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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21670
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CARDINAL REALTY SERVICES, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-4427382
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6954 AMERICANA PARKWAY
REYNOLDSBURG, OHIO 43068
(Address of principal executive offices including zip code)
(614) 759-1566
(Registrant's telephone number, including area code)
------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: SHARES OF COMMON
STOCK, NO PAR VALUE
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation 8-K is not contained herein, and will not be contained to the best
of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
As of March 28, 1997 the aggregate market value of voting stock held by
non-affiliates (based on total shares outstanding reduced by the number of
shares held by directors, officers, and other affiliates) of the Registrant was
$91,050,152 based on the closing price reported on the National Association of
Securities Dealers Automated Quotation National Market System.
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 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 March 28, 1997 there were 4,445,531 shares of Common Stock outstanding.
The following document is incorporated herein by reference: None
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2
CARDINAL REALTY SERVICES, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 1996
PART I: PAGE:
ITEM 1 BUSINESS...............................................................3
ITEM 2 PROPERTIES............................................................16
ITEM 3 LEGAL PROCEEDINGS.................................................... 17
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 17
PART II:
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.................................... 18
ITEM 6 SELECTED FINANCIAL DATA............................................. 19
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................... 21
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 32
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................... 32
PART III:
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 32
ITEM 11 EXECUTIVE COMPENSATION............................................... 37
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....... 54
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 57
PART IV:
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...... 57
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES..............................F-1
2
3
PART I
This report contains forward-looking statements. The forward looking
statements include, without limitation, the stability of controlled Management
Services Fee revenues (page 6); potential increases in Ancillary Services Fee
revenues from apartment residents (page 8); future appreciation in real property
market value from investments and improvements (page 15); competitive advantages
based upon experience and quality of service (page 15); business strategies
(page 16); and increases in distributable cash flow available to the Company
(page 27). All of the forwarding looking statements contained in this report
represent management's good faith projections of future results and are based
upon existing market, financial and economic conditions known to management.
Future changes or developments in national, regional and local economic and
market conditions, especially increased competition at any of these levels
within the multi-family residential property industry; changing demographics in
the specific locations in which apartment communities owned or managed by the
Company are located; the discontinuance of the identifiable trend towards
consolidation within the multi-family residential property industry, generally;
increases in interest rates or increasing inflation all may operate to render
the forward looking statements contained in this report inaccurate. There can be
no assurance that any of the forward looking statements will prove to be
correct. Actual results may differ and such differences may be material.
ITEM 1. BUSINESS
--------
THE COMPANY
Cardinal Realty Services, Inc. (the "Company"), an Ohio corporation,
invests in, and holds direct and indirect ownership interests in, multi-family
real estate. Its wholly owned subsidiary, Lexford Properties, Inc. ("Lexford"),
a Texas corporation, provides property management and related services to owners
of multi-family real estate. According to 1997 rankings by the National Multi
Housing Council, the Company is the nation's 19th largest owner of multi-family
properties and Lexford is the 9th largest manager of multi-family properties.
As of December 31, 1996, the Company had an ownership interest in 522
apartment communities (consisting of an aggregate of 34,363 apartment units) in
14 states. As of the same date, Lexford managed 609 apartment communities
(consisting of an aggregate of 55,397 apartment units) in 22 states. Lexford's
management portfolio included 519 apartment communities (34,209 units) in which
the Company has an ownership interest (the "Properties" or "Portfolio") and 90
apartment communities (21,188 units) managed for third party owners.
The majority of the Portfolio was constructed during the 1980s and is
comprised entirely of buildings of modular construction. On December 31, 1996,
the average economic occupancy of the Portfolio was 92.5% and the average rent
collected per unit was $396. The Portfolio is mostly located in suburban,
secondary and tertiary markets in the eastern United States.
The Company's headquarters is located in suburban Columbus, Ohio at 6954
Americana Parkway, Reynoldsburg, Ohio 43068. The Company's telephone number is
(614) 759 - 1566. Lexford's headquarters is in suburban Dallas, Texas at 8615
Freeport Parkway, Suite 200, Irving, Texas 75063. Lexford also maintains
regional operations offices in: Columbus, Ohio; Orlando, Florida; Seattle,
Washington; and Houston and San Antonio, Texas. On December 31, 1996, the
Company employed 167 employees at its corporate headquarters and in the regional
office, an additional 61 employees who work at Lexford headquarters and in its
regional offices, and 1,665 employees at the Properties.
The Company's common stock, without par value ("Common Stock"), is traded
on the Nasdaq National Market tier of the Nasdaq Stock Market under the
symbol "CRSI." (SEE ITEM 5 - "MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS").
3
4
The Company is successor by name only to Cardinal Industries, Inc. ("CII")
(SEE THE COMPANY'S FORM 10 REGISTRATION STATEMENT). The Company registered its
Common Stock with the Securities and Exchange Commission in June 1993. Prior to
March 1995, the Company's Common Stock was traded on the OTC Bulletin Board
(trading symbol "CNRV").
1996 DEVELOPMENTS
In January 1996, the Company implemented a corporate restructuring to
segregate its services and ownership businesses, creating a Management Services
division and an Investment Management division, respectively. The Investment
Management division was formerly referred to as Advisory Services. The corporate
restructuring allowed the Management Services division to pursue its growth
strategy of improving the performance of the apartment communities under
management and entering the third-party fee based property management business,
and allowed the Investment Management division to focus on its growth strategy
of improving return on the Company's investments in real estate. Related to the
corporate restructuring, the Company made a number of changes in senior-level
management.
Effective August 1, 1996, the Company significantly enhanced its Management
Services business when it acquired Lexford by merger (the "Lexford Merger") of a
wholly owned subsidiary of the Company with and into Lexford. Under the terms of
the Lexford Merger, the Company succeeded to the ownership of all the issued and
outstanding stock of Lexford and the shareholders of Lexford received 700,000
shares of restricted, newly issued Common Stock. For purposes of the Lexford
Merger, the Common Stock was valued at $20 per share. Approximately $9.0
million, or 450,000 shares, of the purchase price is subject to forfeiture in
whole or in part in the event Lexford does not achieve certain profitability
criteria within the three full fiscal years ending December 31, 1999. The
Lexford shareholders received 250,000 shares of Common Stock free of
contingencies in the Lexford Merger.
Lexford has been engaged in the practice of third-party property management
since commencing business in June 1988. The executives of Lexford have extensive
experience in managing apartment communities for third- party owners - a busines
which the Company had identified as an important part of its growth strategy
prior to the Lexford Merger. At the time of the Lexford Merger, Lexford managed
approximately 22,000 apartment units and enjoyed a reputation for extensive
training programs and the accuracy of its reporting systems. Through the Lexford
Merger, the Company was also able to expand its geographic scope to establish a
national presence, and to add class A and B residential properties to its
management portfolio. The unaffiliated properties managed by Lexford are located
primarily in the western U.S. and include a range of property types (from
affordable to luxury) while the Company's Portfolio is located primarily in the
eastern U.S. and consists entirely of affordable apartment communities of single
story modular construction. Since completing the Lexford Merger, the Company has
consolidated its Management Services division property and financial operations
with those of Lexford, and combined other functions, including payroll, training
and human resources. The Company's property management operations are conducted
under the Lexford name and the Lexford executives (who were among the former
owners of Lexford) direct day-to-day operations of the former Management
Services division.
THE COMPANY'S BUSINESS
The Company is engaged in two core business activities: 1) providing
management and other services to owners of multi-family real estate; and 2)
investing in real estate. The Company's real estate investments include
investments in limited partnerships or other entities that own apartment
communities in which the Company or one of its subsidiaries owns all of the
equity interest (the "Wholly Owned Properties"), and investments in limited
partnerships that own apartment communities in which the Company or one of its
subsidiaries serves as general partner of, and in most cases, also owns some
limited partner interests (the "Syndicated Partnerships").
4
5
The unaudited net contribution to profit (revenues less direct expenses)
and Adjusted EBITDA (defined as Recurring Earnings Before Interest, Income
Taxes, Depreciation and Amortization excluding interest on mortgages secured by
the Wholly Owned Properties) by the two core business activities of the Company
for the years ended December 31, 1996 and 1995, are as follows. Financial
information presented includes revenue generated from the Wholly Owned
Properties which is eliminated in the Consolidated Financial Statements, and
does not include allocation of general corporate overhead. The 1995 financial
information is based on a Pro Forma Income Statement since the results of
operations of the Wholly Owned Properties were excluded from the consolidated
income statement during the period the assets were Held for Sale (SEE ITEM 7 --
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS").
Lexford - Management Services - Net Contribution to Profit
1996 1995
--------------- ---------------
Revenues
Controlled Contracts............. $11,916,175 $11,592,409
Third Party Contracts............ 2,135,429 0
Ancillary........................ 617,098 1,036,482
Other............................ 460,639 637,744
--------------- ---------------
15,129,341 13,266,635
--------------- ---------------
Direct Expenses....................... 9,386,591 6,707,291
--------------- ---------------
Net Contribution to Profit............ $5,742,750 $6,559,344
=============== ===============
Adjusted EBITDA....................... $5,742,750 $6,559,344
=============== ===============
The decline in Management Services' Net Contribution to Profit is primarily
due to two factors: 1) a decline in Ancillary Revenues associated with the
Company's restructuring of its parts supply operation (see "Ancillary
Services"), and 2) a decline in Other Income due to the one-time recovery in
1995 of accounts receivable which had previously been written off. The increase
in direct expenses primarily is due to the Lexford Merger.
Investment Management - Net Contribution to Profit
1996 1995
---------------- -----------------
Revenues
Interest Income.......................... $9,298,650 $4,361,497
Fee Based Services
Administrative Fees................ 1,532,447 1,573,694
Loan Fees.......................... 751,994 966,398
Income from Disposal of Non-Core Assets.. 962,761 3,408,379
Other.................................... 52,631 99,827
---------------- -----------------
12,598,483 10,409,795
---------------- -----------------
Direct Expenses............................. 1,958,136 1,960,068
---------------- -----------------
Net Equity in Wholly Owned Properties....... (455,234) (2,745,738)
---------------- -----------------
Net Contribution to Profit.................. $10,185,113 $5,703,989
================ =================
Adjusted EBITDA............................. $11,278,914 $6,052,544
================ =================
5
6
The increase in the Investment Management contribution was derived
principally from the improved financial operating performances of the Syndicated
Partnerships (reflected in Interest Income) and the Wholly Owned Properties.
CONSOLIDATED SUMMARY
---------------------------
1996 1995
------------- -------------
Net Contribution to Profit:
Lexford - Management Services................. $5,742,750 $6,559,344
Investment Management......................... 10,185,113 5,703,989
------------- -------------
15,927,863 12,263,333
------------- -------------
Other Expenses:
Administration................................ 5,030,967 4,399,349
Restructure Costs............................. 242,899 1,537,073
Interest - Corporate.......................... 1,098,333 1,522,087
Depreciation and Amortization................. 769,434 537,849
------------- -------------
7,141,633 7,996,358
------------- -------------
Income before Income Taxes & Extraordinary Items.. $8,786,230 $4,266,975
============= =============
Adjusted EBITDA by
Business Activity
----------------------------
1996 1995
-------------- -------------
Adjusted EBITDA - Net Contribution:
Lexford - Management Services............ $5,742,750 $6,559,344
Investment Management ................... 11,278,914 6,052,544
Corporate Administration................. (5,030,967) (4,399,349)
-------------- -------------
Adjusted EBITDA.......................... $11,990,697 $8,212,539
============== =============
Lexford - Management Services
The Company's management services business, conducted by Lexford, provides
traditional property management services to owners of multi-family real estate.
Lexford earns fees for these services, which services include: day-to-day
management and maintenance of apartment communities; attracting and retaining
qualified residents; collecting rents and other receivables from residents;
providing cash management services for rental revenues, security deposits,
taxes, insurance and deferred maintenance escrows; and compiling and reporting
information to property owners. Lexford's client base includes 519 of the 522
apartment communities (34,209 units) in which the Company has an ownership
interest. Management contracts for the Properties are almost all long-term and
include incentive fees for rent collection. The revenue stream from managing the
Properties is considered to be stable and recurring. Lexford clients also
include unrelated third-party owners. The terms of management contracts for
third-party owners vary considerably according to the objectives of the owners,
and are typically subject to termination on 30-days' notice. Due to the
combination of controlled and third-party management contracts, the Company
expects that the number of units managed will fluctuate somewhat over time.
Lexford intends to aggressively seek to expand its third-party business, which
it may do without jeopardizing its base of long-term management contracts for
the Properties.
6
7
Lexford's management philosophy centers on maximizing the financial
performance of the properties it manages for owners. Lexford believes that
managers must have detailed knowledge of their properties to maximize
performance. Consequently, Lexford's property management operations are
decentralized, with on-site managers responsible for day-to-day leasing and
maintenance issues, and multi-property managers frequently visiting the
properties to manage personnel and review the property's appearance and
financial performance. To maintain control and realize efficiencies, financial
operations, including payroll and cash management, are centralized in Columbus,
Ohio and Dallas, Texas. To help ensure compliance with legal and customer
service standards, Lexford has developed a system of policies and procedures for
on-site employees, who receive continuous training from Lexford's Training
Department. Lexford encourages its employees to pursue continuing education
opportunities, and a number of managers have earned the designation of Certified
Property Manager. Lexford holds the designation of Accredited Management
Organization from the Institute of Real Estate Management.
Location of Properties
The table below indicates the geographic locations of apartment communities
managed by Lexford as of December 31, 1996.
No. of No. of
State Properties Units
---------------- --------------- ----------------
Alabama 2 159
Arkansas 1 232
Arizona 3 1,015
California 9 2,764
Colorado 5 2,255
Florida 142 9,915
Georgia 74 5,059
Illinois 4 289
Indiana 71 4,817
Kentucky 35 2,132
Maryland 6 465
Michigan 25 1,739
Ohio 140 8,524
Oklahoma 1 138
Oregon 2 800
Pennsylvania 9 582
South Carolina 3 269
Tennessee 7 465
Texas 46 10,309
Virginia 2 732
Washington 15 2,259
West Virginia 7 478
--------------- ----------------
609 55,397
=============== ================
7
8
Operating Performance
In the aggregate, Net Operating Income ("NOI") of the Portfolio increased
approximately 7.4% over 1995, (7.9% on a same unit basis) due primarily to an
approximate 4.5% increase in rental revenue (5.0% on a same unit basis).
Management also believes that the results were favorably influenced by increased
emphasis on accountability at the property management level, an incentive
compensation plan for on-site managers and leadership from the Lexford staff.
Ancillary Services
Lexford also provides ancillary services to real estate owners, including
replacement parts, laundry services and maintenance supplies. In prior years,
the Company maintained a warehouse with an inventory of parts and supplies,
which were shipped to the apartment communities upon the receipt of orders. In
November 1996, the Company disposed of such inventory and Lexford established a
"Preferred Vendor" program that features discounts with major vendors (including
General Electric, Whirlpool, Glidden, Sherman Williams, Sears, Roebuck & Co.,
and Maintenance Warehouse/Home Depot). The program allows Lexford clients to
benefit from volume purchasing by paying discounted prices for high-quality
goods. By outsourcing the replacement parts and supplies, Lexford eliminated its
inventory and reduced overhead significantly. As of December 31, 1996, more than
95% of the Portfolio were participating in the Preferred Vendor program. The
program was made available to third- party clients effective December 1, 1996.
Lexford receives a rebate for every purchase made through the Preferred Vendor
program, as well as a rebate from residents' use of laundry equipment. Lexford
expects that it can improve third party client participation in the "Preferred
Vendor" program in 1997.
Lexford also provides services to apartment residents, including renters
insurance and leased apartment furnishings. As of December 31, 1995, 20% of
residents at apartment communities in which the Company has an ownership
interest selected renters insurance offered through an insurance agency
affiliated with Lexford. As of December 31, 1996, the percentage increased to
27%. Lexford plans to make the renters insurance program available to residents
of third-party clients in the second quarter of 1997. Lexford receives
compensation for services rendered and a reimbursement of expenses. Lexford also
offers leased apartment furnishings through agreements with national companies
such as Aaron Rents, Inc. and Globe Furniture Rentals, and receives a rebate on
furniture packages leased by residents. Although there can be no assurance, the
Company believes that Lexford can continue to increase the number of residents
who select renters insurance and leased apartment furnishings offered through
Lexford or its affiliates.
On a very limited basis, Lexford offers telecommunications and cable
television services to residents. The Company expects that Lexford will expand
those services in 1997.
Investment Management
The Company's equity investments in real estate are comprised of the Wholly
Owned Properties, the Syndicated Partnerships and a small number of non-core
assets. The Portfolio Managers and Assets Managers employed in the Company's
Investment Management division are charged with maximizing the value of the
Company's real estate assets (the Wholly Owned Properties and Syndicated
Partnerships are collectively referred to herein as the "Properties") and its
return on real estate investments. The Company maintains at least a 1%
partnership interest in each of the Syndicated Partnerships, and typically a 9%
to 10% managing general partner interest. In addition to its equity investments
(i.e., partnership interests) in the Syndicated Partnerships, the Company holds
interest earning receivables from a majority of the Syndicated Partnerships. In
most instances, the Company's interest earning receivable from a Syndicated
Partnership is the Company's more meaningful, income producing asset. Positive
cash flow generated from the operations of Syndicated Partnerships is generally
available to pay accrued interest on receivables owing to the Company. Interest
income on receivables from Syndicated Partnerships is a major source of Company
revenue. (SEE NOTE 1 TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS).
The Company's Investment Management division administers the Company's
duties and functions as general partner of the Syndicated Partnerships by
8
9
providing asset management services to the Syndicated Partnerships. In addition,
the Investment Management division performs the following services for the
accounts of the co-owners (limited partners) of the Syndicated Partnerships:
informational and financial reporting services, including tax return preparation
and provision of tax return information; and capital and financial planning,
including determination of reserves, funding of capital requirements and
administration of capital distributions to partners. The Investment Management
division earns fees for providing these services, as well as for its efforts in
successful mortgage loan refinancing transactions.
Wholly Owned Properties
As of December 31, 1996, the Company's portfolio included 113 Wholly Owned
Properties (8,504 units). The Wholly Owned Properties are owned by (i) limited
partnerships in which the Company or one of its wholly owned subsidiaries owns
both the general partner interest and limited partner interests (ii) limited
liability companies in which the Company or one of its wholly owned subsidiaries
own all the member interests, or (iii) wholly owned subsidiaries of the Company.
Revenues from the Wholly Owned Properties, primarily generated from rent
payments collected from residents, increased approximately $1.9 million or 4.8%
in 1996.
The following table summarizes the unaudited operating results of the
Wholly Owned Properties by quarter in 1996 and for the years ended December 31,
1996 and 1995:
9
10
Wholly Owned Properties (cont'd)
Quarter Ending Year Year
------------------------------------------------------------ Ending Ending
March 31, June 30, Sept. 30, Dec. 31, Dec. 31, Dec. 31,
1996 1996 1996 1996 1996 1995
------------- ------------- ---------------- --------------- ------------ --------------
Statistical information
- -----------------------
Properties at end of period 114 114 114 113 113 116
Average Units 8,777 8,587 8,574 8,568 8,626 8,777
Ave Economic Occupancy 89.7% 92.5% 91.0% 91.1% 91.1% 91.8%
Ave Rent Collected/Unit/Month $378 $385 $389 $396 $387 $366
Property - Operating Expenses/Unit/Month $433 $435 $446 $462 $1,776 $1,700
Capital & Maintenance/Unit/Month $82 $118 $94 $107 $401 $451
Real Estate Taxes/Unit/Month $96 $95 $97 $92 $380 $358
Property - Operating Expense Ratio 37.3% 36.4% 37.1% 37.6% 37.1% 37.9%
Financial Information (000's) omitted
- -------------------------------------
Revenues
Rental Income $ 9,954 $ 9,926 $ 10,004 $ 10,172 $ 40,055 $ 38,514
Other Property Income 236 328 307 350 1,221 862
------------- ------------- ---------------- --------------- ------------ --------------
Total Revenues 10,190 10,254 10,311 10,522 41,276 39,376
------------- ------------- ---------------- --------------- ------------ --------------
Expenses
Property Operating 3,802 3,736 3,824 3,956 15,319 14,921
Real Estate Taxes 842 814 833 789 3,277 3,145
------------- ------------- ---------------- --------------- ------------ --------------
Operating Expenses 4,644 4,550 4,657 4,745 18,596 18,066
------------- ------------- ---------------- --------------- ------------ --------------
Net Operating Income 5,546 5,704 5,654 5,777 22,680 21,310
------------- ------------- ---------------- --------------- ------------ --------------
Interest - Mortgage 3,564 3,637 3,500 3,431 14,132 13,549
Interest - Corporate Advances 100 100 100 101 401 262
Major Maintenance (1) 654 842 668 608 2,772 3,960
Non Operating 311 130 417 227 1,085 1,561
Depreciation 1,200 1,183 1,242 1,119 4,745 4,723
------------- ------------- ---------------- --------------- ------------ --------------
Non Operating 5,829 5,892 5,927 5,486 23,135 24,055
------------- ------------- ---------------- --------------- ------------ --------------
Inc./(Loss) bef. extraordinary items (283) (188) (273) 291 (455) (2,745)
------------- ------------- ---------------- --------------- ------------ --------------
Extraordinary gain/(Loss) (2) 0 0 0 (1,614) (1,614) 804
------------- ------------- ---------------- --------------- ------------ --------------
Net Income/(Loss) $ (283) $ (188) $ (273) $ (1,323) $ (2,069) $ (1,941)
============= ============= ================ =============== ============ ==============
Capital Expenditures (1) $ 62 $ 174 $ 135 $ 330 $ 701 $ 0
============= ============= ================ =============== ============ ==============
<FN>
Note: See Exhibit 99 for Individual Property Financial Information by Wholly
Owned Property for each Wholly Owned Property as of December 31, 1996.
(1) The Company initiated a limited capitalization program effective January 1,
1996 which requires capitalization of major exterior building improvements.
In prior years all items were expensed.
(2) See Note 6 to Notes to the Consolidated Financial Statements
</FN>
10
11
Same Units Comparison
The Company uses a "same unit" comparison as an indicator of the
performance of the 108 Wholly Owned Properties owned for the entire year in 1996
and 1995. Total Revenues increased 5.7%, while expenses increased 3.6% resulting
in a same unit net operating income increase of 7.5%. The average rent collected
was $391 in 1996 versus $373 for 1995 with economic occupancy at 92.5% in 1996
versus 91.8% in 1995.
Deconsolidated Balance Sheet
Effective January 1, 1996, the Company's Wholly Owned Properties were
reclassified from "Real Estate Assets Held For Sale" to operating assets on the
Company's Consolidated Balance Sheet and their results of operations were
reflected in the Company's Consolidated Income and Cash Flow Statements (SEE
NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). The following unaudited
table is a pro forma presentation of the Company's Consolidated Balance Sheet as
of December 31, 1996 without the consolidation of the Wholly Owned Properties,
which highlights the impact of consolidating the Wholly Owned Properties on the
Company's Balance Sheet.
Pro Forma
Deconsolidated Balance Sheet
December 31, 1996
(000s omitted)
Assets Liabilities and Equity
- -------------------------------------------------- ------------------------------------------
Cash................................ $ 271 Term Debt and Other........ $ 15,263
Accounts Receivable................. 5,348 Accounts Payable........... 400
Interests in and Receivables from Accrued Expenses and Taxes. 8,256
Syndicated Partnerships............. 54,610
Equity in Wholly Owned Properties... 17,073 Other Liabilities.......... 5,369
Furniture, Fixtures - Net........... 1,168
Funds Held in Escrow................ 7,031
Prepaids and Other.................. 6,296 Shareholders' Equity....... 62,509
------------- --------------
$ 91,797 $ 91,797
============= ==============
Funds From Operations
Funds From Operations ("FFO") is a financial statistic primarily used
by real estate investment trusts ("REITs") to report performance of owned real
estate. FFO represents net income excluding depreciation, extraordinary gains or
losses and funding from escrows for deferred maintenance. The following table
sets forth unaudited condensed, combined FFO of the Wholly Owned Properties for
the years ended December 31, 1996, 1995, and 1994.
1996 1995 1994
-------------- --------------- -------------
Income, excluding Depreciation and Extraordinary Items $ 4,290 $ 1,978 $ 2,676
Maintenance funded from Deferred Escrows.................. 523 1,714 334
-------------- --------------- -------------
Funds from Operations..................................... $ 4,813 $ 3,692 $ 3,010
============== =============== =============
<FN>
Note: 1995 and 1994 FFO has been restated for interest expense capitalized
during the period the Wholly Owned Properties were classified as Held
for Sale.
</FN>
11
12
Syndicated Partnerships
The Company holds receivables from substantially all of the 409 Syndicated
Partnerships, in which the Company had an ownership interest on December 31,
1996, primarily in the form of second mortgages and general partner advances to
the Syndicated Partnerships. Interest payments on these receivables generate a
majority of the interest income recognized by the Company. On December 31, 1996,
the contractual value of the Company's interest in second mortgages, advances
and other receivables, including related accrued interest, was $238.9 million
(SEE NOTE 3 TO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). Over the past four
years, cash flow from the Syndicated Partnerships has improved, largely as a
result of refinanced first mortgage debt, investment in property improvements
and increased NOI. The improved cash flow allows for increased interest and, in
certain instances, principal reduction payments from the Syndicated Partnerships
to the Company.
The following table summarizes the overall unaudited operating results of
the Syndicated Partnerships by quarter in 1996 and for the years ended December
31, 1996 and 1995. The financial information presented is based upon accrual
accounting at the partnership level. Certain transactions between the Company
and the Syndicated Partnerships are recorded at amounts at the partnership level
that will not necessarily correspond to amounts recorded at the Company level as
Interest Income due to "Fresh Start" accounting (SEE NOTE 1 TO NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS).
Quarter Ending Year Year
-------------------------------------------------------- Ending Ending
March 31, June 30, Sept. 30, Dec. 31, Dec. 31, Dec. 31,
1996 1996 1996 1996 1996 1995
------------- ------------- -------------- ------------- ------------ ----------
Statistical information
- -----------------------
Properties at end of period................. 414 414 414 409 409 415
Average Units............................... 26,197 26,197 26,197 26,084 26,162 26,374
Ave Economic Occupancy...................... 91.2% 92.4% 92.7% 92.9% 92.4% 91.9%
Average Rent Collected/Unit/Month .......... $377 $385 $390 $395 $387 $369
Property - Operating Expenses/Unit/Month.... $453 $439 $455 $464 $1,811 $1,767
Capital & Maintenance/Unit/Month............ $103 $104 $126 $187 $519 $586
Real Estate Taxes/Unit/Month................ $91 $89 $88 $90 $358 $351
Property - Operating Expense Ratio.......... 39.1% 36.9% 37.7% 37.9% 37.9% 39.1%
12
13
Syndicated Partnerships (cont'd)
Quarter Ending Year Year
------------------------------------------------------------ Ending Ending
March 31, June 30, Sept. 30, Dec. 31, Dec. 31, Dec. 31,
1996 1996 1996 1996 1996 1995
------------- ------------- ---------------- --------------- ------------ -------------
Revenues
Rental Income............................. $ 29,641 $ 30,256 $ 30,693 $ 31,001 $ 121,591 $ 116,193
Other Property Income..................... 688 946 988 953 3,574 3,151
---------------------------------------------------------------------------------------
Total Revenues............................ 30,329 31,202 31,681 31,954 125,165 119,344
---------------------------------------------------------------------------------------
Expenses
Property Operating........................ 11,857 11,502 11,930 12,103 47,391 46,601
Real Estate Taxes......................... 2,378 2,321 2,317 2,348 9,364 9,247
---------------------------------------------------------------------------------------
Operating Expenses.................... 14,235 13,823 14,247 14,451 56,755 55,848
---------------------------------------------------------------------------------------
Net Operating Income.................. 16,094 17,379 17,434 17,503 68,410 63,496
---------------------------------------------------------------------------------------
Interest - Mortgage....................... 9,920 10,007 9,940 9,855 39,723 40,452
Interest - General Partner................ 3,035 3,090 3,078 3,337 12,539 12,203
Major Maintenance (1)..................... 2,484 2,129 2,618 3,120 10,350 15,462
Non Operating............................. 533 1,120 161 231 2,045 2,880
Depreciation.............................. 4,532 4,543 4,588 4,810 18,474 18,497
---------------------------------------------------------------------------------------
Non Operating......................... 20,504 20,889 20,385 21,353 83,131 89,494
---------------------------------------------------------------------------------------
Inc./(Loss) bef. extraordinary items........ (4,410) (3,510) (2,951) (3,850) (14,721) (25,998)
---------------------------------------------------------------------------------------
Extraordinary gain/(Loss)................... 0 0 1,247 (588) 659 33,429
---------------------------------------------------------------------------------------
Net Income/(Loss)........................... $ (4,410) $ (3,510) $ (1,704) $ (4,438) $ (14,062) $ 7,431
=======================================================================================
Capital Expenditures (1).................... $ 215 $ 588 $ 674 $ 1,757 $ 3,234 $ 0
=======================================================================================
<FN>
(1) The Syndicated Partnerships initiated a limited capitalization program
effective January 1, 1996 which requires capitalization of major
exterior building improvements. In prior years all items were
expensed.
</FN>
Note: See Exhibit 99 for Syndicated Partnership performance, by property, for
all Properties in which the Company had an ownership interest as of December 31,
1996.
The Company's interest income is principally derived from the Syndicated
Partnerships. The following unaudited table reflects interest income from
Syndicated Partnerships recognized over the prior three years:
000s omitted
----------------------------------------------------
Interest Income 1996 1995 1994
----------------- --------------- ----------------
Recurring $ 6,960 $ 4,099 $ 2,633
Refinancing 1,937 0 0
----------------- --------------- ----------------
Total $ 8,897 $ 4,099 $ 2,633
================= =============== ================
13
14
The $2.9 million increase in recurring interest income was generated by
the aggregate $4.9 million increase in net operating income and the
approximately $700,000 decrease in interest expense at the Syndicated
Partnerships. This $5.6 million increase in cash flow at the Syndicated
Partnership level was partially offset by (i) an approximately $852,000 increase
in distributions to outside limited partners in 1996 as compared to 1995 (ii) an
approximately $683,000 increase in principal payments on cash flow secondary
mortgages ("B Notes"). The $1.1 million balance of the partnership cash flow
increase did not flow to the Company as interest income for several reasons,
including: (1) many partnerships which experienced cash flow increases in 1996
were in negative cash flow situations in 1995, and the 1996 increases therefore
do not equate to distributable positive cash flow in whole or in part; and (2)
in connection with refinancings and major maintenance, partnerships may require
temporary advances (or holdbacks of cash distributions) which may not be repaid
as of the end of a fiscal year, thereby diminishing or delaying interest income
to the Company. (SEE "CAPITALIZATION OF PROPERTIES").
Capitalization of Properties
The Company believes that obtaining and maintaining the best available
financing for the Properties is vital to maximizing their operating performance
and managing refinancing risk. Over the past four years, the Company has
successfully negotiated long-term, non-recourse, fixed interest rate financing
for approximately 92% of the Properties. The Company has also negotiated and
established escrows for property improvements, real property tax liabilities and
working capital as provisions of refinancing.
The Company applies a two-fold first mortgage loan refinancing strategy.
First, securing serviceable long-term, fixed rate financing for the Properties'
first mortgage debt improves the chances of relatively stable cash flow with
sufficient coverage to properly maintain the Properties and thereby enhance
long-term Property performance. Second, to the extent NOIs increase, the Company
benefits from increased cash flow from operation of the Wholly Owned Properties
and, generally, from increased interest income from the Syndicated Partnerships.
The Company earns mortgage restructuring fees for successful refinancing efforts
on behalf of the Syndicated Partnerships.
In 1996, the Company refinanced (i) 98 Property mortgages (with a total
principal amount of $115.4 million) through an affiliate of PaineWebber
Incorporated (ii) 21 Property mortgages (with a total principal amount of $26.1
million) through First Union Capital Markets Group, and (iii) five Property
mortgages (with a total principal amount of $5.4 million) through Donaldson,
Lufkin & Jenrette Securities Corporation. These refinancings reduced annual
Property debt service requirements, including B Note cash flow payments, by $1.3
million and funded escrows in the aggregate amount of $4.2 million.
The refinancing transactions mentioned above eliminated B Notes with
principal balances amounting to $1.2 million on six Wholly Owned Properties and
$3.9 million on 21 Syndicated Partnerships. During 1996, excess cash flow at the
Property level applied to these eliminated B Notes amounted to approximately
$98,000 and $338,000 on the Wholly Owned Properties and the Syndicated
Partnerships, respectively. Approximately $255,000 of principal payments were
made on B Notes of Wholly Owned Properties which remained outstanding at
December 31, 1996. Approximately $1.1 million of principal payments were made on
B Notes of Syndicated Partnerships which remained outstanding at December 31,
1996.
As of December 31, 1996, more than 83% of the mortgage loans on the
Properties had scheduled maturities beyond December 31, 1999. This represents
approximately 82% of the mortgage loans to the Syndicated Partnerships and
approximately 89% of the mortgage loans to the Wholly Owned Properties.
14
15
Non-Core Assets
The Company also owns or holds an ownership interest in a small number of
properties and parcels of land (the "Non-Core Assets"). The Company intends to
dispose of these assets on the best terms it can obtain. In 1996, the Company
recognized approximately $963,000 from the sale of Non-Core Assets. The Company
does not expect the sale of Non-Core Assets to be a continuing source of
revenue, as a minimal number of Non-Core Assets remain to be sold.
COMPETITION
Lexford competes nationally for management contracts, and locally for
apartment community residents. The Company believes that the property management
business continues to follow the consolidation trend of the real estate industry
in general.
Competition for Apartment Residents
Competition for residents at apartment communities is subject to the
condition and pricing of individual units, local market conditions, the location
of the apartment community, the apartment community owner's capitalization and
other factors. Lexford's portfolio of managed properties is spread over a large
geographic area and, therefore, not subject to any one set of local economic
circumstances. Additionally, the Company believes that Lexford benefits from
managing a diverse portfolio that includes luxury apartments in major markets as
well as affordable apartments in secondary and tertiary markets.
To remain competitive and provide opportunities for increases in rental
rates, the Company continues to invest in improvements to the Properties. The
following table displays Property improvement expenditures for the years 1994
through 1996 for both Wholly Owned Properties and Syndicated Partnerships. The
improvements were funded primarily by escrows established under the terms of
agreements for refinanced mortgage loans entered into since January 1, 1994. The
Company expects that these investments in the Properties will increase their
value. The Company will continue to address capital improvements and routine
maintenance requirements in future years.
Major Maintenance by Year (000s omitted)
-------------------------------------------------------
1996 1995 1994
---------------- ---------------- -----------------
Major Maintenance...... $13,122 $19,422 $13,514
Capital Improvements... 3,935 N/A N/A
---------------- ---------------- -----------------
$17,057 $19,422 $13,514
================ ================ =================
Major Maintenance expenditures are typically concentrated in years
immediately following mortgage refinancings due to requirements of mortgage
lenders. The 1996 activity declined due to a "trailing off" of expenditures
related to properties refinanced in 1994 and 1995. Reserves for major
maintenance established in the 1996 refinancing program will be expended
primarily in 1997. These expenditures, combined with termite repairs funded from
the proceeds of the termite litigation, are expected to reverse, at least for
1997, the downward expenditure trend experienced in 1996.
Competition for Management Contracts
Lexford competes with numerous other fee based property managers for
third-party management contracts. Competition in this arena is keen, as well as
highly fragmented, according to geographic region and property type. The Company
is Lexford's largest client, by virtue of the number of apartment communities
15
16
controlled by the Company. These contracts provide a base that will remain
stable as Lexford seeks to acquire additional management contracts from
third-party owners.
Although there can be no assurance, the Company believes that Lexford's
experience and track record with respect to financial controls, quality service,
lower operating costs and emphasis on employee training are competitive
advantages. The Company also believes that its ability to co-invest with owners
or developers of multi-family real estate may provide opportunities to control
additional apartment communities.
CORPORATE STRATEGY
The Company's overall business objective is to maximize the total return to
shareholders and investors through increases in the value of the Company's
Properties, cash flows and earnings. The Company believes that this objective is
best accomplished by providing high-quality services to owners of real estate
and to residents of apartment communities. The Company currently offers property
management, ancillary and investment management services; it intends to improve
margins from, and participation in, these services as well as to explore
opportunities to offer additional services.
Lexford will strive to expand its business by soliciting additional
fee-based contracts for providing management and other services to multi-family
communities. To that end, Lexford plans to implement an advertising and
promotional campaign to increase its visibility, and to devote additional
resources to improve and expand its marketing efforts. Lexford's growth strategy
will be primarily targeted at regions in which it has properties under
management, so that economies of scale may be realized. Lexford will seek to
expand into regions where large congregations of apartments are located, and
where it believes there are opportunities for future growth.
With respect to apartment communities in which it has an ownership
interest, the Company intends to continue its conservative financial strategies,
including funding reserves of at least $300 per unit annually for capital
improvements, and seeking opportunities for refinancing when improved terms can
be achieved. The Company also intends to carefully evaluate return on investment
from the Properties with the goal of disposing of under-performing or
non-performing Properties, and replacing them with assets from which it can
achieve higher investment returns.
The Company also plans to invest in technology to enhance the capabilities
of both Lexford and the Investment Management division. In 1996, the Company
invested in new hardware and software at its corporate headquarters to improve
processing and reporting capabilities. The Company plans to continue this
investment by migrating computer technology to the Properties through the second
quarter of 1998 (SEE ITEM 7: "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" -- LIQUIDITY AND CAPITAL RESOURCES).
ITEM 2. PROPERTIES
----------
The Company maintains ownership interests in the Wholly Owned Properties
and the Syndicated Partnerships (SEE ITEM 1. "BUSINESS" - INVESTMENT
MANAGEMENT).
The Company's corporate headquarters are located in a 52,168 square-foot,
single-story office building at 6954 Americana Parkway, in suburban Columbus,
Ohio. The Company entered into a lease for the building with Americana
Investment Company (an entity affiliated with an outside director of the Company
- - SEE PART II ITEM 13: "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS") in late
1992. Management believes that the lease terms are competitive with commercial
lease rates in the suburban Columbus market.
Lexford's corporate headquarters are located in a 15,185 square-foot suite
of offices located in an office park at 8615 Freeport Parkway in suburban
16
17
Dallas, Texas. Lexford entered into a lease for the office suite in 1993. In
addition to the corporate headquarters, Lexford leases regional operations
offices in Orlando, Florida; Seattle, Washington; and in Houston and San
Antonio, Texas.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company reached a settlement in THE ESTATE OF HAROLD MURPHY, ET AL V.
CARDINAL REALTY SERVICES, INC. ET AL., pending in the United States District
Court for the Southern District of Indiana. The settlement resulted in the
judgment entered against the Company being vacated, the withdrawal of the
pending action and a release of all claims against the Company in consideration
of the Company's payment of $370,000 to the Plaintiffs. Pursuant to the terms of
the proposed settlement, there was no admission of liability by the Company. The
$370,000 settlement amount was paid in the second quarter of 1996.
The Company reached a settlement in CARDINAL INDUSTRIES, INC. V. NATIONAL
UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA ET AL., pending in the United
States District Court for the Southern District of Ohio, Eastern Division. The
settlement provided for a gross payment of $7.5 million to the Company, for the
benefit of the affected Properties, and certain other parties to be paid in two
installments. The first installment of $4.0 million was received in October
1996, with the balance received in November 1996. A large portion of the
settlement payments was paid to the Company's attorneys in the case (who handled
the case on a contingency fee basis). The settlement provides for the release of
all claims between the Company and National Union Fire Insurance Company.
Pursuant to the terms of the settlement, there was no admission of liability by
either party. The settlement funds are being held by the Company, pending the
finalization of an allocation of proceeds to the affected Properties.
On March 7, 1996, the Company filed suit against Hartford Fire Insurance
Company ("Hartford") in the United States District Court for the Middle District
of Florida, in a case captioned CARDINAL REALTY SERVICES, INC. V. HARTFORD FIRE
INSURANCE CO., Case No. 96-458-CIV T-24A. In that case, the Company seeks to
recover from Hartford, pursuant to an excess property insurance policy issued to
the Company by Hartford, for termite-related losses at approximately 150
Properties in which the Company holds an interest. The termite related losses
are the same as those which formed the object matter of the NATIONAL UNION
litigation. Hartford's insurance policy provides coverage for such losses to the
extent they exceed $25 million. The parties are presently engaged in the
discovery process, and a trial has been scheduled for September 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
17
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
Effective March 9, 1995, the Company commenced trading of its Common Stock
on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol
"CRSI". Prior to this date, the Company's Common Stock traded on the OTC
Bulletin Board as "CNRV". On December 31, 1996, there were approximately 1,431
registered holders of the Company's Common Stock. The following table sets forth
the high and low bid prices of the Common Stock for the periods indicated. These
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
1996 1995
----------------------- ---------------------
High Low High Low
---------- ------------ ----------- ---------
First Quarter........... $18.75 $17.50 $13.75 $10.50
Second Quarter.......... 21.75 17.50 18.00 12.75
Third Quarter........... 20.75 18.50 18.50 16.88
Fourth Quarter.......... 21.25 19.38 19.75 16.00
The Company's transfer agent is:
The Huntington National Bank
Trust Department
The Huntington Center
Attention: HC 1112
Columbus, Ohio 43287
The Company has paid no dividends since it became a public reporting
company. Until August 1995, the Company's ability to pay dividends was subject
to a prohibition contained in its financing arrangements with The Huntington
National Bank. The terms of the Company's current credit facility provided by
The Provident Bank no longer restrict dividends. (SEE ITEM 7 - "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"--"Liquidity and Capital Resources").
In connection with its acquisition of Lexford on August 1, 1996, the
Company issued 700,000 shares of its Common Stock to the former shareholders of
Lexford Properties, Inc. as merger consideration for the cancellation of all the
issued and outstanding shares of capital stock of Lexford Properties, Inc.
450,000 shares of Common Stock issued to the former shareholders of Lexford
Properties, Inc. are subject to forfeiture, in whole or in part, in the event
that Lexford fails to produce net income from property management operations in
sufficient amounts in the 1997, 1998 or 1999 fiscal years.
During 1996, the Company issued 30,000 shares of restricted Common Stock
and 8,750 shares of Common Stock underlying matching stock grants to The
Provident Bank, as trustee (the "Trustee") of the Cardinal Realty Services, Inc.
Executive Deferred Compensation Rabbi Trust for the benefit of certain executive
officers of the Company. (SEE PART III, ITEM 11 "EXECUTIVE COMPENSATION - (F)
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT").
18
19
All of the shares of Common Stock issued to the former shareholders of
Lexford Properties, Inc., as well as to the trustee, were issued without
registration under the Securities Act of 1933, as amended (the "Act") based upon
the Company's claim (on account of the private and limited nature of the
issuances) to the exemption from registration provided under Section 4(2) of the
Act.
ITEM 6: SELECTED FINANCIAL DATA
-----------------------
The information below should be read in conjunction with the CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO AND ITEM 7 - "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
The net income previously reported in the 1994 and 1993 Consolidated
Statements of Income has been adjusted in order to comply with Statement of
Position 90-7 "Reorganization Under the Bankruptcy Code" pertaining to
accounting for deferred income taxes. The restatement involved a change in
accounting for benefits realized from the Company's net operating loss
carryforwards generated prior to its emergence from bankruptcy proceedings
("Pre-Reorganization NOLs"). The financial statements for the years 1994 and
1993 have been adjusted to reflect the benefits from net operating loss
carryforwards as a credit to Additional Paid-in Capital, rather than reflecting
such benefits as a reduction in income tax expense reported for financial
statement purposes. In the future, such benefits will be applied to Additional
Paid-in Capital until the Pre-Reorganization NOLs and other tax benefits have
been fully utilized. The adjustment does not affect the Company's cash flows or
total shareholders' equity (SEE NOTES 1 AND 10 TO NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS).
The unaudited tables set forth below provide a variety of statistical
information about the Company. The Company believes that earnings before
interest, income taxes, depreciation, amortization and extraordinary items
("EBITDA"), EBITDA adjusted for non recurring items ("Recurring EBITDA") and
Recurring EBITDA less interest on mortgage loans secured by the Wholly Owned
Properties ("Adjusted EBITDA") are significant indicators of the strength of its
results. EBITDA is a measure of a company's ability to generate cash to service
its obligations, including debt service 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.
19
20
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1996(1) 1995 1994 1993
---------------- ---------------- ------------------ ----------------
Operating Revenue.....................$ 65,300,990 $ 23,676,429 $ 22,600,025 $ 16,064,076
================ ================ ================== ================
Income before Extraordinary Item......$ 5,370,230 $ 4,292,713 $ 3,943,943 $ 229,049
Extraordinary Item....................$ (1,614,356) $ 804,022 $ 3,155,901 $ 1,050,086
---------------- ---------------- ------------------ ----------------
Net Income ...........................$ 3,755,874 $ 5,096,735 $ 7,099,844 $ 1,279,135
================ ================ ================== ================
EBITDA(2).............................$ 29,530,914 $ 24,599,501 $ 24,752,196 $ 19,887,705
================ ================ ================== ================
Adjusted EBITDA(2)....................$ 11,990,697 $ 8,212,539 $ 6,850,341 $ 4,189,385
================ ================ ================== ================
Income Per Common Share:
Income before Extraordinary Item.... $1.37 $1.11 $1.02 $0.06
Extraordinary Item.................. (0.41) 0.21 0.82 0.27
---------------- ---------------- ------------------ ----------------
Net Income.......................... $0.96 $1.32 $1.84 $0.33
================ ================ ================== ================
Balance Sheet Data: (At period end)
Total Assets..........................$ 245,367,779 $ 239,398,900 $ 236,729,107 $ 243,969,706
Long-Term Debt........................ 163,319,285 170,111,869 168,159,368 179,816,494
Shareholders' Equity.................. 62,509,178 51,246,094 43,248,143 31,684,299
<FN>
(1) The Company, during 1995 and prior years, classified the Wholly Owned
Properties as Held for Sale. 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, expenses or depreciation were included in the
consolidated statements of income. Commencing in 1996, the Company
changed the classification of the Wholly Owned Properties and fully
consolidated the operations of the Wholly Owned Properties in the
Company's Statement of Income (SEE NOTES 1 AND 2 TO NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS).
(2) Adjusted EBITDA for the years ended December 31, 1995, 1994 and 1993
includes the funds from operations of the Wholly Owned Properties
during the period Held for Sale (SEE ITEM 1 - "BUSINESS - FUNDS FROM
OPERATIONS").
</FN>
20
21
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
INTRODUCTION
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto (SEE ITEM 1 - "BUSINESS" AND
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS).
The financial statements for the years ended December 31, 1995 and 1994 do
not include the results of operations (revenues or expenses) attributable to the
Wholly Owned Properties previously classified as "Real Estate Assets Held for
Sale". Commencing January 1, 1996 the Results of Operations, including
depreciation of the Wholly Owned Properties, have been included in the
Consolidated Statements of Income. Therefore, the Consolidated Statement of
Income for the year ended December 31, 1996 is not comparable to the
Consolidated Statements of Income for the years ended December 31, 1995 and
1994.
In order to facilitate the comparison of operations in 1996 to prior years,
the following "pro forma" Income Statements (the "Pro Forma Income Statements")
has been prepared for the year ended December 31, 1995 as if the Wholly Owned
Properties were previously consolidated. All intercompany transactions have been
eliminated. Depreciation expense for the Wholly Owned Properties has been
estimated for 1995 (SEE NOTES 1 AND 2 TO NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS).
The following discussion of Results of Operations for the year ended
December 31, 1996 as compared to 1995 is based upon the Pro Forma Income
Statement.
Unaudited
Pro Forma
1996 1995
-------------- -------------
Revenues:
Rental and Other Operating Real Estate Revenues......... $41,276,684 $39,375,333
Fee Based............................................... 13,651,042 11,803,329
Interest, Principally from Syndicated Partnerships...... 8,897,233 4,099,329
Income from Disposal of Non-Core Assets-Net............. 962,761 3,408,379
Other................................................... 513,270 737,571
------------- -------------
65,300,990 59,423,941
------------- -------------
Expenses:
Rental Operating........................................ 21,129,433 21,977,790
Fee Based............................................... 9,366,777 6,910,228
Administration.......................................... 5,030,967 4,399,349
Restructure Costs/Tender Offer Costs ................... 242,899 1,537,073
Interest - Wholly Owned Property Debt................... 14,131,780 13,549,258
Interest - Corporate Debt............................... 1,098,333 1,522,087
Depreciation and Amortization........................... 5,514,571 5,261,181
------------- -------------
56,514,760 55,156,966
------------- -------------
Income Before Income Taxes and Extraordinary Item........ 8,786,230 4,266,975
Provision for Income Taxes .............................. 3,416,000 1,664,000
------------- -------------
Income before Extraordinary Item......................... 5,370,230 2,602,975
Extraordinary Item, net of Income Taxes ................. (1,614,356) 804,022
------------- -------------
Net Income............................................... $3,755,874 $3,406,997
============= =============
21
22
Unaudited
Pro Forma
1996 1995
-------------- -------------
EBITDA (Unaudited)..................................... $29,530,914 $24,599,501
============== ==============
Adjusted EBITDA (Recurring EBITDA reduced by
interest on Wholly Owned Property Debt) (Unaudited). $11,990,697 $8,212,539
============== ==============
Net Income per Common Share:
Income Before Extraordinary Item....................... $1.37 $0.67
Extraordinary Item..................................... (0.41) 0.21
-------------- --------------
Net Income............................................. $0.96 $0.88
============== ==============
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Years ended December 31, 1996 and
Pro forma 1995
Rental and Other Operating Real Estate Revenues are derived from the Wholly
Owned Properties which are apartment communities that comprise the Company's
Operating Real Estate Assets. Revenues increased $1.9 million, or 4.8%, in 1996
as compared to 1995. The increase was primarily due to the increase in average
rent collected from $366 in 1995 to $387 in 1996. The average economic occupancy
of the 108 Wholly Owned Properties in operation at all times during 1996 and
1995 was 92.5% in 1996 compared to 91.8% in 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.
Fee Based Revenues are comprised of Lexford and Investment Management
revenues generated from services provided to Properties and residents at the
Properties. Property Management Services revenues principally relate to property
management and accounting services provided to the Properties. Ancillary
Services revenues consist principally of revenue generated from the sale of
replacement and maintenance material to the Properties. In addition, Ancillary
Services revenues include revenue generated from furniture leasing and renters
insurance services provided to residents. Investment Management revenues consist
of partnership administration fees as well as loan refinancing and restructuring
fees.
The following are the major components of Lexford Revenues and Investment
Management Revenues (unaudited) for 1996 as compared to pro forma 1995:
22
23
1996 1995
--------------- ---------------
Lexford:
Property Management Services:
Property Management and Accounting Services -- Controlled ............ $ 7,782,722 $7,414,992
Property Management and Accounting Services -- Third Party ........... 2,135,429 0
Other Management Service Fee Revenues. ............................... 1,399,742 1,497,530
Ancillary Services:
Furniture Leasing and Renters Insurance .............................. 403,704 290,937
Replacement and Maintenance Material Revenues-net .................... 45,676 532,315
--------------- ---------------
Total Management Services Revenue......................................... 11,767,273 9,735,774
--------------- ---------------
Investment Management:
Partnership Administration & Other fees .............................. 1,131,775 1,181,540
Loan Refinancing and Restructuring Fees .............................. 751,994 886,015
--------------- ---------------
Total Investment Management Revenues ..................................... 1,883,769 2,067,555
--------------- ---------------
Total Fee Based Revenues.................................................. $13,651,042 $11,803,329
=============== ===============
Fee Based Revenues increased approximately $1.8 million, or 15.6%, in 1996
as compared to 1995. The increase was primarily due to the acquisition of
Lexford Properties, a third party property management company, which generated
$2.1 million in Fee Revenue since its acquisition on August 1, 1996 (SEE NOTE 1
TO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - "LEXFORD ACQUISITION"). The
increase in property management revenues was offset by an approximately $487,000
decrease in replacement and maintenance material sales to Syndicated
Partnerships. The decline in replacement and maintenance material sales occurred
as the Company transitioned from a warehouse operation to a coordinated buying
group for replacement and maintenance material. Revenue in the future will be
derived from a portion of the volume discounts generated by the property
purchases.
Fee Based Revenues are dependent to a certain extent on the financial
condition of the Properties owned and managed by the Company and the Company's
ability to retain its ownership interests. Loss of these interests, due to an
increase in interest rates or an inability to refinance matured loans, could
have a material adverse impact on Fee Based Revenues and the financial condition
of the Company. Although there can be no assurance, management does not
currently foresee any material loss of ownership interests in the Properties in
1997 that would adversely affect the Company's Fee Based Revenues. In addition,
Lexford derives its third party property management revenues from 30 day
cancelable contracts. Therefore, the amount of revenue generated from third
party management contracts may be subject to significant fluctuation from period
to period. Lexford, for example, in early 1997 lost the management of
approximately 3,000 units in a portfolio involved in bankruptcy proceedings
which resulted in a change of control of the ownership of these units.
Fee Based Revenues are also directly related to the occupancy and level of
rents collected at the properties managed by the Company. For the past two years
the Company has maintained occupancy, on average, above 90% at the properties
managed by the Company. The Company's ability to obtain rental increases and
maintain occupancy are highly dependent upon market conditions, the physical
condition of the properties and the competitive environments affecting such
properties.
Interest Income increased $4.8 million or 117% in 1996 compared to 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 3 TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS).
Approximately $1.9 million of the increase was generated from the excess
proceeds derived from refinancing of Syndicated Partnerships (SEE LIQUIDITY AND
23
24
CAPITAL RESOURCES -- FINANCING AND DEBT RESTRUCTURING OF THE PROPERTIES).
Although the interest income generated from excess refinance proceeds is not
recurring, Interest Income may be favorably impacted in the future by the lower
debt service as a result of the refinancing transactions completed in 1996. The
balance of the increase was a result of improved cash flow due to increased
operating performance of the Syndicated Partnerships (a same unit 7.9% increase
in net operating income in 1996 as compared to 1995) and lower debt service
requirements on mortgage debt refinanced in prior years. Although there can be
no assurance, Interest Income should continue to be favorably impacted in the
future from the improved cash flow on the Syndicated Partnerships generated from
lower debt service requirements and increases in operating income.
Income from Disposal of Non-Core Assets -- Net, decreased approximately
$2.4 million in 1996 as compared to 1995. This income is derived from the
proceeds of the sale of Non-Core Assets and the recovery of investor notes
receivables in excess of the aggregate recorded value of these assets. During
1994 the Company recovered the entire recorded value of these assets and, as a
result, began recognizing the proceeds, net of collection and closing costs, as
income. Additional income from the disposal of Non-Core Assets may be recognized
in the future although it is not a significant long term source of revenue for
the Company.
Other Income decreased approximately $224,000 in 1996 as compared to 1995.
The decrease was principally due to income in 1995 from the recovery of trade
accounts receivable which had previously been written off.
Rental Operating Expenses decreased approximately $848,000, or 3.8%, in
1996 as compared to 1995. The decrease was primarily due to the implementation
in 1996 of a capitalization program which resulted in the capitalization of
major building exterior improvements. Previously all items were expensed. In
1996 approximately $700,000 of improvements were capitalized that would have
been expensed in prior years. In addition, major maintenance expense decreased
approximately $487,000 in 1996 as compared to 1995. The decrease in 1996
primarily related to major maintenance on Wholly Owned Properties refinanced in
1995 and 1994. Reserves for major maintenance established in the 1996
refinancing program will be expended in 1997 and reverse the decrease
experienced in 1996.
Fee Based Expenses increased approximately $2.5 million in 1996 as compared
to 1995. Approximately $2.0 million of the increase was related to the
third-party management operation of Lexford, which was acquired effective August
1, 1996.
Administration Expenses increased approximately $632,000 in 1996 compared
to 1995. The increase was primarily due to bonuses payable to employees pursuant
to the Company's 1996 Incentive Compensation Plan. The incentive compensation is
based upon certain increases in Company profitability. The percentage increase
used as a measurement for the majority of the incentive compensation is computed
net of the cost of such plan. The increase in incentive compensation in 1996
compared to 1995 is reflective of the significant increases in profitability
achieved in 1996 compared to 1995.
Restructuring Costs in 1996 of $242,899 related to realignments to the
Company's organization to eliminate overlapping responsibilities. The
restructuring in 1996 was a follow up to the restructuring costs incurred in
1995 of $1.5 million. The restructuring costs are primarily comprised of
severance and separation costs. Management anticipates that the restructurings
completed in 1995 and 1996 should result in annual savings in excess of $1.0
million, primarily related to reductions in payroll and related fringe benefit
costs.
Interest Expense on mortgages on the Wholly Owned Properties increased
approximately $582,000 in 1996 as compared to 1995. The increase in interest
expense was due to the refinancing transactions completed in 1996 and 1995.
Although the overall contractual interest rates decreased, interest expense
increased, due to the impact of "Fresh Start" reporting with effective interest
rates applied to the Carrying Value of the mortgages. Interest expense on the
Company's corporate lines of credit decreased approximately $424,000 in 1996
compared to 1995. The decrease is due to lower outstanding balances on the
lines, and the refinancing of the Company's corporate credit lines in August
1995 at a more favorable interest rates (SEE "LIQUIDITY AND CAPITAL RESOURCES").
24
25
Depreciation and Amortization Expense increased approximately $253,000 in
1996 as compared to 1995. The increase is primarily due to amortization expense
related to loan origination costs capitalized in connection with the refinancing
of corporate debt and mortgages on the Wholly Owned Properties, combined with
amortization of management contracts and goodwill associated with the Lexford
acquisition.
Income before Extraordinary Item increased from $2.6 million in 1995 to
$5.4 million in 1996. The Extraordinary charge of $1.6 million, net of taxes was
a result of mortgage debt refinancing on certain Wholly Owned Properties (SEE
NOTE 6 TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND "LIQUIDITY AND
CAPITAL RESOURCES"--FINANCING AND DEBT RESTRUCTURING OF THE PROPERTIES). The
extraordinary gain of $804,000 recognized in 1995 was due to debt forgiveness
generated from the debt restructuring and refinancing of mortgages on Wholly
Owned Properties. Net income increased from $3.4 million in 1995 to $3.8 million
in 1996.
The financial position of the Company may be impacted by the availability
to the Company of certain tax benefits, such as net operating loss carryforwards
and other tax attributes. To the extent all or a portion of the Company's tax
attributes are unavailable to offset taxable income, the cash flow of the
Company could be materially impacted (SEE NOTE 10 TO NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS).
Comparison of Results of Operations for the Years ended December 31, 1995 and
1994
Fee Based Revenues are comprised of Management Services and Investment
Management revenues generated from services provided to Properties and residents
of the apartment communities. The following are the major components of
Management Services Revenues and Investment Management Revenues for 1995 as
compared to 1994:
1995 1994
-------------------- ------------------
Management Services:
Property Management Services:
Property Management and Accounting Services -- Controlled... $ 9,844,330 $ 9,564,710
Other Management Service fee revenues....................... 1,748,079 1,679,888
Ancillary Services:
Furniture Leasing and Renters Insurance..................... 296,203 255,942
Replacement and Maintenance Material revenues--net.......... 740,279 577,074
-------------------- ------------------
Total Management Services Revenues............................... 12,628,891 12,077,614
-------------------- ------------------
Investment Management:
Partnership Administration & Other fees........................ 1,573,693 1,686,877
Loan Refinancing and Restructuring Fees........................ 966,398 1,514,027
-------------------- ------------------
Total Investment Management Revenues............................. 2,540,091 3,200,904
-------------------- ------------------
Total Fee Based Revenues......................................... $ 15,168,982 $ 15,278,518
==================== ==================
Fee Based Revenues decreased approximately $110,000 in 1995 as compared to
1994, due to a decrease in Investment Management revenues of approximately
$661,000, which was partially offset by increases in Property Management
Services and Ancillary Services Revenues of approximately $348,000 and $203,000,
respectively. The decrease in Investment Management revenues was principally due
to a decrease of approximately $548,000 in loan refinancing and restructuring
fees in 1995 as compared to 1994. 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, and a property owner's ability to refinance
25
26
based on the current interest rate environment. The balance of the decrease in
Investment Management revenues was due to fees earned in 1994 related to
bankruptcy services provided to properties in Chapter 11 bankruptcy proceedings.
The increase in Property Management Services revenues was due to an increase in
management and accounting services fees of approximately $280,000. The increase
was primarily due to an increase in the number of Properties managed after
management of six properties was returned to the Company due to the cancellation
of a third party management contract in the third quarter of 1995. The aggregate
increase in Ancillary Services revenues of approximately $203,000 was
principally due to an increase in replacement and maintenance material sales to
properties. The increased sales were attributable to the deferred maintenance
escrow funds established with the refinancing and restructuring of mortgage debt
on a significant number of the Properties in 1994 and 1995.
Interest Income increased $1.7 million in 1995 as compared to 1994.
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 3 TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS).
The increase in Interest Income was due to increased cash flow from the
Syndicated Partnerships primarily as a result of lower debt service requirements
on refinanced or restructured mortgage debt.
Income from Disposal of Non-Core Assets -- Net increased approximately
$219,000 in 1995 as compared to 1994. This income is derived from the proceeds
of the sale of Non-Core Assets and the recovery of investor notes receivable in
excess of the aggregate recorded value of these assets. During 1994 the Company
recovered the entire recorded value of these assets and, as a result, began
recognizing the proceeds, net of collection and closing costs, as income.
Other Income decreased approximately $692,000 in 1995 as compared to 1994.
The decrease was principally due to the settlement of a pending claim in 1994.
The settlement resulted in a release of an accrued liability of approximately
$726,000 in exchange for the Company's dismissal of a preference action.
Fee Based Expenses decreased approximately $336,000 in 1995 as compared to
1994. The decrease in Fee Based Expenses reflects the staff reductions and
realignments implemented by the Company in 1993 and 1994.
Administration Expenses increased approximately $406,000 in 1995 as
compared to 1994. The increase was primarily due to the recording of a
litigation reserve in the fourth quarter of 1995. The reserves were established
for ongoing and potential legal and litigation costs involving the Company.
Administration Expenses also increased in 1995 due to additional corporate
governance costs and expenses associated with the registration of the Company's
Common Stock on the Nasdaq National Market tier of the Nasdaq Stock Market.
Restructuring Costs of $1.5 million were incurred in 1995 as a charge
related to the corporate restructuring implemented at the end of 1995 which
aligned the Company's organization structure with current and future business
goals. The $1.5 million charge is primarily comprised of severance and
separation costs.
Interest Expense decreased approximately $121,000 in 1995 as compared to
1994. The decrease was due to a reduction in the average debt outstanding of
approximately $2.0 million in 1995 versus 1994. In addition, in August 1995, the
Company obtained more favorable financing terms on its corporate debt by
negotiating a variable interest rate with a new lender, The Provident Bank (the
"Bank"), at the Bank's prime rate of interest minus 1.0% as compared to a
previous variable interest rate at the Huntington National Bank's prime rate of
interest plus 0.5%. These favorable factors were partially offset by an increase
in the prime interest rate charged by most lenders in 1995. The prime interest
rate charged by the Company's lender ranged from 6.0% to 8.5% in 1994 as
compared to a range of 8.5% to 9.0% in 1995 (SEE LIQUIDITY AND CAPITAL
RESOURCES).
Depreciation Expense increased approximately $90,000 due to depreciation on
capital improvements undertaken at the end of 1994 and throughout 1995.
26
27
Income before Extraordinary Item. As a result of the approximately $1.1
million aggregate increase in revenues less an increase in expenses and taxes of
approximately $728,000, Income before Extraordinary Item improved from $3.9
million in 1994 to $4.3 million in 1995. The extraordinary gain, due to debt
forgiveness generated from the debt restructuring and refinancing on Wholly
Owned Properties, was $804,000 in 1995 versus $3.2 million in 1994. Net Income
amounted to $5.1 million in 1995 as compared to $7.1 million in 1994.
Earnings before Interest, Taxes, Depreciation and Amortization
The Company believes that earnings before interest, income taxes,
depreciation, amortization and extraordinary items ("EBITDA"), Recurring EBITDA
and Adjusted EBITDA are significant indicators of the strength of its results.
EBITDA is a measure of a Company's ability to generate cash to service its
obligations, including debt service obligation, and to finance capital and other
expenditures, including expenditures for acquisitions. EBITDA does not represent
cash flow as defined by Generally Accepted Accounting Principles ("GAAP") and
does not necessarily represent amounts of cash available to fund the Company's
cash requirements. Unaudited EBITDA and the computation of Adjusted EBITDA for
the years ended December 31, 1996, 1995 and 1994 is as follows: (000s omitted)
Pro Forma
-------------------------------
1996 1995 1994
-------------- --------------- --------------
EBITDA .............................................. $29,531 $24,600 $24,752
- ------ -------------- --------------- --------------
Interest Income derived from refinance proceeds . (1,936) 0 0
Income from Disposal of Non Core Assets.......... (963) (3,408) (3,189)
Other Income..................................... 0 0 (726)
Loan Fees........................................ (752) (966) (1,514)
Restructure/Tender Offer Costs................... 243 1,537 977
-------------- --------------- --------------
Recurring EBITDA..................................... 26,123 21,763 20,300
- ---------------- -------------- --------------- --------------
Interest on Wholly Owned Properties.............. (14,132) (13,549) (13,450)
-------------- --------------- --------------
Adjusted EBITDA...................................... $11,991 $ 8,214 $ 6,850
- --------------- ============== =============== ==============
EBITDA increased $4.9 million, or 20.0%, and Adjusted EBITDA increased $3.8
million, or 46.0%, in 1996 as compared to 1995. EBITDA decreased $152,000, or
1%; however, Adjusted EBITDA increased $1.4 million, or 19.9%, in 1995 as
compared to 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion regarding liquidity and capital resources should
be read in conjunction with the Company's Consolidated Balance Sheets as of
December 31, 1996 and 1995 and the Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994.
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 has increased significantly
over the past three years, from approximately $1.0 million in 1994; to
approximately $5.6 million in 1995; to approximately $12.7 million in 1996.
27
28
Increases in Cash Received from Interests in and Receivables from Syndicated
Partnerships has been a major factor in such increase. Cash Received from
Interests in and Receivables from Syndicated Partnerships, which is primarily
comprised of payments of accrued interest, increased 82.7%, or $4.1 million, in
1996 as compared to 1995 and 98.5%, or $2.4 million, in 1995 as compared to
1994. In 1996, 294 Syndicated Partnerships provided operating cash flow to the
Company, as compared to 220 in 1995 and 160 in 1994.
The increase in Net Cash Provided by Operating Activities was also due to
$4.5 million of operating cash flow from the Wholly Owned Properties. This
operating cash flow was formerly treated as cash flow from investing activity
while the Wholly Owned Properties were classified as "Real Estate Assets Held
for Sale" (SEE NOTES 1 AND 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS).
The other factors impacting the Company's cash flow in 1996, 1995 and 1994
are discussed in "Results from Operations" and "Financing and Debt Restructuring
of the Properties".
The Company anticipates that cash flow from its operations and borrowings
available under the Company's credit facility will be adequate to meet the
reasonably foreseeable capital and liquidity needs of the Company. If the
Company is successful in its future growth plans, it may be necessary to seek
additional capital sources through other debt or equity sources (SEE ITEM 1-
"BUSINESS").
In August 1995, The Provident Bank (the "Bank") and the Company closed on 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.
The new credit facility provides credit up to $32.0 million, and is
comprised of: a $3.0 million revolving line of credit for operating needs
subject to annual review and extension by the Bank; a $7.0 million line of
credit for acquisitions and Property debt restructuring (the "Acquisition Line")
due in six years with interest only, payable in the first year; 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 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 beginning in March 1996 in 60 equal monthly
installments of principal and interest. Excess corporate cash is applied to pay
down the Reducing Line and reborrowed as needed (SEE NOTE 4 TO NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS).
In July 1996, the Company received a commitment letter from the Bank for an
additional $10.0 million line of credit. The new line will bear interest at the
Bank's prime rate of interest minus 1% with interest only during the first year,
and will be due in six years. The Company did not draw on this line in 1996. On
December 31, 1996, including the $10.0 million commitment, the Company had
unrestricted credit availability of approximately $25.4 million.
In addition, all of the Company and the majority of Property bank accounts
are maintained at the Bank. The banking relationship has increased cash flow at
the Properties as a result of reduced service charges and increased interest
income on the Property bank account balances. The Company may benefit from a
portion of the improved cash flow at the Properties.
Presently, the Company plans to finance its working capital needs from cash
flow and through borrowing under its credit facility. Although it is anticipated
that the Company will have access to sufficient funds to meet its requirements,
if opportunities develop on favorable terms for additional mortgage
restructuring, or acquisitions, the Company may seek alternative outside debt or
equity sources to fund such activities. In addition, any significant decrease or
increase in interest rates will affect the Company's earnings and cash flows
favorably or unfavorably, respectively.
28
29
In November 1995, the shareholders of the Company approved an increase in
the number of authorized shares of Common Stock from 4,500,000 to 13,500,000 and
also authorized 1,500,000 shares of "Blank Check" Preferred Stock. The Company
has no current commitments or arrangements which would require the issuance of a
material number of additional shares. The Company sought the increase in
authorized shares to provide an additional source of capital and provide greater
flexibility in structuring potential transactions, such as the Lexford
acquisition.
The Company's capital expenditures for 1996 amounted to approximately
$423,000 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 or the Company's credit facility. The Company currently forecasts capital
expenditures of approximately $400,000 in 1997, principally for enhanced
computer system hardware and software. The Company is currently implementing new
software systems in order to obtain optimal efficiencies from technology.
Improvement and Replacement Expense for the Wholly Owned Properties was
$2.8 million and capital expenditures amounted to approximately $682,000 during
1996. Improvement and Replacement Expense was funded from Wholly Owned Property
cash flow and maintenance escrow funds. The 1997 combined budget for improvement
and replacement expense and capital expenditures for the Wholly Owned Properties
is anticipated to be $4.5 million.
Lexford Acquisition
Effective August 1, 1996, the Company acquired Lexford, a privately held,
third-party multi-family management company headquartered in Dallas, Texas (SEE
NOTE 1 - BUSINESS - MANAGEMENT SERVICES OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS). The acquisition added approximately 22,000 apartment units to the
Company's management portfolio which totals 55,397 units at December 31, 1996.
Based on 1997 rankings by the National Multi Housing Council, Lexford has become
the nation's ninth largest manager of multi-family real estate. The Company
intends to maintain Lexford's Dallas office as headquarters for its combined
property management business, which will be conducted under the Lexford name.
To acquire Lexford, the Company issued 700,000 shares of Common Stock
valued, for acquisition purposes, at $20 per share representing a maximum
purchase price of $14 million. Approximately $9 million of the purchase price
(450,000 shares) is subject to forfeiture in the event the Company's combined
property management operations do not achieve certain profitability criteria.
Lexford shareholders received 250,000 shares of the Company's Common Stock free
of contingencies. The remaining 450,000 contingent shares will cease to be
subject to risk of forfeiture if and when specified increases in the
profitability of the Company's property management operations are achieved
during the three full fiscal years following the merger (i.e. on or before the
end of the Company's 1999 fiscal year). If, during the specified period, profit
from property management operations increases $1.8 million or more from 1995
levels, the former Lexford shareholders would own 150,000 of the contingent
shares free of contingencies, and if the increase is $4.0 million or more from
1995 levels, the former Lexford shareholders would own the entire 700,000 shares
free of contingencies, or approximately 15.4% of the Company's shares
outstanding as of December 31, 1996.
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30
Selected pro forma, unaudited financial information relating to Lexford
third party management operations for the years ended December 31, 1996 and
1995, is as follows:
Lexford Pro Forma
Year Ended December 31,
--------------------------------------------------
1996 1995
---------------------- ------------------------
Fee Based Revenues......... $5,588,563 $4,685,735
---------------------- ------------------------
Fee Based Expenses......... 4,781,933 4,027,520
Interest Expense........... 61,507 73,879
---------------------- ------------------------
4,843,440 4,101,399
---------------------- ------------------------
Income Before Taxes........ 745,123 584,336
---------------------- ------------------------
EBITDA..................... $806,630 $658,215
======================= ========================
The acquisition of Lexford was accounted for as a purchase, with a portion
of the purchase price, ($1.6 million), assigned to the value of the Lexford
management contracts, and the balance ($3.9 million) assigned to the value of
the "Lexford" name and 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
In 1996 the Company refinanced first mortgages on 125 Properties comprised
of 35 Wholly Owned Properties (SEE NOTE 6 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS) and 90 Syndicated Partnerships. The new mortgages on 98 Properties
were financed through PaineWebber Incorporated ("PaineWebber"); the mortgages on
21 Properties were financed through First Union Capital Markets Group ("First
Union"); the mortgages on five Properties were financed through Donaldson,
Lufkin & Jenrette Securities Corporation; and the mortgage on one Property was
financed with the Department of Housing and Urban Development ("HUD"). The new
PaineWebber mortgages on the 26 Wholly Owned Properties have fixed interest
rates of 8.8% with a 30 year principal amortization and a 10 year maturity, and
the 72 Syndicated Partnerships have fixed interest rates from 8.8% to 9.0 % with
a 25 year principal amortization schedule beginning in year four, and a 10 year
maturity. The new First Union mortgages have fixed interest rates ranging from
8.0% to 9.1% with a 25 year principal amortization and a 10 year maturity. The
other mortgages refinanced in 1996 have terms similar to the First Union
mortgages. While the PaineWebber mortgages secured by the Wholly Owned
Properties are cross collateralized and cross defaulted, all of the mortgage
loans are without recourse to the Company.
Aggregate mortgage debt, and related interest on the 35 Wholly Owned
Properties with a contractual balance of $46.8 million and a carrying value of
$45.6 million was refinanced with mortgage debt having a carrying and
contractual balance of $47.8 million. A fourth quarter extraordinary non cash
charge of $1.6 million was triggered by the mortgage debt refinancing on certain
Wholly Owned Properties. The charge occurred related to Properties that had a
carrying value (recorded in 1992 under the "Fresh Start" accounting method upon
confirmation of the bankruptcy plan of reorganization of the Company's
predecessor) less than the unpaid contractual balance of the mortgage loan at
such time. Generally Accepted Accounting Principles required the Company to
record the charge upon refinancing the prior mortgage as the previous lender was
repaid at the contractual balance. Additional extraordinary charges may occur in
the future on Wholly Owned Properties with contractual mortgage debt in excess
of the "Fresh Start" carrying value. The required annual debt service on the
Wholly Owned Properties refinanced in 1996 decreased by approximately $300,000
30
31
with the Company investing $1.1 million, net of excess proceeds from refinancing
certain Wholly Owned Properties. In addition, $1.2 million of cash flow
secondary mortgages ("B Notes") on six Wholly Owned Properties were refinanced
in 1996. The B Notes previously required 100% of the excess cash flow to be
applied to the principal. In 1996 the excess cash flow applied to these B Notes
amounted to approximately $98,000.
Aggregate mortgage debt, and related interest, on the 90 Syndicated
Partnerships with a balance of $95.2 million was refinanced with mortgage debt
totaling $101.7 million. The Company advanced $5.6 million to certain Syndicated
Partnerships to facilitate the refinancing (debited to Interests in and
Receivables from Syndicated Partnerships), but received excess proceeds of $5.0
million from the refinancing of other Syndicated Partnerships. The required
annual debt service on the Syndicated Partnerships will decrease approximately
$600,000 per year for the first three years. In addition, $3.9 million of B
Notes on 21 Syndicated Partnerships were refinanced in 1996. In 1996, excess
cash flow applied to these B Notes amounted to approximately $338,000. Although
there can be no assurance, management anticipates that cash distributions to the
Company will increase from these Syndicated Partnerships due to the lower debt
service requirements and the elimination of the B Notes. Increased cash flow at
the Syndicated Partnerships, if it occurs, may enhance recovery of Interests in
and Receivables from Syndicated Partnerships, including Interest Income, to the
Company in the future.
During 1996 the Company granted deeds in lieu of foreclosure to the
mortgagees of three Wholly Owned Properties. No significant gain or loss was
recognized on these transactions because the assets and the non recourse
mortgages on each of these Wholly Owned Properties had been recorded in equal
amounts.
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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Not applicable.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
(a) DIRECTORS
The Board of Directors ("Board") of the Company consists of nine
members. The Company's Regulations classify the directors into three
classes, with the directors in each class serving for three year terms
and until their successors are elected. The terms of the directors
listed below will expire at the 1997, 1998 and 1999 annual meetings of
the Company's shareholders, respectively, as indicated below.
CLASS II DIRECTORS SERVING UNTIL THE 1997 ANNUAL MEETING
Has Served as Principal Occupation
Name Age Director Since and Business Experience
- ------------ -------- ---------------- ---------------------------------------
Joseph E. 64 1992 A corporate financial consultant, Mr.
Madigan Madigan also is a Director of Cooker
Restaurant Corp., Skyline Chili, Inc.,
VOCA Corporation and The Frank Gates
Service Company. Mr. Madigan currently
serves as Chairman of the Company's
Board of Directors and served as Acting
Chief Executive Officer of the Company
from June 13, 1995 to December 1, 1995.
Mr. Madigan was Executive Vice
President, Chief Financial Officer and
Director of Wendy's International, Inc.
from 1980 through 1987. He was Treasurer
and Vice President of Borden, Inc.
between 1968 and 1980. Mr. Madigan is
also a former Trustee of Excelsior
Income Shares, Inc., a closed-end income
fund, and NCC Funds, a Cleveland-based
closed-end investment fund.
George J. 61 1992 President of Allstate Development
Neilan Company, and has been involved in land
acquisition and development in the
Charleston, West Virginia area since
1982. He also maintains an intellectual
property legal practice in South
Charleston, West Virginia.
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33
Has Served as Principal Occupation
Name Age Director Since and Business Experience
- ------------ -------- ---------------- ---------------------------------------
Glenn C. 39 1992 Senior Vice President of Brown, Gibbons,
Pollack Lang & Company, L.P., an investment
banking firm located in Cleveland, Ohio,
since January 6, 1997. Mr. Pollack
served as President of Zeus Advisors,
Inc., a consulting firm located in
Cleveland, Ohio, from November 1994 to
December 1996. From September 1989 to
October 1994, Mr. Pollack was Chief
Executive Officer of A & W Foods, Inc.,
a regional food distributor. Mr. Pollack
was a senior manager in the Corporate
Strategies Group at the Cleveland Office
of Price Waterhouse in 1988 and 1989,
and served in a similar capacity from
1984 to 1988 with Siedmann & Associates,
a Cleveland-based consulting firm.
CLASS III DIRECTORS SERVING UNTIL THE 1998 ANNUAL MEETING
Has Served as Principal Occupation
Name Age Director Since and Business Experience
- ------------ -------- ---------------- ---------------------------------------
John B. 39 1995 President and Chief Executive Officer of
Bartling, Jr. the Company since December 1, 1995. From
April 1993 until December 1995, Mr.
Bartling was a Director in the Real
Estate Products Group of CS First
Boston, an investment banking firm. He
was an executive officer of NHP, Inc., a
company specializing in the development,
ownership and management of real estate
assets, from June 1987 to April 1993. In
addition, Mr. Bartling served as
Executive Vice President of NHP Real
Estate Corp., NHP Capital Corp. and NHP
Servicing Inc., wholly owned
subsidiaries of NHP, Inc., from 1991 to
April 1993.
George R. 69 1992 Chairman of the Board and past President
Oberer, Sr. and CEO of Oberer Development Company
since the early 1970s. He was President
of the predecessor corporation, Oberer
Construction Company, since 1953. Mr.
Oberer is President and CEO of Gold Key
Realty Company. Oberer Development
Company and Gold Key Realty Company are
engaged in real estate development and
management, respectively.
33
34
Has Served as Principal Occupation
Name Age Director Since and Business Experience
- ------------ -------- ---------------- ---------------------------------------
Robert J. 61 1992 A central Ohio real estate developer,
Weiler Mr. Weiler joined The Robert Weiler
Company in 1957 and has been Chairman of
the Board since 1987. A real estate
consultant since 1970, Mr. Weiler also
is a licensed real estate appraiser and
a member of the Appraisal Institute,
having served as President of the Ohio
Chapter. He was a Director of the
National and Ohio Association of
Realtors and is a past President of the
Columbus Board of Realtors. Formerly, he
was a Director of Main Federal, Freedom
Federal and Buckeye Federal Savings &
Loan.
CLASS I DIRECTORS SERVING UNTIL THE 1999 ANNUAL MEETING
Has Served as Principal Occupation
Name Age Director Since and Business Experience
- ------------ -------- ---------------- ---------------------------------------
Robert V. 49 1992 President of RVG Management &
Gothier, Sr. Development Company, a manager and
developer of residential and commercial
properties, since 1976 and general
partner of Rostan Associates, a real
estate holding company associated with
RVG Management and Development Company,
since 1986. Mr. Gothier also is a member
of the Harrisburg Board of Realtors and
the legislative board of the
Pennsylvania Manufactured Home
Association.
H. Jeffrey 42 1992 Partner in the law firm of Benesch,
Schwartz Friedlander, Coplan & Aronoff LLP
("BFCA") since 1988 and Chairman of the
firm's Bankruptcy and Commercial
Department. Prior to joining BFCA, Mr.
Schwartz was a law clerk to the
Honorable William J. O'Neill, United
States Bankruptcy Court for the Northern
District of Ohio, from 1982 to 1983 and
to the Honorable Joseph T. Molitoris,
United States Bankruptcy Court for the
Northern District of Ohio from 1980 to
1982. Mr. Schwartz is a faculty member
of the Bankruptcy Litigation Institute,
has written numerous articles on
bankruptcy law and is the former
Chairman of the Section of Bankruptcy
and Commercial Law of the Cleveland Bar
Association.
34
35
Has Served as Principal Occupation
Name Age Director Since and Business Experience
- ------------ -------- ---------------- ---------------------------------------
Gerald K. 60 1992 President of Craig Capital Co., a
Wedren Washington, D.C.-based merger and
acquisition firm, since 1973. Mr. Wedren
has been Managing Partner of Tavern Real
Estate Limited Partnership and Wedren
Associates, which own and lease
properties in the Washington and
Baltimore area, since 1988. Mr. Wedren
was President of G.E.W., Inc., an owner
of fast food restaurants, from 1981 to
1988; was of counsel with the Columbus
law firm of Brownfield, Bowen, Bally &
Sturtz from 1973 to 1981; and was Acting
Director of the Department of Commerce
and Commissioner of Securities for the
State of Ohio in 1971 and 1972. He is a
Director of Marwed Corporation and
Tavern Realty Co.
(b) EXECUTIVE OFFICERS
In addition to John B. Bartling, Jr., Chief Executive Officer and President
and a director of the Company, listed below are the executive officers of the
Company as of March 28, 1997. Each executive officer will serve until his or her
successor is selected by the Board or until his or her earlier resignation or
removal. There are no family relationships among these officers.
Principal Occupation During the
Name Age Past Five or More Years
- ----------------------- ---------- ------------------------------------------
Mark D. Thompson 39 Chief Financial Officer and Executive
Vice President of the Company since
October 31, 1996. Prior to that time,
Mr. Thompson was Executive Vice
President of Corporate Acquisitions of
the Company since April 1, 1996. Mr.
Thompson was a partner in the law firm
of McDonald, Hopkins, Burke & Haber from
January 1995 to such time. Prior to that
time, Mr. Thompson was an associate and
partner in the law firm of Benesch,
Friedlander, Coplan & Aronoff LLP from
January 1985 and October 1992,
respectively.
Patrick M. Holder 49 Executive Vice President of the Company
since December 20, 1996 and President of
Lexford Properties, Inc., a wholly owned
subsidiary of the Company, since August
1, 1996. Mr. Holder was President of
Lexford Partners, a property management
firm, from 1988 to July 31, 1996. Mr.
Holder previously served as President of
Brentwood Properties from 1987 to 1988.
Paul R. Selid 34 Senior Vice President of the Company
since April 15, 1996. Prior to that
time, Mr. Selid was Vice President of
Acquisitions of NHP, Inc. since December
1994. Mr. Selid also served as Vice
President of Asset Management &
Underwriting of NHP, Inc. from September
1992 to December 1994. Mr. Selid
previously served as Vice President of
Finance of Hall Financial Group, Inc.
from January 1990 to September 1992.
35
36
Principal Occupation During the
Name Age Past Five or More Years
- ----------------------- ---------- ------------------------------------------
Michele R. Souder 35 Vice President of the Company since
January 16, 1996 and Chief Financial
Officer of Lexford Properties, Inc., a
wholly owned subsidiary of the Company,
since November 1, 1996. Prior to that
time, Ms. Souder was Director of Audit
of the Company since August 1993. From
October 1992 to August 1993, she served
as an Associate in the Turnaround and
Crisis Management division of Jay Alix &
Associates, a management consulting
firm. She previously served in various
positions as Portfolio Analyst, Product
Manager and Manager of Asset Management
of the Company, from July 1987 to
October 1992.
Ronald P. Koegler 44 Vice President and Controller of the
Company since December 20, 1996. Mr.
Koegler served as Vice President and
Treasurer of the Company from January
16, 1996 to December 20, 1996. Prior to
that time, Mr. Koegler was Controller of
the Company since April 1992. He served
as Assistant Controller of the Company
from October 1989 to April 1992. Mr.
Koegler holds a B.S.B.A. degree in
accounting from The Ohio State
University, where he graduated Summa Cum
Laude.
Michael F. Sosh 35 Vice President and Treasurer of the
Company since January 9, 1997. Prior to
that time, Mr. Sosh served as Divisional
Vice President and Assistant Treasurer
of The Bon-Ton Stores, Inc. since March
1995. He previously served as Manager of
Financial Planning and Financial Analyst
of The Bon- Ton Stores, Inc. from 1987
to 1995. Mr. Sosh was a banking officer
with Meridian Bancorp, Inc. from 1983 to
1987.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of the Company's Common Stock, to
file initial statements of beneficial ownership (Form 3), and statements of
changes in beneficial ownership (Forms 4 or 5) of Common Stock of the Company
with the Securities and Exchange Commission (the "SEC"). Officers, directors and
greater than 10% shareholders are required by SEC regulation to furnish the
Company with copies of all such forms they file.
To the Company's knowledge, based on its review of the copies of such forms
received by it, or written representations from certain reporting persons that
no additional forms were required for those persons, the Company believes that
during the previous fiscal year, all filing requirements applicable to its
officers, directors, and greater than 10% beneficial owners were complied with.
(c) CERTAIN SIGNIFICANT EMPLOYEES
In addition to the executive officers named above, listed below are certain
officers of the Company and its wholly owned subsidiary, Lexford Properties,
Inc., as of March 28, 1997. Each officer will serve until his or her successor
is selected by the Board or until his or her earlier resignation or removal.
There are no family relationships among these officers.
36
37
Principal Occupation During the
Name Age Past Five or More Years
- ----------------------- ---------- ------------------------------------------
Annette Hoover 68 Vice President of Lexford Properties,
Inc., a wholly owned subsidiary of the
Company, since August 1, 1996. From 1988
to August 1996, Ms. Hoover was Vice
President of Lexford Partners, a
property management firm.
Bruce P. Woodward 45 Vice President of Lexford Properties,
Inc., a wholly owned subsidiary of the
Company, since August 1, 1996. From 1988
to August 1996, Mr. Woodward was Vice
President of Lexford Partners, a
property management firm.
James D. Alexander 47 Vice President of Lexford Properties,
Inc., a wholly owned subsidiary of the
Company, since August 1, 1996. From
February 1992 to August 1996, Mr.
Alexander was Vice President of Lexford
Partners, a property management firm.
From May 1988 to February 1992, Mr.
Alexander served as Executive Vice
President and Director of Portfolio
Management at Southwest Savings Bank,
where he handled asset management and
marketing services for the bank's $3
billion real estate portfolio.
Peggy C. Smith 45 Vice President of the Company since
December 20, 1996 and Vice President of
Lexford Properties, Inc., a wholly owned
subsidiary of the Company, since August
1, 1996. From 1988 to August 1996, Ms.
Smith was Vice President of Lexford
Partners, a property management firm.
Thomas Trubiana 45 Vice President of Lexford Properties,
Inc., a wholly owned subsidiary of the
Company, since August 1, 1996. Mr.
Trubiana served as Vice President of the
Company from 1988 to 1996. Prior to
joining the Company, Mr. Trubiana was
Regional Manager and Director of
Development with Allen & O'Hara, Inc., a
real estate development and management
firm, from 1982 to 1987.
Dain C. Akin 44 Vice President and Acting General
Counsel of the Company since March 18,
1996. From February 1992 to March 1996,
Mr. Akin served as Director of Tax of
the Company.
Jeffrey D. Meyer 31 Secretary and Associate General Counsel
of the Company since February 26, 1996.
Mr. Meyer was an associate in the law
firm of Benesch, Friedlander, Coplan and
Aronoff LLP from May 1992 to February
1996.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
(a) SUMMARY COMPENSATION TABLE
The following table sets forth the compensation earned by the Company's
Chief Executive Officer during 1996 and the other four most highly compensated
executive officers (and two additional individuals for whom disclosure would
have been provided but for the fact such individuals were not serving as
executive officers at the end of the last completed fiscal year) for services
rendered in all capacities to the Company during 1996 as well as 1995 and 1994,
where applicable.
37
38
- ------------------------------------------------------------------------------------------------------------------------------------
| | | | Long-Term Compensation | |
| | | Annual Compensation | Awards | |
| | | ------------------------------------------------------------------| |
| | | | | Other | | Securities| |
| | | | | Annual | Restricted | Under- | |
| | | | | Compen- | Stock | Lying | LTIP | All Other
|Name and | | Salary | Bonus(es) | sation | Award(s) | Options | Payouts |Compensation
|Principal Position | Year | ($) | ($) | ($) | ($) | (#) | ($) | ($)
- -----------------------------------------------------------------------------------------------------------------------------------
John B. Bartling, Jr. 1996 $285,000 $171,000(1) $503,800(2) $402,188(3) 20,000(4) -- $7,371(5)
Chief Executive Officer and 1995 $23,750(6) -- $13,250(7) -- -- -- --
President 1994 -- -- -- -- -- -- --
Mark D. Thompson 1996 $127,885(8) $157,491(9) $216,635(10) $136,875(11) 12,500(12) -- $934(13)
Chief Financial Officer and 1995 -- -- -- -- -- -- --
Executive Vice President 1994 -- -- -- -- -- -- --
Paul R. Selid 1996 $86,538(14) $112,500(15) $137,163(16) -- 12,500(17) -- $3,576(18)
Senior Vice President 1995 -- -- -- -- -- -- --
1994 -- -- -- -- -- -- --
Michele R. Souder 1996 $100,245 $45,110(19) -- -- 2,500(20) -- $2,600(21)
Vice President and Chief 1995 $77,476 $15,037(22) -- -- -- -- $2,140(21)
Financial Officer of Lexford 1994 $77,025 $7,500(23) -- $ 39,500(24) -- -- $1,949(21)
Properties, Inc.
Ronald P. Koegler 1996 $84,492 $38,250(19) -- -- 2,500(25) -- $6,218(26)
Vice President 1995 $75,194 $15,450(22) -- -- -- -- $5,603(26)
and Controller 1994 $71,655 $10,100(23) -- $23,250(27) -- -- $3,860(26)
David P. Blackmore 1996 $130,668(28) $84,012(29) -- -- -- -- $20,543(30)
Former Chief Financial Officer 1995 $116,730 $117,096(22) -- -- -- -- $3,197(31)
and Executive Vice President 1994 $107,214 $76,000(23) -- $29,868(32) -- -- $3,022(31)
Michael F. Carbone 1996 $205,905(33) $102,953(34) -- -- -- -- $578,138(35)
Former Chief Financial Officer 1995 $201,643 (36) $6,000(37) -- -- -- $7,314(38)
and Vice President 1994 $191,322 $155,500(23) $6,000(37) $6,288(39) -- -- $4,112(38)
- ------------------
<FN>
(1) This amount includes a cash bonus for 1996 paid in 1997 in the amount of
$27,862. This amount also includes an award of 6,940 shares of Common Stock
as a stock bonus for 1996 granted in 1997. The value of the stock bonus was
determined by multiplying the number of shares subject to this grant by the
closing price of the Common Stock at fiscal year-end, which was $20.625.
(2) This amount includes an award of 10,000 shares of restricted Common Stock
in 1997 pursuant to the terms of Mr. Bartling's Employment Agreement with
the Company, which states that Mr. Bartling will receive one share of
Common Stock for each share of Common Stock purchased by him, up to a
maximum of 10,000 shares. The value of 5,000 shares subject to this award
was determined by multiplying such shares by the closing price of the
Common Stock on June 10, 1996, the date of his matching purchase, which was
$19.875. In addition, pursuant to an amendment to Mr. Bartling's Employment
Agreement, Mr. Bartling elected to receive shares of Common Stock in lieu
of cash bonus compensation otherwise payable to him on account of the
Company's 1996 fiscal year. The shares of Common Stock were issued based on
a valuation of $20.625 per share, being the closing price of the Common
Stock on December 31, 1996. The shares issued to Mr. Bartling pursuant to
this election qualified as shares purchased for the grant of matching stock
and accordingly the value of these 5,000 shares of matching stock was
determined by multiplying such shares by the closing price of the Common
Stock on December 31, 1996, the date applicable to such qualified matching
purchase, which was $20.625. Mr. Bartling elected to contribute the shares
subject to each of the foregoing grants to the Cardinal Realty Services,
Inc. Executive Deferred Compensation Rabbi Trust. This amount also includes
(a) payments of $12,500 per month from January 1, 1996 to November 30, 1996
for Mr. Bartling's relocation and temporary living expenses, as well as a
payment of $154,800 to compensate Mr. Bartling for any taxes relating to
such monthly payments, and (b) a car allowance of $750 per month.
(3) Mr. Bartling received an award of 22,500 shares of restricted Common Stock
on April 5, 1996, one-third of which vest on the third, fourth and fifth
anniversaries of such date. The value of this award was determined by
multiplying the number of shares subject to this grant by the closing price
of the Common Stock on April 5, 1996, $17.875. The value of this award at
the end of the 1996 fiscal year was $464,063 based on the fiscal year-end
38
39
price of $20.625 per share. Mr. Bartling is entitled to receive dividends,
if paid, on this restricted Common Stock as and when such stock vests.
(4) Mr. Bartling received an option to purchase 20,000 shares of Common Stock
at $17.875 per share on April 5, 1996, one-fourth of which vest on the
second, third, fourth and fifth anniversaries of the date of grant.
(5) Includes the Company's payment of a premium in the amount of $1,190 for a
term life insurance policy with a death benefit of $2,000,000 and the
Company's portion of the cost of group term life insurance, health
insurance and disability insurance paid on behalf of Mr. Bartling in the
aggregate amount of $6,181.
(6) Salary for the period from December 1, 1995, when Mr. Bartling commenced
his employment with the Company, to December 31, 1995.
(7) Includes a payment of $12,500, which sum was required to be paid monthly
from December 1, 1995 to November 30, 1996 for Mr. Bartling's relocation
and temporary living expenses, and (b) a car allowance of $750 for the
month of December, 1995.
(8) Salary for the period from April 1, 1996, when Mr. Thompson commenced his
employment with the Company, to December 31, 1996.
(9) This amount includes a cash bonus for 1996 paid in 1997 in the amount of
$27,203. This amount also includes an award of 6,317 shares of Common Stock
as a stock bonus for 1996 granted in 1997. The value of the stock bonus was
determined by multiplying the number of shares subject to this grant by the
closing price of the Common Stock at fiscal year-end, which was $20.625.
(10) Includes an award of 5,000 shares of Common Stock in 1997 pursuant to the
terms of Mr. Thompson's Employment Agreement with the Company, which states
that Mr. Thompson will receive one share of Common Stock for each share of
Common Stock purchased by him, up to a maximum of 5,000 shares. The value
of 2,500 shares subject to this award was determined by multiplying such
shares by the closing price of the Common Stock on June 10, 1996, the date
of his matching purchase, which was $19.875. In addition, pursuant to an
amendment to Mr. Thompson's Employment Agreement, Mr. Thompson elected to
receive shares of Common Stock in lieu of cash bonus compensation otherwise
payable to him on account of the Company's 1996 fiscal year. The shares of
Common Stock were issued based on a valuation of $20.625 per share, being
the closing price of the Common Stock on December 31, 1996. The shares
issued to Mr. Thompson pursuant to this election qualified as shares
purchased for the grant of matching stock and accordingly the value of
these 2,500 shares of matching stock was determined by multiplying such
shares by the closing price of the Common Stock on December 31, 1996, the
date applicable to such qualified matching purchase, which was $20.625. Mr.
Thompson elected to contribute the shares subject to each of the foregoing
grants to the Cardinal Realty Services, Inc. Executive Deferred
Compensation Rabbi Trust. This amount also includes a relocation bonus of
$60,000 paid in 1997 for moving his principal residence to Columbus, Ohio,
as well as payment of $55,385 to compensate Mr. Thompson for any taxes
relating to such relocation bonus.
(11) Mr. Thompson received an award of 7,500 shares of restricted Common Stock
on April 15, 1996, one-third of which vests on the third, fourth and fifth
anniversaries of such date. The value of this award was determined by
multiplying the number of shares subject to this grant by the closing price
of the Common Stock on April 15, 1996, $18.25. The value of this award at
the end of the 1996 fiscal year was $154,688 based on the fiscal year-end
price of $20.625 per share. Mr. Thompson is entitled to receive dividends,
if paid, on the Common Stock as and when such stock vests.
(12) Mr. Thompson received an option to purchase 12,500 shares of Common Stock
at $17.625 per share on April 1, 1996, one-fifth of which vest on the
first, second, third, fourth and fifth anniversaries of the date of grant.
(13) Includes the Company's portion of the cost of group term life insurance and
disability insurance paid on behalf of Mr. Thompson in the aggregate amount
of $934.
(14) Salary for the period from April 15, 1996, when Mr. Selid commenced his
employment with the Company, to December 31, 1996.
(15) This amount includes a cash bonus for 1996 paid in 1997 in the amount of
$27,484. This amount also includes an award of 4,122 shares of Common Stock
as a stock bonus for 1996 granted in 1997. The value of the stock bonus was
determined by multiplying the number of shares subject to this grant by the
closing price of the Common Stock at fiscal year-end, which was $20.625.
39
40
(16) This amount includes an award of 2,500 shares of Common Stock in 1997
pursuant to the terms of Mr. Selid's Employment Agreement with the Company,
which states that Mr. Selid will receive one share of Common Stock for each
share of Common Stock purchased by him, up to a maximum of 2,500 shares.
The value of 1,250 shares subject to this award was determined by
multiplying such shares by the closing price of the Common Stock on June
10, 1996, the date of his matching purchase, which was $19.875. In
addition, pursuant to an amendment to Mr. Selid's Employment Agreement, Mr.
Selid elected to receive shares of Common Stock in lieu of cash bonus
compensation otherwise payable to him on account of the Company's 1996
fiscal year. The shares of Common Stock were issued based on a valuation of
$20.625 per share, being the closing price of the Common Stock on December
31, 1996. The shares issued to Mr. Selid pursuant to this election
qualified as shares purchased for the grant of matching stock and
accordingly the value of these 1,250 shares of matching stock was
determined by multiplying such shares by the closing price of the Common
Stock on December 31, 1996, the date applicable to such qualified matching
purchase, which was $20.625. Mr. Selid elected to contribute the shares
subject to each of the foregoing grants to the Cardinal Realty Services,
Inc. Executive Deferred Compensation Rabbi Trust. This amount also includes
payments aggregating $45,000 pursuant to the terms of Mr. Selid's
Employment Agreement, all of which sums were paid to Mr. Selid during 1996
for Mr. Selid's relocation and temporary living expenses, as well as a
payment of $41,538 to compensate Mr. Selid for income taxes relating to
such payments.
(17) Mr. Selid received an option to purchase 12,500 shares of Common Stock at
$18.25 per share on April 15, 1996, one-fifth of which vest on the first,
second, third, fourth and fifth anniversaries of the date of grant.
(18) Includes the Company's portion of the cost of group term life insurance,
health insurance and disability insurance paid on behalf of Mr. Selid in
the aggregate amount of $3,576.
(19) Cash bonus for 1996 paid in 1997.
(20) Ms. Souder received an option to purchase 2,500 shares of Common Stock at
$19.25 per share on June 27, 1996, one-third of which vest on the first,
second and third anniversaries of the date of grant.
(21) Includes the Company's portion of the cost of group term life insurance,
health insurance and disability insurance paid on behalf of Ms. Souder.
(22) Cash bonus for 1995 paid in 1996.
(23) Cash bonus for 1994 paid in 1995.
(24) Ms. Souder received an award of 3,000 shares of restricted Common Stock on
February 24, 1994, one-third of which vested on the first, second and third
anniversaries of such date. The value of this award was determined by
multiplying the number of shares subject to this grant by $8.00 being the
bid price of the Common Stock in the Over The Counter market on February
24, 1994. Ms. Souder also received an award of 1,000 shares of restricted
Common Stock on October 11, 1994, one-third of which vested on the first,
second and third anniversaries of such date. The value of this award was
determined by multiplying the number of shares subject to this grant by
$15.50 being the bid price of the Common Stock in the Over The Counter
market on October 11, 1994.
(25) Mr. Koegler received an option to purchase 2,500 shares of Common Stock at
$19.25 per share on June 27, 1996, one-third of which vest on the first,
second and third anniversaries of the date of grant.
(26) Includes the Company's portion of the cost of group term life insurance,
health insurance and disability insurance paid on behalf of Mr. Koegler.
(27) Mr. Koegler received an award of 1,500 shares of restricted Common Stock on
October 11, 1994, one-third of which vested on the first, second and third
anniversaries of such date. The value of this award was determined by
multiplying the number of shares subject to this grant by $15.50 being the
bid price of the Common Stock in the Over The Counter market on October 11,
1994.
(28) Salary for the period from January 1, 1995 to October 31, 1996, the
effective date of Mr. Blackmore's resignation.
(29) This amount includes a cash bonus for 1996 paid in 1997 in the amount of
$37,338. This amount also includes an award of 2,263 shares of Common Stock
as a stock bonus for 1996 granted in 1997. The value of the stock bonus was
40
41
determined by multiplying the number of shares subject to this grant by the
closing price of the Common Stock at fiscal year-end, which was $20.625.
(30) Includes the Company's portion of the cost of group term life insurance,
health insurance and disability insurance paid on behalf of Mr. Blackmore
and the Company's matching contribution, in the form of the Company's
Common Stock, made pursuant to Mr. Blackmore's contribution in the
Company's 401(k) Savings Plan in the aggregate amount of $3,238. This
amount also includes $17,305 paid to Mr. Blackmore in 1996 pursuant to the
terms of Mr. Blackmore's Severance Agreement and Mutual Release and
Consulting Agreement with the Company (See "Termination of Employment of
Certain Executive Officers").
(31) Includes the Company's portion of the cost of group term life insurance,
health insurance and disability insurance paid on behalf of Mr. Blackmore
and the Company's matching contribution, in the form of the Company's
Common Stock, made pursuant to Mr. Blackmore's contribution in the
Company's 401(k) Savings Plan.
(32) Mr. Blackmore received an award of deferred Common Stock equal to 0.19% of
the Company's Total Committed Equity. The value of the award was estimated
based on (a) a projection as to the number of shares of Common Stock that
management believed would be issued pursuant to the Plan of Reorganization
and (b) a per share valuation of the Common Stock based on the estimated
value of the Common Stock of $3.93 per share, the value upon which issuance
of the Deferred Stock was contingent at the date of grant. Mr. Blackmore
received approximately 7,600 shares of Deferred Stock. Mr. Blackmore is
fully vested in the Deferred Stock. In the event the Company were to
declare a dividend on its Common Stock, the dividend would be paid on the
Deferred Stock awarded to Mr. Blackmore.
(33) See "Termination of Employment of Certain Executive Officers".
(34) Cash bonus for 1996 paid in 1997. See "Termination of Employment of Certain
Executive Officers".
(35) Includes the Company's portion of the cost of group term life insurance,
health insurance and disability insurance paid on behalf of Mr. Carbone.
This amount also includes severance payments of $427,953 and consulting
fees of $150,000 (See "Termination of Employment of Certain Executive
Officers").
(36) See "Termination of Employment of Certain Executive Officers".
(37) Includes car allowance of $500 per month.
(38) Includes the Company's portion of the cost of group term life insurance,
health insurance and disability insurance. Also includes the Company's
matching contribution, in the form of the Company's Common Stock, made
pursuant to Mr. Carbone's participation in the Company's 401(k) Savings
Plan.
(39) Mr. Carbone received an award of deferred Common Stock equal to 0.04% of
the Company's Total Committed Equity. The value of the award was estimated
based on (a) a projection as to the number of shares of Common Stock that
management believed would be issued pursuant to the Plan of Reorganization
and (b) a per share valuation of the Common Stock based on the estimated
value of the Common Stock of $3.93 per share, the value upon which issuance
of the Deferred Stock was contingent at the date of grant. Mr. Carbone
received approximately 1,600 shares of Deferred Stock. Mr. Carbone is fully
vested in the Deferred Stock. In the event the Company were to declare a
dividend on its Common Stock, the dividend would be paid on the Deferred
Stock awarded to Mr. Carbone.
</FN>
41
42
(b) STOCK OPTIONS GRANTS TABLE
The following table sets forth the information noted for all grants
of stock options to each of the executive officers named in the Summary
Compensation Table during 1996:
- ------------------------------------------------------------------------------------------------------------------------
| | | Potential Realizable |
| | | Value at Assumed Annual |
| | | Rates of Stock Price |
| | Individual Grants | Appreciation For Option Term|
|----------------------------------------------------------------------------------------------------------------------|
| | Number of | | | | | |
| | Securities |Percent of Total | | | | |
| | underlying | Options Granted | Exercise of | | | |
| | Options | to Employees in | Base Price |Expiration| | |
| Name | Granted (#) | Fiscal Year | ($/Sh) | Date | 5% ($) | 10% ($) |
|----------------------------------------------------------------------------------------------------------------------|
John B. Bartling, Jr.,
Chief Executive Officer 20,000(1) 33% $17.875 4/5/06 $224,830 $569,763
and President............
Mark D. Thompson, Chief
Financial Officer and 12,500(2) 21% $17.625 4/1/06 $138,553 $351,121
Executive Vice President.
Paul R. Selid, 12,500(3) 21% $18.25 4/15/06 $143,467 $363,572
Senior Vice President....
Michele R. Souder, 2,500(4) 4% $19.25 6/27/06 $30,266 $76,699
Vice President...........
Ronald P. Koegler,
Vice President and 2,500(5) 4% $19.25 6/27/06 $30,266 $76,699
Controller...............
David P. Blackmore,
Former Chief Financial
Officer and Executive -- -- -- -- -- --
Vice President...........
Michael F. Carbone,
Former Chief Financial
Officer and Vice -- -- -- -- -- --
President................
- ------------------
<FN>
(1) Mr. Bartling received an option to purchase 20,000 shares of Common Stock
with an exercise price of $17.875 per share on April 5, 1996, one-fourth of
which vest on the second, third, fourth and fifth anniversaries of the date
of grant.
(2) Mr. Thompson received an option to purchase 12,500 shares of Common Stock
with an exercise price of $17.625 per share on April 1, 1996, one-fifth of
which vest on the first, second, third, fourth and fifth anniversaries of
the date of grant.
(3) Mr. Selid received an option to purchase 12,500 shares of Common Stock with
an exercise price of $18.25 per share on April 15, 1996, one-fifth of which
vest on the first, second, third, fourth and fifth anniversaries of the
date of grant.
(4) Ms. Souder received an option to purchase 2,500 shares of Common Stock with
an exercise price of $19.25 per share on June 27, 1996, one-third of which
vest on the first, second and third anniversaries of the date of grant.
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(5) Mr. Koegler received an option to purchase 2,500 shares of Common Stock
with an exercise price of $19.25 per share on June 27, 1996, one-third of
which vest on the first, second and third anniversaries of the date of
grant.
</FN>
(c) STOCK OPTIONS VALUE TABLE
The following table sets forth the fiscal year-end value of unexercised
stock options for each of the executive officers named in the Summary
Compensation Table for the 1996 fiscal year.
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END
SHARES VALUE (#) ($)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE (1)
- -------------------------------------- ---------------- ---------------- ---------------------------- ---------------------------
John B. Bartling, Jr., Chief 0 Exercisable/ N/A Exercisable/
Executive Officer and President...... 0 0 20,000 Unexercisable(1) $55,000 Unexercisable(2)
Mark D. Thompson, Chief Financial 0 Exercisable/ N/A Exercisable/
Officer and Executive Vice President.. 0 0 12,500 Unexercisable(3) $37,500 Unexercisable(4)
Paul R. Selid, 0 Exercisable/ N/A Exercisable/
Senior Vice President................. 0 0 12,500 Unexercisable(5) $29,688 Unexercisable(6)
Michele R. Souder 0 Exercisable/ N/A Exercisable/
Vice President........................ 0 0 2,500 Unexercisable(7) $3,438 Unexercisable(8)
Ronald P. Koegler 0 Exercisable/ N/A Exercisable/
Vice President and Controller......... 0 0 2,500 Unexercisable(9) $3,438 Unexercisable(10)
David P. Blackmore, Former Chief
Financial Officer and Executive Vice
President............................. 4,378 $78,804(11) N/A N/A
Michael F. Carbone, Former Chief
Financial Officer..................... 0 0 N/A N/A
- ------------------
<FN>
(1) Mr. Bartling received an option to purchase 20,000 shares of Common Stock
with an exercise price of $17.875 per share on April 5, 1996, one-fourth of
which vest on the second, third, fourth and fifth anniversaries of the date
of grant.
(2) The value of the stock option was calculated by multiplying the number of
underlying securities by the difference between (a) $20.625 per share being
the closing price of the Common Stock at fiscal year-end on the Nasdaq
National Market tier of the Nasdaq Stock Market, and (b) the exercise price
of the option, $17.875 per share.
(3) Mr. Thompson received an option to purchase 12,500 shares of Common Stock
with an exercise price of $17.625 per share on April 1, 1996, one-fifth of
which vest on the first, second, third, fourth and fifth anniversaries of
the date of grant.
(4) The value of the stock option was calculated by multiplying the number of
underlying securities by the difference between (a) $20.625 per share being
the closing price of the Common Stock at fiscal year-end on the Nasdaq
National Market tier of the Nasdaq Stock Market, and (b) the exercise price
of the options, $17.625 per share.
(5) Mr. Selid received an option to purchase 12,500 shares of Common Stock with
an exercise price of $18.25 per share on April 15, 1996, one-fifth of which
vest on the first, second, third, fourth and fifth anniversaries of the
date of grant.
(6) The value of the stock option was calculated by multiplying the number of
underlying securities by the difference between (a) $20.625 per share being
the closing price of the Common Stock at fiscal year-end on the Nasdaq
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National Market tier of the Nasdaq Stock Market, and (b) the exercise price
of the options, $18.25 per share.
(7) Ms. Souder received an option to purchase 2,500 shares of Common Stock with
an exercise price of $19.25 per share on June 27, 1996, one-third of which
vest on the first, second and third anniversaries of the date of grant.
(8) The value of the stock option was calculated by multiplying the number of
underlying securities by the difference between (a) $20.625 per share being
the closing price of the Common Stock at fiscal year-end on the Nasdaq
National Market tier of the Nasdaq Stock Market, and (b) the exercise price
of the option, $19.25 per share.
(9) Mr. Koegler received an option to purchase 2,500 shares of Common Stock
with an exercise price of $19.25 per share on June 27, 1996, one-third of
which vest on the first, second and third anniversaries of the date of
grant.
(10) The value of the stock option was calculated by multiplying the number of
underlying securities by the difference between (a) $20.625 per share being
the closing price of the Common Stock at fiscal year-end on the Nasdaq
National Market tier of the Nasdaq Stock Market, and (b) the exercise price
of the option, $19.25 per share.
(11) On September 11, 1992, Mr. Blackmore was granted a stock option to purchase
4,378 shares of Common Stock with an exercise price of $1.42 per share. On
October 23, 1996, Mr. Blackmore exercised his option to purchase such
shares. The value of this exercise was determined by multiplying the number
of shares subject to this stock option by $19.88, being the closing price
of the Common Stock on October 23, 1996.
</FN>
(d) LONG-TERM INCENTIVE PLANS TABLE
The following table sets forth the information noted for all long-term
incentive plans awards granted to each of the executive officers named in the
Summary Compensation Table during 1996:
- -----------------------------------------------------------------------------------------------------------------------------------
| | Perform- |
| | ance or Other | Estimated Future Payouts Under Non-Stock Price-Based Plans
| Number of | Period Until |--------------------------------------------------------------
| Shares | Maturation | Threshold | Target | Maximum
Name | (#) | Payout | ($ or #) | ($ or #) | ($ or #)
- -----------------------------------------------------------------------------------------------------------------------------------
John B. Bartling, Jr., Chief 20,000(1) (1) 0 shares (1) 20,000 shares (1) 20,000 shares (1)
Executive Officer and President.
Mark D. Thompson, Chief
Financial Officer and Executive 9,000(2) (2) 0 shares (2) 9,000 shares (2) 9,000 shares (2)
Vice President..................
Paul R. Selid, 9,000(2) (2) 0 shares (2) 9,000 shares (2) 9,000 shares (2)
Senior Vice President...........
Michele R. Souder -- N/A N/A N/A N/A
Vice President..................
Ronald P. Koegler -- N/A N/A N/A N/A
Vice President and Controller...
David P. Blackmore
Former Chief Financial Officer -- N/A N/A N/A N/A
and Executive Vice President ...
Michael F. Carbone
Former Chief Financial Officer -- N/A N/A N/A N/A
and Vice President ............
- ------------------
<FN>
(1) Mr. Bartling received an award of the right to receive 20,000 deferred
shares of Common Stock on April 5, 1996, providing that so long as Mr.
Bartling remains in the employ of the Company, one-third of such shares
will be earned and will be issued when the average number of issued and
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outstanding shares of Common Stock over ten consecutive trading days
multiplied by the average closing price of the Common Stock on the Nasdaq
National Market tier of the Nasdaq Stock Market over such period (or if the
Common Stock is not listed or admitted to trading on such exchange, the
principal securities exchange on which the Common Stock is listed or
admitted to trading) plus the liquidation value of all issued and
outstanding preferred stock of the Company ("Market Capitalization"),
exceeds $90 million, one-third of which shall vest when the Market
Capitalization exceeds $120 million, and the final one-third of which shall
vest when the Market Capitalization exceeds $150 million. The terms of the
deferred shares provide for acceleration upon a change of control of the
Company or the termination of Mr. Bartling's employment other than for
cause. The shares, if earned, will be contributed to the Cardinal Realty
Services, Inc. Executive Deferred Compensation Rabbi Trust.
(2) Mr. Thompson and Mr. Selid each received an award of the right to receive
9,000 deferred shares of Common Stock on April 15, 1996, providing that so
long as Mr. Thompson and Mr. Selid remain in the employ of the Company
one-third of such shares will be earned and will be issued when the average
number of issued and outstanding shares of Common Stock over 90 consecutive
trading days multiplied by the average closing price of the Common Stock on
the Nasdaq National Market tier of the Nasdaq Stock Market over such
period (or if the Common Stock is not listed or admitted to trading on such
exchange, the principal securities exchange on which the Common Stock is
listed or admitted to trading) plus the liquidation value of all issued and
outstanding preferred stock of the Company ("Market Capitalization"),
exceeds $90 million, one-third of which shall vest when the Market
Capitalization exceeds $120 million, and the final one- third of which
shall vest when the Market Capitalization exceeds $150 million. The terms
of the deferred shares provide for acceleration upon a change of control of
the Company or the termination of Mr. Thompson's and Mr. Selid's employment
other than for cause. The shares, if earned, will be contributed to the
Cardinal Realty Services, Inc. Executive Deferred Compensation Rabbi Trust
</FN>
(e) DIRECTOR COMPENSATION
Each director of the Company who is not an employee of the Company is paid
an annual retainer fee of $15,000, plus (a) meeting fees of $1,000 for
attendance at each meeting of the Board and (b) $750 for each committee meeting
that occurs on a date when the full Board does not meet. Pursuant to the
Company's 1992 Incentive Equity Plan, as amended (the "Incentive Equity Plan"),
each member of the Board who was not employed by the Company was granted, at the
commencement of the director's term, a stock option to purchase shares of the
Company's Common Stock representing 0.1875% of the Company's "Total Committed
Equity", subject to certain vesting requirements (all of which have been
satisfied), which was subsequently calculated to be an option to purchase 7,500
shares of the Company's Common Stock for each director. The foregoing stock
options expire on September 19, 2002. "Total Committed Equity" is defined in the
Incentive Equity Plan as the total number of shares of the Company's Common
Stock (a) issued upon the allowance of claims (as defined in Section 101(5) of
the Bankruptcy Code) pursuant to the Third Amended Plan of Reorganization of the
Company and its substantively consolidated subsidiaries (the "Plan of
Reorganization") that was confirmed by the United States Bankruptcy Court for
the Southern District of Ohio, Eastern Division (the "Bankruptcy Court") on
August 26, 1992 and became effective on September 11, 1992 (the "Effective
Date") and (b) issued or reserved for issuance under the Incentive Equity Plan
as of September 11, 1992. In addition, each director was granted on November 30,
1995 and May 23, 1996, and will be granted annually on the day after the
Company's Annual Meeting of Shareholders, so long as each director remains a
director of the Company, an option to purchase 2,000 shares of the Company's
Common Stock with an exercise price equal to the fair market value on the date
of the grant a ten year term from date of grant and a vesting period of the
lesser of one year or the period from the date of the grant to the next annual
meeting of shareholders.
At the Company's annual shareholders meeting held on May 22, 1996, the
shareholders approved the Company's Non-Employee Director Restricted Stock Plan
(the "Directors Restricted Stock Plan"). Under the terms of the Directors
Restricted Stock Plan, each non-employee director of the Company may elect to
receive shares of the Company's Common Stock in lieu of cash directors fees
otherwise payable to him. The Company has reserved 50,000 shares for issuance
under the Directors Restricted Stock Plan and is also authorized to purchase
shares of the Company's Common Stock on the open market or in private
transactions in order to provide for the payment of shares of Common Stock to
non-employee directors under the Directors Restricted Stock Plan. Each
non-employee director who participates in the Directors Restricted Stock Plan
receives shares of restricted Common Stock in lieu of cash compensation with the
shares paid to such director being valued at a 20% discount from their fair
45
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market value on the date of payment. Shares of restricted Common Stock issued or
paid to directors under the Directors Restricted Stock Plan have a restriction
period of 3 years. The director may not sell, exchange, transfer, pledge,
hypothecate, assign or otherwise dispose of the shares during the restriction
period, except by bequest pursuant to a will or by intestacy. All restrictions
will lapse and the holder of the restricted Common Stock will be entitled to
receipt of the shares following the earliest of (a) 3 years from the date of the
issuance or payment of the restricted Common Stock to the holder; (b) the date
of the holder's death or disability; (c) the date the holder, after being
nominated by the Board, is not elected by the shareholders in an election for
the Board; or (d) the date on which the Board determines that the holder will
not be nominated for election to the Board. Shares of the restricted Common
Stock will be forfeited to the Company in the event that, during the restriction
period, the holder (a) resigns (other than by reason of disability) or is
dismissed for cause from the Board during his elected term as a director; (b)
declines to stand for an election to the Board after having been nominated by
the Board; or (c) sells, exchanges, transfers, pledges, hypothecates, assigns or
otherwise attempts to dispose of shares of restricted Common Stock except by
bequest pursuant to a will or intestacy. As of the end of the Company's 1996
fiscal year, each non- employee director had elected to participate in the
Directors Restricted Stock Plan by electing to receive shares of restricted
Common Stock in lieu of a percentage of directors fees otherwise payable in
cash, such elective percentages ranging from 25% to 100% of directors fees.
(f) EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT
John B. Bartling, Jr. Employment Agreement
------------------------------------------
The Company and Mr. Bartling entered into an employment agreement, dated as
of December 1, 1995 (the "Bartling Employment Agreement") for an original term
through December 31, 1998 and an annual base salary of $285,000 ("Bartling's
Base Salary"), plus an annual cash bonus of 2% of Bartling's Base Salary for
each 1% increase in the Company's recurring earnings before interest (other than
interest paid on mortgage loans secured by the Company's Wholly Owned
Properties), taxes, depreciation and amortization determined in accordance with
generally accepted accounting principles without regard to extraordinary gains
or losses ("Adjusted EBITDA") from the previous fiscal year's Adjusted EBITDA,
limited to 60% of Bartling's Base Salary.
Under the terms of the Bartling Employment Agreement, the Company granted
Mr. Bartling (i) 22,500 shares of Restricted Stock (see footnote 3 of the
Summary Compensation Table), (ii) the right to receive up to 20,000 deferred
shares of Restricted Stock (see footnote 1 of the Long-Term Incentive Plans
Table), (iii) one share of the Company's Common Stock, at no additional cost to
him, for each share of the Company's Common Stock purchased by Mr. Bartling in
1996 up to a maximum of 10,000 shares (the "Bartling Matching Shares"), and (iv)
options to purchase 20,000 shares of the Company's Common Stock (see footnote 1
of the Stock Options Grants Table).
The Bartling Employment Agreement was amended effective as of December 20,
1996 to provide that Mr. Bartling could elect to receive shares of the Company's
Common Stock in lieu of his cash bonus earned in 1996. Shares of Common Stock
made subject to such election would be valued at the December 31, 1996 closing
price for the Company's Common Stock. Such amendment further provided that any
such shares which Mr. Bartling might elect to receive in lieu of his cash bonus
earned for 1996 would qualify for the grant of the 5,000 Bartling Matching
Shares not yet awarded to Mr. Bartling as of such date. In March, 1997, Mr.
Bartling elected to receive 6,940 shares in lieu of a portion of his 1996 cash
bonus (see footnote 1 of the Summary Compensation Table). Accordingly, pursuant
to Mr. Bartling's election, Mr. Bartling was entitled to receive the balance of
the 5,000 Bartling Matching Shares not yet awarded to him as of such date.
Upon termination of Mr. Bartling's employment without cause, Mr. Bartling
would be entitled to receive: (i) any of Bartling's Base Salary, and any other
benefits due him under the Bartling Employment Agreement, payable for the
remaining period of the original term or any extension thereof; (ii) the cash
bonus, if any, applicable to the fiscal year in which such termination without
cause occurs; and (iii) all of the shares of Restricted Stock, all shares of
deferred Common Stock (whether or not any of the Market Capitalization targets
are then met) and stock options, fully vested, and otherwise free of any
forfeiture provisions or other restrictions imposed under the documents
evidencing such awards, except for any restrictions or limitations imposed by
applicable state and federal securities laws and regulations.
Furthermore, in the event the Company's Market Capitalization exceeds $150
million or there is a change in control of the Company, the vesting of all
Restricted Stock and stock options awarded to Mr. Bartling will be accelerated.
The Bartling Employment Agreement and related Award Agreements were amended
to permit Mr. Bartling to defer the receipt of all shares of the Company's
Common Stock which would otherwise be payable to him under the terms of the
46
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Bartling Employment Agreement and the related Award Agreements. Pursuant to
these amendments made in conjunction with the adoption of the Cardinal Realty
Services, Inc. Executive Deferred Compensation Plan, all such shares of Common
Stock have been or will be issued for the benefit of Mr. Bartling to The
Provident Bank as Trustee (the "Trustee") of the Cardinal Realty Services, Inc.
Executive Deferred Compensation Rabbi Trust.
The Bartling Employment Agreement has been further amended effective as of
January 1, 1997 to increase Mr. Bartling's base salary to $340,000; $298,750 of
which is payable in cash and the balance is payable in the form of 2,000 shares
of the Company's Common Stock (valued at $20.625 per share, being the closing
price of the Company's Common Stock on December 31, 1996) issuable to the
Trustee for Mr. Bartling's benefit.
Mark D. Thompson Employment Agreement
-------------------------------------
The Company and Mr. Thompson entered into an employment agreement, dated as
of April 1, 1996 (the "Thompson Employment Agreement") for an original term
through April 14, 1997 and an annual base salary of $175,000 ("Thompson's Base
Salary"), plus bonuses under the Company's Incentive Compensation Plan for its
1996 fiscal year, under which Mr. Thompson will receive a cash bonus of up to
60% of Thompson's Base Salary based on incremental increases in the Company's
Adjusted EBITDA from the previous fiscal year's Adjusted EBITDA.
Under the terms of the Thompson Employment Agreement and the Incentive
Equity Plan, the Company granted Mr. Thompson 7,500 shares of Restricted Stock
(see footnote 11 of the Summary Compensation Table), (ii) the right to receive
up to 9,000 deferred shares of Restricted Stock (see footnote 2 of the Long-Term
Incentive Plans Table), (iii) one share of the Company's Common Stock, at no
additional cost to him, for each share of the Company's Common Stock purchased
by Mr. Thompson in 1996 up to a maximum of 5,000 shares (the "Thompson Matching
Shares"), and (iv) options to purchase 12,500 shares of the Company's Common
Stock (see footnote 2 of the Stock Options Grants Table).
The Thompson Employment Agreement was amended effective as of December 20,
1996 to provide that Mr. Thompson could elect to receive shares of the Company's
Common Stock in lieu of his cash bonus earned in 1996. Shares of Common Stock
made subject to such election would be valued at the December 31, 1996 closing
price for the Company's Common Stock. Such amendment further provided that any
such shares which Mr. Thompson might elect to receive in lieu of his cash bonus
earned for 1996 would qualify for the grant of the 2,500 Thompson Matching
Shares not yet awarded to Mr. Thompson as of such date. In March, 1997, Mr.
Thompson elected to receive 3,772 shares in lieu of a portion of his 1996 cash
bonus (see footnote 8 of the Summary Compensation Table). Accordingly, pursuant
to Mr. Thompson's election, Mr. Thompson was entitled to receive the balance of
the 2,500 Thompson Matching Shares not yet awarded to him as of such date.
Upon termination of Mr. Thompson's employment without cause, Mr. Thompson
would be entitled to receive: (i) any of Thompson's Base Salary, and any other
benefits due him under the Thompson Employment Agreement, payable for the
remaining period of the original term, if any, plus the immediately succeeding
nine months; (ii) a prorated portion of the cash bonus, if any, applicable to
the fiscal year in which such termination without cause occurs; and (iii) all of
the shares of Restricted Stock (other than those shares of Restricted Stock
based on Market Capitalization which have not theretofore vested) and stock
options, fully vested, and otherwise free of any forfeiture provisions or other
restrictions imposed under the documents evidencing such awards, except for any
restrictions or limitations imposed by applicable state and federal securities
laws and regulations.
Furthermore, in the event the Company's Market Capitalization exceeds $150
million or there is a change in control of the Company, the vesting of all
Restricted Stock and stock options awarded to Mr. Thompson will be accelerated.
The Thompson Employment Agreement and related Award Agreements were amended
to permit Mr. Thompson to defer the receipt of all shares of the Company's
Common Stock which would otherwise be payable to him under the terms of the
Thompson Employment Agreement and the related Award Agreements. Pursuant to
these amendments made in conjunction with the adoption of the Cardinal Realty
Services, Inc. Executive Deferred Compensation Plan, all such shares of Common
Stock have been or will be issued for the benefit of Mr. Thompson to The
Provident Bank as Trustee (the "Trustee") of the Cardinal Realty Services, Inc.
Executive Deferred Compensation Rabbi Trust.
47
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The Thompson Employment Agreement has been further amended effective as of
January 1, 1997 to increase Mr. Thompson's base salary to $230,000, of which
$200,000 is payable in cash and the balance is payable in the form of 1,455
shares of the Company's Common Stock (valued at $20.625 per share, being the
closing price of the Company's Common Stock on December 31, 1996) issuable to
the Trustee for Mr. Thompson's benefit.
Paul R. Selid Employment Agreement
----------------------------------
The Company and Mr. Selid entered into an employment agreement, dated as of
April 15, 1996 (the "Selid Employment Agreement") for an original term through
April 14, 1997 and an annual base salary of $125,000 ("Selid's Base Salary"),
plus bonuses under the Company's Incentive Compensation Plan for its 1996 fiscal
year, under which Mr. Selid will receive a cash bonus of up to 60% of Selid's
Base Salary based on incremental increases in the Company's return on investment
percentage ("ROI") from the previous fiscal year's ROI.
Under the terms of the Selid Employment Agreement and the Incentive Equity
Plan, the Company granted Mr. Selid (i) the right to receive up to 9,000
deferred shares of Restricted Stock (see footnote 2 of the Long-Term Incentive
Plans Table), (ii) one share of the Company's Common Stock, at no additional
cost to him, for each share of the Company's Common Stock purchased by Mr. Selid
in 1996 up to a maximum of 2,500 shares (the "Selid Matching Shares"), and (iii)
options to purchase 12,500 shares of the Company's Common Stock (see footnote 3
of the Stock Options Grants Table).
The Selid Employment Agreement was amended effective as of December 20,
1996 to provide that Mr. Selid could elect to receive shares of the Company's
Common Stock in lieu of his cash bonus earned in 1996. Shares of Common Stock
made subject to such election would be valued at the December 31, 1996 closing
price for the Company's Common Stock. Such amendment further provided that any
such shares which Mr. Selid might elect to receive in lieu of his cash bonus
earned for 1996 would qualify for the grant of the 1,250 Selid Matching Shares
not yet awarded to Mr. Selid as of such date. In March, 1997, Mr. Selid elected
to receive 2,304 shares in lieu of a portion of his 1996 cash bonus (see
footnote 15 of the Summary Compensation Table). Accordingly, pursuant to Mr.
Selid's election, Mr. Selid was entitled to receive the balance of the 1,250
Selid Matching Shares not yet awarded to him as of such date.
Upon termination of Mr. Selid's employment without cause, Mr. Selid would
be entitled to receive: (i) any of Selid's Base Salary, and any other benefits
due him under the Selid Employment Agreement, payable for the remaining period
of the original term, if any, plus the immediately succeeding nine months; (ii)
a prorated portion of the cash bonus, if any, applicable to the fiscal year in
which such termination without cause occurs; and (iii) all of the stock options,
fully vested, and otherwise free of any forfeiture provisions or other
restrictions imposed under the documents evidencing such awards, except for any
restrictions or limitations imposed by applicable state and federal securities
laws and regulations.
Furthermore, in the event the Company's Market Capitalization exceeds $150
million or there is a change in control of the Company, the vesting of all
Restricted Stock and stock options awarded to Mr. Selid will be accelerated.
The Selid Employment Agreement and related Award Agreements were amended to
permit Mr. Selid to defer the receipt of all shares of the Company's Common
Stock which would otherwise be payable to him under the terms of the Selid
Employment Agreement and the related Award Agreements. Pursuant to these
amendments made in conjunction with the adoption of the Cardinal Realty
Services, Inc. Executive Deferred Compensation Plan, all such shares of Common
Stock have been or will be issued for the benefit of Mr. Selid to The Provident
Bank as Trustee of the Cardinal Realty Services, Inc. Executive Deferred
Compensation Rabbi Trust.
Termination of Employment of Certain Executive Officers
-------------------------------------------------------
Michael F. Carbone resigned as Vice President and Chief Financial Officer
of the Company effective as of January 16, 1996 and entered into a Severance
Agreement and Mutual Release (the "Carbone Severance Agreement") and a
consulting agreement (the "Carbone Consulting Agreement") each dated as of
January 16, 1996. The Carbone Severance Agreement provided that Mr. Carbone
would receive (i) regular payments of base annual compensation through December
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31, 1996; (ii) a cash bonus equal to 50% of his annual base salary (being a cash
payment of $102,952.50); and (iii) an additional cash bonus in the amount of
$325,000 in compromise of any and all disputes regarding cash bonuses earned or
to be earned for fiscal years 1995 and 1996. In addition, in consideration of
Mr. Carbone's release of any and all claims against the Company, his irrevocable
proxy and covenants of confidentiality and cooperation, Mr. Carbone received a
cash payment of $102,952.50 and a tax loan to cover his income tax obligations
incurred as a result of the exercise of his stock options. The Carbone
Consulting Agreement provides that Mr. Carbone will provide financial and
business consulting services as requested by the Company for up to 12 hours per
month during the one year period beginning June 1, 1996 and in consideration
therefor, Mr. Carbone received a payment in the amount of $150,000. The Carbone
Consulting Agreement also provides that Mr. Carbone will be entitled to an
incentive fee (at market rates to be agreed upon between the Company and Mr.
Carbone) in consideration for any financings obtained by the Company from
financing sources solicited by Mr. Carbone on the Company's behalf; provided
that the financings are completed within one year following the completion of
the term of consulting services. In consideration of the Carbone Consulting and
Carbone Severance Agreements, Mr. Carbone granted the Company's nominees an
irrevocable proxy for the voting of all shares of the Company's Common Stock
held by him over a specified period of time ending not later than July 1, 1999,
or if later, the date of final adjournment of the Company's 1999 annual
shareholders meeting.
David P. Blackmore resigned as Chief Financial Officer and Executive Vice
President of the Company effective October 31, 1996 and entered into a Severance
Agreement and Mutual Release (the "Blackmore Severance Agreement") and a
Consulting Agreement (the "Blackmore Consulting Agreement") with the Company
each dated as of September 4, 1996. The Blackmore Severance Agreement provided
that Mr. Blackmore would receive (i) a payment in the amount of $112,500 payable
over nine months representing a bonus for Mr. Blackmore's prior services as an
executive officer of the Company, (ii) 83 1/3% of the cash bonus and stock bonus
he would otherwise have been entitled to receive pursuant to the Company's 1996
Incentive Compensation Plan (which, based upon the Company's fiscal year 1996
results amounted to $37,338 in cash and 2,263 shares of Common Stock valued at
$20.625 per share), (iii) an award of an additional 2,000 shares of Common Stock
issued in conjunction with the payment of the cash bonus and stock bonus and
(iv) executive outplacement services and certain other benefits. The Blackmore
Consulting Agreement provided that Mr. Blackmore would receive the sum of
$50,000 either in a lump sum or payable over nine months, which amount is being
paid over nine months. In consideration of the Blackmore Severance and Blackmore
Consulting Agreements, Mr. Blackmore granted the Company's nominees an
irrevocable proxy for the voting of all shares of the Company's Common Stock
held by him over a specified period of time ending not later than July 1, 1999,
or if later, the date of final adjournment of the Company's 1999 annual
shareholders meeting. The Company also agreed to provide Mr. Blackmore with a
tax loan to cover his tax obligations incurred as a result of the exercise of
his stock options.
The Company currently maintains a policy of providing its executive
officers with nine months of their base salary in the event of a termination of
their employment without cause.
(g) COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following Report of the Compensation Committee and the Performance
Graph included in this Form 10-K shall not be deemed to be incorporated by
reference by any general statement incorporating by reference this Form 10-K
into any filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, except to the extent the Company specifically
incorporates this Report or the Performance Graph by reference therein, and
shall not be deemed soliciting material or otherwise deemed filed under either
of such Acts.
The Compensation Committee administers the Company's various compensation
plans and reviews and recommends to the Board of Directors compensation levels
for executive officers, evaluates executive management's performance and
considers executive management succession and related matters. The Compensation
Committee is composed exclusively of independent, non-employee directors.
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Philosophy of Compensation Committee
The Compensation Committee believes that executive compensation should
reflect the value created for the Company's shareholders while supporting the
Company's long-term strategic goals. It is the belief of the Compensation
Committee that executive compensation should serve to:
o reward individuals for significant contribution to the Company's
success;
o align the interests of executives with those of the Company's
long-term investors;
o retain, motivate and attract qualified executives; and
o provide incentives to executives to achieve strategic objectives in a
manner consistent with the Company's values.
Executive Officer Compensation
Individual executive officer compensation consists of three components:
base salary, annual cash and stock incentive bonuses and long-term equity
incentives. Each component will be discussed below.
In 1996, the Company through the efforts of its Chief Executive Officer and
the Compensation Committee, retained an entirely new group of executive
officers, some of whom were newly hired by the Company and others of whom
received promotions based upon their prior superior performance in non-executive
officer positions with the Company. In 1996, the Company also accepted the
resignations of, and negotiated severance agreements with, all former executive
officers (other than its Chief Executive Officer whose term of employment
commenced only on December 1, 1995). In addition, in 1996 the Company acquired
Lexford Properties which now, as the Company's wholly owned subsidiary, performs
all of the Company's fee based property management services. An integral part of
the negotiation of the Company's acquisition of Lexford Properties was the
structuring negotiation and documentation of terms of employment between Lexford
Properties, Inc. and the former equity owners of Lexford Properties engaged in
the active management of that entity, including, without limitation, Patrick M.
Holder who is now an executive officer of the Company. In determining the annual
salaries of each new executive officer and significant employee retained or
promoted during 1996, the Compensation Committee retained a nationally
recognized executive compensation and benefits consultant in order to obtain and
benefit from its advice and assistance concerning appropriate levels of
executive compensation and information regarding compensation trends and levels
of compensation paid by comparable companies participating in the multi-family
residential real estate industry generally. The Compensation Committee met
several times in 1996 and thoroughly deliberated the complete compensation
packages payable to each such newly retained or promoted executive officer and
significant employee.
Salaries for executive officers are reviewed by the Compensation Committee
on an annual basis and may be increased based on (a) individual performance and
contribution and (b) increases in competitive pay levels.
The Compensation Committee believes that the compensation packages agreed
to with its executive officers and other significant employees genuinely
preserves its philosophical objectives by placing significant emphasis on the
latter two components of the Compensation Committee's stated compensation
components, namely, annual cash and stock incentive bonus and long term equity
incentives. In this regard, the Company's compensation arrangements are weighted
heavily towards incentive bonuses based upon the Company's financial performance
measured in terms of its earnings before interest, taxes, depreciation, and
amortization without regard to extraordinary gains or losses ("Adjusted EBITDA")
and awards of restricted stock which will vest on the basis of growth in the
Company's market capitalization. It should be noted that the Compensation
Committee, in consultation with the full Board, the Company's Chief Executive
and Financial Officers and industry analysts, continued to refine the best
measure of the Company's growth in financial results from period to period
during 1996. The Company announced the results of these deliberations in its
Form 10-Q for the nine months ended September 30, 1996 by stating that Adjusted
EBITDA represented, in the Company's view, the best measure of recurring
financial performance from period to period. These analyses and definitive
results represented in the opinion of the Compensation Committee, the full Board
and Company's management, a definitive departure from emphasizing non-recurring
gains and income from the sale of non-core assets thereby re-defining the
Company as a growth company with the goal of expanding its business, operations,
revenues, assets and profits. In addition, in 1996, the Compensation Committee
continued its expanding emphasis on stressing compensation of management in the
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form of management's equity ownership in the Company as the best means of
aligning the long-term goals of management with the long-terms goals of the
Company's shareholders. A significant portion of management's compensation takes
the form of equity ownership in the Company. In this way, the Compensation
Committee believes that Mr. Bartling's Chief Executive Officer compensation
package and the compensation packages of the Company's other executive officers
implements its goal of aligning his interests with those of the Company's
long-term investors.
The Compensation Committee has confirmed that all base salaries for the
Company's executive officers, including Mr. Bartling's base compensation, are
reasonable and competitive, based upon the surveys compiled by management, as
well as the advice and consultation of the representatives of the consulting
firm.
Management Incentive Plan
Annual bonuses for the executive officers on account of the Company's 1996
fiscal year were governed by the Company's 1996 Incentive Compensation Plan (the
"Incentive Compensation Plan"), which was specifically designed to link
executive compensation to the Company's achieving certain operating goals and
exceeding certain projected increases in specific financial measures applicable
to the specific role in which each executive officer (and each other employee of
the Company participating in the Incentive Compensation Plan) is engaged. The
financial measures include Adjusted EBIDTA for the Company's Chief Executive
Officer and senior financial and legal officers, net income from property
management for the Company's property management employees, and return on equity
for the Company's Investment Management division employees (i.e., those
employees committed to maximizing the Company's return on its investments in
real property assets). Under the terms of the Incentive Compensation Plan, upon
achieving increases in the designated financial performance measure when
compared to the Company's 1995 results, the executive officers and other
participating employees are entitled to certain cash and stock awards.
As discussed above and disclosed elsewhere in this Form 10-K, a significant
part of Mr. Bartling's compensation package includes the award of the aggregate
of 42,500 shares of restricted stock which will vest in part based upon Mr.
Bartling's continued employment and in part upon increases in the Company's
market capitalization as well as the award of stock options and matching stock.
These awards were provided for in Mr. Bartling's Employment Agreement, which
became effective on December 1, 1995, while the shares of restricted stock as
well as the stock option award were issued on April 5, 1996. Similar awards,
albeit in lesser amounts, were granted to the Company's new Executive Vice
President and Chief Financial Officer and Senior Vice President when such
executive officers were retained in April 1996.
Deductibility
The Company intends, to the extent practicable, to preserve the
deductibility under the Internal Revenue Code of compensation paid to its
executive officers, while maintaining compensation programs that will attract
and retain its executives in a competitive environment; provided, that, in light
of the Company's ability to offset current income taxes through the utilization
of net operating loss carry forwards and passive activity loss carry forwards,
the Compensation Committee will consider facilitating executives' ability to
defer taxable incentive compensation (thereby also deferring, but not reducing,
the Company's deductibility of such items). In keeping with this philosophy to
provide for maximizing compensation payable in the form of the Company's Common
Stock, as well as to provide its executives with the ability to defer taxable
incentive compensation, the Company adopted its Executive Deferred Compensation
Plan and Executive Deferred Compensation Rabbi Trust in 1996. Pursuant to the
Executive Deferred Compensation Plan, the Company's highly compensated executive
officers can elect to direct the Company to issue any shares of the Company's
Common Stock to The Provident Bank, as Trustee under the Executive Deferred
Compensation Rabbi Trust, rather than directly to the employee otherwise
entitled to receive the shares of Common Stock, thereby deferring the
recognition of taxable income for federal income tax purposes. The Company
believes that, for the foreseeable future, this practice will not otherwise
result in increased income tax liability to the Company due to the availability
of net operating and passive activity loss carry forwards for federal income tax
purposes.
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Conclusion
In conclusion, the Compensation Committee will enable the Company to retain
highly qualified executive management and motivate its officers with respect to
the attainment of important goals and objectives. The Compensation Committee
believes the focus on Common Stock ownership by the executive officers and other
long-term stock programs has aligned and will continue to align the interests of
management with the interests of shareholders of the Company. The Compensation
Committee further believes that its continuing efforts to refine the best
measures of the Company's long-term growth and improving financial results are
reflected in the terms of the 1996 Incentive Compensation Plan and will continue
to be reflected in future management incentive programs.
The Compensation Committee of the Board of Directors
Glenn C. Pollack, Chairman
George R. Oberer, Sr.
Gerald E. Wedren
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(h) PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
Company's Common Stock, to that of the Dow Jones Real Estate Investment Index
and the Dow Jones Market Index. In calculating cumulative total shareholder
return, reinvestment of dividends is assumed. This graph is shown for the four
full fiscal years in which the Company's Common Stock (Nasdaq: CRSI) has been
registered under the Securities Exchange Act of 1934, as amended. [GRAPHIC
OMITTED]
VALUE OF $100 INVESTED AT 12/31/92
- --------------------------------------------------------------------------------
| 12/31/92 | 12/31/93 | 12/31/94 | 12/31/95 | 12/31/96
- ----------------------|----------|----------|-----------|------------|----------
CRSI Market Value | 100 | 250 | 350 | 583 | 687
- ----------------------|----------|----------|-----------|------------|----------
Dow Jones Real Estate | 100 | 112 | 103 | 121 | 150
- ----------------------|----------|----------|-----------|------------|----------
Dow Jones Equity Mkt | 100 | 107 | 104 | 139 | 167
- --------------------------------------------------------------------------------
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ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN PERSONS
On March 26, 1997, the Company had outstanding 4,445,531 shares of Common
Stock. The following table sets forth the information as of March 26, 1997
regarding Common Stock owned beneficially by (a) each person known by the
Company to own beneficially more than 5% of the Company's outstanding Common
Stock, (b) each director of the Company and executive officer named in the
Summary Compensation table above and (c) all present executive officers and
directors of the Company as a group.
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE OF
BENEFICIAL OWNER OWNERSHIP(1) COMMON STOCK(1)
- --------------------------------------------- ------------------------ ----------------
Bank of America National 513,929 11.56%
Trust & Savings Association
333 South Hope Street
Los Angeles, CA 90071
Directors and Executive Officers Named
in "Summary Compensation Table"
John B. Bartling, Jr. 64,940 (2) 1.46%
Mark D. Thompson 33,181 (3) *
Paul R. Selid 19,372 (4) *
Michele R. Souder 4,185 (5) *
Ronald P. Koegler 6,399 (6) *
David P. Blackmore 41,914 (7) *
Michael F. Carbone 50,726 (8) 1.14%
Robert V. Gothier, Sr. 14,185 (9)(10) *
Joseph E. Madigan 15,079 (9)(11) *
George J. Neilan 10,962 (9)(12) *
George R. Oberer, Sr. 31,579 (9)(13) *
Glenn C. Pollack 14,302 (9)(14) *
H. Jeffrey Schwartz 21,945 (9)(15) *
Gerald E. Wedren 11,291 (9)(16) *
Robert J. Weiler 47,589 (9)(17) 1.07%
All present executive officers and directors 472,000 (18) 10.41%
of the Company as a group (15 persons not
including Messrs. Blackmore and Carbone)
- ------------------
* Less than one percent (1%)
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<FN>
(1) The shares and percentages of Common Stock indicated in the table are based
on 4,445,531 issued and outstanding shares of Common Stock; provided,
however, that in the event that the number of shares beneficially owned by
a named individual or group includes the shares as to which the named
person or group has the right to acquire beneficial ownership on or before
May 25, 1997, then in such event, in calculating the percentages shown, the
number of the Company's issued and outstanding shares of Common Stock is
increased by a similar number of shares.
(2) Mr. Bartling received awards of restricted Common Stock in the aggregate of
54,440 shares under his Employment Agreement and related Award Agreements
with the Company (see footnotes 2 and 3 to the Summary Compensation Table
and footnote 1 to the Long-Term Incentive Plans Table). This amount also
includes 10,000 shares purchased by Mr. Bartling. This amount also includes
500 shares of Common Stock to be granted to Mr. Bartling for the first
quarter of the 1997 fiscal year in lieu of an increase in base
compensation, which is calculated based on the closing price of the Common
Stock on December 31, 1996, which was $20.625.
(3) Mr. Thompson received awards of restricted Common Stock in the aggregate of
25,681 shares under the his Employment Agreement and related Award
Agreements with the Company (see footnotes 10 and 11 to the Summary
Compensation Table and footnote 2 to the Long-Term Incentive Plans Table).
This amount includes 5,000 shares purchased by Mr. Thompson. This amount
also includes 364 shares of Common Stock to be granted to Mr. Thompson for
the first quarter of the 1997 fiscal year in lieu of an increase in base
compensation, which is calculated based on the closing price of the Common
Stock on December 31, 1996, which was $20.625. This amount also includes
2,500 currently exercisable shares subject to an option to purchase 12,500
shares which vests over five years.
(4) Mr. Selid received awards of restricted Common Stock in the aggregate of
14,372 shares under the Incentive Equity Plan (see footnote 16 to the
Summary Compensation Table and footnote 2 to the Long-Term Incentive Plans
Table). This amount includes 2,500 shares purchased by Mr. Selid. This
amount also includes 2,500 currently exercisable shares subject to an
option to purchase 12,500 shares which vests over five years.
(5) Ms. Souder received awards of restricted Common Stock in the aggregate of
4,000 shares under the Incentive Equity Plan (see footnote 24 to the
Summary Compensation Table). This amount also includes 185 shares of Common
Stock to be granted to Ms. Souder for the first quarter of the 1997 fiscal
year in lieu of an increase in base compensation, which is calculated based
on the closing price of the Common Stock on December 31, 1996, which was
$20.625.
(6) Mr. Koegler received 5,510 shares of Restricted Stock under the Incentive
Equity Plan, 4,500 shares of which are currently exercisable. Mr. Koegler
received a currently exercisable option to purchase 1,355 shares of Common
Stock pursuant to the Trustee's Second Employee Retention Plan which was
approved by the Bankruptcy Court during the Company's bankruptcy
proceedings. Mr. Koegler's account is allocated with approximately 343
shares of Common Stock pursuant to his participation in the Company's
401(k) Plan. This amount also includes 121 shares of Common Stock to be
granted to Mr. Koegler for the first quarter of the 1997 fiscal year in
lieu of an increase in base compensation, which is calculated based on the
closing price of the Common Stock on December 31, 1996, which was $20.625.
(7) Mr. Blackmore received 24,061 shares of Restricted Stock, which has vested
under the Incentive Equity Plan. Mr. Blackmore also received an award of
deferred Common Stock (the "Deferred Stock") under the Incentive Equity
Plan of 7,619 shares, contingent upon (i) the average price per share of
the Common Stock during the six-month period from March 11, 1995 to
September 11, 1995 being at least $3.93 and (ii) Mr. Blackmore being in the
employ of the Company on September 11, 1995. The Compensation Committee of
the Board of Directors accelerated the vesting of the Deferred Stock and
such shares were issued to Mr. Blackmore on January 18, 1995. Mr. Blackmore
also received stock option grants of 4,378 shares pursuant to the Trustee's
Second Employee Retention Plan which was approved by the Bankruptcy Court
during the Company's bankruptcy proceedings. Mr. Blackmore exercised such
option and retained these shares. Mr. Blackmore has been attributed with
1,758 shares of Common Stock pursuant to his participation in the Company's
401(k) plan. Mr. Blackmore also received 535 shares for an unsecured Claim
under the Plan of Reorganization. Mr. Blackmore purchased 1,300 shares of
Common Stock in April 1995. Mr. Blackmore sold 2,000 shares in January
1997. Mr. Blackmore has been attributed with 4,263 shares which he is to
receive pursuant to his Severance Agreement and Mutual Release with the
Company.
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(8) Mr. Carbone, the Company's former Chief Financial Officer and Vice
President, received an award of restricted Common Stock (the "Restricted
Stock") equal to 0.75% of the Company's Total Committed Equity under the
Incentive Equity Plan, estimated to be 30,076 shares of Restricted Stock.
Mr. Carbone received an award of deferred Common Stock (the "Deferred
Stock") equal to 0.04% of the Company's Total Committed Equity under the
Incentive Equity Plan, estimated to be 1,604 shares, contingent upon (i)
the average price per share of the Common Stock during the six-month period
from March 11, 1995 to September 11, 1995 being at least $3.93 and (ii) Mr.
Carbone being in the employ of the Company on September 11, 1995. The
Compensation Committee of the Board of Directors accelerated the vesting of
the Deferred Stock and such shares were issued to Mr. Carbone on January
18, 1995. Mr. Carbone has been attributed with 2,288 shares of Common Stock
pursuant to his participation in the Company's 401(k) Savings Plan in which
the Company matches a portion of an employee's contribution. InnVestors
Limited, of which Mr. Carbone was President and is a shareholder, received
14,758 shares of Common Stock for an unsecured Claim under the Plan of
Reorganization. Mr. Carbone also purchased 2,000 shares of Common Stock.
(9) Each non-employee director of the Company was granted a stock option to
purchase 7,500 shares of Common Stock equal to 0.1875% of the Company's
Total Committed Equity. The options are exercisable to the extent of 10% of
the shares of Common Stock covered by the grant after the optionee has
served continuously as a director of the Company for six months and to the
extent of an additional 10% of such shares after each of the next nine
successive six month periods of continuous service; therefore, 6,750 shares
of Common Stock underlying this stock option are attributable to each
non-employee director (except Mr. Gothier, who has exercised his option to
purchase 3,750 shares, leaving an option to purchase 3,000 shares
exercisable within 60 days), because such shares will be exercisable within
60 days based on the commencement of each director's term on September 11,
1992. In addition, on December 1, 1995, each director was granted an option
to purchase 2,000 shares of Common Stock, with an exercise price equal to
$17.25 and a vesting period of the earlier of one year or the period from
the date of the grant to the next annual meeting of shareholders. On May
23, 1996, each director was granted an option to purchase 2,000 shares of
Common Stock, with an exercise price of $21.25 and a vesting period of the
earlier of one year or the period from the date of the grant to the next
annual meeting of shareholders. All such shares underlying the foregoing
options are attributed to each non-employee director because such shares
are exercisable or will be exercisable within 60 days.
(10) This amount includes (a) 300 shares of Common Stock purchased by Mr.
Gothier through his Individual Retirement Account, (b) 2,375 shares of
Common Stock purchased by RVG Management and Development Company, of which
Mr. Gothier is President and a shareholder, (c) 760 shares of restricted
Common Stock granted to Mr. Gothier pursuant to his participation in the
Company's Non-Employee Director Restricted Stock Plan, in which he received
such shares in lieu of director's fees and (d) 3,750 shares purchased by
Mr. Gothier through the exercise of a stock option.
(11) Mr. Madigan received an award of restricted Common Stock on December 1,
1995 and December 1, 1996 (the "1996 Award"), each in the amount of 2,000
shares under the Incentive Equity Plan, each of which will vest equally
over a three year period from the date of grant. Mr. Madigan elected to
defer the receipt of the shares subject to the 1996 Award, which were
instead issued to the Cardinal Realty Service, Inc. Executive Deferred
Compensation Rabbi Trust. This amount also includes 329 shares of
restricted Common Stock granted to Mr. Madigan pursuant to his
participation in the Company's Non-Employee Director Restricted Stock Plan,
in which he received such shares in lieu of director's fees.
(12) This amount includes 212 shares of restricted Common Stock granted to Mr.
Neilan pursuant to his participation in the Company's Non-Employee Director
Restricted Stock Plan, in which he received such shares in lieu of
director's fees.
(13) This amount includes (a) 5,788 shares of Common Stock received by Oberer
Development Company, of which Mr. Oberer is President and a shareholder,
for an unsecured claim under the Company's Plan of Reorganization, (b)
14,000 shares of Common Stock held by Mr. Oberer, individually, and (c)
1,041 shares of restricted Common Stock granted to Mr. Oberer pursuant to
his participation in the Company's Non-Employee Director Restricted Stock
Plan, in which he received such shares in lieu of director's fees.
(14) This amount includes (a) 2,500 shares of Common Stock held by Mr. Pollack,
individually, and (b) 1,052 shares of restricted Common Stock granted to
Mr. Pollack pursuant to his participation in the Company's Non-Employee
Director Restricted Stock Plan, in which he received such shares in lieu of
director's fees.
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(15) This amount includes (a) 10,000 shares of Common Stock held by Mr.
Schwartz, individually, and (b) 1,195 shares of restricted Common Stock
granted to Mr. Schwartz pursuant to his participation in the Company's
Non-Employee Director Restricted Stock Plan, in which he received such
shares in lieu of director's fees.
(16) This amount includes 541 shares of restricted Common Stock granted to Mr.
Wedren pursuant to his participation in the Company's Non-Employee Director
Restricted Stock Plan, in which he received such shares in lieu of
director's fees.
(17) This amount includes (a) 36,000 shares of Common Stock held by Mr. Weiler's
wife and (b) 839 shares of restricted Common Stock granted to Mr. Weiler
pursuant to his participation in the Company's Non-Employee Director
Restricted Stock Plan, in which he received such shares in lieu of
director's fees.
(18) This amount includes shares individually held by the directors and
executive officers listed in this chart excluding Messrs. Blackmore and
Carbone, former executive officers. This amount also includes shares held
by or attributed to Patrick M. Holder and Michael F. Sosh, executive
officers of the Company. Mr. Holder received 175,000 shares of Restricted
Stock in connection with the Company's acquisition of Lexford Properties,
of which 125,000 shares are subject to forfeiture if the Company's net
income from property management operations does not achieve certain
specified increases during the three full fiscal years ending with the
Company's 1999 fiscal year.
</FN>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Joseph E. Madigan, Chairman of the Company's Board of Directors, received a
retainer in 1996 of $4,000 per month (which amount was increased in December
1996 to $5,000 per month). Mr. Madigan also received in December 1996, and will
receive annually during his tenure as chairman, an award of 2,000 shares of
restricted Common Stock, one-third of which shares vest annually over a three
year period.
H. Jeffrey Schwartz, director of the Company, is a partner in the law firm
of Benesch, Friedlander, Coplan & Aronoff LLP, which serves as outside legal
counsel to the Company.
Robert J. Weiler, a director of the Company, is a principal of Americana
Investment Company, the lessor of the building housing the Company's principal
executive offices. Mr. Weiler did not participate in the Company's decision to
relocate to the headquarters or in the lease negotiations. Management believes
that the lease terms for the Company's executive offices are competitive with
commercial lease rates in the Columbus, Ohio market. The annual lease payments
are as follows:
1997 (thru 10/31) $282,580 ($6.50/sq.ft.)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) Documents filed as part of this report:
1. Financial Statements: The Audited Consolidated Balance Sheets of
the Company and Subsidiaries as of December 31, 1996 and 1995,
and the related Consolidated Statements of Income, Shareholders'
Equity and Cash Flows of the Company and Subsidiaries for the
years ended December 31, 1996, 1995 and 1994.
2. Consolidated Financial Statement Schedules: (See the financial
statement schedules listed on Index to Consolidated Financial
Statement Schedules on Page F-1 of this report).
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58
3. Exhibits:
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements: The Audited
Consolidated Balance Sheets of the Company
and Subsidiaries as of December 31, 1996 and
1995, and the related Consolidated
Statements of Income, Shareholders' Equity
and Cash Flows of the Company and
Subsidiaries for the years ended December
31, 1996, 1995 and 1994.
2. Consolidated Financial Statement Schedules:
(See the financial statement schedules
listed on Index to Consolidated Financial
Statement Schedules on Page F-1 of this
report).
3. Exhibits:
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE
2.1 Third Amended Disclosure Incorporated by
Statement Pursuant to reference to Exhibit
Section 1125 of Bankruptcy 2.1 to the
Code to Accompany Company's
the Plan of Reorganization Registration Statement
of Jay Alix, Chapter on Form 10 (the "Form
11 Trustee for Cardinal 10")
Industries, Inc. and its
Substantively Consolidated
Subsidiaries and
Third Amended Plan of
Reorganization of Jay
Alix, Chapter 11 Trustee,
for Cardinal Industries,
Inc. and its Substantively
Consolidated Subsidiaries
2.2 Findings of Fact, Conclusions Incorporated by
of Law and Order Confirming reference to Exhibit
Third Amended Plan of 2.2 to the Form 10
Reorganization of Jay Alix,
Chapter 11 Trustee,
for Cardinal Industries,
Inc. and its Substantively
Consolidated Subsidiaries
3.1 Amended and Restated Articles Incorporated by
of Incorporation filed reference to Exhibit
September 11, 1992 with the 3.1 to the Form 10
Ohio Secretary of State
of State
3.2 Certificate of Amendment to Incorporated by
the Articles of reference to Exhibit
Incorporation filed October 3.2 to the Form 10
27, 1992 with the
Ohio Secretary of State
3.3 Certificate of Amendment to Incorporated by reference to Exhibit
the Articles of 3.3 to the Company's Annual Report
Incorporation filed January on Form 10-K for the fiscal year ended
9, 1996 with the Ohio December 31, 1995
Secretary of State (the "1995 Form 10-K")
3.4 Amended Code of Regulations Incorporated by reference to Exhibit
3.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1993 (the "1993 Form
10-K")
4.1 Form of Common Stock Incorporated by reference to Exhibit
Certificate 4.1 to Form 10
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59
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE
10.1 Loan and Security Agreement, Incorporated by
dated as of August reference to Exhibit
11, 1995, between The 10.1 to the 1995 Form
Provident Bank and the 10-K
Company and certain of its
subsidiaries
10.2 Cognovit Promissory Note Incorporated by
dated August 11, 1995 reference to Exhibit
in the amount of $22,000,000 10.2 to the 1995 Form
issued by the 10-K
Company and certain of its
subsidiaries in favor of
The Provident Bank.
10.3 Cognovit Promissory Note Incorporated by
dated August 11, 1995 reference to Exhibit
in the amount of $3,000,000 10.3 to the 1995 Form
issued by the Company 10-K
and certain of its
subsidiaries in favor of The
Provident Bank.
10.4 Cognovit Promissory Note Incorporated by
dated August 11, 1995 reference to Exhibit
in the amount of $7,000,000 10.4 to the 1995 Form
issued by the Company 10-K
and certain of its
subsidiaries in favor of The
Provident Bank.
10.5 Agreement for Modification Incorporated by
of Management reference to Exhibit
Agreement dated as of August 10.5 to the 1995 Form
11, 1995 among 10-K
Cardinal Apartment
Management Group, Inc., the
Company and certain of its
subsidiaries
10.6 Assignment of Management Incorporated by
Contracts dated August reference to Exhibit
11, 1995 between Cardinal 10.6 to the 1995 Form
Apartment Management 10-K
Group, Inc. and The
Provident Bank
10.7 Stock Pledge Agreement dated Incorporated by
August 11, 1995 reference to Exhibit
between Cardinal Realty 10.7 to the 1995 Form
Services, Inc. and The 10-K
Provident Bank
10.8 Stock Pledge Agreement dated Incorporated by
August 11, 1995 reference to Exhibit
between Cardinal Industries 10.8 to the 1995 Form
of Texas, Inc. and The 10-K
Provident Bank
10.9 Stock Pledge Agreement dated Incorporated by
August 11, 1995 reference to Exhibit
between Cardinal Industries 10.9 to the 1995 Form
Development 10-K
Corporation and The
Provident Bank
10.10 Stock Pledge Agreement dated Incorporated by
August 11, 1995 reference to Exhibit
between Cardinal Realty 10.10 to the 1995
Company and The Form 10-K
Provident Bank
10.11 Limited Power of Attorney Incorporated by
dated August 11, 1995 reference to Exhibit
by certain subsidiaries of 10.11 to the 1995
the Company to the Form 10-K
Company
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60
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE
10.12 Limited Power of Attorney Incorporated by
dated August 11, 1995 reference to Exhibit
by the Company and certain 10.12 to the 1995
of its subsidiaries to Form 10-K
The Provident Bank
10.13 Waiver Agreement dated Incorporated by
August 11, 1995 among reference to Exhibit
The Provident Bank and the 10.13 to the 1995
Company and certain Form 10-K
of its subsidiaries
10.14 Post Closing Agreement dated Incorporated by
as of August 11, reference to Exhibit
1995 among The Provident 10.14 to the 1995
Bank and the Company Form 10-K
and certain of its
subsidiaries
10.15 Form of Management Agreement Incorporated by
between Cardinal reference to Exhibit
Apartment Management Group, 10.10 to the Form 10
Inc. and certain
Properties
10.16 Form of Management Agreement Incorporated by
between Cardinal reference to Exhibit
Apartment Management Group, 10.16 to the 1995
Inc. (which was Form 10-K
merged with and into the
Company) and certain of
the Properties (as amended
August 11, 1995)
10.17 Form of Partnership Asset Incorporated by
Management Agreement reference to Exhibit
between Cardinal Industries 10.11 to the Form 10
Services Corporation
and certain Properties
10.18 Form of Extended Partnership Incorporated by
Administration reference to Exhibit
Agreement between Cardinal 10.12 to the Form 10
Industries, Inc. and
certain Properties
10.19 Form of Agreement for Tax Incorporated by
Appeal Services reference to Exhibit
between the Company and 10.13 to the Form 10
certain Properties
10.20 Asset Purchase Agreement Incorporated by
dated April 24, 1991, reference to Exhibit
among Economy Lodging 10.14 to the Form 10
Systems, Inc., HMS
Property Management Group,
Inc., Cardinal
Industries, Inc. and
Cardinal Industries Services
Corporation
10.21 Lease, dated September 24, Incorporated by
1992, between the reference to Exhibit
Company and the Americana 10.15 to the Form 10
Investment Company
10.22 Term Lease Master Agreement Incorporated by
and Term Lease reference to Exhibit
Supplement, dated October 6, 10.16 to the Form 10
1992, between the Company and
IBM Credit Corporation
60
61
10.23 Bankruptcy Court Orders, Incorporated by
entered June 28, 1990 reference to Exhibit
and July 27, 1990, approving 10.17 to the Form 10
Trustee's First Employee
Retention Plan
10.24 Bankruptcy Court Order, Incorporated by
entered April 3, 1992, reference to Exhibit
approving Trustee's Second 10.18 to the Form 10
Employee Retention
Plan
10.25 Description of Cash Bonus Incorporated by
Plan of the Company reference to Exhibit
10.28 to the Form 10
10.26 1992 Incentive Equity Plan Incorporated by
of the Company, as reference to Exhibit
amended (effective November 10.26 to the 1995
30, 1995) Form 10-K
10.27 Tax Obligation Loan Program Incorporated by
of the Company reference to Exhibit
10.30 to the Form 10
10.28 Form of Deferred Shares Incorporated by
Agreement for Employees reference to Exhibit
of the Company 10.31 to the Form 10
10.29 Form of Restricted Shares Incorporated by
Agreement for Key reference to Exhibit
Employees of the Company 10.32 to the Form 10
10.30 Form of Restricted Shares Incorporated by
Agreement for Executive reference to Exhibit
Officers of the Company 10.33 to the Form 10
10.31 Form of Non-Qualified Stock Incorporated by
Option Agreement for reference to Exhibit
Participants in Trustee's 10.33 to the Form 10
Employee Retention Plan
10.32 Form of Non-Qualified Stock Incorporated by
Option Agreement for reference to Exhibit
Non-Employee Directors 10.36 to the Form 10
10.33 Form of Indemnification Incorporated by
Agreement between the reference to Exhibit
Company and its officers and 10.37 to the Form 10
directors
10.34 Undeliverable Distributions Incorporated by
Trust dated as of reference to Exhibit
September 11, 1992, between 10.38 to the Form 10
The Company and
James H. Bownas, Trustee
10.35 401(k) Plan of the Company Incorporated by
reference to Exhibit
10.41 to the Form 10
10.36 Premium Finance Agreement Incorporated by
dated September 12, reference to Exhibit
1995 between the Company and 10.36 to the 1995
Transamerica Form 10-K
Insurance Finance Corporation
61
62
10.37 Premium Finance Agreement Incorporated by
dated December 4, 1995 reference to Exhibit
between the Company and 10.37 to the 1995
First Premium Form 10-K
Services, Inc.
10.38 Employment Agreement dated Incorporated by
as of December 1, reference to Exhibit
1995 between the Company and 10.38 to the 1995
John B. Bartling, Form 10-K
Jr., President and Chief
Executive Officer of the
Company
10.39 Severance Agreement and Filed as an Exhibit
Mutual Release dated as to this Form 10-K
of September 4, 1996 between
the Company and
David P. Blackmore
10.40 Severance Agreement and Filed as an Exhibit
Mutual Release dated as to this Form 10-K
of January 16, 1996 between
the Company and
Michael F. Carbone
10.41 Assumption of Loan and Filed as an Exhibit
Security Agreement dated to this Form 10-K
as of February 26, 1997
between The Provident
Bank and
Lexford Properties, Inc.
11.1 Statement re: computation of See Index to
per share earnings Financial Information -
Note 1 in the Notes
to Consolidated
Financial Statements
21.1 Subsidiaries of The Company Filed as an Exhibit
to the 1995 Form 10-K
27 Financial Data Schedule Filed as an Exhibit
to this Form 10-K
99 Individual Property Filed as an Exhibit
Financial Information to this Form 10-K
Summary
62
63
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) 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.
CARDINAL REALTY
SERVICES, INC.
(Registrant)
Date: March 28, 1997 By: /s/ John B. Bartling, Jr.
----------------------
John B. Bartling, Jr.,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Signature Title Date
- --------- ----- -----
/s/ Joseph E. Madigan Chairman of the Board March 28, 1997
- -----------------------------
Joseph E. Madigan
/s/ John B. Bartling, Jr. President, Chief Executive March 28, 1997
- ----------------------------- Officer and Director
John B. Bartling, Jr.
/s/ Mark D. Thompson Executive Vice President and March 28, 1997
- ----------------------------- Chief Financial Officer
Mark D. Thompson
/s/ Ronald P. Koegler Vice President and Controller March 28, 1997
- -----------------------------
Ronald P. Koegler
/s/ Robert V. Gothier, Sr. Director March 28, 1997
- -----------------------------
Robert V. Gothier, Sr.
/s/ George J. Neilan Director March 28, 1997
- -----------------------------
George J. Neilan
/s/ George R. Oberer, Sr. Director March 28, 1997
- -----------------------------
George R. Oberer, Sr.
/s/ Glenn C. Pollack Director March 28, 1997
- -----------------------------
Glenn C. Pollack
/s/ H. Jeffrey Schwartz Director March 28, 1997
- -----------------------------
H. Jeffrey Schwartz
/s/ Gerald E. Wedren Director March 28, 1997
- -----------------------------
Gerald E. Wedren
/s/ Robert J. Weiler Director March 28, 1997
- -----------------------------
Robert J. Weiler
63
64
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy materials have been sent to the Registrant's
shareholders. An annual report and proxy materials are expected to be
distributed on or about May 15, 1997 to shareholders of record on or about May
13, 1997.
64
65
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
Audited Financial Information - Cardinal Realty Services, Inc. and Subsidiaries
Report of Independent Auditors............................................F-2
Consolidated Balance Sheets at December 31, 1996 and 1995.................F-3
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 ....................................F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994 ........................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 ..............................F-6 - F-7
Notes to Consolidated Financial Statements.........................F-8 - F-32
Consolidated Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts.....................F-33
Schedule III - Real Estate and Accumulated Depreciation......F-34 - F-40
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedules or because the information required is included in the consolidated
financial statements or notes thereafter.
F-1
66
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Cardinal Realty Services, Inc.
We have audited the accompanying consolidated balance sheets of Cardinal Realty
Services, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedules listed in the accompanying index.
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Cardinal Realty Services, Inc. and subsidiaries at December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
The Consolidated Financial Statements for 1994 have been restated to reflect the
changes with respect to income taxes as described in Note 1.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
March 6, 1997
F-2
67
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
------------------ ------------------
ASSETS
Wholly Owned Properties (Notes 2 and 5):
Land.................................................................... $23,652,841 $24,082,635
Building and Improvements............................................... 137,917,083 140,251,420
------------------ ------------------
161,569,924 164,334,055
Accumulated Depreciation................................................ (4,478,379) 0
------------------ ------------------
157,091,545 164,334,055
Interests in and Receivables from Syndicated Partnerships (Notes 3 and 14) 54,610,421 52,591,444
Cash.................................................................... 3,593,121 2,751,986
Accounts Receivable, Affiliates ($4,089,328 and $3,935,466, net
of an allowance of $2,034,290 and $2,468,845, at December 31,
1996 and 1995, respectively), Residents and Officers (Note 14).......... 5,044,603 5,088,478
Furniture, Fixtures and Other, Net ....................................... 1,167,579 1,312,228
Funds Held in Escrow (Note 1)............................................. 14,011,013 9,390,610
Prepaids and Other (Note 1)............................................... 9,849,497 3,930,099
------------------ ------------------
$245,367,779 $239,398,900
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages, Term Debt and Other Notes Payable:
Non Recourse Mortgages on Wholly Owned Properties (Note 5).............. $148,056,017 $148,188,111
Term Debt (Note 4)...................................................... 15,118,048 20,470,205
Other Notes Payable (Note 7) ........................................... 145,220 1,453,553
------------------ ------------------
163,319,285 170,111,869
Accounts Payable.......................................................... 1,560,749 1,350,641
Accrued Interest, Real Estate and Other Taxes............................. 4,023,310 4,532,148
Other Accrued Expenses.................................................... 8,531,031 9,716,866
Other Liabilities (Note 8)................................................ 5,424,226 2,441,282
------------------ ------------------
Total Liabilities....................................................... 182,858,601 188,152,806
------------------ ------------------
Commitments and Contingencies (Notes 9, 10, 12)
Shareholders' Equity (Notes 1 and 9):
Preferred Stock, 1,500,000 shares authorized, unissued.................. 0 0
Common Stock, 13,500,000 shares authorized with no
stated value, 3,892,600 and 3,603,160 shares issued and
outstanding, at December 31, 1996 and 1995, respectively.............. 29,122,547 29,122,547
Additional Paid-in Capital.............................................. 15,968,426 8,461,216
Retained Earnings....................................................... 17,418,205 13,662,331
------------------ ------------------
62,509,178 51,246,094
------------------ ------------------
$245,367,779 $239,398,900
================== ==================
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
F-3
68
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------------- ------------------ ---------------
Revenues, primarily from Affiliates (Note 14):
Rental and Other Revenues - Wholly Owned Properties (Note 2)............... $41,276,684
Fee Based.................................................................. 13,651,042 $15,168,982 $15,278,518
Interest, Principally from Syndicated Partnerships......................... 8,897,233 4,361,497 2,703,112
Income from Disposal of Non-Core Assets-Net................................ 962,761 3,408,379 3,189,067
Other...................................................................... 513,270 737,571 1,429,328
------------------- ------------------ ---------------
65,300,990 23,676,429 22,600,025
------------------- ------------------ ---------------
Expenses:
Rental Operating .......................................................... 21,129,433
Fee Based.................................................................. 9,366,777 8,667,358 9,003,485
Administration............................................................. 5,030,967 4,399,349 3,993,435
Restructure Costs in 1996 and 1995, Tender Offer costs in 1994 (Note 11)... 242,899 1,537,073 977,266
Interest - Wholly Owned Property Debt (Note 5)............................. 14,131,780 0 0
Interest - Corporate Debt.................................................. 1,098,333 1,522,087 1,643,368
Depreciation and Amortization (Note 2)..................................... 5,514,571 537,849 447,528
------------------- ------------------ ---------------
56,514,760 16,663,716 16,065,082
------------------- ------------------ ---------------
Income Before Income Taxes and Extraordinary Item............................. 8,786,230 7,012,713 6,534,943
Provision for Income Taxes (Notes 1 and 10):
Credited to Additional Paid-in Capital..................................... 3,166,000 2,356,000 2,390,000
Current.................................................................... 250,000 364,000 201,000
------------------- ------------------ ---------------
Income Before Extraordinary Item.............................................. 5,370,230 4,292,713 3,943,943
Extraordinary (Loss) / Gain, Net of Income Tax Benefit/(Provision) of
$1,015,000 in 1996 and ($510,000) and ($2,074,000), in 1995 and 1994,
respectively (Note 6)......................................................... (1,614,356) 804,022 3,155,901
------------------- ------------------ ---------------
Net Income.................................................................... $3,755,874 $5,096,735 $7,099,844
=================== ================== ===============
Net Income per Common Share:
Income before Extraordinary Item.......................................... $ 1.37 $ 1.11 $ 1.02
Extraordinary Item........................................................ (0.41) 0.21 0.82
------------------- ------------------ ---------------
Net Income................................................................ $ 0.96 $ 1.32 $ 1.84
=================== ================== ===============
Weighted Average Common Shares Outstanding................................... 3,933,000 3,850,000 3,850,000
=================== ================== ===============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
F-4
69
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Common Stock
--------------------------
Additional Retained
Shares Amount Paid-in Capital Earnings Total
------------ ------------- --------------- -------------- ---------------
Balance, January 1, 1994 .............................. 2,383,414 $29,122,547 $1,096,000 $1,465,752 $31,684,299
Shares issued in 1994, principally in connection with
claims resolution process (Note 1) .................. 1,161,509
Less: Treasury shares issued to wholly owned
partnerships and subsidiaries, and
unclaimed shares related to bankruptcy claims
(Note 1) ..................................... (136,296)
Credit from utilization of pre-confirmation tax
benefits (Note 10) ................................... 4,464,000 4,464,000
Net Income for the year ended December 31, 1994 ..... 7,099,844 7,099,844
-------------- ------------- --------------- --------------- ------------
Balance, December 31, 1994............................. 3,408,627 29,122,547 5,560,000 8,565,596 43,248,143
Shares issued in 1995, principally in connection with
the claims resolution process (Note 1) .............. 183,354
Exercise of options under Non-Qualified Stock Option
Plan (Note 9) ....................................... 15,303 35,216 35,216
Less: Treasury Shares Issued to wholly owned
partnerships and subsidiaries (Note 1) ....... (4,124)
Credit from utilization of pre-confirmation tax
benefits (Note 10) .................................. 2,866,000 2,866,000
Net Income for the year ended December 31, 1995...... 5,096,735 5,096,735
-------------- ------------- --------------- -------------- ---------------
Balance, December 31, 1995............................. 3,603,160 29,122,547 8,461,216 13,662,331 51,246,094
-------------- ------------- --------------- -------------- ---------------
Shares issued in 1996, in connection with the claims
resolution process (Note 1) ......................... 6,670
Shares issued in connection with Lexford Acquisition
(Note 1)............................................. 700,000 14,000,000 14,000,000
Contingent........................................ (450,000) (9,000,000) (9,000,000)
Exercise of options under Non-Qualified Stock Option
Plan (Note 9) ....................................... 34,308 61,671 61,671
Restricted stock compensation awards and Director
Restricted Stock Plan ............................... 325,869 325,869
Less: Treasury Shares primarily from the redemption
in 1996 of stock held by Syndicated Partnerships .... (1,538) (31,330) (31,330)
Credit from utilization of pre-confirmation tax
benefits (Note 10) .................................. 2,151,000 2,151,000
Net Income for the year ended December 31, 1996...... 3,755,874 3,755,874
-------------- ------------- --------------- -------------- ----------------
Balance, December 31, 1996............................. 3,892,600 $29,122,547 $15,968,426 $17,418,205 $62,509,178
============== ============= =============== ============== ================
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
F-5
70
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------------- ----------------- -----------------
Cash flows provided by Operating activities:
Management and Investment Management activities:
Cash received from Fee Based activities...................................... $22,414,166 $22,173,861 $20,010,063
Cash received from Interests in and Receivables from Syndicated Partnerships. 9,074,008 4,965,246 2,500,272
Cash receipts -- other....................................................... 2,170,253 3,261,207 1,274,820
Cash paid to Vendors, Suppliers and Employees................................ (21,784,246) (21,784,640) (18,823,050)
Interest paid on Term Debt and Other Notes Payable........................... (1,147,593) (1,554,454) (1,602,080)
Income Taxes paid - City and State........................................... (239,145) (234,436) (146,172)
Taxes paid, other than Income Taxes.......................................... (76,575) (553,140) (530,793)
Payments related to non-recurring items...................................... (2,221,248) (705,075) (1,652,965)
----------------- ----------------- -----------------
8,189,620 5,568,569 1,030,095
----------------- ----------------- -----------------
Real Estate Asset activities:
Cash received from Rental activities......................................... 41,297,937 0 0
Cash paid on Rental activities............................................... (23,262,002) 0 0
Interest paid on Mortgages................................................... (13,517,318) 0 0
----------------- ----------------- -----------------
4,518,617 0 0
----------------- ----------------- -----------------
Net Cash provided by Operating activities....................................... 12,708,237 5,568,569 1,030,095
----------------- ----------------- -----------------
Cash Flow provided by/(used in) Investing activities:
Management and Investment Management activities:
Proceeds from sale of Non-Core Assets and Other............................ 1,016,334 3,787,441 8,036,470
Capital Expenditures....................................................... (422,853) (397,519) (152,959)
Repayment from/(Advances to) Syndicated Partnerships - net................. (2,556,807) (8,565,119) (1,361,547)
Acquisition of Real Estate Assets.......................................... 0 (1,864,736) 0
Real Estate Asset activities:
Net cash flow provided by/(used in) Rental activities during period Held
for Sale (net of Interest paid of $13,692,045 in 1995 and $11,618,952
in 1994) ................................................................ 0 3,037,826 (587,020)
Capitalized Refinancing Costs.............................................. (1,687,492) 0 0
Funding of Escrows......................................................... (41,279) 0 0
Capital Expenditures....................................................... (681,639) 0 0
----------------- ----------------- -----------------
Net Cash provided by/(used in) Investing activities............................. (4,373,736) (4,002,107) 5,934,944
----------------- ----------------- -----------------
Cash Flows (used in)/provided by Financing activities:
Management and Investment Management activities:
Proceeds from the exercise of Stock Options................................ 61,671 35,216 0
Redemption of Stock held by Syndicated Partnerships........................ (31,330) 0 0
Proceeds from Term Debt and Other.......................................... 0 21,000,505 0
Principal payments on Term Debt and Other.................................. (7,052,484) (21,859,553) (7,620,884)
Real Estate Asset activities:
Proceeds from Mortgage Debt................................................ 47,442,961 0 0
Payments on Mortgages - principal amortization............................. (2,139,137) (2,150,733) (1,279,985)
Payments on Mortgages - lump sum........................................... (45,775,047) (479,554) 0
----------------- ----------------- -----------------
Net Cash (used in)/provided by Financing activities:............................ (7,493,366) (3,454,119) (8,900,869)
----------------- ----------------- -----------------
Increase/(Decrease) in Cash..................................................... 841,135 (1,887,657) (1,935,830)
Cash at Beginning of Year....................................................... 2,751,986 4,639,643 6,575,473
----------------- ----------------- -----------------
Cash at End of Year............................................................. $3,593,121 $2,751,986 $4,639,643
================= ================= =================
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
F-6
71
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
-------------------- ------------------- ------------------
Reconciliation of Net Income to Net Cash
Provided By Operating Activities:
Net Income........................................................ $3,755,874 $5,096,735 $7,099,844
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization................................. 5,514,571 537,849 447,528
Provision for Losses on Accounts Receivable................... (207,308) 412,794 1,461,869
Income from Disposal of Non-Core Assets ...................... (962,761) (3,408,379) (3,189,067)
(Gain) / Loss on Debt Restructuring........................... 2,629,356 (1,314,022) (5,229,901)
Provision for Income Taxes credited to Paid-in Capital........ 2,151,000 2,866,000 4,464,000
Changes in Operating Assets and Liabilities:
Interests in and Receivables from Syndicated Partnerships... 616,715 335,505 (322,143)
Accounts Receivable and Other............................... (4,339,533) (17,039) (3,375,941)
Funds Held in Escrow........................................ (4,857,423) 595,256 1,509,127
Accounts Payable and Other Liabilities...................... 8,407,746 463,870 (1,835,221)
-------------------- ------------------- ------------------
Net Cash Provided by Operating Activities........................... $12,708,237 $5,568,569 $1,030,095
==================== =================== ==================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In 1995, the Company acquired four apartment properties primarily financed with
$4,770,000 of first mortgages on the properties.
In June 1995, the Company purchased from a mortgage lender the non-recourse
mortgages on one Syndicated Partnership and four Wholly Owned Properties. The
mortgages totaled $8.8 million and were acquired 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 1996, the Company granted deeds in lieu of foreclosure to the mortgagee for
three Wholly Owned Properties. The properties had an aggregate carrying value of
$3.9 million. In 1995 and 1994 the Company granted deeds in lieu of foreclosure
to the mortgagees for certain Wholly Owned Properties. The properties had an
aggregate carrying value of $3.5 million and $3.6 million, respectively. No
significant gain or loss was recognized on these transactions because the assets
and the non-recourse mortgages on each of these Wholly Owned Properties had been
recorded in equal amounts.
Effective August 1, 1996, the Company acquired Lexford Properties, Inc. through
a merger with a wholly owned subsidiary of the Company. The Company issued
700,000 shares of its Common Stock (valued at $14,000,000) in consideration of
the acquisition; however 450,000 of the shares issued (valued at $9,000,000) are
subject to forfeiture, in whole or in part, if the Company's combined property
management operations fail to achieve certain profitability criteria on or
before the end of the Company's 1999 fiscal year.
In 1996, all interest incurred was expensed. In 1995 and 1994 the interest
incurred on the Wholly Owned Properties was capitalized as the properties were
Held for Sale, while interest on corporate term debt was expensed (Note 2).
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
72
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
--------
Cardinal Realty Services, Inc. and its subsidiaries (the "Company")
principal business is the ownership and management of multifamily
apartment properties. The Company is also involved in the acquisition
and redevelopment of multifamily apartment properties. The Company holds
an ownership interest in apartment communities either as (i) the sole
owner of various limited partnerships or subsidiaries which own
apartment communities (the "Wholly Owned Properties"), or (ii) the
general partner in various limited partnerships which own apartment
communities (the "Syndicated Partnerships"), collectively referred to as
the "Properties". With respect to the Syndicated Partnerships, the
Company retains a general partner interest ranging from 1.0% to 10.0%,
but typically 9.0% to 10.0%. The limited partnership interests are
substantially all owned by unrelated third party investors. The Company
also has receivables, typically in the form of second mortgages, from
the Syndicated Partnerships that generate a majority of the interest
income recognized by the Company.
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 typical Property averages
65 rental units which are located in multiple single story buildings
with studio, one and two bedroom apartments. All of the Properties have
non-recourse first mortgage indebtedness which is owed to financial
institutions. The Company is not dependent for its revenues on any
particular property and the loss of any property would not be material
to the Company's financial position. Geographic distribution of the
Properties also minimizes the Company's exposure to local economic
conditions.
The Company derives revenues from two core business activities: 1)
management of multifamily residential real property, including provision
of management services to owners of property in which the Company does
not have an ownership interest ("Management Services"); and 2)
activities related to the ownership of multifamily residential real
property (including provision of asset management services to passive
co-owners) ("Investment Management"). In December 1995, the Company
restructured along these business lines. The restructuring was
implemented, in part, to cause the Company and its management to focus
attention on these two distinct, yet complementary, business activities.
F-8
73
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Management Services
-------------------
The Company's Management Services division is charged with the conduct
of the Company's property management business. The Company's property
management business involves all traditional elements of third party
property management including: day-to-day management and maintenance of
multi-family residential apartment properties, attracting and retaining
qualified residents, collecting rents and other receivables from
residents, providing cash management services for rental revenues,
security deposits, taxes and insurance and deferred maintenance escrows,
and compiling and furnishing information to property owners.
Effective August 1, 1996, the Company acquired Lexford Properties, Inc.
("Lexford") by merger of a wholly owned subsidiary of the Company with
and into Lexford. On that date, Lexford became a wholly owned subsidiary
of the Company. Lexford has been engaged in the business of third party
property management services to the owners of multifamily residential
real property since commencing business operations in June 1988. At the
time the Company acquired Lexford, Lexford managed approximately 22,000
apartment units for third party owners. The Company currently intends
that Lexford will continue to provide and expand its third party
property management services as well as oversee the operation of the
Company's Management Services division which managed approximately
34,000 units in 1996, including the Wholly Owned Properties.
Accordingly, the Company's property management business will be
conducted through its wholly owned subsidiary, Lexford Properties, Inc.
Management believes that the acquisition of Lexford has enhanced the
Company's property management capabilities and will facilitate the
Company's ability to acquire, as well as service, additional multifamily
residential properties in the future including properties not built by
the Company. (SEE "LEXFORD ACQUISITION").
The Company's Management Services division also operates an adjunct
business which the Company refers to as "Ancillary Services". The
Company's Ancillary Services includes the sale of parts and supplies to
both the Wholly Owned Properties and Syndicated Partnerships and also
the leasing of furniture and sale of renters insurance to residents at
the Properties. In June 1996, the Company announced realignments in its
organization. As part of this restructure, the Company contracted to out
source the parts and supply inventory previously handled internally by
the Company's Ancillary Services function. The Company completed the
transition to the out sourcing by the end of 1996. Thereafter, the
Company's Ancillary Services department will continue to provide
assistance to the Properties, in the acquisition of needed parts and
supplies and the management of a coordinated buying group obtaining
substantial volume discounts. In consideration of these services, the
Company will generate income by retaining some portion of discounts
earned.
F-9
74
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Investment Management
---------------------
The objective of the Company's Investment Management division is to
maximize the value of its real estate holdings and its returns on real
estate investments. The Company performs these functions both with
respect to the Wholly Owned Properties as well as the Syndicated
Partnerships. The Company strives to obtain and maintain the best
available financing for the Properties and to maximize the Properties'
operating performance. The Company evaluates the performance of all real
estate holdings to identify investment requirements, under-performing
Properties or those that can be sold at an attractive price relative to
their performance.
The Company's Investment Management division acting in the Company's
capacity as general partner of the Syndicated Partnerships provides
asset management services to the Syndicated Partnerships. In addition,
the Company's Investment Management division performs the following
services for the accounts of the co-owners (limited partners) of the
Syndicated Partnerships: informational and financial reporting services
(including tax return preparation and provision of tax return
information to the limited partners) and capital and financial planning,
(including determination of reserves, funding of capital requirements
and administration of capital distributions to partners).
Fresh Start Accounting
----------------------
The Company adopted a method of accounting referred to as fresh start
("Fresh Start") reporting as of September 11, 1992 ("The Effective
Date") as a result of the Company's judicial plan of reorganization (the
"Plan of Reorganization"). The Company prepared financial statements on
the basis that a new reporting entity was created with assets and
liabilities recorded at their estimated fair values as of the Effective
Date. At the Effective Date, to the extent the non-recourse debt on
certain Wholly Owned assets exceeded the estimated fair value of the
Wholly Owned Property, the Company reduced the contractual amount of the
related non-recourse first mortgage debt by the amounts of the
deficiency (the "Mortgage Deficiencies"). The contractual mortgage
balance, net of any applicable Mortgage Deficiency, is referred to as
the "Carrying Value" of the mortgage.
Non-Core Assets
---------------
The Company also has interests in motel properties, vacant land, single
family homes, investor notes receivable and certain other assets
(collectively the "Non-Core Assets"). The Company valued these Non- Core
Assets, at the Effective Date, based on previous sales activity and
independent appraisals. In 1994, the Company recovered the entire
carrying value of the Non-Core Assets from the collection of receivables
and proceeds from disposal. The Company began recognizing income, net of
collection and closing costs, from the proceeds of disposal of these
Non-Core Assets once the carrying value was fully recovered. As of
December 31, 1996, the Company still has an ownership interest in
certain Non-Core Assets that may have potential value.
F-10
75
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Lexford Acquisition
-------------------
Effective August 1, 1996 the Company acquired Lexford by way of a merger
(the "Lexford Merger") of a wholly owned subsidiary of the Company with
and into Lexford. The acquisition was accounted for as a purchase. The
terms of the Lexford Merger provided that the Company would succeed to
the ownership of all of the issued and outstanding stock of Lexford and
the shareholders of Lexford would receive 700,000 shares of restricted,
newly issued Common Stock. For purposes of the Lexford Merger, the
Common Stock was valued at $20 per share. Approximately $9.0 million, or
450,000 shares, of the purchase price is subject to forfeiture in whole
or in part in the event Lexford does not achieve certain profitability
criteria by December 31, 1999. These shares are held in escrow pending
release. At the time the shares subject to forfeiture are released
without contingency, the Company will record the additional purchase
price. The Lexford shareholders received 250,000 shares of Common Stock
free of contingencies.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those
estimates.
Long-Lived Assets -- FASB Statement No. 121
-------------------------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of, ("FASB 121") which requires
impairment losses to be recorded on long-lived assets used in
operations, when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. FASB 121 became effective
beginning fiscal year 1996. Management is not aware of any indicator
that would result in any significant impairment loss.
F-11
76
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Fair Value of Financial Instruments
-----------------------------------
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of FASB
Statement No. 107, Disclosure About Fair Value of Financial Instruments.
The fair value of Cash and Funds Held in Escrow is equal to their
respective carrying amounts. For Interests in and Receivables from
Syndicated Partnerships the Company used the Fresh Start accounting
methodology used at the Effective Date to estimate the value at December
31, 1996 and 1995, which value approximated $133.4 million and $107.6
million, respectively. Such methodology is generally based on estimates
of the fair market value of the apartment communities owned by the
Syndicated Partnerships, less related indebtedness. The Interests in and
Receivables from Syndicated Partnerships substantially consist of second
mortgage loans receivable, whose ultimate repayment is subject to a
number of variables, including the performance and value of the
underlying real estate property and the ultimate timing of repayments of
the receivables. Considerable judgment is required in the interpretation
of market data to develop estimates of fair value, accordingly, the
estimates are not necessarily indicative of the amounts that could be
realized or would be paid in a current market exchange. The effect of
using different market assumptions and/or estimation methodologies may
be material to the estimated fair value amounts (See Note 3).
The carrying value of the amounts comprising the Company's term debt and
other notes payable as described in Notes 3 and 7 approximate their fair
value.
As further described in Note 5, at December 31, 1996 the Company's
mortgages on Wholly Owned Properties in the amount of $148.1 million had
contractual balances totaling $157.4 million. Interest rates on the
mortgages ranged from 7.0% to 10.0% with rates being fixed on
approximately $144.2 million of the contractual balances. In addition,
mortgages with a contractual and carrying value of $4.8 million had
matured as of December 31, 1996 (See Note 5). Management believes that
using the Company's incremental borrowing rate to estimate fair value of
the mortgages is not appropriate and, because of excessive costs,
considers estimates of fair value to otherwise be impracticable.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Cardinal
Realty Services, Inc. and its wholly owned subsidiaries, including
Wholly Owned Properties. All significant intercompany balances and
transactions (except for Fee Based Revenues and related expenses
generated from Wholly Owned Properties in 1995 and 1994) have been
eliminated in consolidation. Total Revenues from Wholly Owned Properties
(during the period such properties were held for sale) amounted to $3.6
million and $3.4 million for the years ended December 31, 1995 and 1994,
respectively. Any gross profit on such revenues has been eliminated in
consolidation (See Note 2).
Reclassification
----------------
Certain reclassifications have been made in the Consolidated Financial
Statements resulting from changes in classification of Wholly Owned
Properties in 1996 previously Held for Sale or to provide comparable
information in the Consolidated Statements of Income and Cash Flows.
These reclassifications had no effect on shareholders' equity.
F-12
77
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Restatement
-----------
The net income previously reported in the 1994 Consolidated Statements
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.
The Company reported net income but was not required to pay taxes on
such income as the result of having the benefit of deductions for tax
purposes including net operating loss carryforwards to offset the
income. The financial statements as adjusted, reflect a non-cash charge
in the form of a tax provision in the Consolidated Statements of Income.
The valuation reserve against net deferred tax assets has 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:
As Adjustment
Previously for Tax As
Reported Provision Adjusted
--------------------- ---------------------- -------------------
1994
- ----
Income before Extraordinary Gain $ 6,333,943 $ (2,390,000) $ 3,943,943
Extraordinary Gain 5,229,901 (2,074,000) 3,155,901
--------------------- ---------------------- -------------------
Net Income $ 11,563,844 $ (4,464,000) $ 7,099,844
===================== ====================== ===================
Per Share of Common Stock: 1
1994
- ----
Income before Extraordinary Gain $1.64 ($0.62) $1.02
Extraordinary Gain 1.36 (0.54) 0.82
--------------------- ---------------------- -------------------
Net Income $3.00 ($1.16) $1.84
===================== ====================== ===================
<FN>
1 Per share amounts have been restated to reflect the completion of the claims
resolution process for the issuance of common stock.
</FN>
F-13
78
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Wholly Owned Properties (previously Held for Sale)
--------------------------------------------------
During 1995 and prior years, the Company classified the Wholly Owned
Properties as Held for Sale. However, based upon mortgage debt that has
since been restructured with favorable amortization terms, combined with
improved net operating income and cash flow performance, management
decided to retain the Wholly Owned Properties for investment. Therefore,
commencing January 1, 1996, the Company changed the classification of
the Wholly Owned Properties and discontinued the Held for Sale
accounting treatment. The Wholly Owned Properties are depreciated over
their estimated remaining useful lives, typically approximately 30
years, using the straight-line method for financial reporting purposes
and tax purposes. The Company expensed all interior replacement costs
and capitalized major building exterior improvements (See Note 2).
Interests in and Receivables from Syndicated Partnerships
---------------------------------------------------------
The carrying value of the interests in and receivables from Syndicated
Partnerships represents the allocation of the estimated fair value of
the assets as of the Effective Date and, as described in Note 3, the
face amounts of the receivables are significantly more than recorded
amounts. These receivables generally include long-term second mortgages
and other receivables. In addition, subsequent to the Effective Date,
the Company has made advances to the Syndicated partnerships. These
advances primarily relate to supplemental funding for refinancing
transactions, and bear interest at prime plus one percent. Interest is
accrued on the recorded values of the second mortgages and certain of
the other receivables based upon contractual interest rates, and
allowances are provided for estimated uncollectible interest based upon
the underlying properties' net cash flow. In certain instances, cash
flow received in excess of accrued second mortgage interest on the
recorded values of the second mortgages is recorded as income. The
Company is also entitled to receive incentive management fees and
supplemental second mortgage interest based upon certain levels of cash
flow of certain of the underlying properties. Also, in the event the
underlying properties are sold or refinanced, the Company is generally
entitled to a participation interest in the net proceeds, as a general
partner and/or a second mortgage holder. The Company accounts for its
general partner interests by the cost method; no significant recorded
value has been ascribed to these interests arising prior to the
Effective Date. The realization of the interests in and receivables from
Syndicated Partnerships is dependent on the future operating performance
of the Syndicated Partnerships.
F-14
79
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Cash
----
Operating cash as of December 31, 1996 and 1995 is comprised of $3.3
million and $2.7 million respectively, related to Wholly Owned
Properties which is held in separate property bank accounts and
approximately $270,000 and $52,000 in corporate funds, respectively. The
majority of excess corporate cash is applied to the corporate term debt
and reborrowed as needed.
Furniture, Fixtures and Other, Net
----------------------------------
Furniture and fixtures are recorded at cost. Furniture and fixtures are
depreciated over their estimated useful lives using the straight-line
method for financial reporting purposes and various accelerated or
straight-line methods for income tax purposes.
Funds Held in Escrow
--------------------
The amounts at December 31, 1996 and 1995 include funds of $7.0 million
and $7.1 million, respectively, escrowed by Wholly Owned Properties for
improvements and deferred maintenance, real estate taxes, insurance and
resident security deposits. In addition, the Company is holding $3.0
million and $2.3 million, at December 31, 1996 and 1995, respectively,
as funds held primarily for payment of insurance premiums which are
collected on behalf of the Properties. At December 31, 1996 the
Company's funds held in escrow also includes $4.0 million of funds
received from the settlement of termite litigation. The funds are being
held pending the finalization of an allocation of proceeds to the
affected properties. Applicable corresponding liabilities have been
recorded at December 31, 1996 and 1995.
Prepaids and Other Assets
-------------------------
Prepaids and Other Assets as of December 31, 1996 and 1995 is comprised
of the following:
1996 1995
------------------ ----------------
Corporate:
- ----------
Acquired Management Contracts, net of amortization of $67,219 $ 1,546,041 $ 0
Goodwill, net of amortization of $62,409 3,797,323 0
Inventory 0 455,083
Other 952,637 987,522
Wholly Owned Properties:
- ------------------------
Capitalized Refinancing Costs 2,721,365 1,370,638
Prepaid Insurance, Taxes and Other 832,131 1,116,856
------------------ ----------------
$ 9,849,497 $ 3,930,099
================== ================
F-15
80
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
The management contracts purchased with the Lexford Acquisition are
being amortized on the straight line basis over 10 years. The Goodwill
related to the Lexford acquisition is being amortized on the straight
line basis over 25 years. The capitalized refinancing costs are
associated with the refinancing of the mortgages on the Wholly Owned
Properties. The costs are being amortized over six to ten years based
upon the maturity of the new loans.
Net Income Per Share
--------------------
Net income per share 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 period and those contingent
shares estimated to be issued to officers, employees and directors in
accordance with the Company's 1992 Incentive Equity Plan, as amended
(the "Incentive Equity Plan"). In August 1996, the Company issued
700,000 shares of Common Stock in connection with the Lexford merger,
450,000 shares of which remain subject to forfeiture in whole or in
part. The 450,000 shares subject to forfeiture are excluded from the
weighted average shares outstanding because the shares are not dilutive.
The weighted average shares outstanding, as of December 31, 1996, was
approximately 3,933,000, (less 210,000 treasury shares) including
approximately 244,000 estimated to be issued in the future pursuant to
the Incentive Equity Plan. As of December 31, 1995 and 1994 the weighted
average shares outstanding was approximately 3,850,000 shares. In
November 1995, the shareholders of the Company approved an increase in
the number of authorized shares of Common Stock of the Company from
4,500,000 to 13,500,000 and also authorized 1,500,000 shares of "Blank
Check" Preferred Stock. The Company currently has no commitments or
arrangements which would require the issuance of additional shares.
Treasury shares include approximately 70,000 shares issued to Wholly
Owned Properties and subsidiaries as part of the Company's plan of
reorganization. In addition, approximately 126,000 unclaimed shares,
related to stock issued for prepetition unsecured claims, have been
converted to treasury shares. The Plan of Reorganization provided that
all stock issued, but not deliverable, to any unsecured creditor, be
held in trust for a period of two years from the Effective Date, at
which time such stock would either be canceled or revert to the Company
as treasury shares at the Company's discretion. The Company elected to
treat undeliverable stock as treasury shares.
F-16
81
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 2: WHOLLY OWNED PROPERTIES
During 1995 and prior years, the Company had attempted to market and
sell the Wholly Owned Properties and classified the Wholly Owned
Properties as Held for Sale. 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.
Commencing January 1, 1996, based upon management's decision to retain
the Wholly Owned Properties for investment, 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. The Company will continue to
monitor and evaluate any changes in circumstances and/or economic
conditions affecting its investment in the Wholly Owned Properties. The
Company is currently analyzing alternatives for its majority interest in
the Wholly Owned Properties, which may include a disposition to third
parties resulting in deconsolidation of the entities.
The number of Wholly Owned Properties by year is as follows:
1996 1995 1994
-------------- --------------- -------------
Beginning of Year 116 116 120
Acquisitions 1 4 0
Disposals (4) (2) (2)
Properties Combined 0 (2) (2)
-------------- --------------- -------------
End of Year 113 116 116
============== =============== =============
F-17
82
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 2: WHOLLY OWNED PROPERTIES (cont'd)
Condensed combined balance sheets, with intercompany payables and
receivables eliminated, of the Company's Wholly Owned Properties as of
December 31, 1996 and 1995 are as follows:
1996 1995
--------------------- ----------------------
ASSETS
Net Operating Real Estate Assets (Held for Sale in 1995) $157,091,545 $173,064,441
Less: Cumulative Income Related to Wholly Owned Properties
from the Effective Date to December 31, 1995 0 (8,730,386)
--------------------- ----------------------
157,091,545 164,334,055
Cash 3,322,494 2,699,924
Accounts Receivable 324,772 1,043,069
Funds Held in Escrow 6,980,142 7,097,162
Prepaids and Other 3,553,497 2,487,494
--------------------- ----------------------
$171,272,450 $177,661,704
===================== ======================
LIABILITIES AND EQUITY
Non Recourse Mortgages Payable:
Contractual $157,381,603 $163,812,985
Mortgage Deficiency (9,325,586) (15,624,874)
--------------------- ----------------------
148,056,017 148,188,111
Accounts Payable 1,160,426 953,076
Accrued Interest and Real Estate Taxes 2,961,795 3,577,547
Other Accrued Expenses 1,337,083 1,315,132
Other Liabilities 683,202 1,094,800
--------------------- ----------------------
154,198,523 155,128,666
Equity 17,073,927 22,533,038
--------------------- ----------------------
$171,272,450 $177,661,704
===================== ======================
F-18
83
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 2: WHOLLY OWNED PROPERTIES (cont'd)
Condensed consolidated statements of income of the Wholly Owned
Properties while Held for Sale, including intercompany expenses, for the
years ended December 31, 1995 and 1994 are as follows:
1995 1994
------------------- -----------------
Rental Revenues $40,000,678 $38,773,604
Operating Expenses (18,691,062) (17,651,516)
------------------- -----------------
Net Operating Income 21,309,616 21,122,088
Improvements and Replacement Expense (2,213,586) (2,579,321)
Improvements and Replacement Expense
funded from Escrows (1,746,156) (334,574)
Interest Expense (contractual interest of approximately
$14,562,000 and $15,312,000, respectively) (13,549,258) (13,450,027)
Other Expenses (1,464,630) (1,564,481)
Reorganization Expenses (96,227) (517,354)
------------------- -----------------
Income, less expenses, excluding depreciation $2,239,759 $2,676,331
=================== =================
Revenues from rental of apartment units is recognized ratably over the
term of the related operating leases, which are generally for a period
of one year or less.
NOTE 3: INTERESTS IN AND RECEIVABLES FROM SYNDICATED PARTNERSHIPS
The Interests in and Receivables from Syndicated Partnerships net of
reserves of $2.3 million and $1.9 million, respectively, are comprised
of the following major components:
1996 1995
--------------------- ----------------------
Second Mortgage Notes $36,450,176 $37,402,604
Advances, since the Effective Date 14,271,906 10,714,680
Other, including accrued interest 3,888,339 4,474,160
--------------------- ----------------------
$54,610,421 $52,591,444
===================== ======================
The majority of second mortgage notes bear interest at 6%. Interest
income is accrued based upon the Fresh Start value of the second
mortgage notes, as described in Note 1. Advances made to Syndicated
Partnerships since the Effective Date primarily were for supplemental
financing for the debt restructuring or refinancing transactions as
described in Note 6. These advances currently bear interest at prime
plus 1%. At December 31, 1996 and 1995, the contractual value of the
Company's interest in second mortgages, advances and other receivables,
including related interest, amounted to $238.9 million and $237.1
million, respectively. There can be no assurance that the Company will
collect any amounts above the carrying value of these receivables.
F-19
84
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 4: CORPORATE TERM DEBT
In August 1995 the Company closed a loan agreement with The Provident
Bank (the "Bank") which provided a new $32.0 million credit facility for
the Company. The new credit facility retired the previous corporate
credit facility with The Huntington National Bank ("HNB"). During 1995,
the variable interest rates on the HNB debt ranged from 9.0% to 10.0%
with fixed rates of 5.54% to 6.03%. At the time of refinancing,
approximately $6.5 million of the HNB facility was subject to a fixed
interest rate of 6.03% with an overall weighted average rate on the
total HNB credit facility of 8.25%
The bank credit facility is comprised of three separate lines of credit,
two of the lines bear interest at the Bank's prime rate of interest
minus 1% and the third line at 7.25% fixed. During 1996, the variable
interest rate on the Bank debt was 7.25%. The loans are secured by all
assets of the Company.
The credit facility was comprised of the following terms and balances at
December 31, 1996 and 1995:
1996 1995
------------------ ------------------
Acquisition revolving line (the "Acquisition Line I"), credit facility
for $7.0 million, with variable interest rate converted in February
1996, to fixed interest rate of 7.25%, due in March 2001, with monthly
installments of principal and interest due of $139,435 with no further
credit availability on this line $6,007,232 $7,000,000
Working capital revolving credit facility (the "Working Capital Line"),
maximum credit facility of $3.0 million, due in August 1997, subject to
annual renewal by the Bank 0 0
Reducing balance revolving line (the "Reducing Line"), maximum credit
facility of $22.0 million, due in August 2001, with quarterly reductions
in available credit of $750,000 commencing in October 1996 9,110,816 13,470,205
------------------ ------------------
$15,118,048 $20,470,205
================== ==================
Borrowings under the Working Capital Line will amortize over 36 months
if the Bank does not renew the facility when due in August 1997. The
Acquisition Line is subject to annual renewal and is restricted to
provide funds for the acquisition of, or refinancing/restructuring of
mortgages on affiliated properties. The Reducing Line was used to retire
the HNB credit facility.
In July 1996, the Company received a commitment letter from the Bank for
a new $10.0 million Acquisition Line (the "Acquisition Line II) of
credit generally under the same terms as the existing facility. The
Company's capital requirements in 1996 did not require the Company to
access this new facility.
At December 31, 1996 the Company had unrestricted credit availability of
approximately $25.4 million, inclusive of the new $10.0 million
commitment from the Bank, but excluding credit availability restricted
for approximately $767,000 of unfunded letters of credit. At December
31, 1995, the Company had $10.7 million available for future credit
which excluded $829,000 of availability restricted for specific credit
needs.
F-20
85
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 4: CORPORATE TERM DEBT (cont'd)
The Company's minimum annual long term debt maturities following
December 31, 1996 are:
1997 $ 4,285,595
1998 4,376,035
1999 4,479,181
2000 1,700,874
2001 276,363
-------------------
$ 15,118,048
===================
NOTE 5: NON RECOURSE MORTGAGES ON WHOLLY OWNED PROPERTIES
In connection with Fresh Start reporting as further described in Note 1,
mortgages on real estate assets have been restated to their estimated
fair value as of the Effective Date. The contractual principal balances
of the mortgages on Real Estate Assets exceed the carrying values by
$9.3 million and $15.6 million at December 31, 1996 and 1995,
respectively. The mortgages are non-recourse and are collateralized by
real estate properties and are payable over periods through 2006. At
December 31, 1996 contractual interest rates ranged from 7.0% to 10.0%
with fixed rates on approximately $144.2 million of the outstanding
contractual mortgage balances. Interest expense is recorded using the
effective interest method based upon the carrying value of the mortgage
debt. The weighted average effective interest rate was 9.0% at December
31, 1996. The weighted average contractual interest rate and term to
maturity on the mortgages on Real Estate Assets, excluding matured
loans, was 8.7% and 7.1 years at December 31, 1996. Annual debt service
requirement was $15.7 million at December 31, 1996. In addition, 15
Wholly Owned Properties have secondary mortgage debt totaling $2.9
million that requires the application of all excess cash flow from
operations to be applied to the outstanding principal on such debt. The
range of interest rates and related carrying amounts of mortgages
payable at December 31, 1996 is as follows:
Contractual Contractual Carrying
Rate Balance Value
- ------------------------- ----------------------- -----------------------
Less than 8.0% $ 15,339,067 $ 13,042,258
8.0% - 9.0% 127,440,097 121,908,563
More than 9.0% 14,602,439 13,105,196
----------------------- -----------------------
$ 157,381,603 $ 148,056,017
======================= =======================
At December 31, 1996, four Wholly Owned Properties had mortgage loans
which had matured with an aggregate contractual and carrying value of
$4.8 million. The Company will either refinance the mortgages or deed
the property to the lender depending upon the outcome of negotiations
with the respective lenders.
Minimum estimated repayment requirements of mortgages for the next five
years based upon the contractual principal balances, exclusive of those
mortgages which have matured, are as follows:
F-21
86
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 5: NON RECOURSE MORTGAGES ON WHOLLY OWNED PROPERTIES (cont'd)
Contractual
Amounts
---------------------
1997 $ 3,055,003
1998 8,961,786
1999 6,572,553
2000 6,574,634
2001 22,371,767
Thereafter 109,845,860
---------------------
$ 157,381,603
=====================
NOTE 6: REFINANCED MORTGAGE DEBT
In 1996, the Company refinanced the mortgage and related interest debt
on 35 Wholly Owned Properties. Mortgage and related interest debt with a
contractual balance of $46.8 million and a Carrying Value of $45.6
million was refinanced with new carrying value and contractual mortgage
debt of $47.8 million. The new mortgages carry a weighted average fixed
interest rate of 8.8%, 25 to 30 year amortization and typically, a 10
year maturity. Annual debt service requirements decreased from $4.9
million to $4.6 million. In these transactions, cash flow secondary
mortgages ("B Notes") on six properties were refinanced. These "B Notes"
required 100% of excess cash flow from operations of the properties to
be applied to the principal outstanding on the B Notes. In 1996 the
excess cash flow applied to the B Notes on these six properties amounted
to approximately $98,000. The Wholly Owned Properties incurred loan
origination costs of $1.7 million which have been capitalized and are
being amortized over the maturity term of the new mortgages. The Company
provided net funding of $1.1 million to complete these transactions.
A fourth quarter 1996 extraordinary non-cash charge of $1.6 million, net
of tax benefits, resulted from mortgage debt refinancing on certain of
the above Wholly Owned Properties. The repayment of the existing
mortgage at the contractual balance was possible due to the improvements
in performance resulting in the increased value of certain properties to
levels in excess of the carrying value established on the Effective
Date. The charge arose from those mortgages repaid from refinance
proceeds at the contractual balance which exceeded the Carrying Value of
the mortgage. (Note 1).
The Company also completed the refinancing of mortgage and related
interest debt of $95.3 million on 90 Syndicated Partnerships. The
Company provided net advances to Syndicated Partnerships of
approximately $600,000 to facilitate these transactions. Annual debt
service requirements decreased, in the aggregate, approximately $626,000
per year. The new mortgages on 72 Syndicated Partnerships are interest
only for three years; after the third year the annual debt service
reduction will be offset by the commencement of principal amortization.
F-22
87
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 6: REFINANCED MORTGAGE DEBT (cont'd)
The refinancing on the Syndicated Partnerships generated loan fee
revenue of approximately $752,000 in 1996 as compared to $886,000 and
$1.3 million in 1995 and 1994, respectively. The fees were based upon a
graduated percentage of the new loan amounts.
In 1995 and 1994, the Company completed modification or refinancing
transactions on Wholly Owned Properties and Syndicated Partnerships
which 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 and $3.2 million, respectively.
NOTE 7: OTHER NOTES PAYABLE
In June 1995, the Company purchased from a mortgage lender the mortgages
on one Syndicated Partnership and four Wholly Owned Properties for $7.8
million. The Company, on an interim basis, financed the purchase of the
mortgages with a promissory note payable to the mortgage lender.
Approximately $1.2 million of the $7.8 million note payable relates to a
Syndicated Partnership and was classified with other notes payable at
December 31, 1995. The balance of the note payable relates to Wholly
Owned Properties and was classified with mortgages on Wholly Owned
Properties at December 31, 1995. The note was repaid from the proceeds
of permanent non recourse financing on the Properties in 1996.
The remaining $145,220 of Other Notes Payable consists of obligations
which are payable through 1997, bear interest at approximately 9.0% and
are secured by equipment and other collateral.
NOTE 8: OTHER LIABILITIES
Other Liabilities at December 31, 1996 and 1995 consists of
approximately $683,000 and $964,000, respectively, of liabilities of the
Wholly Owned Properties and $4.7 million and $1.3 million, respectively,
of obligations of the Company. The Other Liabilities of the Wholly Owned
Properties at December 31, 1996 consists principally of general
operating accruals and obligations of the properties. The Company's
Other Liabilities includes $3.4 million due to Syndicated Partnerships
related to a litigation settlement to be funded from restricted cash
held in escrow (See Note 1). The remaining other liabilities principally
relate to obligations from the Company's Plan of Reorganization.
In 1994, the Company settled a pending claim in its bankruptcy case
which resulted in a reduction of a recorded liability of approximately
$726,000 in exchange for the Company's dismissal of a bankruptcy
preference action against an insurance company and an insurance broker.
The income recognized due to the release of the liability is reflected
in Other Income.
F-23
88
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 9: INCENTIVE COMPENSATION PLAN
The Company's 1992 Incentive Equity Plan which benefits its officers,
key employees and non-employee directors, was established as of the
Effective Date of the Company's Plan of Reorganization. Under this plan
approximately 481,200 shares are available for awards of stock options
and restricted stock. In addition to the Incentive Equity Plan, as of
the Effective Date, the bankruptcy trustee awarded options to purchase
approximately 36,000 shares to certain key employees under an employee
retention plan. Since the shares included in the 1992 Incentive Equity
Plan and the trustee awarded options were provided in the Plan of
Reorganization, the shares have been deemed awarded prior to the
Effective Date with no compensation expense recorded for periods
subsequent to the Effective Date. In November 1995, the Board of
Directors adopted and the shareholders approved an amendment to the
Incentive Equity Plan (the "Plan Amendment"). The Plan Amendment
provided for an additional 200,000 shares of Common Stock to be
available for the granting of future awards for officers and key
employees. In addition, the Plan Amendment provides for 50,000 shares of
Common Stock to be available for the granting of stock options to
non-employee directors. Awards of shares provided in the Plan Amendment,
depending on the nature of the award, may be reflected as compensation.
The shares of stock available for future awards may be awarded at the
discretion of the Company's Board of Directors.
In 1996 the Company awarded to officers and non-employee directors
49,500 shares of restricted stock, 38,000 shares of deferred stock and
stock options for the purchase of 76,000 shares. The restricted stock is
comprised of up to 17,500 shares awarded as a Company match of shares if
purchased by certain officers by April 1997, and 32,000 shares which
will vest ratably over time. The deferred stock vests based upon the
Company achieving specified levels of total market capitalization. The
grant date weighted fair value of restricted and deferred stock was
approximately $18.57 per share. Included in the 76,000 of stock options
awarded in 1996 were options to purchase 2,000 shares that were awarded
to each of the eight non-employee directors of the Company.
Approximately 32,500 shares of restricted stock awards and the options
to purchase 30,000 shares were awarded out of the shares included in the
original 1992 Incentive Equity Plan. Approximately 173,000 shares remain
available for future awards. The Company's performance based Incentive
Bonus Plan implemented in 1996 includes awards of restricted stock and
stock options if specified Company performance criteria are achieved.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its employee and director
stock options because, the alternative fair value accounting provided
for under FASB Statement No. 123, "Accounting for Stock Based
Compensation," ("FASB 123") requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB
25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FASB 123, which also requires that the information be
determined as if the Company has accounted for its employee stock
options granted subsequent to December 31, 1994 under the fair value
method of that Statement. The fair value for these options was estimated
at the date of the grant using Black-Scholes option pricing model.
F-24
89
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 9: INCENTIVE COMPENSATION PLAN (cont'd)
The following assumptions were utilized in the pricing model; a weighted
average risk free interest rate of 6.5% in 1995 and 1996; dividend yield
of one percent; volatility factors of the expected market price of the
Company's common stock of 0.236; and a weighted average expected life of
seven years in 1996 and eight years in 1995.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restriction and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options vesting period. The Company's pro
forma information follows:
1996 1995
------------------- -------------------
Pro forma net income $ 3,629,797 $ 5,090,716
=================== ===================
Pro forma earnings per share $ 0.92 $ 1.32
=================== ===================
As reported Earnings per share $ 0.96 $ 1.32
=================== ===================
Pro forma net income may not be representative of compensation expense
under FASB 123 when the effect of the amortization of multiple awards
would be reflected.
F-25
90
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 9: INCENTIVE COMPENSATION PLAN (cont'd)
The following table summarizes the Company's stock option activity, and
related information for the years ended December 31, 1996, 1995 and 1994
(in thousands except for exercise prices)
1996 1995 1994
------------------- --------------------- ---------------------
Weighted Weighted Weighted
Ave. Ave. Ave.
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------- --------------------- ---------------------
Options outstanding at beginning of year 135 $4.10 135 $2.33 140 $2.31
------------------- --------------------- ---------------------
Options granted 76 $18.87 16 $17.25 1 $7.00
Options exercised (34) $1.80 (14) $2.27 (1) $2.62
Options forfeited (1) $2.62 (2) $2.62 (5) $2.62
------------------- --------------------- ---------------------
Options outstanding at end of year 176 $10.91 135 $4.10 135 $2.33
=================== ===================== =====================
Options exercisable at end of year 88 $5.20 96 $2.21 86 $2.12
=================== ===================== =====================
Weighted Ave. Fair Value of Options
Granted during the Year $6.37 $6.84 N/A
========== =========== ==========
Options awarded have an exercise price equal to or greater than the
market price of the Common Stock at the time of the award, and are
subject to vesting schedules as determined by the Company's Board of
Directors. The options granted expire, if not exercised, ten years from
the date on which the option was granted. Exercise prices for options
outstanding as of December 31, 1996 ranged from $1.42 to $21.25 per
share with a weighted average remaining term of 7.7 years.
NOTE 10: INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return. For financial reporting purposes, the Company follows FASB
Statement No. 109 ("FASB 109"). In accordance with FASB 109, as well as
SOP 90-7, income taxes have been provided at statutory rates in effect
during the period. Tax benefits associated with net operating loss
carryforwards and other temporary differences that existed at the time
fresh start reporting was adopted are reflected as an increase to
Additional Paid-in Capital in the period in which they were realized.
F-26
91
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 10: INCOME TAXES (cont'd)
The provision for income taxes in the Consolidated Statements of Income
(including amounts applicable to extraordinary items) is as follows:
Years Ended
--------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
Current:
Federal $ 0 $ 50,000 $ 0
State 250,000 314,000 201,000
Amounts not payable in cash 2,151,000 2,866,000 4,464,000
---------------- ---------------- ----------------
$ 2,401,000 $ 3,230,000 $ 4,665,000
================ ================ ================
The Company's actual income tax payments for the years 1996, 1995 and
1994 were significantly less than the total provision for income taxes
because of available net operating loss carryforwards and other tax
benefits. The amounts included in the provision for taxes for which no
amounts were payable in cash are set forth in the table above.
The effective income tax rates varied from the federal statutory rates
as follows:
1996 1995 1994
------------ ------------ ------------
Federal Tax provision at statutory rates $ 2,094,000 $ 2,832,000 $ 4,118,000
State Income Taxes,
Net of Federal Income Tax Benefit 288,000 386,000 537,000
Other Permanent Differences 19,000 12,000 10,000
------------ ------------ ------------
$ 2,401,000 $ 3,230,000 $ 4,665,000
============ ============ ============
Effective Income Tax Rate 39.0% 38.8% 39.6%
============ ============ ============
F-27
92
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 10: INCOME TAXES (cont'd)
Significant components of the Company's deferred tax assets and
liabilities are as follows at December 31, 1996 and 1995.
(000s omitted)
--------------------------------
1996 1995
-------------- ------------
Deferred Tax Assets and Other:
Net operating loss carryforwards and other carryforwards $ 19,000 $ 17,000
Suspended passive activity losses 38,000 39,000
Tax basis of assets in excess of Fresh Start estimated values 39,000 43,000
-------------- ------------
96,000 99,000
-------------- ------------
Less: valuation reserve (24,000) (30,000)
-------------- ------------
$ 72,000 $ 69,000
============== ============
Deferred Tax Liabilities:
Negative capital accounts $ 41,000 $ 35,000
Tax basis of liabilities in excess of related
Fresh Start estimated fair values 3,000 4,000
Tax basis of assets less than related
Fresh Start estimated fair values 28,000 30,000
-------------- ------------
$ 72,000 $ 69,000
============== ============
The valuation reserve against deferred tax assets has been reduced by
amounts equivalent to the portions of the tax provisions which are not
payable in cash. Corresponding increases have been made to Additional
Paid-in Capital.
As a result of the uncertainties relating to the ultimate utilization
of favorable tax attributes described below, the Company has provided a
valuation reserve for the remaining excess of the net deferred tax
assets as of December 31, 1996 and 1995.
F-28
93
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 10: INCOME TAXES (cont'd)
In addition to regular corporate income tax, corporations are subject
to an alternative minimum tax liability to the extent alternative
minimum tax exceeds regular tax. The Company will record an alternative
minimum tax liability in the year that events and transactions create
an alternative minimum tax which is probable of being paid and can be
reasonably estimated by the Company. As of December 31, 1996, the
Company has estimated that it has net operating loss ("NOL")
carryforwards for tax purposes of approximately $44.3 million which if
not utilized, expires in the years 2001 through 2009. In the event that
current or future 5% shareholders (as defined by the Internal Revenue
Code) acquire or dispose of shares, over a defined time period,
representing in the aggregate 50% or more of the Company's outstanding
shares, a limitation on the use of NOL carryforwards will occur. The
Company has also estimated that it has approximately $108.7 million in
suspended passive activity losses ("PALs") which may be available to
offset future passive and active income. The Company's determination of
its NOLs, PALs, and other tax attributes, as well as its ability to
utilize them to reduce taxable income is subject to uncertainties.
Although the Company believes that its determinations concerning its
tax attributes are supportable under applicable tax laws, there can be
no assurance that taxing authorities, upon examination will not argue
to the contrary.
NOTE 11: RESTRUCTURING/TENDER OFFER COSTS
In 1995, the Company implemented a corporate restructuring plan and
initiated further restructuring in 1996. The Company recorded a charge
of approximately $243,000 and $1.5 million in 1996 and 1995,
respectively, related to the costs of the restructuring, principally
severance and separation costs. Approximately 26 employees were
released as a result of the restructurings in 1995 and 1996. In 1996
the Company paid $1.7 million of costs related to the 1995 and 1996
restructuring.
In 1994, the Company received proposed tender offers for the
acquisition of at least 80% of the outstanding shares of the Company's
Common Stock. The Board of Directors of the Company engaged various
outside professionals to assist in the analysis of the proposed tender
offers. The costs associated with the outside professionals were
deferred pending the resolution of the proposed tender offers. Due to
the termination of all proposed tender offers, the Company expensed
approximately $977,000 of costs incurred in connection with the
proposed tender offers.
F-29
94
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 12: COMMITMENTS AND CONTINGENCIES
Office Lease
------------
The Company leases its corporate office space under an operating lease
which expires in October, 1997. The Company has an option for five
additional terms of three years each. The Company is responsible for
the payment of insurance, real estate taxes and operating expenses of
the leased facility. (See Note 14). The Company's Lexford wholly owned
subsidiary leases office space in four cities to support its third
party management operations. The majority of leases expire in 1999.
Annual rental requirements are approximately $558,000 in 1997, $272,000
in 1998 and $133,000 in 1999. The Company also leases various
equipment, typically over five years, and management offices under
operating leases which generally have remaining terms of less than one
year. The equipment rental requirements are approximately $241,000 in
1997, $211,000 in 1998 and $146,000 in 1999. Rent expense for the years
ended December 31, 1996, 1995, and 1994 was approximately $749,000,
$512,000 and $391,000, respectively.
Litigation
----------
The Company is involved in various legal actions arising out of the
normal course of its business. Management of the Company, based upon
knowledge of facts and the advice of counsel, believes potential
exposure to loss from legal actions has been adequately reserved for in
the financial statements and should not result in a material adverse
effect on the Company's consolidated financial position.
NOTE 13: RETIREMENT PLAN
The Company maintains the Cardinal Realty Services, Inc. Savings Plan
(the "Savings Plan") under section 401(k) of the Internal Revenue
Service Code (the "Code"), to which participants may contribute a
percentage of their base pay and overtime earnings up to limits
established by the Code. The Savings Plan was amended and restated,
effective July 1, 1993, to (i) provide for discretionary matching
contributions by the Company, (ii) provide for immediate vesting in all
Company contributions and (iii) allow loans to participants. Effective
December 31, 1995 the Savings Plan was amended to exclude highly
compensated employees. Effective July 1, 1996, the Savings Plan was
amended to include employees of the Properties as participants,
increase the Company match from 1% for every 3% of wages contributed to
1% for every 2% of wages contributed, and to allow highly compensated
employees to participate in the Plan. The Company contribution amounts
to 1% of wages for every 2% of wages contributed by a participant up to
a maximum of the lesser of 3% of wages or $2,000 per year. In 1996,
1995 and 1994, the Company's cash contributions amounted to
approximately $134,000, $92,000, and $88,000, respectively. The Company
cash contributions are then invested in Company stock held by the
Savings Plan Trustee.
F-30
95
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 14: RELATED PARTY TRANSACTIONS
The Company is the general and limited partner in, or the owner of, all
Wholly Owned Properties and is a general partner in the Syndicated
Partnerships. The Company also serves as the management company for
substantially all of these properties and provides various ancillary
services including sales of parts and supplies to the properties and
furniture rentals and renters insurance to residents. The Company's fee
based revenue, interest income and ancillary income result primarily
from properties affiliated with the Company. Approximately $4.1 million
and $3.9 million of the Company's accounts receivable are due from the
Syndicated Partnerships as of December 31, 1996, and 1995,
respectively.
The Company advanced, net of amounts repaid, to Syndicated Partnerships
$2.6 million, $8.6 million, and $1.4 million in 1996, 1995 and 1994,
respectively. The majority of the advances relate to supplemental
financing provided for the refinancing of the mortgages on the
properties as described in Note 6. Effective October 1, 1995, in
conjunction with the favorable terms the Company achieved on its credit
facility, the interest rate on these advances was revised to prime plus
one percent from principally prime plus six percent. The interest rate
on advances will be adjusted in the future based on prevailing market
rates.
During 1994, the Company loaned approximately $331,000 to certain key
officers and certain key employees. The majority of the loans bear
interest at the rate of 1% in excess of the prime rate of the Bank, and
are due in five years. The loans were made to fund the personal income
tax obligations arising from the tax effect of the vesting in the
Company's Common Stock awarded to these individuals and are secured by
the Common Stock awarded. All loans were repaid in 1996. At December
31, 1995, the amount of loans and related interest outstanding amounted
to approximately $109,900.
An outside director of the company is a partner in the law firm which
serves as outside general counsel to the Company. Legal fees paid
related to services provided to the Company by this law firm were
approximately $286,000 in 1996, $255,000 in 1995, and $432,000 in 1994.
In addition, legal fees paid related to debt restructuring and
refinancing services provided by this law firm to the Wholly Owned
Properties and Syndicated Partnerships were approximately $523,000 in
1996, $739,400 in 1995 and $935,000 in 1994, respectively.
Another outside director of the Company has an ownership interest in
the lessor of the Company's Ohio office facility (as discussed in Note
12).
F-31
96
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 15: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------- -------------------- --------------------- -----------------------
Revenues
1996 $ 14,689,011 $ 14,711,256 $ 15,709,041 $ 20,191,682
1995 $ 5,541,014 $ 6,147,749 $ 5,748,023 $ 6,239,643
Income before Extraordinary Gain
1996 $ 1,091,350 $ 757,284 $ 887,034 $ 2,634,562
1995 $ 1,108,805 $ 1,494,284 $ 1,302,527 $ 387,097
Extraordinary Gain/(loss), net of
Income Taxes
1996 $ 0 $ 0 $ 0 $ (1,614,356)
1995 $ 263,952 $ 540,070 $ 0 $ 0
Net Income
1996 $ 1,091,350 $ 757,284 $ 887,034 $ 1,020,206
1995 $ 1,372,757 $ 2,034,354 $ 1,302,527 $ 387,097 (1)
Net Income per Common Share:
Income before Extraordinary Item
1996 $ 0.28 $ 0.19 $ 0.22 $ 0.64
1995 $ 0.28 $ 0.39 $ 0.34 $ 0.10
Extraordinary Gain/(Loss)
1996 $ 0.00 $ 0.00 $ 0.00 $ (0.39)
1995 $ 0.07 $ 0.14 $ 0.00 $ 0.00
Net Income
1996 $ 0.28 $ 0.19 $ 0.22 $ 0.25
1995 $ 0.35 $ 0.53 $ 0.34 $ 0.10
<FN>
(1) Reduced for pre-tax one time charge of $1.5 million related to corporate
restructuring (See Note 11).
</FN>
F-32
97
SCHEDULE II
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Allowance
for Doubtful Accounts
---------------------------
1996 1995
- --------------------------------------------------- --------------- ------------
Balance at Beginning of Period $2,468,845 $2,056,051
Add: Charged to Costs and Expenses:
(Recovery)/Reserves associated with loan fees (300,000) 291,164
Other reserves 92,692 121,630
Less: Account Charge Offs (227,247) 0
--------------- ------------
Balance at End of Period $2,034,290 $2,468,845
=============== ============
F-33
98
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------------
COLUMN A | COLUMN B | COLUMN C | COLUMN D
- ------------------------------------------------------------------------------------------------------------------------
| | |
DESCRIPTION - | ENCUMBRANCES | INITIAL COST TO THE | COSTS CAPITALIZED
(ALL GARDEN APARTMENTS) | | COMPANY | SUBSEQUENT TO
| | | ACQUISITIONS
| | |
- ------------------------------------------------------------------------------------------------------------------------
| | AT | AT | | BUILDINGS |
| | CONTRACTUAL | STATED CARRYING | LAND | & | IMPROVEMENTS CARRYING
PROPERTY NAME |ST| VALUE | VALUE | | IMPROVEMENTS | COSTS
- ------------------------------------------------------------------------------------------------------------------------
ACADIA COURT II IN 1,886,146 1,886,146 398,032 1,668,862 1,470 0
AMBERWOOD OH 908,924 908,924 171,878 1,003,228 0 0
AMESBURY I OH 1,257,832 1,257,832 136,179 1,133,012 3,030 0
AMESBURY II OH 1,331,775 1,331,775 168,000 1,621,000 4,660 0
ANNHURST II OH 1,122,316 1,202,232 123,397 1,006,847 0 0
ANNHURST III OH 966,308 966,308 70,246 1,003,822 0 0
APPLEGATE APTS II IN 1,265,575 1,265,575 163,470 1,815,278 10,705 0
APPLERIDGE I OH 1,061,450 1,061,450 214,233 912,594 7,200 0
ARAGON WOODS IN 1,150,600 1,150,600 298,431 1,248,762 0 0
ASHFORD HILLS OH 1,606,595 1,307,867 359,522 1,260,948 2,100 0
BEL AIRE II FL 1,198,276 436,040 81,451 287,059 0 0
BLUBERRY HILL FL 771,041 771,041 63,610 362,610 224 0
BRADFORD PLACE IL 1,181,417 886,338 215,924 719,156 (450) 0
BRUNSWICK APTS IL 1,449,460 1,449,460 53,500 1,644,920 0 0
BRUNSWICK II WV 1,341,640 1,341,640 104,000 1,696,000 0 0
CALIFORNIA GARDENS FL 1,174,998 584,065 96,067 521,414 0 0
CAMBRIDGE COMMONS III IN 1,888,323 1,271,224 1,087 1,306,118 0 0
CANTERBURY CROSSING FL 1,507,576 676,592 78,303 385,838 0 0
CEDARGATE II KY 1,032,435 1,032,435 123,475 966,198 0 0
CEDARHILL TN 1,487,500 1,487,500 235,269 1,331,238 0 0
CEDARWOOD II KY 1,020,000 1,020,000 173,648 913,048 3,011 0
CEDARWOOD III KY 888,760 888,760 122,917 966,624 23,740 0
CENTRE LAKE I, II & III FL 4,952,458 4,952,458 1,210,779 3,116,732 6,239 0
CHERRY GLEN I IN 1,396,026 1,396,026 203,862 1,465,002 0 0
CHERRY GLENN II IN 1,143,198 1,143,198 4,343 1,731,393 1,660 0
CHERRY TREE APT MD 2,217,868 2,217,868 623,153 2,711,201 2,988 0
CLEARWATER APTS OH 1,061,450 1,061,450 132,478 1,045,131 13,839 0
COLONY WOODS II GA 1,599,700 1,599,700 273,901 1,556,452 0 0
CRYSTAL COURT II FL 1,373,608 1,373,608 268,168 1,332,505 0 0
DARTMOUTH PLACE II OH 897,388 897,388 114,393 1,135,027 2,970 0
DOGWOOD GLEN I IN 1,792,218 1,792,218 248,246 1,427,201 21,107 0
ELMTREE PARK I IN 1,223,246 1,223,246 208,426 1,308,102 225 0
ELMTREE PARK II IN 1,050,340 1,050,340 45,751 1,107,766 163 0
FOREST GLEN FL 1,136,177 1,136,177 229,086 994,552 12,000 0
FORSYTHIA COURT II MD 2,414,099 1,801,658 283,697 1,597,543 0 0
FOXHAVEN OH 1,896,035 1,896,035 403,075 1,657,128 13,745 0
GARDEN COURT MI 2,185,573 2,185,573 127,573 2,247,404 1,856 0
GARDEN TERRACE I FL 621,464 621,464 89,123 801,137 39,180 0
GLEN ARM MANOR GA 1,283,702 1,283,702 148,679 1,274,345 43,359 0
F-34
99
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------------
COLUMN A | COLUMN B | COLUMN C | COLUMN D
- ------------------------------------------------------------------------------------------------------------------------
| | |
DESCRIPTION - | ENCUMBRANCES | INITIAL COST TO THE | COSTS CAPITALIZED
(ALL GARDEN APARTMENTS) | | COMPANY | SUBSEQUENT TO
| | | ACQUISITIONS
| | |
- ------------------------------------------------------------------------------------------------------------------------
| | AT | AT | | BUILDINGS |
| | CONTRACTUAL | STATED CARRYING | LAND | & | IMPROVEMENTS CARRYING
PROPERTY NAME |ST| VALUE | VALUE | | IMPROVEMENTS | COSTS
- ------------------------------------------------------------------------------------------------------------------------
GLENVIEW AL 1,734,783 1,734,783 178,221 1,784,904 0 0
GLENWOOD VILLAGE GA 1,534,803 890,683 156,445 1,000,148 0 0
HARVEST GROVE OH 1,124,610 1,124,610 251,000 1,201,600 1,433 0
HARVEST GROVE I OH 1,400,534 1,400,534 225,001 1,276,072 0 0
HATCHERWAY GA 971,926 971,926 111,336 1,102,856 18,511 0
HAYFIELD PARK KY 1,615,000 1,615,000 341,799 1,680,717 11,524 0
HEATHMOORE I MI 1,601,847 1,601,847 128,605 1,329,672 0 0
HERON POINTE FL 1,649,000 1,649,000 367,599 1,440,838 20,125 0
HIDDEN ACRES FL 1,686,279 1,686,279 388,349 1,136,083 685 0
HILLSIDE TRACE FL 1,025,402 1,025,402 197,277 833,232 0 0
HOLLY SANDS II FL 1,062,500 1,062,500 231,970 943,482 39,715 0
HUNTER GLEN IL 1,051,233 1,051,233 256,720 1,461,719 0 0
INDIAN LAKE I & II GA 4,711,452 4,711,452 898,265 5,262,660 4,481 0
JEFFERSON WAY FL 1,053,286 1,053,286 116,366 1,062,590 16,769 0
JUPITER COVE I FL 1,440,394 1,142,910 219,698 805,001 0 0
JUPITER COVE III FL 1,502,508 1,502,508 285,929 1,026,413 0 0
KINGS COLONY GA 2,107,287 1,517,566 237,393 1,723,165 0 0
LAKESHORE I GA 1,265,576 1,265,576 45,846 995,214 (60) 0
LAUREL BAY MI 924,211 924,211 164,159 1,160,480 0 0
LAUREL GLEN GA 1,742,500 1,742,500 265,974 1,627,699 0 0
LINDENDALE APTS OH 1,439,828 1,439,828 188,724 1,717,434 0 0
MARABOU MILLS II IN 1,030,710 1,030,710 84,391 1,190,609 2,233 0
MARABOU MILLS III IN 1,205,060 1,205,060 75,122 1,099,183 0 0
MARIBOU MILLS IN 1,468,322 1,468,322 179,704 1,570,450 4,203 0
MARK LANDING I FL 1,338,708 1,338,708 250,827 1,481,543 32,904 0
MARSHLANDING II GA 982,213 934,175 28,851 918,445 2,778 0
MEADOWOOD OH 493,934 493,934 50,520 573,536 0 0
MEADOWOOD II IN 760,434 760,434 61,771 1,193,299 463 0
MERRIFIELD MD 2,127,341 2,127,341 210,294 2,271,824 2,546 0
MIGUEL PLACE FL 1,504,500 1,504,500 237,234 1,125,414 0 0
MILL RUN GA 1,283,468 1,283,468 187,772 1,260,209 0 0
MONTROSE SQUARE OH 1,759,807 1,759,807 568,914 2,184,937 0 0
NEWBERRY II MI 1,331,331 738,819 91,315 715,532 0 0
OAK GARDENS FL 2,756,106 1,868,311 582,419 1,758,597 484 0
OAKWOOD VILLAGE FL 757,708 314,630 103,045 566,398 0 0
PELICAN POINTE I FL 1,354,265 1,354,265 221,311 1,204,527 9,730 0
PELICAN POINTE II FL 1,038,343 1,038,343 158,390 1,190,595 9,290 0
PICKERINGTON MEADOWS OH 1,186,165 1,186,165 150,000 1,200,000 0 0
PINE BARRENS FL 1,560,120 1,560,120 302,399 1,405,048 51,675 0
F-35
100
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------------
COLUMN A | COLUMN B | COLUMN C | COLUMN D
- ------------------------------------------------------------------------------------------------------------------------
| | |
DESCRIPTION - | ENCUMBRANCES | INITIAL COST TO THE | COSTS CAPITALIZED
(ALL GARDEN APARTMENTS) | | COMPANY | SUBSEQUENT TO
| | | ACQUISITIONS
| | |
- ------------------------------------------------------------------------------------------------------------------------
| | AT | AT | | BUILDINGS |
| | CONTRACTUAL | STATED CARRYING | LAND | & | IMPROVEMENTS CARRYING
PROPERTY NAME |ST| VALUE | VALUE | | IMPROVEMENTS | COSTS
- ------------------------------------------------------------------------------------------------------------------------
PINE VIEW FL 1,496,190 1,068,154 260,359 986,494 3,764 0
RAMBLEWOOD II GA 1,935,831 1,935,831 264,381 1,906,078 0 0
RAVENWOOD SC 1,718,721 1,718,721 169,601 1,507,589 0 0
RED DEER II OH 1,261,013 1,261,013 235,173 1,474,820 0 0
RIDGEWOOD IN 1,223,260 1,223,260 100,301 1,320,200 0 0
RIDGEWOOD II & III IN 1,393,574 1,393,574 100,795 1,564,956 0 0
RIVER GLEN I OH 1,106,752 1,106,752 146,287 1,287,027 0 0
RIVER GLEN II OH 1,184,132 1,184,132 178,568 1,230,268 0 0
RIVERS END II FL 1,176,332 1,176,332 160,894 936,779 0 0
RIVERVIEW ESTATES OH 1,392,390 1,392,390 74,073 1,609,026 38,800 0
ROSEWOOD COMMONS II IN 1,318,698 1,318,698 121,194 1,172,776 201 0
SHERBROOK IN 1,225,203 1,225,203 141,991 1,254,354 0 0
SHERBROOK PA 1,397,504 1,397,504 355,188 1,492,285 8,400 0
SKY PINES II FL 1,070,741 1,070,741 266,498 676,283 50,450 0
SPICEWOOD APT IN 1,036,385 1,036,385 90,619 1,025,442 2,927 0
SPRINGBROOK SC 1,742,965 1,742,965 120,467 1,762,353 32,645 0
SPRINGWOOD KY 839,305 839,305 85,723 844,029 26,000 0
STEWART WAY I GA 1,396,413 1,396,413 260,869 1,614,962 16,447 0
STEWART WAY II GA 1,252,664 1,252,664 215,612 1,468,190 0 0
SUFFOLK GROVE II OH 1,096,137 1,096,137 154,263 1,248,211 2,085 0
SUNSET WAY I FL 1,685,131 1,685,131 621,326 1,353,585 0 0
SUNSET WAY II FL 2,719,585 2,144,007 649,409 1,678,049 0 0
THE WILLOWS I OH 601,932 601,932 157,611 761,576 14,736 0
THE WILLOWS III OH 884,000 884,000 44,602 871,216 6,054 0
THYMEWOOD II FL 1,729,672 838,033 429,480 731,592 0 0
VALLEYBROOK GA 1,586,737 1,586,737 129,440 1,353,762 0 0
WALKER PLACE TX 1,198,295 1,198,295 269,890 1,196,059 0 0
WHISPERING PINES II FL 638,957 638,957 71,433 505,435 0 0
WILLCREST WOODS GA 1,067,846 1,067,846 245,513 1,189,165 16,260 0
WILLOW LAKE SC 2,099,515 2,099,515 188,704 1,738,232 0 0
WILLOWOOD II IN 1,065,380 1,065,380 149,671 1,310,162 21,600 0
WILLOWOOD II OH 957,792 957,792 35,657 622,170 0 0
WINDWOOD I FL 606,231 606,231 24,569 457,382 27,495 0
WINTHROP COURT II OH 760,000 760,000 145,906 825,115 300 0
WOODLANDS II PA 1,189,328 1,189,328 118,447 1,346,599 (249) 0
----------------------------------------------------------------------------------
TOTALS $157,381,602 $148,056,017 $23,652,841 $146,087,543 $712,425 $0
==================================================================================
F-36
101
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
COLUMN A | COLUMN E | COLUMN F | COLUMN G | COLUMN H | COLUMN I
- -----------------------------------------------------------------------------------------------------------------------------------
| | | | |
| GROSS AMOUNT AT WHICH CARRIED AT | | | | LIFE ON WHICH
DESCRIPTION - | CLOSE OF PERIOD, DECEMBER 31, 1996 | | | | DEPRECIATION IN
(ALL GARDEN APARTMENTS) | NOTES (1) AND (2) | | | | LATEST INCOME
- ----------------------------------------------------------------------| | | | STATEMENT
| | | BUILDINGS | | ACCUMULATED | DATE OF | DATE | IS COMPUTED
| | LAND | & | TOTAL | DEPRECIATION | CONSTRUCTION | ACQUIRED | NOTE (3)
PROPERTY NAME |ST| | IMPROVEMENTS | | NOTE (3) | | |
- -----------------------------------------------------------------------------------------------------------------------------------
ACADIA COURT II IN 398,032 1,602,171 2,000,203 52,800 06/06/86 N/A N/A
AMBERWOOD OH 171,878 1,001,682 1,173,560 31,600 10/01/87 N/A N/A
AMESBURY I OH 136,179 1,021,288 1,157,467 34,000 02/17/86 N/A N/A
AMESBURY II OH 168,000 1,623,162 1,791,162 54,300 N/A 09/26/95 N/A
ANNHURST II OH 123,397 1,128,155 1,251,552 36,983 07/01/86 N/A N/A
ANNHURST III OH 70,246 978,257 1,048,503 30,300 05/05/88 N/A N/A
APPLEGATE APTS II IN 163,470 1,823,186 1,986,656 58,500 06/01/87 N/A N/A
APPLERIDGE I OH 214,233 717,454 931,687 25,824 01/01/87 N/A N/A
ARAGON WOODS IN 298,431 1,171,393 1,469,824 37,800 12/26/86 N/A N/A
ASHFORD HILLS OH 359,522 927,802 1,287,324 30,577 06/23/86 N/A N/A
BEL AIRE II FL 81,451 395,381 476,832 13,229 01/01/86 N/A N/A
BLUBERRY HILL FL 63,610 362,275 425,885 11,700 12/01/86 N/A N/A
BRADFORD PLACE IL 215,924 615,347 831,271 20,158 07/23/86 N/A N/A
BRUNSWICK APTS IL 53,500 1,607,542 1,661,042 53,200 04/01/86 N/A N/A
BRUNSWICK II WV 104,000 1,693,983 1,797,983 56,400 N/A 09/26/95 N/A
CALIFORNIA GARDENS FL 96,067 396,171 492,238 12,550 07/01/87 N/A N/A
CAMBRIDGE COMMONS III IN 1,087 1,171,693 1,172,780 36,475 01/29/88 N/A N/A
CANTERBURY CROSSING FL 78,303 546,200 624,503 19,614 12/01/83 N/A N/A
CEDARGATE II KY 123,475 867,384 990,859 28,500 06/01/86 N/A N/A
CEDARHILL TN 235,269 1,225,967 1,461,236 40,300 05/30/86 N/A N/A
CEDARWOOD II KY 173,648 885,104 1,058,752 29,600 01/01/86 N/A N/A
CEDARWOOD III KY 122,917 988,875 1,111,792 33,400 05/20/86 N/A N/A
CENTRE LAKE I, II & III FL 1,210,779 3,109,169 4,319,948 102,700 06/01/86 N/A N/A
CHERRY GLEN I IN 203,862 1,450,193 1,654,055 47,500 07/10/86 N/A N/A
CHERRY GLENN II IN 4,343 1,682,732 1,687,075 54,000 04/01/87 N/A N/A
CHERRY TREE APT MD 623,153 2,428,672 3,051,825 79,300 09/01/86 N/A N/A
CLEARWATER APTS OH 132,478 966,579 1,099,057 31,900 11/01/86 N/A N/A
COLONY WOODS II GA 273,901 1,502,115 1,776,016 46,600 03/28/88 N/A N/A
CRYSTAL COURT II FL 268,168 1,217,477 1,485,645 40,000 06/01/86 N/A N/A
DARTMOUTH PLACE II OH 114,393 1,082,021 1,196,414 35,700 07/18/86 N/A N/A
DOGWOOD GLEN I IN 248,246 1,305,749 1,553,995 43,746 07/18/86 N/A N/A
ELMTREE PARK I IN 208,426 1,172,043 1,380,469 38,500 06/08/86 N/A N/A
ELMTREE PARK II IN 45,751 1,105,662 1,151,413 35,300 05/01/87 N/A N/A
FOREST GLEN FL 229,086 915,022 1,144,108 31,000 01/01/86 N/A N/A
FORSYTHIA COURT II MD 283,697 1,469,727 1,753,424 46,811 06/01/87 N/A N/A
FOXHAVEN OH 403,075 1,576,864 1,979,939 52,100 08/18/86 N/A N/A
GARDEN COURT MI 127,573 2,161,190 2,288,763 67,000 04/22/88 N/A N/A
GARDEN TERRACE I FL 89,123 839,083 928,206 33,900 09/01/81 N/A N/A
GLEN ARM MANOR GA 148,679 1,181,627 1,330,306 41,000 01/01/86 N/A N/A
F-37
102
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
COLUMN A | COLUMN E | COLUMN F | COLUMN G | COLUMN H | COLUMN I
- -----------------------------------------------------------------------------------------------------------------------------------
| | | | |
| GROSS AMOUNT AT WHICH CARRIED AT | | | | LIFE ON WHICH
DESCRIPTION - | CLOSE OF PERIOD, DECEMBER 31, 1996 | | | | DEPRECIATION IN
(ALL GARDEN APARTMENTS) | NOTES (1) AND (2) | | | | LATEST INCOME
- ----------------------------------------------------------------------| | | | STATEMENT
| | | BUILDINGS | | ACCUMULATED | DATE OF | DATE | IS COMPUTED
| | LAND | & | TOTAL | DEPRECIATION | CONSTRUCTION | ACQUIRED | NOTE (3)
PROPERTY NAME |ST| | IMPROVEMENTS | | NOTE (3) | | |
- -----------------------------------------------------------------------------------------------------------------------------------
GLENVIEW AL 178,221 1,596,313 1,774,534 52,200 08/01/86 N/A N/A
GLENWOOD VILLAGE GA 156,445 656,472 812,917 21,216 12/01/86 N/A N/A
HARVEST GROVE OH 251,000 1,201,181 1,452,181 40,100 N/A 09/26/95 N/A
HARVEST GROVE I OH 225,001 1,157,494 1,382,495 37,700 09/08/86 N/A N/A
HATCHERWAY GA 111,336 1,089,384 1,200,720 37,000 01/01/86 N/A N/A
HAYFIELD PARK KY 341,799 1,516,918 1,858,717 50,200 07/17/86 N/A N/A
HEATHMOORE I MI 128,605 1,190,421 1,319,026 38,900 07/31/86 N/A N/A
HERON POINTE FL 367,599 1,417,656 1,785,255 48,000 01/01/86 N/A N/A
HIDDEN ACRES FL 388,349 437,395 825,744 14,041 01/01/87 N/A N/A
HILLSIDE TRACE FL 197,277 831,948 1,029,225 26,200 09/01/87 N/A N/A
HOLLY SANDS II FL 231,970 962,066 1,194,036 33,100 06/01/86 N/A N/A
HUNTER GLEN IL 256,720 1,314,349 1,571,069 42,100 03/01/87 N/A N/A
INDIAN LAKE I & II GA 898,265 4,878,142 5,776,407 154,600 08/11/87 N/A N/A
JEFFERSON WAY FL 116,366 1,057,936 1,174,302 33,800 08/01/87 N/A N/A
JUPITER COVE I FL 219,698 877,950 1,097,648 27,728 09/01/87 N/A N/A
JUPITER COVE III FL 285,929 1,024,831 1,310,760 32,300 09/01/87 N/A N/A
KINGS COLONY GA 237,393 1,226,496 1,463,889 38,424 11/15/87 N/A N/A
LAKESHORE I GA 45,846 893,969 939,815 29,300 06/20/86 N/A N/A
LAUREL BAY MI 164,159 1,070,561 1,234,720 31,800 10/01/89 N/A N/A
LAUREL GLEN GA 265,974 1,625,191 1,891,165 53,600 04/04/86 N/A N/A
LINDENDALE APTS OH 188,724 1,632,869 1,821,593 52,300 03/01/87 N/A N/A
MARABOU MILLS II IN 84,391 1,144,923 1,229,314 35,000 N/A 10/29/93 N/A
MARABOU MILLS III IN 75,122 1,097,431 1,172,553 34,400 12/01/87 N/A N/A
MARIBOU MILLS IN 179,704 1,572,233 1,751,937 51,700 06/23/86 N/A N/A
MARK LANDING I FL 250,827 1,512,164 1,762,991 48,900 11/01/87 N/A N/A
MARSHLANDING II GA 28,851 882,456 911,307 28,595 12/31/86 N/A N/A
MEADOWOOD OH 50,520 572,652 623,172 19,100 01/01/86 N/A N/A
MEADOWOOD II IN 61,771 1,040,637 1,102,408 34,200 05/30/86 N/A N/A
MERRIFIELD MD 210,294 2,198,381 2,408,675 68,900 01/11/88 N/A N/A
MIGUEL PLACE FL 237,234 1,083,604 1,320,838 34,200 10/01/87 N/A N/A
MILL RUN GA 187,772 1,258,267 1,446,039 41,500 04/14/86 N/A N/A
MONTROSE SQUARE OH 568,914 2,160,316 2,729,230 72,000 01/01/87 N/A N/A
NEWBERRY II MI 91,315 626,087 717,402 20,204 12/26/86 N/A N/A
OAK GARDENS FL 582,419 1,249,586 1,832,005 39,063 01/01/88 N/A N/A
OAKWOOD VILLAGE FL 103,045 210,100 313,145 6,994 01/01/86 N/A N/A
PELICAN POINTE I FL 221,311 1,212,401 1,433,712 38,500 11/01/87 N/A N/A
PELICAN POINTE II FL 158,390 1,121,018 1,279,408 35,700 11/01/87 N/A N/A
PICKERINGTON MEADOWS OH 150,000 1,198,151 1,348,151 39,900 N/A 03/29/95 N/A
PINE BARRENS FL 302,399 1,454,558 1,756,957 49,800 06/01/86 N/A N/A
F-38
103
CARDINAL REALTY SERVICES, INC.
AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
COLUMN A | COLUMN E | COLUMN F | COLUMN G | COLUMN H | COLUMN I
- -----------------------------------------------------------------------------------------------------------------------------------
| | | | |
| GROSS AMOUNT AT WHICH CARRIED AT | | | | LIFE ON WHICH
DESCRIPTION - | CLOSE OF PERIOD, DECEMBER 31, 1996 | | | | DEPRECIATION IN
(ALL GARDEN APARTMENTS) | NOTES (1) AND (2) | | | | LATEST INCOME
- ----------------------------------------------------------------------| | | | STATEMENT
| | | BUILDINGS | | ACCUMULATED | DATE OF | DATE | IS COMPUTED
| | LAND | & | TOTAL | DEPRECIATION | CONSTRUCTION | ACQUIRED | NOTE (3)
PROPERTY NAME |ST| | IMPROVEMENTS | | NOTE (3) | | |
- -----------------------------------------------------------------------------------------------------------------------------------
PINE VIEW FL 260,359 810,665 1,071,024 26,105 05/01/87 N/A N/A
RAMBLEWOOD II GA 264,381 1,763,395 2,027,776 57,400 10/01/86 N/A N/A
RAVENWOOD SC 169,601 1,505,266 1,674,867 48,100 05/07/87 N/A N/A
RED DEER II OH 235,173 1,380,894 1,616,067 43,700 08/01/87 N/A N/A
RIDGEWOOD IN 100,301 1,320,199 1,420,500 18,336 N/A 08/01/96 N/A
RIDGEWOOD II & III IN 100,795 1,415,338 1,516,133 46,900 03/01/86 N/A N/A
RIVER GLEN I OH 146,287 1,244,725 1,391,012 39,900 04/01/87 N/A N/A
RIVER GLEN II OH 178,568 1,196,259 1,374,827 37,600 11/01/87 N/A N/A
RIVERS END II FL 160,894 908,316 1,069,210 30,300 01/01/86 N/A N/A
RIVERVIEW ESTATES OH 74,073 1,645,347 1,719,420 60,100 01/01/87 N/A N/A
ROSEWOOD COMMONS II IN 121,194 1,171,170 1,292,364 37,300 06/01/87 N/A N/A
SHERBROOK IN 141,991 1,201,653 1,343,644 39,400 06/16/86 N/A N/A
SHERBROOK PA 355,188 1,436,005 1,791,193 46,700 12/20/86 N/A N/A
SKY PINES II FL 266,498 725,691 992,189 25,800 06/01/86 N/A N/A
SPICEWOOD APT IN 90,619 983,867 1,074,486 32,700 03/16/86 N/A N/A
SPRINGBROOK SC 120,467 1,725,155 1,845,622 58,000 06/13/86 N/A N/A
SPRINGWOOD KY 85,723 868,728 954,451 30,000 01/01/86 N/A N/A
STEWART WAY I GA 260,869 1,617,084 1,877,953 54,600 01/01/86 N/A N/A
STEWART WAY II GA 215,612 1,465,928 1,681,540 47,400 12/01/86 N/A N/A
SUFFOLK GROVE II OH 154,263 1,191,012 1,345,275 38,000 06/01/87 N/A N/A
SUNSET WAY I FL 621,326 1,351,499 1,972,825 42,800 08/01/87 N/A N/A
SUNSET WAY II FL 649,409 1,475,311 2,124,720 45,703 04/27/88 N/A N/A
THE WILLOWS I OH 157,611 754,543 912,154 27,500 01/01/87 N/A N/A
THE WILLOWS III OH 44,602 839,952 884,554 26,900 07/01/87 N/A N/A
THYMEWOOD II FL 429,480 362,932 792,412 12,118 01/01/86 N/A N/A
VALLEYBROOK GA 129,440 1,351,676 1,481,116 43,900 10/15/86 N/A N/A
WALKER PLACE TX 269,890 1,194,216 1,464,106 37,200 01/25/88 N/A N/A
WHISPERING PINES II FL 71,433 504,656 576,089 16,700 03/31/86 N/A N/A
WILLCREST WOODS GA 245,513 1,171,951 1,417,464 38,500 12/31/86 N/A N/A
WILLOW LAKE SC 188,704 1,754,417 1,943,121 56,785 12/12/86 N/A N/A
WILLOWOOD II IN 149,671 1,222,104 1,371,775 39,700 06/01/87 N/A N/A
WILLOWOOD II OH 35,657 596,607 632,264 19,500 08/01/86 N/A N/A
WINDWOOD I FL 24,569 484,172 508,741 16,100 05/01/88 N/A N/A
WINTHROP COURT II OH 145,906 823,536 969,442 27,400 02/25/86 N/A N/A
WOODLANDS II PA 118,447 1,281,910 1,400,357 41,100 03/01/87 N/A N/A
---------------------------------------------------------
$23,652,841 $137,917,083 $161,569,924 $4,478,379
=========================================================
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104
CARDINAL REALTY SERVICES, INC.
NOTES TO SCHEDULE III
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Note (1) Schedule III Reconciliation: 1996 1995 1994
----------------- ----------------- ------------------
Balance as of beginning of year $ 164,334,055 $ 166,430,698 $ 170,171,409 (4)
Additions during the year
Acquisitions of Property 1,420,501 6,391,600 0
Costs Capitalized 702,056 0 0
Deductions during the period
Disposals through foreclosure (4,886,688) (3,380,382) (3,607,081)
Other (4) 0 (937,482) (253,908)
Application of Income from the
Effective Date through
December 31, 1995 upon full
consolidation from "Held for Sale"
classification 0 (4,170,379) N/A
----------------- ----------------- ------------------
Balance at close of period 161,569,924 164,334,055 166,310,420
Other
Furniture and Fixtures 0 3,368,617 4,160,477
Application of Income from the
Effective Date through
December 31, 1995 upon full
consolidation from "Held for Sale"
classification 0 (3,368,617) N/A
----------------- ----------------- ------------------
161,569,924 164,334,055 170,470,897
Income for the Period from the
Effective Date to December 31, 1995,
and 1994, respectively N/A N/A (6,236,719)
Other Assets Held for Sale N/A N/A N/A
----------------- ----------------- ------------------
Balance, Operating Real Estate
Assets, December 31, 1996,
1995 & 1994, respectively $161,569,924 $164,334,055 $164,234,178
================= ================= ==================
<FN>
Note (2) Tax basis of assets: The tax basis for federal income tax
purposes in the real estate was approximately $117,700,000 at December
31, 1996.
Note (3) Depreciation: No depreciation has been provided for the period
September 11, 1992 (Effective Date) to December 31, 1995 as the assets
were held for sale. (See Notes 1 and 2 to Consolidated Financial
Statements).
Note (4) Correction of interest recorded in prior years; such interest
was capitalized during the period the Wholly Owned Properties were
classified as Held for Sale and therefore has no impact on equity.
</FN>
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