- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21670
------------------------------------
LEXFORD, 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.)
THE HUNTINGTON CENTER
41 SOUTH HIGH STREET SUITE 2410
COLUMBUS, OH 43215
(Address of Principal Executive Offices including Zip Code)
(614) 242-3850
(Registrant's Telephone Number, including Area Code)
------------------------------------
Indicate by check X whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check X whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes X No
--- ---
As of November 12, 1997 there were 4,512,815 shares of common stock issued.
Page 1 of 113 sequentially numbered pages
Exhibit Index on page 28.
- --------------------------------------------------------------------------------
2
LEXFORD, INC. AND SUBSIDIARIES
INDEX
Part I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1997
(Unaudited) and December 31, 1996 (Audited)....................3
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 1997 and 1996 (Unaudited)..................4
Consolidated Statement of Shareholders' Equity
for the Nine Months Ended September 30, 1997 (Unaudited).......5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 (Unaudited)....6-7
Notes to Consolidated Financial Statements......................8-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................16-26
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................27
Item 2. Changes in Securities.............................................27
Item 3. Defaults upon Senior Securities...................................27
Item 4. Submission of Matters to a Vote of Security Holders...............27
Item 5. Other Information.................................................28
Item 6. Exhibits and Reports on Form 8-K..................................28
Signatures....................................................................29
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
LEXFORD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996 (AUDITED)
September 30, December 31,
1997 1996
================== ==================
ASSETS
Wholly Owned Properties (Note 2):
Land..................................................................... $ 23,652,841 $ 23,652,841
Building, Improvements and Fixtures...................................... 139,446,636 137,917,083
------------------ ------------------
163,099,477 161,569,924
Accumulated Depreciation................................................. (8,025,801) (4,478,379)
------------------ ------------------
155,073,676 157,091,545
Interests in and Receivables from Syndicated Partnerships (Notes 1 and 4)... 52,783,451 54,610,421
Cash (Note 1)............................................................... 3,824,500 3,593,121
Accounts Receivable, Affiliates (Less an Allowance
of $1,573,581 at September 30, 1997 and $2,034,290 at
December 31, 1996), Residents and Officers (Note 4)...................... 1,916,887 5,044,603
Furniture, Fixtures and Other, Net.......................................... 1,483,247 1,167,579
Funds Held in Escrow (Note 1)............................................... 13,751,242 14,011,013
Intangible Assets, Net (Note 1) ............................................ 5,073,944 5,973,560
Prepaids and Other (Note 1)................................................. 4,479,727 3,875,937
------------------ ------------------
$ 238,386,674 $ 245,367,779
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages, Term Debt and Other Notes Payable:
Mortgages on Wholly Owned Properties (Notes 2 and 3)..................... $ 145,521,928 $ 148,056,017
Term Debt................................................................ 5,060,814 15,118,048
Other Notes Payable...................................................... 64,797 145,220
------------------ ------------------
150,647,539 163,319,285
Accounts Payable............................................................ 1,037,026 1,560,749
Accrued Interest, Real Estate and Other Taxes (Notes 2 and 3)............... 5,029,803 4,023,310
Other Accrued Expenses ..................................................... 6,286,249 8,531,031
Other Liabilities........................................................... 4,677,058 5,424,226
------------------ ------------------
Total Liabilities 167,677,675 182,858,601
------------------ ------------------
Shareholders' Equity (Note 1):
Preferred Stock, 1,500,000 Shares Authorized, No Shares Issued .......... -- --
Common Stock, 13,500,000 Shares Authorized with No Stated Value,
4,031,754 and 3,892,600 Shares Issued and Outstanding
at September 30, 1997 and December 31, 1996, Respectively............ 29,122,547 29,122,547
Additional Paid-in Capital (Note 1)...................................... 19,576,271 15,968,426
Retained Earnings........................................................ 22,010,181 17,418,205
------------------ ------------------
70,708,999 62,509,178
------------------ ------------------
$ 238,386,674 $ 245,367,779
================== ==================
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
3
4
LEXFORD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
Three Months Ended Nine Months Ended
-------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
--------------- --------------- --------------- ----------------
Revenues:
Rental and Other Revenues-Wholly Owned Properties.......... $ 10,742,992 $ 10,311,403 $ 31,371,970 $ 30,755,215
Fee Based.................................................. 3,789,263 3,688,833 11,534,422 9,272,256
Interest, Principally from Syndicated Partnerships......... 2,619,671 1,680,081 7,765,913 4,626,766
Income from Disposal of Assets - Net....................... 772,910 7,181 1,462,266 281,873
Other...................................................... 307,111 21,543 452,274 173,198
--------------- --------------- --------------- ----------------
18,231,947 15,709,041 52,586,845 45,109,308
--------------- --------------- --------------- ----------------
Expenses:
Rental Operating........................................... 4,407,596 5,281,275 14,487,648 15,719,226
Fee Based.................................................. 3,037,739 2,627,882 9,255,932 5,723,834
Administration............................................. 1,509,504 1,151,715 4,326,329 3,273,449
Restructure / Nonrecurring Costs........................... 538,489 0 788,489 300,000
Interest - Wholly Owned Property Debt...................... 3,569,134 3,500,425 10,505,661 10,700,604
Interest - Corporate Debt.................................. 174,254 278,714 481,578 840,180
Depreciation and Amortization.............................. 1,993,256 1,418,696 4,933,698 4,071,047
--------------- --------------- --------------- ----------------
15,229,972 14,258,707 44,779,335 40,628,340
--------------- --------------- --------------- ----------------
Income Before Income Taxes................................... 3,001,975 1,450,334 7,807,510 4,480,968
Provision for Income Taxes: .................................
Credited to Paid-in Capital 1,061,000 341,442 2,735,000 1,308,600
Current 100,000 221,858 300,000 436,700
--------------- --------------- --------------- ----------------
Income before Extraordinary Loss ............................ 1,840,975 887,034 4,772,510 2,735,668
Extraordinary Loss, Net of Income Tax Benefit of
$115,000 (Note 3).......................................... 0 0 (180,534) 0
--------------- --------------- --------------- ----------------
Net Income $ 1,840,975 $ 887,034 $ 4,591,976 $ 2,735,668
=============== =============== =============== ================
Net Income per Common Share:
Income Before Extraordinary Item........................... $0.44 $0.22 $1.15 $0.69
Extraordinary Loss ........................................ 0.00 0.00 (0.04) 0.00
--------------- --------------- --------------- ----------------
Net Income $0.44 $0.22 $1.11 $0.69
=============== =============== =============== ================
Weighted Average Common Shares Outstanding................... 4,165,000 4,093,000 4,149,000 3,953,000
=============== =============== =============== ================
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
4
5
LEXFORD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
Common Stock
------------------------------ Additional Retained
Shares Amount Paid-in Capital Earnings Total
------------- --------------- ---------------- -------------- -------------
Balance, January 1, 1997....................... 3,892,600 $ 29,122,547 $ 15,968,426 $ 17,418,205 $ 62,509,178
Shares Issued, in Connection with
the Claims Resolution Process ................ 12,137
Exercise of Options under Non-Qualified Stock
Option Plan................................... 8,330 35,677 35,677
Stock Compensation and Director Restricted
Stock Plan, Net of 27,334 Shares Subject to
Vesting Restrictions (Note 1)................. 118,687 952,168 952,168
Credit from Utilization of 2,620,000
Pre-Confirmation Tax Benefits ................ 2,620,000
Net Income for the Period ...................... 4,591,976 4,591,976
------------- --------------- ---------------- -------------- -------------
Balance, September 30, 1997 .................... 4,031,754 $ 29,122,547 $ 19,576,271 $ 22,010,181 $ 70,708,999
============= =============== ================ ============== =============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
5
6
LEXFORD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
---------------------- --------------------
Cash Flows Provided by Operating Activities:
Management and Investment Service Activities:
Cash Received from Fee Based Activities........................................... $ 15,614,716 $ 16,989,544
Cash Received from Interests in and Receivables from Syndicated Partnerships...... 9,539,672 6,042,883
Cash Receipts -- Other............................................................ 1,647,011 1,276,105
Cash Paid to Vendors, Suppliers and Employees..................................... (16,809,235) (17,374,022)
Interest Paid on Term Debt and Other Notes Payable................................ (460,218) (881,886)
Income Taxes Paid - City and State................................................ (163,353) (189,919)
Taxes Paid, Other than Income Taxes............................................... (83,529) (55,186)
Payments Related to Nonrecurring Items............................................ (284,701) (1,891,525)
---------------------- --------------------
9,000,363 3,915,994
---------------------- --------------------
Wholly Owned Properties Activities:
Cash Received from Rental Activities.............................................. 31,228,727 30,923,763
Payments on Rental Activities..................................................... (15,161,873) (17,105,705)
Interest Paid on Mortgages........................................................ (10,472,977) (10,178,201)
---------------------- --------------------
5,593,877 3,639,857
---------------------- --------------------
Net Cash Provided by Operating Activities............................................ 14,594,240 7,555,851
---------------------- --------------------
Cash Flows (Used in) Investing Activities:
Management and Investment Service Activities:
Proceeds from Sale of Assets and Other............................................ 1,840,588 701,492
Capital Expenditures.............................................................. (786,018) (528,748)
Repayment from/(Advances to) Syndicated Partnerships.............................. 579,082 396,369
Acquisition of Mortgages and Real Estate Assets................................... (445,625) 0
Wholly Owned Properties Activities:
Funding of Escrows................................................................ (1,022,457) (310,759)
Capital Expenditures ............................................................. (1,529,553) (370,453)
---------------------- --------------------
Net Cash (Used in) Investing Activities.............................................. (1,363,983) (112,099)
---------------------- --------------------
Cash Flows (Used in) Financing Activities:
Management and Investment Service Activities:
Proceeds from the Exercise of Stock Options....................................... 35,677 47,050
Redemption of Stock held by Syndicated Partnerships............................... (31,330)
Net Proceeds from/(Principal Payments) on Term Debt and Other..................... (10,237,033) (3,996,623)
Wholly Owned Properties Activities:
Proceeds from Mortgage Debt....................................................... 2,560,000 13,365,000
Payments on Mortgages - Principal Amortization.................................... (1,514,788) (1,415,176)
Payments on Mortgages - Lump Sum.................................................. (3,842,734) (14,445,947)
---------------------- --------------------
Net Cash (Used in) Financing Activities.............................................. (12,998,878) (6,477,026)
---------------------- --------------------
Increase in Cash .................................................................... 231,379 966,726
Cash at Beginning of Year............................................................ 3,593,121 2,751,986
---------------------- --------------------
Cash at End of Period................................................................ $ 3,824,500 $ 3,718,712
====================== ====================
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
6
7
LEXFORD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
September 30, September 30,
1997 1996
--------------- ----------------
Reconciliation of Net Income to
Net Cash Provided by Operating Activities:
Net Income............................................................... $ 4,591,976 $ 2,735,668
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization........................................ 4,933,698 4,071,047
Provision for Losses on Accounts Receivable.......................... 109,940 74,069
Income from Disposal of Assets ...................................... (1,462,266) (281,873)
Loss on Debt Restructuring........................................... 295,534 0
Provision for Income Taxes Credited to Paid-in Capital............... 2,620,000 1,308,600
Stock Compensation Credited to Paid-in Capital....................... 952,168 0
Changes in Operating Assets and Liabilities:
Interests in and Receivables from Syndicated Partnerships............ 1,405,518 1,617,714
Accounts Receivable and Other Assets................................. 3,244,552 (6,183,344)
Accounts Payable and Other Liabilities............................... (2,096,880) 4,213,970
--------------- ----------------
Net Cash Provided by Operating Activities..................................... $ 14,594,240 $ 7,555,851
=============== ================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In the first nine months of 1996, the Company granted deeds in lieu of
foreclosure for three Wholly Owned Properties. These Properties had an aggregate
carrying value of $3.9 million. No gain or loss was recognized on these
transactions because the assets and the non-recourse mortgages on these
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.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
8
LEXFORD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Lexford,
Inc., formerly known as Cardinal Realty Services, Inc., and its wholly owned
subsidiaries (collectively the "Company"). For consolidated financial statement
purposes, the "Company" also includes limited partnerships and other legal
entities which own Wholly Owned Properties and in which the Company, in turn,
owns a 100% equity interest. The Company holds an ownership interest in
multi-family communities either as (i) the sole owner of various limited
partnerships or subsidiaries which own multi-family communities (the "Wholly
Owned Properties"), or (ii) the general partner in various limited partnerships
which own multi-family communities (the "Syndicated Partnerships"), collectively
referred to as the "Properties". The accounts of the Syndicated Partnerships are
not included within the Company's Consolidated Financial Statements. All
significant intercompany balances and transactions have been eliminated in this
consolidation. The accompanying consolidated financial statements, except for
the Consolidated Balance Sheet at December 31, 1996, are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for a complete financial statement presentation. The consolidated financial
statements, the notes hereto and the capitalized terms included herein should be
read in conjunction with the Company's Form 10-K for the fiscal year ended
December 31, 1996.
The interim consolidated financial statements have been prepared in
accordance with the Company's customary accounting practices. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine month period ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997.
Business Overview
- -----------------
The Company engages in two core business activities: 1) management of
multi-family residential real property, including management services to passive
co-owners as well as to owners of property in which the Company does not have an
ownership interest ("Management Services"); and 2) activities related to the
ownership of multi-family residential real property, including asset management
services to passive co-owners ("Investment Management").
Management Services
-------------------
The Company's Management Services division is charged with the conduct of
the Company's property management business. The Company's property management
business involves all traditional elements of third party property management
including: day-to-day management and maintenance of multi-family residential
properties, attracting and retaining qualified residents, collecting rents and
other receivables from residents, providing cash management services for rental
revenues, security deposits, taxes and insurance and deferred maintenance
escrows, and compiling and furnishing information to property owners.
8
9
LEXFORD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (cont'd)
Effective August 1, 1996, the Company acquired Lexford Properties, Inc.
("Lexford Properties") by merger of a wholly owned subsidiary of the Company
with and into Lexford Properties, Inc. On that date, Lexford Properties became a
wholly owned subsidiary of the Company. Lexford Properties has been engaged in
the business of third party property management services to the owners of
multi-family residential real property since commencing business operations in
June 1988. Lexford Properties succeeded to the operation of the Company's
Management Services division. Accordingly, the Company's property management
business is conducted through Lexford Properties. Management believes that the
acquisition of Lexford Properties has enhanced the Company's property management
capabilities (SEE "LEXFORD PROPERTIES ACQUISITION").
Lexford Properties also operates an adjunct business which the Company
refers to as "Preferred Resource" formerly referred to as Ancillary Services or
Preferred Vendor. The Preferred Resource business currently provides assistance
to most of the Properties managed by Lexford Properties, in the acquisition of
needed parts and supplies and the management of a coordinated buying group
enjoying substantial volume discounts. In consideration of these services, the
Company generates income by retaining some portion of discounts earned. In
addition, Preferred Resource provides services to residents such as renter's
insurance.
Investment Management
---------------------
The objective of the Company's Investment Management division is to
maximize the value of its real estate holdings and its returns on real estate
investments. The Company strives to obtain and maintain the best available
financing for the Properties and to maximize the Properties' operating
performance. The Company evaluates the performance of all real estate holdings
to identify investment requirements, under-performing Properties or those that
can be sold at an attractive price relative to their performance. The Company
maintains a partnership interest in each of the Syndicated Partnerships, ranging
from 1% to 10%. Beyond its equity investment in the Properties, the Company
holds receivables from a majority of the Syndicated Partnerships (SEE "RECORDED
VALUES OF RECEIVABLES FROM SYNDICATED PARTNERSHIPS" AND NOTE 4). The remaining
partnership interests in the Syndicated Partnerships are substantially all owned
by unrelated third party limited partner investors.
The Company's Investment Management division, acting in the Company's
capacity as general partner of the Syndicated Partnerships, provides asset
management services to the Syndicated Partnerships. In addition, the Company's
Investment Management division performs the following services for the accounts
of the co-owners (limited partners) of the Syndicated Partnerships:
informational and financial reporting services (including tax return preparation
and provision of tax return information to the limited partners) and capital and
financial planning (including determination of reserves, funding of capital
requirements and administration of capital distributions to partners).
9
10
LEXFORD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (cont'd)
Fresh Start Accounting
- ----------------------
The Company adopted a method of accounting referred to as fresh start
("Fresh Start") reporting as of September 11, 1992 (the "Effective Date") as a
result of the Company's judicial plan of reorganization (the "Plan of
Reorganization"). The Company prepared financial statements on the basis that a
new reporting entity was created with assets and liabilities recorded at their
estimated fair values as of the Effective Date. At the Effective Date, to the
extent the non-recourse debt secured by certain assets owned by the Company
exceeded the estimated fair value of the respective Wholly Owned Property, the
Company reduced the contractual amount of the related non-recourse mortgage debt
by the amount of the deficiency (the "Mortgage Deficiency"). The contractual
mortgage balance, net of any applicable Mortgage Deficiency, is referred to as
the "Carrying Value" of the mortgage (SEE NOTES 2 AND 3).
Cash and Other Assets
- ---------------------
Cash at September 30, 1997 is comprised of approximately $2.8 million
related to Wholly Owned Properties, which is held in separate property bank
accounts, and approximately $1.0 million in corporate funds.
Funds Held in Escrow at September 30, 1997 includes funds of $8.0 million
held in escrow for the benefit of Wholly Owned Properties for improvements and
deferred maintenance, real estate taxes, insurance and resident security
deposits. In addition, the Company is holding $2.4 million at September 30, 1997
as funds held primarily for payment of insurance premiums which are collected on
behalf of the Properties. At September 30, 1997 the Company's Funds Held in
Escrow also includes $3.3 million of funds received from the settlement of
termite litigation relating to certain Properties. Although the Company has
begun to distribute funds to the affected Properties, the complete distribution
of the funds is pending the finalization of an allocation of proceeds to the
affected Properties. Applicable corresponding liabilities have been recorded and
are included in Other Liabilities.
Intangible Assets at September 30, 1997 is primarily comprised of goodwill
and management contracts, net of amortization of approximately $599,000, related
to the Lexford Properties acquisition. In the third quarter of 1997, the Company
recorded a charge of approximately $364,000 as an amortization adjustment to the
value assigned to the third party management contracts acquired in 1996. The
adjustment was based upon the status of the current portfolio of third party
management contracts (SEE "LEXFORD PROPERTIES ACQUISITION" AND ITEM 2,
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES -- LEXFORD PROPERTIES
ACQUISITION).
Prepaids and Other assets at September 30, 1997 includes $2.5 million of
capitalized costs associated with refinancing mortgages on Wholly Owned
Properties and approximately $212,000 of loan costs associated with the
refinancing of the Company's corporate lines of credit which are amortized based
upon the maturity date of the credit facility. In addition, Prepaids and Other
assets consists of approximately $1.8 million of other prepaid expenses.
10
11
LEXFORD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (cont'd)
Recorded Values of Receivables from Syndicated Partnerships
- -----------------------------------------------------------
The Company owns general partner and, in some cases, nominal limited
partner interests in, and holds second mortgage loans and other receivables
from, Syndicated Partnerships. The majority of these receivables arose prior to
the Effective Date as a result of agreements related to the syndication of the
Syndicated Partnerships. Advances made to Syndicated Partnerships since the
Effective Date primarily were for supplemental financing for debt restructuring
or refinancing transactions. The advances bear interest at one percent over the
prime rate of interest of The Provident Bank (the "Bank"), which was 9.5% at
September 30, 1997. Interests in and Receivables from Syndicated Partnerships
were recorded at their estimated fair value as of the Effective Date based upon
Fresh Start accounting. The contractual amounts of receivables are significantly
greater than the recorded values. At September 30, 1997 and December 31, 1996,
the contractual value of the Company's Interests in and Receivables from
Syndicated Partnerships amounted to $233.5 million and $238.9 million,
respectively. The decrease in the contractual value is attributable to the
Syndicated Partnerships that have been disposed of since December 31, 1996. The
decline in the recorded value of Interests in and Receivables from Syndicated
Partnerships was due to the sale of properties, collection of advances (SEE NOTE
4) and the collection of accrued interest. The gains from the disposals have
been included in Income from Disposal of Assets. There can be no assurance that
the Company will collect any amounts above the recorded Fresh Start value of
these receivables. In addition, if materially adverse developments affect the
Syndicated Partnerships, the Company may have to establish additional reserves
or allowances with respect to the Fresh Start values.
The Fresh Start values of the Company's Interests in and Receivables from
Syndicated Partnerships were established as of the Effective Date utilizing an
estimation of value based upon a capitalization rate of 10.5% applied to the net
operating income of the respective Syndicated Partnership. The estimated value
was then adjusted by the Syndicated Partnership's mortgage debt and the
Syndicated Partnership's other assets and liabilities to determine an estimated
net fair value. The Company then calculated its share of the estimated net fair
value for each Syndicated Partnership, without regard to the possibility that
payments to limited partners might be required in order to effectuate sales of
the properties owned by certain of the Syndicated Partnerships.
Interest is accrued on the recorded Fresh Start values of second mortgages
and certain other receivables based upon contractual interest rates. Allowances
are provided for estimated uncollectible interest based upon the underlying
Syndicated Partnerships' ability to generate net cash flow sufficient to pay the
amounts due the Company. In certain instances, payments made to the Company by
individual Syndicated Partnerships in excess of carrying amounts of accrued
interest on the recorded values of second mortgages is recorded as interest
income. Any such payments in excess of amounts recorded as accrued interest
normally still represent contractual interest payable from the Syndicated
Partnerships to the Company and is representative of interest which accrues on
the excess of the contractual balance of the second mortgage or other receivable
above that of the recorded Fresh Start value on the Company's balance sheet. The
Company is also entitled to receive incentive management fees and supplemental
second mortgage interest from certain of the underlying Syndicated Partnerships
if certain specified amounts of net operating income are achieved. Also, in the
event the underlying Properties are sold or refinanced, the Company is generally
entitled to a participation interest in the net proceeds, if available, as a
second mortgage holder and on account of its partnership interest(s).
The Company accounts for its partnership interests in Syndicated
Partnerships by the cost method; no significant recorded value has been ascribed
to these interests. The realization of the Interests in and Receivables from
Syndicated Partnerships is dependent on the future operating performance of the
Syndicated Partnerships generating sufficient net operating income and net
proceeds upon ultimate disposition of the underlying Properties.
11
12
LEXFORD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (cont'd)
Lexford Properties Acquisition
- ------------------------------
Effective August 1, 1996 the Company acquired Lexford Properties by way of
a merger (the "Lexford Merger") of a wholly owned subsidiary of the Company with
and into Lexford Properties. 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 Properties and
the shareholders of Lexford Properties would receive 700,000 shares of
restricted, newly issued common stock, without par value ("Common Stock"), of
the Company. For purposes of the Lexford Merger, the Common Stock was valued at
$20 per share. Approximately $9.0 million, or 450,000 shares, of the purchase
price is subject to forfeiture in whole or in part in the event Lexford
Properties does not achieve certain profitability criteria by December 31, 1999.
These shares are held in escrow pending release. If the profitability criteria
are met, the shares subject to forfeiture will be released without contingency
and the Company will record the additional purchase price at such time. The
Lexford Properties shareholders received 250,000 shares of Common Stock free of
contingencies. The 450,000 shares subject to forfeiture are not reflected in the
Shareholders' Equity section of the Company's Balance Sheet nor in the
Consolidated Statement of Shareholders' Equity presented herein.
Net Income Per Share
- --------------------
Net Income per share for the period is computed based on the total weighted
average number of shares of the Company's Common Stock outstanding during the
subject period as well as those contingent shares estimated to be issued to
officers, employees and directors in accordance with the Company's 1992
Incentive Equity Plan, as amended or employment agreements with certain
executive officers. In the first nine months of 1997, the Company expensed
approximately $515,000 related to stock compensation and recorded approximately
$437,000 of stock issued related to the 1996 bonus plan. For the three and nine
months ended September 30, 1997, the total weighted average shares outstanding
was approximately 4,165,000 and 4,149,000, respectively. In February 1997 the
Company retired all treasury shares held by the Company and Wholly Owned
Properties. In August 1996, the Company issued 700,000 shares of Common Stock in
connection with the Lexford Merger, 450,000 shares of which remain subject to
forfeiture in whole or in part. The 450,000 shares subject to forfeiture are
excluded from the weighted average shares outstanding because the shares are not
dilutive if they are earned.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted for periods ending
after December 15, 1997. Accordingly as of December 31, 1997, the Company will
be required to change the method currently used to compute earnings per share
and to restate all prior periods. Under the new requirements for calculating
basic earnings per share (which will replace primary earnings per share) the
dilutive effects of stock options and other common stock equivalents will be
excluded. The impact is expected to result in basic earnings per share of $.46
and $.24 for the quarters ended September 30, 1997 and 1996, respectively, and
$1.15 and $.72 for the nine months ended September 30, 1997 and 1996,
respectively. The impact of Statement 128 on dilutive earnings per share (which
will replace fully diluted earnings per share) for such periods is not expected
to be material.
The shareholders of the Company at its annual meeting on October 7, 1997,
approved the Company's 1997 Performance Equity Plan (the "Performance Plan").
The Performance Plan authorizes the grant of restricted stock awards to certain
officers and non employee directors. A total of 318,000 shares will be issued
subject to forfeiture. Vesting under the Performance Plan occurs only upon
attainment of specified performance goals within a three year term, ending in
1999. If the performance goals are achieved, the Company will incur a non cash
charge, which may range from $4.0 million to $6.0 million for 1997, related to
the value of the stock that will vest under the Performance Plan.
12
13
LEXFORD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION (cont'd)
Corporate Restructuring and Other Nonrecurring Charges
- ------------------------------------------------------
During the nine months ended September 30, 1997, the Company incurred
Nonrecurring Costs totaling approximately $788,000, with approximately $538,000
in the third quarter of 1997. Approximately $400,000 of the charge, $150,000 in
the third quarter, was due to costs related to the elimination of overlapping
functions between Lexford Properties and the operations of the Company's
previous management services operations. In the third quarter of 1997 the
Company recorded a charge of approximately $389,000 primarily related to costs
incurred for the Form S-11 filing for the proposed spinoff of the Company's
Wholly Owned Properties. The Company has withdrawn this filing as it is
currently evaluating the possibility of the Company maintaining its ownership
interests in the Wholly Owned Properties and itself electing to be treated as a
Real Estate Investment Trust ("REIT") under the Internal Revenue Code.
NOTE 2 WHOLLY OWNED PROPERTIES
At September 30, 1997 and 1996, the Company owned 113 and 114 Wholly Owned
Properties, respectively.
Condensed combined balance sheets, with intercompany payables and
receivables eliminated, of the Company's Wholly Owned Properties as of September
30, 1997 and December 31, 1996 are as follows:
September 30, 1997 December 31, 1996
------------------------- -------------------------
Assets
Net Wholly Owned Properties Real Estate Assets $ 155,073,676 $ 157,091,545
Cash 2,771,975 3,322,494
Accounts Receivable 665,274 324,772
Funds Held in Escrow 8,002,599 6,980,142
Prepaids and Other 2,968,343 3,553,497
------------------------- -------------------------
$ 169,481,867 $ 171,272,450
========================= =========================
Liabilities and Equity
Mortgage Payable:
Contractual $ 153,680,070 $ 157,381,603
Mortgage Deficiency (8,158,142) (9,325,586)
------------------------- -------------------------
145,521,928 148,056,017
Accounts Payable 803,673 1,160,426
Accrued Interest and Real Estate Taxes 3,849,192 2,961,795
Other Accrued Expenses 1,227,883 1,337,083
Other Liabilities 873,453 683,202
------------------------- -------------------------
152,276,129 154,198,523
Equity 17,205,738 17,073,927
------------------------- -------------------------
$ 169,481,867 $ 171,272,450
========================= =========================
13
14
LEXFORD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 WHOLLY OWNED PROPERTIES (cont'd)
As of the Effective Date, in accordance with Fresh Start reporting, the
mortgages on the Wholly Owned Properties were restated to estimate fair value
(the "Carrying Value") if the Fresh Start value of the respective asset was less
than the outstanding principal amount of its mortgage. Although the value of the
assets may have increased since the Effective Date, the Carrying Values of the
mortgages and the assets have not been adjusted. Interest expense is recorded
based on the Carrying Value of the mortgage using the effective interest rate
method. Mortgages which have been originated following the Effective Date, are
recorded as liabilities on the Consolidated Balance Sheets in their full
principal amount. Typically, each Wholly Owned Property is secured by a separate
mortgage loan. The mortgage loans on a portfolio of 26 Wholly Owned Properties
contain cross collateral and cross default provisions; however, all of the
mortgage loans secured by the Wholly Owned Properties are non-recourse to the
Company.
With respect to those Wholly Owned Properties and other assets which the
Company has acquired, and may acquire, after the Effective Date, the recorded
values are established on the basis of acquisition cost, in accordance with
generally accepted accounting principles.
NOTE 3 MORTGAGE REFINANCINGS
During the first nine months of 1997, the Company refinanced mortgages on
two Wholly Owned Properties. Mortgage indebtedness on these Wholly Owned
Properties, with a contractual value of $2.6 million and a Carrying Value of
$2.3 million, was refinanced with mortgages bearing a fixed rate of interest of
8.2%, with 25 year amortization and ten year maturities. Annual debt service on
the affected Wholly Owned Properties decreased approximately $40,000. An
extraordinary non-cash loss of approximately $180,000, net of tax benefits,
resulted from the mortgage debt refinancings of the Wholly Owned Properties. The
loss arose from the mortgages repaid from refinance proceeds at the contractual
balance which exceeded the Carrying Value of the mortgages.
In the third quarter of 1997, the Company paid off the mortgage debt on one
Wholly Owned Property. The payment of $1.2 million approximated the Carrying
Value of the mortgage and represented a significant discount from the
contractual value of $1.9 million.
Through September 30, 1996, the Company completed the refinancing of the
mortgage and related interest debt on nine Wholly Owned Properties. Mortgage and
related interest debt, with a contractual value of $15.1 million and a Carrying
Value of $14.7 million, was refinanced with mortgages bearing interest ranging
from approximately 8.0% to 9.1% per annum, with a 25 year amortization schedule
and seven to ten year maturities. These transactions funded improvement and
deferred maintenance, tax and working capital escrows of approximately $570,000.
The Company did not recognize an extraordinary gain or loss associated with the
mortgage refinancings on these Properties.
During the first nine months of 1997, the Company also completed the
refinancing of the mortgage and related accrued interest debt on 12 Syndicated
Partnerships. The new loans bear interest at a fixed rate ranging from 8.2% to
9.0% per annum with a ten year maturity. The Company negotiated, on behalf of
the Syndicated Partnerships, discounts from the previous mortgage lenders
totaling approximately $1.3 million. Annual debt service requirements for the
affected Syndicated Partnerships decreased, in the aggregate, approximately
$230,000 as a result of these transactions.
14
15
LEXFORD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 MORTGAGE REFINANCINGS (cont'd)
Through September 30, 1996, the Company completed the refinancing of the
mortgage and related interest debt on 23 Syndicated Partnerships. The
refinancing of the mortgages on 11 of the 23 Syndicated Partnerships generated
excess cash proceeds of $1.5 million in the third quarter of 1996. Such proceeds
were utilized by the respective Syndicated Partnerships to pay down obligations
owed by such Syndicated Partnerships to the Company.
NOTE 4 RELATED PARTY TRANSACTIONS
The Company manages all of the 113 Wholly Owned Properties and 400 of the
406 Syndicated Partnerships. The Company also provides various ancillary
services, including a Preferred Resource purchasing program to the Properties,
and renter's insurance to residents (see Note 1 - Business Overview Management
Services). The Company earned fee based revenues from the Syndicated
Partnerships of approximately $2.7 million and $2.9 million for the three months
ended September 30, 1997 and 1996, respectively, and $8.5 million and $8.4
million for the nine months ended September 30, 1997 and 1996, respectively. The
Company also earned a majority of its interest income on its receivables
(including second mortgages) from the Syndicated Partnerships. Approximately
$1.2 million and $4.1 million of the Accounts Receivable were due from the
Syndicated Partnerships as of September 30, 1997 and December 31, 1996,
respectively. The decline in the accounts receivable is cyclical in nature due
to the timing of the billing and collection of the annual insurance premiums
collected and paid by the Company on behalf of the Syndicated Partnerships. The
cyclical nature of the insurance billings also impacted Other Accrued Expenses.
Fee Based Revenues and Accounts Receivable related to the Wholly Owned
Properties are eliminated in consolidation.
The Company received, net of advances to Syndicated Partnerships, principal
repayment of advances of approximately $579,000 from the Syndicated Partnerships
in the first nine months of 1997 as compared to approximately $396,000 in the
first nine months of 1996. These advance repayments were applied to Interests in
and Receivables from Syndicated Partnerships (SEE NOTE 1 BASIS OF PRESENTATION
- -- RECORDED VALUES OF RECEIVABLES FROM SYNDICATED PARTNERSHIPS).
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion explains material changes in the Company's results
of operations, comparing the three and nine months ended September 30, 1997 and
1996 and significant developments affecting the Company's financial condition
since the end of 1996. The following discussion should be read in conjunction
with the historical financial statements of the Company.
RESULTS OF OPERATIONS
Rental and Other Revenues are derived from the Wholly Owned Properties
which own and operate apartment communities. Rental and Other Revenues increased
approximately $431,000 or 4.2% and approximately $617,000 or 2.0% for the three
and nine months ended September 30, 1997, respectively, as compared to the same
periods in 1996. On a comparable unit basis, Rental and Other Revenues from the
113 Wholly Owned Properties in operation for both periods ("same store")
increased approximately $403,000 or 3.9% and approximately $843,000 or 2.8%, for
the three and nine months ended September 30, 1997, respectively, as compared to
the same periods in 1996, with average monthly rent collected per unit during
the nine month period increasing from $390 in 1996 to $395 in 1997. The average
economic occupancy was 91.3% for the nine months ended September 30, 1997 as
compared to 92.2% for the nine months ended September 30, 1996. Economic
occupancy is defined as the amount of revenue collected from residents as a
percentage of the revenue a property could generate if full rents, based upon
the last rent received, were collected for 100% of the units.
Fee Based Revenues are comprised of Management Services and Investment
Management revenues generated from services provided to Syndicated Partnerships,
third party owners and residents at the Properties. Management Services revenues
principally relate to property management and accounting services provided to
the Syndicated Partnerships and, from and after August 1, 1996, property
management services provided to third party property owners (SEE LIQUIDITY AND
CAPITAL RESOURCES -- LEXFORD PROPERTIES ACQUISITION). As of September 30, 1997,
the Company had an ownership interest in 519 apartment communities (consisting
of an aggregate of 33,984 rental units) in 14 states. As of the same date,
Lexford Properties managed 592 apartment communities (consisting of an aggregate
of 52,001 apartment units) in 22 states. Lexford Properties' management
portfolio included 513 apartment communities (33,627 units) in which the Company
has an ownership interest and 79 apartment communities (18,374 units) managed
for third party owners. In the first quarter of 1997 Lexford Properties lost the
management of approximately 3,000 third party owned units in a portfolio
involved in bankruptcy proceedings which resulted in a change of control of the
ownership of these units. The loss of this portfolio has resulted in a decline
in third party management revenues of approximately $300,000 per quarter in
1997. Third party management revenues are typically subject to 30 day contracts
and, as such, may experience significant fluctuation from period to period.
Lexford Properties also provides ancillary services to third party owners and
the Syndicated Partnerships, including a "Preferred Resource" discount buying
program and laundry services. 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 Properties established its Preferred Resource
program that features discounts with major vendors. Lexford Properties enters
into group buying, volume discount contracts with such major vendors achieving
discounts which the third party owners and Syndicated Partnerships could not
achieve on a stand alone basis. The program, therefore, allows Lexford
Properties' clients to benefit from volume purchasing by paying discounted
prices. By outsourcing the replacement parts and supplies, Lexford Properties
eliminated its inventory and reduced overhead. The program was made available to
third-party clients effective December 1, 1996. Lexford Properties receives a
rebate from vendors for every purchase made through the Preferred Resource
program, as well as a rebate from residents' use of laundry equipment.
Investment Management revenues consist of partnership administration fees as
well as fees generated from loan refinancing and restructuring (SEE NOTE 1 OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- BUSINESS OVERVIEW).
16
17
The following are the major components of Management Services revenues and
Investment Management fee-based revenues for the three and nine months ended
September 30, 1997 as compared to the same periods in 1996 (certain amounts
previously reported have been reclassified herein between Management Services
and Preferred Resource for all periods presented):
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------- ----------------------------------
1997 1996 1997 1996
---------------- ----------------- --------------- ----------------
Management Services:
Property Management Services:
Syndicated Partnerships $ 1,954,746 $ 1,936,102 $ 5,819,601 $ 5,810,629
Third Party 1,054,014 834,847 3,046,713 834,847
Other Management Service Fees 272,801 271,405 812,096 832,213
Preferred Resource:
Furniture Leasing and Renter's Insurance 50,016 51,629 240,314 213,063
Preferred Resource Purchase Rebates 51,018 0 306,938 0
Resident Application Fees 106,980 78,166 336,236 282,728
Replacement and Maintenance
Material Revenues - Net 0 71,341 0 222,144
---------------- ----------------- --------------- ----------------
Total Management Services Revenues 3,489,575 3,243,490 10,561,898 8,195,624
---------------- ----------------- --------------- ----------------
Investment Management:
Partnership Administration & Other Fees 292,018 267,329 858,814 849,491
Loan Refinancing and Restructuring Fees 7,670 178,014 113,710 227,141
---------------- ----------------- --------------- ----------------
Total Investment Management Fee Revenues 299,688 445,343 972,524 1,076,632
---------------- ----------------- --------------- ----------------
Total Fee Based Revenues $ 3,789,263 $ 3,688,833 $ 11,534,422 $ 9,272,256
================ ================= =============== ================
Fee Based Revenues increased approximately $100,000, or 2.7%, and $2.3
million, or 24.4%, for the three and nine months ended September 30, 1997,
respectively, as compared to the same periods in 1996. The increase for the nine
month periods was almost entirely due to increases in property management and
accounting services revenues from the operations of Lexford Properties, acquired
effective August 1, 1996. Preferred Resource Revenues increased approximately
$7,000 and $166,000 for the three and nine months ended September 30, 1997,
respectively, as compared to the same periods in 1996. The increases were due to
an increase in renter's insurance revenues and the volume of revenue generated
from the Preferred Resource program rebates as compared to the revenue earned
from the discontinued maintenance parts and supply operation in the prior year.
Interest Income increased approximately $939,000, or 55.9%, and $3.1
million, or 67.8%, for the three and nine months ended September 30, 1997,
respectively, as compared to the same periods in 1996. Interest Income is
primarily derived from the interest collected or accrued on the recorded value
of Interests in, and Receivables from, Syndicated Partnerships (SEE NOTE 1 OF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - RECORDED VALUES OF RECEIVABLES
FROM SYNDICATED PARTNERSHIPS ). The increase in Interest Income was primarily
due to lower first mortgage debt service requirements due to refinancings of
Syndicated Partnership mortgages. Although there can be no assurances, Interest
Income should continue to be favorably impacted in the future as a result of
refinanced mortgage debt and, possibly, increasing net operating income (SEE NET
OPERATING INCOME OF SYNDICATED PARTNERSHIPS).
17
18
Income from Disposal of Assets increased approximately $766,000 and $1.2
million for the three and nine months ended September 30, 1997, respectively, as
compared to the same periods in 1996. This income is derived from the net
disposition proceeds in excess of the aggregate recorded value of these assets.
The Company may sell certain Properties and, although there can be no assurance,
may recognize additional income from disposal of assets. Income from Disposal of
Assets is not a recurring, long term source of revenue.
Other Income increased approximately $285,000 and $279,000 for the three
and nine months ended September 30, 1997, respectively, as compared to the same
periods in 1996. The increase was due to the income generated from the sale of
an investment in a mortgage note on a property owned by a third party.
Rental Operating Expense decreased approximately $874,000 or 16.5% and $1.2
million, or 7.8%, for the three and nine months ended September 30, 1997,
respectively, as compared to the same periods in 1996. The majority of the
decrease is due to the capitalization of certain furniture and fixture
replacements previously expensed. In the third quarter, management reviewed its
replacement maintenance costs and determined that certain expenditures had a
longer useful life and did not require frequent replacement. Management believes
that the revised capitalization policy is more like that of its industry peers,
most of whom are Real Estate Investment Trusts ("REIT"). The adjustment recorded
in the third quarter reflects the amount of expenditures from January 1, 1997 to
June 30, 1997 that were previously reflected as expenses as well as such
replacement costs incurred in the third quarter of 1997. These items have been
capitalized and will be depreciated over an estimated useful life of five years.
Fee Based Expenses increased approximately $410,000 and $3.5 million for
the three and nine months ended September 30, 1997, respectively, as compared to
the same periods in 1996. The increase was primarily due to Fee Based Expenses
related to the third party management operation of Lexford Properties which was
acquired effective August 1, 1996.
Administration Expenses increased approximately $358,000 and $1.1 million
for the three and nine months ended September 30, 1997, respectively, as
compared to the same periods in 1996. The increase in administration expenses
was due, in part, to the executive and middle management restructuring
implemented at the end of 1995 which resulted in lower payroll expense during
the first half of 1996 due to open positions, principally at the senior
management level, many of which positions have since been filled. The Company
has also incurred additional costs in 1997 associated with a promotional and
marketing campaign designed to promote the Lexford Properties third party
property management operation.
Restructure / Nonrecurring Costs were approximately $538,000 and $788,000
for the three and nine months ended September 30, 1997. Approximately $400,000
of the charge was incurred in 1997 as a one time charge related to costs
incurred in connection with realignments to the Company's Management Services
division as part of the integration of the Lexford Properties third party
management operations with the pre-existing Management Services division of the
Company. In the third quarter of 1997, the Company recorded a charge of
approximately $389,000, primarily due to the write-off of costs deferred in
connection with a Form S-11 registration statement filing for the spin off of
the Company's Wholly Owned Properties. The Company has withdrawn this filing and
is currently evaluating a possible election of the entire Company to be treated
as a REIT under the Internal Revenue Code.
Interest Expense for mortgages on the Wholly Owned Properties increased
approximately $69,000 and decreased approximately $195,000 for the three and
nine months ended September 30, 1997, respectively, as compared to the same
periods in 1996. In the third quarter, Interest Expense increased due to the
expensing of the Mortgage Deficiency related to the lump sum principal payments
made on cash flow secondary mortgages (SEE NOTE 1 OF NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS -- FRESH START ACCOUNTING). The year-to-date decrease is
related to the refinancing transactions completed in late 1996. Interest Expense
on the Company's corporate lines of credit decreased approximately $104,000 and
$359,000 for the three and nine month comparative periods. This decrease is due
primarily to the decline in the average debt outstanding on the Company's credit
facility: $5.0 million was outstanding at September 30, 1997 as compared to
$18.0 million at September 30, 1996.
18
19
Depreciation and Amortization Expense increased approximately $574,000 and
$863,000 for the three and nine months ended September 30, 1997, respectively,
as compared to the same periods in 1996. The increase is due to the amortization
of goodwill and management contracts associated with the Lexford Properties
acquisition and depreciation associated with the items capitalized as discussed
in "Rental Operating Expense". In addition, the Company recorded a charge of
approximately $364,000 as an amortization adjustment to the value assigned to
the third party management contracts acquired in 1996. The adjustment was based
upon an analysis of the current portfolio for third party management contracts.
Income before Extraordinary Item amounted to $1.8 million, or $0.44 per
share, and $4.8 million, or $1.15 per share, for the three and nine months ended
September 30, 1997, respectively, as compared to approximately $887,000 or $0.22
per share, and $2.7 million, or $0.69 per share, for the same periods in 1996.
The extraordinary loss of approximately $180,000 net of tax benefits, in the
second quarter of 1997 was a result of mortgage debt refinancings on Wholly
Owned Properties (SEE NOTE 3 OF NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS).
Earnings before Interest, Taxes, Depreciation and Amortization
The Company believes that earnings before interest, income taxes,
depreciation, amortization and extraordinary items ("EBITDA"), Recurring EBITDA
(EBITDA less Loan Fees and as adjusted for Nonrecurring items) and Adjusted
EBITDA (Recurring EBITDA plus principal payments of receivables from Syndicated
Partnerships less interest on Wholly Owned Property mortgage debt) are
significant indicators of the strength of its results. EBITDA is a measure of a
Company's ability to generate cash to service its obligations, including debt
service 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. Unaudited
EBITDA and the unaudited computation of Recurring EBITDA and Adjusted EBITDA for
the three and nine months ended September 30, 1997 and 1996 is as follows:
For the Three Months Ended For the Nine Months Ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
--------------- ---------------- --------------- ----------------
EBITDA $ 8,738,619 $ 6,648,169 $ 23,728,447 $ 20,092,799
- ------ --------------- ---------------- --------------- ----------------
Income from Disposal of Assets (772,910) (7,181) (1,462,266) (281,873)
Loan Fees (7,670) (178,014) (113,710) (227,141)
Second Mortgage Principal Amortization 783,339 0 783,339 0
Restructure / Nonrecurring Costs 538,489 0 788,489 300,000
--------------- ---------------- --------------- ----------------
Recurring EBITDA 9,279,867 6,462,974 23,724,299 19,883,785
- ---------------- --------------- ---------------- --------------- ----------------
Interest on Wholly Owned Properties (3,569,134) (3,500,425) (10,505,661) (10,700,604)
--------------- ---------------- --------------- ----------------
Adjusted EBITDA $ 5,710,733 $ 2,962,549 $ 13,218,638 $ 9,183,181
- --------------- =============== ================ =============== ================
Adjusted EBITDA increased approximately $2.7 million or 92.8% and $4.0
million, or 43.9% for the three and nine months ended September 30, 1997,
respectively, as compared to the same periods in 1996. The increase was due to
the increase in interest income and cash flow derived from Syndicated
Partnerships and the change related to the capitalization of certain replacement
items previously expensed. Approximately $899,000 of the increase in Adjusted
EBITDA was due to the implementation of the change to capitalize certain
replacement items (such as kitchen appliances, carpeting, and other apartment
interior furnishings). Without the change in capitalization, the increase in
Adjusted EBITDA would have been 62% and 34% for the three and nine months ended
September 30, 1997, respectively, as compared to the same periods in 1996.
19
20
Contribution to Profit by Business Activity
The unaudited net contribution to profit (revenues less direct expenses)
and Adjusted EBITDA by the core business activities of the Company for the three
and nine months ended September 30, 1997 and 1996, are as follows. Financial
information presented includes fee based revenue generated from the Wholly Owned
Properties which is eliminated in the Consolidated Financial Statements, and
does not include an allocation of general corporate overhead.
The following presentation shows Management Services and Preferred Resource
separately. Management believes that this presentation format is more
appropriate to reflect sources of revenues and the direct costs related to the
different lines of business. Operational realignments implemented during the
third quarter of 1997 provided for a more accurate allocation of expenses
between Management Services and Preferred Resource and certain amounts have been
reclassified accordingly with year to date amounts being restated for
comparability.
Management Services - Net Contribution to Profit
For the Three Months Ended For the Nine Months Ended
------------------------------------- -------------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
----------------- ----------------- ----------------- -----------------
Revenues
Affiliated Partnership Contracts $ 3,127,785 $ 2,844,946 $ 8,765,258 $ 8,850,528
Third Party Contracts 1,054,014 834,847 3,046,713 834,847
----------------- ----------------- ----------------- -----------------
4,181,799 3,679,793 11,811,971 9,685,375
----------------- ----------------- ----------------- -----------------
Direct Expenses 3,074,165 3,043,813 9,065,072 6,303,750
----------------- ----------------- ----------------- -----------------
Net Contribution to Profit $ 1,107,634 $ 635,980 $ 2,746,899 $ 3,381,625
================= ================= ================= =================
Adjusted EBITDA $ 1,107,634 $ 635,980 $ 2,746,899 $ 3,381,625
================= ================= ================= =================
The year-to-date decline in the Management Services net contribution to
profit is due to the fact that a diminution of fee revenue associated with third
party management occurred without significant simultaneous expense reductions.
The revenue losses were due in large part to the loss of management of 3,000
units in the first quarter of 1997 as the result of an owner-client's bankruptcy
proceedings. Other factors contributing to the decline in net contribution is a
decrease in other income related to the recovery of fully reserved receivables
in 1996 upon refinancing of properties.
In the second quarter of 1997 the Company implemented a realignment of the
Management Services operations to reduce costs and recover margins. The benefits
of the realignment are reflected in the results for the third quarter. In the
third quarter of 1996, the Management Services operations incurred additional
transition costs due to the Lexford Properties acquisition.
Preferred Resource -- Net Contribution to Profit
For the Three Months Ended For the Nine Months Ended
------------------------------------ -------------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
----------------- ----------------- ----------------- -----------------
Revenues
Renter's Insurance $ 97,164 $ 84,545 $ 359,620 $ 281,488
Rebate/Parts Sales and Other 234,403 373,891 631,013 1,131,839
Resident Application Fees 106,980 69,314 336,236 273,876
----------------- ----------------- ----------------- -----------------
438,547 527,750 1,326,869 1,687,203
----------------- ----------------- ----------------- -----------------
Direct Expenses 235,172 280,652 480,364 757,105
----------------- ----------------- ----------------- -----------------
Net Contribution to Profit $ 203,375 $ 247,098 $ 846,505 $ 930,098
================= ================= ================= =================
Adjusted EBITDA $ 203,375 $ 247,098 $ 846,505 $ 930,098
================= ================= ================= =================
20
21
Investment Management - Net Contribution to Profit
For the Three Months Ended For the Nine Months Ended
---------------------------------- ------------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---------------- ---------------- ---------------- -----------------
Revenues
Interest Income $ 2,778,346 $ 1,953,054 $ 8,211,080 $ 4,899,739
Fee Based Services
Administrative Fees 378,970 342,975 1,127,015 1,111,050
Loan Fees 49,650 242,614 192,775 346,351
Income from Disposal of Assets and Other 998,292 226,136 1,762,927 500,828
---------------- ---------------- ---------------- -----------------
4,205,258 2,764,779 11,293,797 6,857,968
---------------- ---------------- ---------------- -----------------
Direct Expenses 707,794 417,313 1,790,640 1,385,336
Net Equity/(Loss) in Wholly Owned Properties 1,058,818 (173,392) 1,402,504 (444,424)
---------------- ---------------- ---------------- -----------------
Net Contribution to Profit $ 4,556,282 $ 2,174,074 $ 10,905,661 $ 5,028,208
================ ================ ================ =================
Adjusted EBITDA $ 5,909,228 $ 3,231,186 $ 13,951,563 $ 8,144,907
================ ================ ================ =================
The increase in the Investment Management net contribution to profit
was derived principally from the improved financial operating performances and
reduced first mortgage debt service requirements of the Syndicated Partnerships
(reflected in Interest Income) and the Wholly Owned Properties. The significant
increase in income for the Wholly Owned Properties was due to the capitalization
of certain items that were previously expensed (SEE "RENTAL OPERATING EXPENSE").
CONSOLIDATED SUMMARY
----------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
---------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---------------- --------------- --------------- ---------------
Net Contribution to Profit:
Management Services $ 1,107,634 $ 635,980 $ 2,746,899 $ 3,381,625
Preferred Resource 203,375 247,098 846,505 930,098
Investment Management 4,556,282 2,174,074 10,905,661 5,028,208
---------------- --------------- --------------- ---------------
5,867,291 3,057,152 14,499,065 9,339,931
---------------- --------------- --------------- ---------------
Other Expenses:
Administration 1,509,504 1,151,715 4,326,329 3,273,449
Restructure / Nonrecurring Costs 538,489 0 788,489 300,000
Interest - Corporate 174,254 278,714 481,578 840,180
Depreciation and Amortization 643,069 176,389 1,095,159 445,334
---------------- --------------- --------------- ---------------
2,865,316 1,606,818 6,691,555 4,858,963
---------------- --------------- --------------- ---------------
Income before Income Taxes $ 3,001,975 $ 1,450,334 $ 7,807,510 $ 4,480,968
================ =============== =============== ===============
21
22
Adjusted EBITDA by Business Activity
------------------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
-------------------------------------- --------------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------------ ----------------- ------------------ ------------------
Adjusted EBITDA - Net Contribution:
Management Services $ 1,107,634 $ 635,980 $ 2,746,899 $ 3,381,625
Preferred Resource 203,375 247,098 846,505 930,098
Investment Management 5,909,228 3,231,186 13,951,563 8,144,907
Corporate Administration (1,509,504) (1,151,715) (4,326,329) (3,273,449)
------------------ ----------------- ------------------ ------------------
Adjusted EBITDA $ 5,710,733 $ 2,962,549 $ 13,218,638 $ 9,183,181
================== ================= ================== ==================
Wholly Owned Properties' Operating Results
The following table summarizes the unaudited operating results of the
Wholly Owned Properties for the three and nine months ended September 30, 1997
and 1996 (SEE RESULTS OF OPERATIONS--RENTAL AND OTHER REVENUES):
For the Three Months Ended For the Nine Months Ended
------------------------------------ -------------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
----------------- ------------------ ----------------- -----------------
Statistical information (1)
- ---------------------------
Properties at end of period 113 114 113 114
Average Units 8,453 8,574 8,453 8,646
Ave Economic Occupancy 92.7% 91.0% 91.3% 92.2%
Ave Rent Collected/Unit/Month $403 $389 $396 $384
Property - Operating Expenses/Unit/Month $159 $149 $154 $146
Capital & Maintenance/Unit/Month $42 $31 $34 $33
Real Estate Taxes/Unit/Month $33 $32 $32 $32
Property - Operating Expense Ratio 37.6% 37.1% 37.3% 36.9%
Financial Information(1)
- ------------------------
Revenues
Rental Income $ 10,217,731 $ 10,004,092 $ 30,068,351 $ 29,883,799
Other Property Income 525,261 307,311 1,303,619 871,416
----------------- ------------------ ----------------- -----------------
Total Revenues 10,742,992 10,311,403 31,371,970 30,755,215
----------------- ------------------ ----------------- -----------------
Expenses
Property Operating 4,038,636 3,824,410 11,704,779 11,363,020
Real Estate Taxes 843,539 832,565 2,468,662 2,488,275
----------------- ------------------ ----------------- -----------------
Operating Expenses 4,882,175 4,656,975 14,173,441 13,851,295
----------------- ------------------ ----------------- -----------------
Net Operating Income 5,860,817 5,654,428 17,198,529 16,903,920
----------------- ------------------ ----------------- -----------------
Interest - Mortgage 3,569,134 3,500,425 10,505,661 10,700,604
Interest - Corporate Advances 156,030 100,000 445,168 300,000
Major Maintenance (83,693) 668,220 1,022,746 2,163,956
Non Operating (189,659) 416,870 (16,088) 858,070
Depreciation and Amortization 1,350,187 1,242,307 3,838,538 3,625,714
----------------- ------------------ ----------------- -----------------
Non Operating 4,801,999 5,927,822 15,796,025 17,648,344
----------------- ------------------ ----------------- -----------------
Income/(Loss) before Extraordinary Items 1,058,818 (273,394) 1,402,504 (744,424)
----------------- ------------------ ----------------- -----------------
Extraordinary Loss 0 0 (295,534) 0
----------------- ------------------ ----------------- -----------------
Net Income/(Loss) $ 1,058,818 $ (273,394) $ 1,106,970 $ (744,424)
================= ================== ================= =================
Capital Expenditures $ 1,156,280 $ 134,654 $ 1,529,553 $ 370,453
================= ================== ================= =================
<FN>
(1 )Not Same Store
</FN>
22
23
Funds from Operations of Wholly Owned Properties
As defined by the National Association of Real Estate Investment Trust
("NAREIT"), Funds From Operations ("FFO") represents net income/(loss) (computed
in accordance with generally accepted accounting principles, consistently
applied) before minority interest, excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization (excluding amortization of deferred financing costs), and after
adjustment for unconsolidated partnerships and joint ventures. The FFO of the
Wholly Owned Properties for the three and nine months ended September 30, 1997,
as compared to the same periods in 1996, is as follows:
Funds From Operations
----------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
---------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---------------- --------------- ---------------- ----------------
Wholly Owned Properties:
Income/(loss) before Extraordinary Items $ 1,058,818 $ (273,394) $ 1,402,504 $ (744,424)
Depreciation on Real Estate 1,254,915 1,149,419 3,555,873 3,450,377
Deferred Maintenance Funded from Escrows 0 0 0 523,025
---------------- --------------- ---------------- ----------------
$ 2,313,733 $ 876,025 $ 4,958,377 $ 3,228,978
================ =============== ================ ================
FFO increased approximately $1.4 million and $1.7 million for the three and
nine months ended September 30, 1997, respectively, as compared to the same
periods in 1996, due to the factors discussed above in "Rental Operating
Expense", specifically as it relates to the capitalization of interior
replacement items. Excluding the effect of the capitalization, FFO increased
approximately $539,000 or 61.5%, and $831,000, or 25.7% for the three and nine
months ended September 30, 1997, as compared to the same periods in 1996.
Net Operating Income of Syndicated Partnerships
The Company holds receivables from substantially all of the 406 Syndicated
Partnerships in which the Company had an ownership interest on September 30,
1997 primarily in the form of second mortgages and general partner advances to
the Syndicated Partnerships. Payments on these receivables generate a majority
of the interest income recognized by the Company.
The following table summarizes certain unaudited aggregated operating
results of the Syndicated Partnerships for the three and nine months ended
September 30, 1997 and 1996. The financial information presented is based upon
accrual accounting at the partnership level. Certain transactions between the
Company and the Syndicated Partnerships are recorded at amounts at the
partnership level that will not necessarily correspond to amounts recorded at
the Company level as Interest Income due to "Fresh Start" accounting (SEE NOTE 1
OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --RECORDED VALUES OF RECEIVABLES
FROM SYNDICATED PARTNERSHIPS).
23
24
For the Three Months Ended For the Nine Months Ended
-------------------------------------------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
Statistical information(1)
- --------------------------
Properties at end of period 406 414 406 414
Average Units 25,576 26,197 25,632 26,197
Ave Economic Occupancy 92.3% 92.7% 91.4% 92.1%
Ave Rent Collected/Unit/Month $401 $390 $394 $384
Property - Operating Expenses/Unit/Month $160 $152 $156 $150
Capital & Maintenance/Unit/Month $52 $42 $40 $37
Real Estate Taxes/Unit/Month $29 $29 $30 $30
Property - Operating Expense Ratio 38.0% 37.7% 38.0% 37.9%
Financial Information(1)
- ------------------------
Revenues
Rental Income $ 30,740,049 $ 30,692,962 $ 90,854,834 $ 90,590,128
Other Property Income 1,624,040 987,619 3,887,390 2,620,971
---------------- ----------------- --------------- ----------------
Total Revenues 32,364,089 31,680,581 94,742,224 93,211,099
---------------- ----------------- --------------- ----------------
Expenses
Property Operating 12,286,049 11,929,779 36,000,554 35,288,320
Real Estate Taxes 2,220,695 2,317,596 6,829,176 7,016,698
---------------- ----------------- --------------- ----------------
Operating Expenses 14,506,744 14,247,375 42,829,730 42,305,018
---------------- ----------------- --------------- ----------------
Net Operating Income 17,857,345 17,433,206 51,912,494 50,906,081
---------------- ----------------- --------------- ----------------
Interest - Mortgage 9,527,622 9,940,331 29,090,795 29,867,349
Interest - Corporate Advances 2,636,108 3,077,535 9,009,984 9,201,984
Major Maintenance (472,790) 2,617,507 3,099,826 7,230,455
Non Operating 500,153 161,166 1,467,313 1,814,000
Depreciation and Amortization 4,902,384 4,588,190 14,191,289 13,663,420
---------------- ----------------- --------------- ----------------
Non Operating 17,093,477 20,384,729 56,859,207 61,777,208
---------------- ----------------- --------------- ----------------
Income/(Loss) before Extraordinary Item 763,868 (2,951,523) (4,946,713) (10,871,127)
---------------- ----------------- --------------- ----------------
Extraordinary Item 574,582 1,247,337 2,422,963 1,247,337
---------------- ----------------- --------------- ----------------
Net Income/(Loss) $ 1,338,450 $ (1,704,186) $ (2,523,750) $ (9,623,790)
================ ================= =============== ================
Capital Expenditures $ 4,500,748 $ 674,302 $ 6,107,347 $ 1,477,432
================ ================= =============== ================
<FN>
(1)Not Same Store
</FN>
On a comparable unit or "same store" basis for the 405 Syndicated
Partnerships in operation throughout all periods presented, Net Operating Income
increased approximately $680,000, or 4.0%, and $1.7 million, or 3.3%, for the
three and nine months ended September 30, 1997, respectively, as compared to the
same periods in 1996. Economic occupancy for the 405 same store Syndicated
Partnerships was 91.4% for the nine months ended September 30, 1997, as compared
to 92.2% for the same period in 1996. Average rent collected per unit per month
on a same store basis was $394 during the nine months ended September 30, 1997,
as compared to $388 for the same period in 1996. The Syndicated Partnership
performance for the first nine months of 1997, as compared to 1996, is
comparable to the Wholly Owned Properties, and was influenced by the same
factors. In the third quarter, major maintenance was adjusted to capitalize
certain replacement items previously expensed. The extraordinary item recorded
on the Syndicated Partnerships related to debt discounts obtained upon the
refinance of the mortgage debt on certain Syndicated Partnerships.
24
25
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
---------
The following discussion regarding liquidity and capital resources should
be read in conjunction with the Company's Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 and the Consolidated Statements of Cash
Flows for the nine months ended September 30, 1997 and 1996.
The Company anticipates that cash flow from its operations and borrowings
available under the Company's credit facility should be adequate to meet the
foreseeable capital and liquidity needs of the Company. If the Company is
successful in implementing potential future growth plans, such as converting to
a REIT, it may be necessary to seek alternative sources of debt or equity
capital.
The principal sources of liquidity for the Company are cash flow from its
operations and borrowing available under the Company's credit facility. The
Company's Net Cash Provided by Operating Activities increased $7.0 million for
the nine months ended September 30, 1997, as compared to the same period in
1996. The increase was due primarily to cash received from Interests in and
Receivables from Syndicated Partnerships which increased $3.5 million due to
improved net operating income and lower debt service requirements. In addition,
cash flow provided by operating activities of the Wholly Owned Properties
increased $1.9 million for the nine months ended September 30, 1997, as compared
to the same period in 1996. The increase was due to the improved operating
performance of the Wholly Owned Properties and approximately $900,000 of
replacement furniture and fixtures capitalized in the third quarter of 1997.
These items were expensed in prior periods. Payments (uses of cash) related to
nonrecurring items included in Operating Activities reflects payments related to
the corporate restructuring costs.
On September 30, 1997 the Company entered into an Amended and Restated Loan
and Security Agreement with the Provident Bank. The new revolving credit
facility ("Facility"), is for $35 million and represents an increase to and
replacement of all former revolving credit facilities with The Provident Bank
(the "Bank"). The scheduled term of the Facility expires March 30, 2000,
although the Company may elect from time to time to convert all or any portion
of the principal amount outstanding under the Facility into a five year term
loan. Revolving loans outstanding under the Facility bear interest at a variable
interest rate equal to the Bank's prime rate of interest, currently 8.5%, minus
1%. As of the end of the third quarter there were no outstanding balances under
the Facility. The Company's former $7.0 million revolving line of credit for
acquisitions and Property debt restructuring (the "Acquisition Line"), was
converted into a term loan which matures in March 2001 and has a 7.25% fixed
interest rate with monthly installments of principal and interest of $139,435.
As of the end of the third quarter, the unpaid principal balance outstanding
under the Acquisition Line was approximately $5.0 million.
In addition, all of the Company and the majority of Property bank accounts
are maintained at the Bank. The banking relationship has increased cash flow at
the Properties as a result of reduced service charges and increased interest
income on the Property bank account balances. The Company benefits from a
portion of the improved cash flow at the Properties.
The shareholders of the Company at its annual meeting on October 7, 1997,
approved the Company's 1997 Performance Equity Plan (the "Performance Plan").
The Performance Plan authorizes the grant of restricted stock awards to certain
officers and non employee directors. A total of 318,000 shares will be issued
subject to forfeiture. Vesting under the Performance Plan occurs only upon
attainment of specified performance goals within a three year term, ending in
1999. If the performance goals are achieved, the Company will incur a non cash
charge, which may range from $4.0 million to $6.0 million for 1997, related to
the value of the stock that will vest under the Performance Plan.
The Company's capital expenditures for the nine months ended September 30,
1997 amounted to approximately $786,000 funded from cash flow and the Company's
credit facility. The Company anticipates that its capital needs in the future
can be satisfied out of cash flow from operations or the Company's credit
facility. The Company is upgrading its software systems in order to obtain
optimal efficiencies from technology. In addition, during the course of 1998,
the Company intends to lease personal computers and new property management
software for use on site at the Properties. The total cost to implement this new
system is estimated to be approximately $2.0 million. The cost will be financed
with an operating lease, with each Property absorbing its pro rata share of the
25
26
rental costs. Although there can be no assurance, management believes this
enhanced technology should improve property performance and provide operational
efficiencies which should offset the increased costs associated with the new
system.
Capital Expenditures, combined with Improvement and Replacement Expense for
the Wholly Owned Properties, was $2.6 million during the nine months ended
September 30, 1997. These costs are funded from Wholly Owned Properties cash
flow and maintenance escrow funds. The 1997 budget for capital expenditures,
improvement and replacement expense for the Wholly Owned Properties is $4.6
million, as compared to annual actual expenditures in 1996 of $3.5 million.
Approximately $1.5 million of the $4.6 million relates to nonrecurring deferred
maintenance which principally will be funded from escrows established in
connection with mortgage refinancing transactions completed in prior years.
Lexford Properties Acquisition
------------------------------
Effective August 1, 1996, the Company acquired Lexford Properties, Inc., a
privately held, third-party multi-family management company headquartered in
Dallas, Texas (SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
BUSINESS OVERVIEW - MANAGEMENT SERVICES AND - LEXFORD PROPERTIES ACQUISITION).
As a result of the acquisition, the Company derives Management Services fee
income from apartment communities in which it has no ownership interest. At
September 30, 1997, Lexford Properties' third party management portfolio
comprised 18,374 units of the Company's management portfolio of approximately
52,000 units. Lexford Properties' Dallas office is headquarters for the
Company's combined property management business, which is conducted under the
Lexford Properties name.
To acquire Lexford Properties, 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 Properties' 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 any one of the three fiscal
years in the specified period, profit from property management operations
increases $1.8 million or more from combined 1995 levels, the former Lexford
Properties shareholders would own 150,000 of the contingent shares free of
contingencies, and if the increase is $4.0 million or more from combined 1995
levels, the former Lexford Properties shareholders would own the entire 700,000
shares free of contingencies, or approximately 15.0% of the Company's shares
outstanding as of September 30, 1997.
Financing and Debt Restructuring of the Properties
--------------------------------------------------
In the first nine months of 1997 the Company refinanced mortgages on 12
Syndicated Partnerships and two Wholly Owned Properties. The new mortgages on 12
Properties were financed through PaineWebber Incorporated ("PaineWebber") and
the mortgages on two Properties were financed through First Union Capital
Markets Group ("First Union"). The PaineWebber mortgages have fixed interest
rates ranging from 8.2% to 9.0% with a 25 year principal amortization schedule,
beginning in year four on Syndicated Partnerships, and a ten year maturity. The
new First Union mortgages have fixed interest rates of 8.7% with a 25 year
principal amortization and a ten year maturity. The Company was able to
negotiate debt discounts from the previous lenders of approximately $1.3 million
in the aggregate on four of the Syndicated Partnerships. In addition, annual
debt service at the Syndicated Partnerships will decrease in the aggregate,
approximately $230,000 per year over the next three years and approximately
$40,000 per year on the Wholly Owned Properties, as a result of these
transactions.
In the third quarter, the Company paid off the mortgage debt on one Wholly
Owned Property. The payment of $1.2 million approximated the Carrying Value of
the mortgage and represented a significant discount from the contractual value
of $1.9 million.
26
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its annual meeting of shareholders on October 7, 1997.
At the meeting, the Company's shareholders:
o Elected the following slate of directors nominated by the
Company; for a term expiring in 1999: Patrick M. Holder; and for
terms expiring in 2000: Joseph E. Madigan, George J. Neilan,
Glenn C. Pollack and Stanley R. Fimberg. The continuing directors
are John B. Bartling, Jr., Robert V. Gothier, Sr., George R.
Oberer, Sr., H. Jeffrey Schwartz, Gerald E. Wedren and Robert J.
Weiler;
o Approved an amendment to the Company's Restated Articles of
Incorporation to change the name of the Company to "Lexford,
Inc."; and
o Approved the Company's 1997 Performance Equity Plan.
The votes cast for, against, withheld and abstained on each of the
matters were as follows:
Election of Directors: Patrick M. Holder received 3,995,991 for and
14,385 withheld votes with no abstentions; Joseph E. Madigan received
3,994,469 for and 15,907 withheld votes with no abstentions; George J.
Neilan received 3,995,997 for and 14,379 withheld votes with no
abstentions; Glenn C. Pollack received 3,995,433 for and 14,943 withheld
votes with no abstentions; and Stanley R. Fimberg received 3,900,193 for
and 110,183 withheld votes with no abstentions. Adoption of amendment to
the Company's Restated Articles of Incorporation to change the name of
the Company to "Lexford, Inc.": 3,952,108 votes were cast for this
amendment, with 14,707 against and 43,561 abstentions. Adoption of the
Company's 1997 Performance Equity Plan: 2,621,732 votes were cast in
favor of this plan, with 523,621 against and 26,872 abstentions.
27
28
Item 5. Other Information
-----------------
The Company has commenced a series of transactions aimed at consolidating
ownership of real estate presently held by syndicated partnerships in which the
Company is the general partner. Those transactions may take various forms,
including, without limitation, purchases of real estate, purchases of
partnership interests and partnership mergers. Many affected partnerships
require the consent of limited partners, and in these cases the Company intends
to seek such consent. Limited Partners will, subject to certain conditions
(including the limited partners' giving of consent in some cases), become
entitled to a cash payment if and when the transactions close. The Company will
reserve the right to terminate each proposed transaction on a case-by-case basis
depending upon the facts and circumstances that may arise prior to closing the
transaction. The Company presently intends to complete as many of these
transactions as practicable during the second quarter of 1998. The Company
cannot predict the success of this series of transactions, but at the present
time does not anticipate a material impact, regardless of outcome, on the
operational results of the properties.
This Form 10-Q contains certain forward-looking statements regarding
prospects for (i) increased interest income to be received from Syndicated
Partnerships, (ii) possible improvements in net operating income from the
Properties, (iii) gains from future Property dispositions, (iv) possible
acquisitions or other growth opportunities, and (v) the Company's foreseeable
capital and liquidity requirements and sources. The forward-looking statements
represent management's good faith evaluations based upon existing market,
financial and economic conditions. There can be no assurance that the
forward-looking statements will prove to be correct.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit Sequential
No. Description Page
- ----------------- --------------------------------------------------- -------------------------------------------
10.1 Amended and Restated Loan Agreement Filed as an Exhibit to this Form
dated as of September 30, 1997 among the 10-Q beginning on page 30
Provident Bank and Cardinal Realty
Services, Inc. and its material subsidiaries
10.2 Cognovit Promissory Note (Renewal Filed as an Exhibit to this Form
Consolidating Balance Revolving Line), 10-Q beginning on page 76
dated September 30, 1997, issued by the
Company and its material subsidiaries in
favor of The Provident Bank
10.42 Registration Rights Agreement, dated as Filed as an Exhibit to this Form
of July 28, 1997, between Cardinal Realty 10-Q beginning on page 97
Services, Inc. and Bank of America
National Trust and Savings Association
11.1 Statement re: computation of Per Share See Note 1 of Notes to
Earnings Consolidated Financial Statements
27 Financial Data Schedule Filed as an Exhibit to this Form
10-Q on page 113
28
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEXFORD, INC.
(Registrant)
Dated: November 13, 1997 By: /s/ John B. Bartling, Jr.
------------------------------------------
John B. Bartling, Jr.
President and Chief Executive Officer
Dated: November 13, 1997 By: /s/ Mark D. Thompson
------------------------------------------
Mark D. Thompson
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Dated: November 13, 1997 By: /s/ Ronald P. Koegler
------------------------------------------
Ronald P. Koegler
Vice President and Controller
29