered into an agreement with the Bank to fix the interest
rate on the Acquisition Line at 7.25% with principal amortization in 60 equal
monthly installments beginning in March 1996. Excess corporate cash is applied
to pay down the Reducing Line and may be reborrowed as needed subject to the
maximum available credit under the reducing balance terms. The Bank's prime rate
of interest averaged 8.25% during the first half of 1996 as compared to an
average HNB prime rate of interest of 9.0% in the first half of 1995.
In July 1996, the Company received a commitment letter from the Bank
for a new $10.0 million acquisition line of credit. The new line will bear
interest at the Bank's prime rate of interest minus 1% with interest, only,
payable during the first year, and will be due in six years. The Company intends
to borrow under the new acquisition line to facilitate refinancing of mortgages
on the Properties and to acquire new Wholly Owned Properties.
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 $2.2 million for
the six months ended June 30, 1996 as compared to the same period in 1995. The
increase was due primarily to $2.9 million of operating cash flow from Operating
Real Estate Assets. This operating cash flow was formerly treated as cash flow
from investing activity while the Operating Real Estate Assets were classified
as Real Estate Assets Held for Sale. (SEE NOTE 1- OPERATING REAL ESTATE ASSETS
(PREVIOUSLY HELD FOR SALE) AND NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS). Payments (uses of cash) related to non-recurring items included in
Operating Activities reflects payments related to the Company's Plan of
Reorganization, the 1996 corporate restructuring and tender offer costs incurred
in 1995. These costs increased approximately $334,000, primarily due to
corporate restructuring costs paid in 1996 (SEE NOTE 1 - CORPORATE RESTRUCTURING
24
25
- - OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). The expenses associated with
these cash payments was accrued in December 1995.
Net Cash Provided by Investing Activities was approximately $361,000
for the six months ended June 30, 1996, as compared to net cash used in
Investing Activities of $1.8 million for the same period in 1995. The change was
due to $1.2 million of net cash flow provided by operations of the Real Estate
Assets being reclassified to operating cash flow in 1996 based on the change in
presentation of the Wholly Owned Properties from assets held for sale to
operating assets. This decline in investing cash flow was more than offset by
approximately $4.0 million of funds used in 1995 for advances to certain
Syndicated Partnerships and the acquisition of Operating Real Estate Assets
versus the net repayment of advances of approximately $600,000 in 1996 (SEE
"FINANCING AND DEBT RESTRUCTURING OF THE PROPERTIES").
The Company's capital expenditures for the six months ended June 30,
1996 amounted to approximately $203,000 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 currently evaluating all of its software systems in
order to obtain optimal efficiencies from technology. The outcome of this review
has not been finalized and the additional capital expenditures for new
technology has not been determined. The Company currently forecasts normal
recurring capital expenditures of approximately $400,000 in 1996 (exclusive of
any capital expenditures for enhanced software and information systems and the
Lexford acquisition) as compared to actual annual expenditures in 1995 of
approximately $398,000.
Capital Expenditures, combined with Improvement and Replacement Expense
for the Operating Real Estate Assets, were approximately $1.7 million during the
six months ended June 30, 1996. These costs are funded from Wholly Owned
Properties cash flow, maintenance escrow funds or by the mortgage lender to the
applicable Property. The 1996 budget for capital expenditures, improvement and
replacement expense for the Operating Real Estate Assets is $4.3 million, or
$489 per unit, as compared to annual actual expenditures in 1995 of $4.0
million, or $454 per unit. Approximately $2.5 million, or $284 per unit, of the
$4.3 million relates to non-recurring deferred maintenance which principally
will be funded from escrows established in connection with mortgage refinancing
and restructuring transactions completed in 1994 and 1995.
Lexford Acquisition
-------------------
In June 1996, the Company entered into a definitive agreement to
acquire Lexford, a privately held, third-party multi-family management company
headquartered in Dallas, Texas (SEE NOTE 1 - BUSINESS OVERVIEW - MANAGEMENT
SERVICES OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). The acquisition adds
approximately 22,000 apartment units to the Company's existing management
portfolio of approximately 35,000 units. Based on 1996 rankings by the National
Multi Housing Council, the Company has become the nation's sixth largest manager
of multi-family real estate. The Company intends to maintain Lexford's Dallas
office as headquarters for its combined property management business, which will
be conducted under the Lexford name. The merger closed effective August 1, 1996.
To acquire Lexford, the Company issued 700,000 shares of Common Stock
valued, for merger purposes, at $20 per share representing a maximum purchase
price of $14 million. Approximately $9 million of the purchase price (450,000
shares) are subject to forfeiture in the event the Company's combined property
management operations do not achieve certain profitability criteria. Lexford
shareholders will initially receive 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 $4.0 million or more from 1995
levels, the former Lexford shareholders would own the entire 700,000 shares
25
26
free of contingencies, or approximately 15.4% of the Company's shares
outstanding as of June 30, 1996.
Lexford's revenue from property management operations has averaged
approximately $5.6 million annually over the past five years, based on unaudited
representations. The acquisition of Lexford will be accounted for as a purchase,
with a substantial portion of the purchase price being recorded as goodwill (to
the extent that the purchase price exceeds the fair market value of Lexford's
net tangible assets.) The portion of the purchase subject to forfeiture (450,000
shares or $9.0 million) will not be recorded until the shares become free of
contingencies.
Financing And Debt Restructuring of the Properties
--------------------------------------------------
During the first six months of 1996, the Company refinanced first
mortgages on seven Wholly Owned Properties (SEE NOTE 3 TO NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS) and six Syndicated Partnerships. The new
mortgages on five Properties were obtained through Donaldson, Lufkin & Jenrette
Securities Corporation and the mortgages on eight properties were financed
through First Union Capital Markets Group ("First Union"). First Union was
retained to provide mortgage loans for approximately 25-30 properties. The new
mortgages bear a fixed rate of interest ranging from 8.0% to 9.1% with 25 year
amortization and 10 year maturity.
Aggregate mortgage debt and related interest on the six Syndicated
Partnerships of approximately $5.4 million was refinanced with debt discounts
obtained of approximately $214,000. The refinancing funded improvement and
replacement, tax and working capital escrows of approximately $294,000. Annual
debt service requirements decreased to approximately $519,000 from approximately
$544,000 as a result of these transactions. Although there can be no assurance,
management expects that these Syndicated Partnerships will increase their
payment of accrued interest to the Company due to lower debt service
requirements achieved with the reduction in debt.
The Company anticipates that it will continue to effect mortgage
refinancing transactions during the remainder of 1996 with First Union and other
lending sources (SEE ITEM 5 - OTHER INFORMATION).
In June 1995, the Company purchased mortgages amounting to $8.8 million
in the aggregate, related to one Syndicated Partnership and four Wholly Owned
Properties, financed with a $7.8 million note payable. As of June 30, 1996 the
Company had obtained permanent non-recourse mortgages on these five Properties.
The proceeds of the refinancing were applied to the Company's note payable.
26
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company reached a settlement in The Estate of Harold Murphy, et
al v. Cardinal Realty Services, Inc. et al., pending in the United
States District Court for the Southern District of Indiana. The
settlement resulted in the judgment entered against the Company
being vacated, and the withdrawal of the pending action and a
release of all claims against the Company in consideration of the
Company's payment of $370,000 to the Plaintiffs. Pursuant to the
terms of the proposed settlement, there was no admission of
liability by the Company. The $370,000 settlement amount was paid in
the second quarter of 1996.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its annual meeting of shareholders on May 22, 1996.
At the meeting, the Company's shareholders:
o Elected the following slate of directors nominated by the
Company, for terms expiring in 1999: Robert V. Gothier, Sr., H.
Jeffrey Schwartz and Gerald E. Wedren. The continuing directors
are John B. Bartling, Jr., Joseph E. Madigan, George J. Neilan,
George R. Oberer, Sr., Glenn C. Pollack, H. Jeffrey Schwartz,
Gerald E. Wedren and Robert J. Weiler; and
o Approved the Company's Non-Employee Director Restricted Stock
Plan.
The votes cast for, against, withheld, abstained and the broker
non-votes on each of the matters were as follows:
ELECTION OF DIRECTORS: Robert V. Gothier, Sr. received 2,655,294 for
and 35,387 withheld votes with no broker non-votes; H. Jeffrey
Schwartz received 2,648,878 for and 41,803 withheld votes with no
broker non-votes; and Gerald E. Wedren received 2,655,296 for and
35,385 withheld votes with no broker non-votes. ADOPTION OF
NON-EMPLOYEE DIRECTOR RESTRICTED STOCK PLAN: 2,571,568 votes were
cast for this amendment, with 58,262 against, 44,523 abstentions and
16,328 broker non-votes.
Item 5. Other Information
-----------------
The Company, in its capacity as general partner of, and as agent
for, certain Properties has entered into two commitment letters with
PaineWebber Incorporated ("PaineWebber") in connection with the
proposed refinancing of approximately 38 mortgage loans outstanding
to the Wholly Owned Properties and approximately 112 mortgage loans
outstanding to the Syndicated Partnerships. Subject to, among other
things, movements in interest rates and the satisfactory completion
of due diligence, the refinancings are expected to reduce the debt
service constants applicable to the loans outstanding to such
Properties, thereby directly improving the cash flow of such
Properties, and indirectly improving the Company's cash flows from
operating (Wholly Owned Properties) and investing (Syndicated
Partnerships) activities, EBITDA and FFO. If such opportunities are
identified, the Company would utilize PaineWebber's services in the
arrangement or origination of the refinancing mortgage loans.
27
28
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE
- ----------- --------------------------------------------------- --------------------------------------------
10.1 Agreement and Plan of Merger by and among Filed as an Exhibit to this Form 10-Q on
the Company, Rexflor Acquisition Corporation page 30.
and Lexford Properties, Inc. ("Lexford") and the
Shareholders of Lexford dated as of July 19,
1996
10.2 Employment Agreement dated as of August 1, Filed as an Exhibit to this Form 10-Q on
1996 between Lexford and Pat Holder, page 80.
President of Lexford
10.3 Employment Agreement dated as of August 1, Filed as an Exhibit to this Form 10-Q on
1996 between Lexford and Bruce Woodward, page 89.
Vice President of Lexford
10.4 Employment Agreement dated as of August 1, Filed as an Exhibit to this Form 10-Q on
1996 between Lexford and Annette Hoover, page 98.
Vice President of Lexford
10.5 Employment Agreement dated as of August 1, Filed as an Exhibit to this Form 10-Q on
1996 between Lexford and Peggy Hunt, Vice page 107.
President of Lexford
10.6 Employment Agreement dated as of August 1, Filed as an Exhibit to this Form 10-Q on
1996 between Lexford and Peggy Crow Smith, page 116.
Vice President of Lexford
10.7 Consulting Agreement dated as of August 1, Filed as an Exhibit to this Form 10-Q on
1996 between the Company and Stanley R. Fimberg page 125.
10.8 Consulting Agreement dated as of August 1, Filed as an Exhibit to this Form 10-Q on
1996 between the Company and Ralph V. Williams page 130.
10.9 Form of Transmittal Letter to the Filed as an Exhibit to this Form 10-Q on
Shareholders of Lexford page 135.
10.10 Form of Registration Rights Agreement by and Filed as an Exhibit to this Form 10-Q on
between the Company and the Lexford page 139.
Shareholders
11.1 Statement re: computation of Per Share See Note 1 of Notes to Consolidated
Earnings Financial Statements
27 Financial Data Schedule Filed as an Exhibit to this Form 10-Q on
page 152.
28
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARDINAL REALTY SERVICES, INC.
(Registrant)
Dated: August 13, 1996 By: /s/ John B. Bartling, Jr.
---------------------------------------------
John B. Bartling, Jr.
President and Chief Executive Officer
Dated: August 13, 1996 By: /s/ David P. Blackmore
---------------------------------------------
David P. Blackmore
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Dated: August 13, 1996 By: /s/ Ronald P. Koegler
---------------------------------------------
Ronald P. Koegler
Vice President and Treasurer
29