UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
December 31, 1998 1-12875
CORNERSTONE REALTY INCOME TRUST, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1589139
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
306 EAST MAIN STREET
RICHMOND, VA 23219
(Address of principal executive offices) (Zip Code)
(804) 643-1761
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
------------------- ------------------------------
REGISTERED:
-----------
Common shares, no par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common shares, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Based on the closing sales price of March 18, 1999, the aggregate market
value of the voting common equity held by non-affiliates of the registrant
on such date was $372,628,385.*
On March 18, 1999, there were outstanding approximately 39,370,148 common
shares.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No
--- ---
*In determining this figure, the Company has assumed that all of its
officers and directors, and persons known to the Company to be beneficial
owners of more than 5% of the Company's common shares, are affiliates. Such
assumptions should not be deemed conclusive for any other purpose.
DOCUMENTS INCORPORATED BY REFERENCE
The portions of the registrant's current report on Form 8-K dated January
15, 1998 referred to in Part I.
The portions of the registrant's current report on Form 8-K dated March 31,
1998 referred to in Part I.
The portions of the registrant's current report on Form 8-K dated June 14,
1998 referred to in Part I.
The portions of the registrant's current report on Form 8-K dated July 2,
1998 referred to in Part I.
The portions of the registrant's current report on Form 8-K dated August
12, 1998 referred to in Part I.
The portions of the registrant's current report on Form 8-K dated October
16, 1998 referred to in Part I.
PART I
INTRODUCTION
This Annual Report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1993, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include, without limitation, statements
concerning anticipated lower expenses from the Company's conversion to
self-administration, anticipated improvements in financial operations from
completed and planned property renovations, and expected benefits from the
Company's ownership of stock in, providing fees for services to, Apple
Residential Income Trust, Inc. (Apple). Such statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievement of the Company to be materially
different from the results of operations or plans expressed or implied by
such forward-looking statements. Such factors include, among other things,
unanticipated adverse business developments affecting the Company, the
properties or Apple, as the case may be, adverse changes in the real estate
markets and general and local economies and business conditions, and year
2000 compliance issues. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable,
any of the assumptions could be inaccurate, and therefore there can be no
assurance that such statements included in this annual report will prove to
be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or
any other person that the results or conditions described in such
statements or the objectives and plans of the Company will be achieved. In
addition, the Company's continued qualification as a real estate investment
trust ("REIT") involves the application of highly technical and complex
provisions of the Internal Revenue Code. Readers should carefully review
the Company's financial statements and the notes thereto, as well as the
risk factors described in the Company's filings with the Securities and
Exchange Commission.
Item 1. Business
Cornerstone Realty Income Trust, Inc. (together with its subsidiaries,
Cornerstone REIT, Limited Partnership, Apple Residential Advisors, Inc.,
Apple Residential Management Group, Inc., and CRIT-NC, LLC, the "Company"),
a Virginia corporation, was incorporated in August 1989. Initial
capitalization occurred on August 18, 1992. Operations of rental property
commenced on June 1, 1993. The business of the Company is to acquire and
operate existing residential apartment complexes located in the
mid-Atlantic and southeastern United States. The Company owned fifty-eight
properties comprising 13,462 apartment units within that region as of
December 31, 1998. The Company's property acquisitions are described in
Item 2 of this report, which is hereby incorporated herein by reference.
Currently, Cornerstone Realty Income Trust, Inc. owns directly all of its
properties other than those in North Carolina, and those in North Carolina
are owned by CRIT-NC, LLC, a Virginia limited liability company organized
in December 1997 that is wholly-owned by Cornerstone Realty Income Trust,
Inc. The Company formed Cornerstone REIT, LP to acquire properties allowing
a structure that allows the Company to issue operating partnership units.
As of December 31, 1998, Cornerstone Realty Income Trust, Inc. owns
1,403,445 operating units representing an 88% interest in Cornerstone REIT,
LP.
The Company, a self-administered and self-managed equity REIT headquartered
in Richmond, Virginia, is a fully integrated real estate organization with
expertise in the management, acquisition and renovation of apartment
communities. The Company maintains an intense focus on the operations of
its properties to generate consistent, sustained growth in net operating
income ("NOI"), which it believes is the key to growing funds from
operations per common share. The Company believes that successful
2
implementation of this strategy will allow it to continue to increase its
NOI from its apartment portfolio. Through renovation and enhanced property
management of the apartment communities, the Company strives to increase
cash flows, thereby adding value to the underlying real estate.
The Company's objective is to increase distributable cash flow and common
share value by:
- Increasing rental rates, maintaining high economic occupancy rates,
and controlling costs at the properties; and
- Acquiring additional properties at attractive prices that provide the
opportunity to improve operating performance through the application
of the Company's management, marketing, and renovation programs.
The Company has seven regional property management offices, located in
Blacksburg and Virginia Beach, Virginia; Raleigh, Charlotte and Wilmington,
North Carolina; Columbia, South Carolina; and Atlanta, Georgia. The Company
currently has approximately 475 employees, including specialists in
acquisition, management, marketing, leasing, development, accounting and
information systems. The Company's executive officers have substantial
experience with apartment properties, having been responsible for the
management, acquisition and renovation of more than 20,000 apartment units
over the last 24 years using the strategies and techniques described below.
The Company's top three executive officers have an average of approximately
16 years each in the management, acquisition and renovation of residential
apartment communities.
History
The Company began operations in 1993 to continue and expand the apartment
community acquisition, renovation and management strategies of Glade M.
Knight, the Company's Chairman, Chief Executive Officer and President.
During his career, Mr. Knight has been involved in the ownership and
management of over 20,000 apartment units, mainly located in the
mid-Atlantic region of the United States. Senior management of the Company,
which consists of Mr. Knight, Debra A. Jones, Chief Operating Officer, and
Stanley J. Olander, Jr., Chief Financial Officer, has worked together, in
the same business as the Company, for more than 16 years. Management
believes that its long-term operating experience is invaluable in enabling
the Company to operate its properties efficiently and to identify and act
upon acquisition opportunities.
Growth through Management and Leasing
The Company seeks to increase net operating income through active property
management, which includes keeping rental rates at or above market levels,
maintaining high economic occupancy through tenant retention, creating a
property identity and effectively marketing each property, and controlling
operating expenses at the property level.
Management develops the overall management and leasing strategy, including
goals and budgets, for each property. In order to achieve each property's
objectives, management delegates significant decision-making responsibility
to regional and on-site employees, thereby instilling in its employees a
sense of ownership of their property. Management believes that this
strategy is an effective way to maximize each property's potential. In
order to achieve desired results, the Company emphasizes training for its
on-site employees as well as raising rents to be at or above the market for
comparable properties. The Company also ties on-site employees' bonuses to
both net operating income targets established for their respective
properties and the Company's overall financial performance.
Management believes that tenant retention is critical to generating net
operating income growth. Tenant retention maintains or increases economic
occupancy and minimizes the costs associated with preparing apartments for
new occupants. The Company employs one person at each property who has a
primary focus on tenant retention. The tenant retention specialist's
objective is to make tenants feel at home in the community through personal
attention, which includes organizing social functions and activities as
well as responding promptly to any tenant problems that may arise in
conjunction with the apartment or community. The Company's philosophy is to
market its properties continually to existing tenants in order to achieve a
low turnover rate. The Company believes that the turnover rate of its
properties is below the average turnover rate for comparable apartment
communities.
The Company seeks to create a unique identity for each property by
emphasizing curb appeal, signage, and attractive common area facilities,
such as clubhouses and swimming pools. The Company has upgraded or
renovated many of the properties' common area facilities after acquisition.
Each property is marketed as a "Cornerstone Community" but typically has an
individual property name tied to a local theme. Each property has a
dedicated on-site marketing person whose responsibility is to position and
market the property within the local community through such activities as
media advertising, on-site promotional events and personal calls to local
businesses.
3
Operating expenses are controlled at each property by setting budgets at
the corporate level and requiring that any expense over budget at a
property be approved by management. Purchase discounts are sought at both
the corporate level and locally in those areas where the Company has a
significant presence. All contracts for goods and services are re-bid
annually to ensure competitive pricing. The Company has a preventive
maintenance program and the ability to perform work using in-house
personnel, which helps the Company to reduce expenses at the properties.
For example, the maintenance manager at each property is qualified to
perform HVAC and plumbing work which otherwise would be contracted outside
the Company.
Growth through Acquisitions, Renovations and Expansion
The Company seeks to generate growth in net operating income through
acquisitions by: (i) acquiring under-performing assets at less than
replacement cost; (ii) correcting operational problems; (iii) making
selected renovations; (iv) increasing economic occupancy; (v) raising
rental rates; (vi) implementing cost controls; and (vii) providing enhanced
property and centralized management. In markets that it targets for
acquisition opportunities, the Company attempts to gain a significant local
presence in order to achieve operating efficiencies. In analyzing
acquisition opportunities, the Company considers acquisitions of property
portfolios as well as individual properties.
The Company has demonstrated an ability to grow through acquisitions. The
Company's first two properties were acquired in June of 1993. At December
31, 1998, the Company owned and operated 58 apartment communities.
The Company analyzes specific criteria in connection with a proposed
acquisition. These criteria include: (i) the market in which a property is
located and whether it has a diversified economy, stable employment base
and increasing average household income; (ii) the property's current and
projected cash flow and the ability to increase net operating income; (iii)
the condition and design of the property and whether the property can
benefit from renovations; (iv) historical and projected occupancy rates;
(v) geographic location in light of the Company's diversification
objectives; and (vi) the purchase price of the property as it relates to
the cost of new construction.
The Company believes it has been and will be able to purchase properties at
less than replacement cost because of the presence of deferred maintenance,
management neglect, or prior owner's financial distress. Upon acquisition,
the Company seeks to improve both operating results and property identity
through a 24-month renovation policy which includes selective renovations
such as new roofs, new exterior siding, exterior painting, clubhouse
renovation and construction, and interior refurbishment. The Company has
invested in renovations to its properties approximately $26 million in
1998, $23 million in 1997, approximately $19.0 million in 1996, and
approximately $7.1 million in 1995. To date, these actions have permitted
the Company to increase rental rates and improve economic occupancy rates
at the properties.
Because the Company has grown and plans to grow through property
acquisitions, management has created a system establishing "Takeover Teams"
to provide immediate transitional management and leasing services to
newly-acquired properties and to implement quickly the Company's
operational programs and policies. A Takeover Team consists of senior
property management personnel as well as marketing and maintenance
specialists from other communities owned by the Company. The Takeover Team
remains at a property until the Company's management and leasing programs
have been installed and the new on-site team is fully operational.
Typically, this process takes two to four weeks to complete.
The Company has also made, and may in the future make, acquisitions of
established apartment communities involved in foreclosure proceedings. In
this situation, the Company seeks properties that have below market-rate
leases, correctable vacancy problems or inefficient property management.
The Company also may make acquisitions of properties from over-leveraged
owners of properties, governmental regulatory authorities, lending
institutions that have taken control of such properties,
mortgagees-in-possession and, possibly, through bankruptcy reorganization
proceedings.
If sufficient tenant demand exists and suitable land is available, the
Company may construct additional apartment units on land adjacent to
certain properties. The Company believes that its successful experience
with large-scale property renovation will also permit strategic and
cost-effective property expansion. It is the Company's policy to acquire
such additional apartment units on a "turn-key" basis from a third party
contractor, thereby minimizing the risks normally associated with
development and lease-up.
Currently, the Company has planned expansion projects for two existing
properties: Glen Eagles and The Meadows. Glen Eagles is a 166-unit
apartment community located in Winston-Salem, North Carolina. The land
adjacent to the community will accommodate approximately 220 additional
apartment units which can be served by existing amenities. At The Meadows,
a 176-unit community in Asheville, North Carolina, there is additional land
for approximately 250 additional apartment units. The Company outsources
its development to third party developers who build and initially operate
the property. The Company is only required to purchase such developed
property if certain rental rate and occupancy results are achieved. The
Company does not fund any development activities for the developer. The
developer has completed the clubhouse and the first building will be ready
for occupancy at the end of February. The Company anticipates construction
and lease-up to be completed in the fourth
4
quarter of 1999. The Company does not have interests in any land adjacent
to any other properties it now owns, but may acquire land or options to
acquire land of this type adjacent to other properties it may acquire in
the future.
Financing Policy
The Company's objective is to seek capital as needed at the lowest possible
cost. In addition to obtaining capital from future sales of common shares
(or preferred shares, if authorized in the future), the Company may obtain
lines of credit or other unsecured borrowings. The Company is also not
precluded from engaging in secured borrowings, although its current policy
is to hold its properties on an unmortgaged basis, and as of December 31
1998 it had no secured debt. The Company may also seek eventually to issue
investment-grade debt, although there is no assurance that this will occur.
During 1998, the Company raised $30 million by issuing 2.6 million common
shares through its participation in a Unit Investment Trust, which resulted
in $28.1 million net proceeds to the Company, after underwriting discounts,
commissions and other direct costs. The Company used the proceeds to pay
down its line of credit, to acquire of additional apartment communities and
for working capital.
The Company uses an unsecured line of credit for interim financing to
assist in property acquisitions. Historically, the Company has drawn on its
unsecured lines of credit to accomplish in a timely manner property
acquisitions deemed desirable by management, and has thereafter curtailed
the outstanding balances on the lines of credit with proceeds of future
offerings. The Company currently expects to continue to use this strategy.
During October 1998, the Company closed a $25 million extension on the
Unsecured Line of Credit, bringing the maximum permitted borrowing to $200
million. The lenders are a syndicate of banks with First Union National
Bank as agent. The Unsecured Line of Credit currently bears interest equal
to one-month LIBOR plus 1.35%. The interest rate is adjusted monthly and
the formula for determination of the interest rate can change based on
changes in financial condition and debt level of the Company.
The $25 million extension on the Unsecured Line of Credit is due on April
15, 1999 and the remaining balance is due on October 30, 2000. On December
31, 1998, the outstanding balance on the Unsecured Line of Credit was $196
million. In negotiating and closing the Unsecured Line of Credit, the
Company was able to increase the amount of and reduce the interest rate on
its prior unsecured borrowings. The Company is currently negotiating with
its lenders to extend the maturities of these obligations. The Company
currently is seeking alternatives to reduce its interest cost and is
considering replacing a portion of the amounts outstanding under its line
of credit with fixed rate longer maturity debt.
The Company has also obtained from First Union National Bank of Virginia a
$5 million unsecured line of credit for general corporate purposes. This
line of credit bears interest at LIBOR plus 1.60%, adjusted monthly, and is
due on March 31, 1999. On December 31, 1998, the outstanding balance on
this loan was approximately $343,000.
The Company intends to maintain a debt policy (the "Debt Limitation")
limiting the Company's total combined indebtedness plus its pro rata share
of indebtedness of any unconsolidated investments ("Joint Venture Debt") to
40% of the Company's total equity market capitalization plus its combined
indebtedness (including its pro rata share of Joint Venture Debt).
Apple Residential Income Trust
In August 1996, Mr. Knight organized Apple Residential Income Trust, Inc.
("Apple") for the purpose of acquiring apartment communities in Texas.
Apple has elected to be taxed as a REIT. The Company will participate in
Apple's growth through its direct or indirect receipt of acquisition,
disposition, management and advisory fees, ownership of Apple common shares
and possible future acquisition of Apple. As of December 31, 1998, Apple
had raised gross proceeds of $281,228,183 in an ongoing best-efforts equity
offering and had acquired 26 properties in the Dallas, Texas area since its
inception.
The Company has a continuing right to acquire and own up to 9.8% of the
common shares of Apple. The purchase price under the option equals the
public offering price for the common shares of Apple (currently $10.00 per
common share) less the related selling commissions (currently $1.00 per
common share). As of December 31, 1998, the Company owned 417,778 common
shares of Apple, representing approximately 1.5% of the total common shares
of Apple outstanding as of that date.
The Company also has a right of first refusal to purchase the properties
and business of Apple. The Company and Apple have hired financial advisors
to evaluate a potential merger. In addition, the Company and Apple have
appointed independent committees of the board of directors to evaluate the
potential merger.
5
The Company or its affiliates provides advisory, property management and
real estate brokerage services to Apple in exchange for fees and expense
reimbursements under a contract with Apple. The Company owns all of the
nonvoting preferred shares of its affiliates, which entitle it to 95% of
the economic benefits of such corporations.
Environmental Matters
In connection with each of its property acquisitions, the Company obtains a
Phase I Environment Report, and such additional environmental reports and
surveys as are necessitated by such preliminary report. Based on such
reports, the Company is not aware of any environmental situations requiring
remediation at its properties which have not been or are not currently
being remediated as necessary. No material remediation costs have or are
expected to occur.
Property Acquisitions in 1998
The following is a summary of the 7 property acquisitions made by the
Company during 1998.
On January 15, 1998, the Company purchased Sterling Point Apartments (which
was subsequently renamed "Stone Point"), in Charlotte, North Carolina.
Information with respect to this property is hereby incorporated herein by
reference from pages 3 through 7 of the Company's Report on Form 8-K dated
January 15, 1998.
On March 31, 1998, the Company acquired Hampton Pointe Apartments in
Charleston, South Carolina. Information with respect to this property is
hereby incorporated herein by reference from pages 4 through 7 of the
Company's Report on Form 8-K dated March 31, 1998.
On April 1, 1998, the Company acquired Edgewood Knoll Apartments (which was
subsequently renamed "Pinnacle Ridge") in Asheville, North Carolina.
Information with respect to these properties is hereby incorporated herein
by reference from pages 8 through 11 of the Company's Report on Form 8-K
dated March 31, 1998.
On June 4, 1998, the Company acquired The Timbers Apartments in Raleigh,
North Carolina. Information with respect to these properties is hereby
incorporated herein by reference from pages 3 through 6 of the Company's
Report on Form 8-K dated June 4, 1998.
On July 2, 1998, the Company acquired The Gables Apartments, in Richmond,
Virginia. Information with respect to this property is hereby incorporated
herein by reference from pages 3 through 6 of the Company's Report on Form
8-K dated July 2, 1998.
On August 12, 1998, the Company acquired Spring Lake Apartments in Morrow,
Georgia. Information with respect to this property is hereby incorporated
herein by reference from pages 4 through 8 of the Company's Report on Form
8-K dated August 12, 1998.
On October 16, 1998, the Company acquired Cape Landing Apartments in Myrtle
Beach, South Carolina. Information with respect to these properties is
hereby incorporated herein by reference from pages 4 through 8 of the
Company's Report on Form 8-K dated October 16, 1998.
Recent Developments
The Company's Board of Directors met on March 30, 1999, and voted to
approve a merger with Apple Residential Income Trust, Inc. subject to,
among other requirements, an affirmative vote of the Company's
shareholders.
Item 2. Properties
PROPERTY DESCRIPTIONS AND CHARACTERISTICS
As of December 31, 1998, the Company owned 58 apartment communities
comprising 13,462 apartment units. The properties are located in North
Carolina (31 communities), Virginia (12 communities), South Carolina (8
communities) and Georgia (7 communities).
6
The following table sets forth specific information regarding the properties:
Initial Total
Year Date of Acquisition Investment at Number
Property Location Completed Acquisition Cost 12-31-98(1) of Units
-------- -------- --------- ----------- ---- ----------- --------
GEORGIA
- -------
Ashley Run................ Atlanta 1987 April 1997 $18,000,000 $19,482,278 348
Stone Brook............... Atlanta 1986 October 1997 7,850,000 8,711,137 188
Carlyle Club.............. Atlanta 1974 April 1997 11,580,000 12,854,800 243
Dunwoody Springs.......... Atlanta 1981 July 1997 15,200,000 18,224,312 350
Savannah West............. Augusta 1968 July 1996 9,843,620 13,289,356 456
West Eagle Greens......... Augusta 1974 March 1996 4,020,000 6,344,127 165
Spring Lake Morrow 1986 August 1998 9,000,000 9,363,025 188
NORTH CAROLINA
- --------------
The Meadows............... Asheville 1974 January 1996 6,200,000 7,442,434 176
Beacon Hill............... Charlotte 1985 May 1996 13,579,203 14,695,613 349
Bridgetown Bay............ Charlotte 1986 April 1996 5,025,000 5,845,929 120
Charleston Place.......... Charlotte 1986 May 1997 9,475,000 10,210,482 214
Hanover Landing........... Charlotte 1972 August 1995 5,725,000 7,449,266 192
Heatherwood .............. Charlotte (3) (3) 17,630,457 23,397,697 476
Meadow Creek.............. Charlotte 1984 May 1996 11,100,000 12,504,352 250
Paces Glen................ Charlotte 1986 July 1996 7,425,000 8,129,400 172
Sailboat Bay.............. Charlotte 1973 November 1995 9,100,000 13,464,303 358
Summerwalk................ Concord 1983 May 1996 5,660,000 7,538,671 160
Deerfield................. Durham 1985 November 1996 10,675,000 11,218,179 204
The Landing............... Durham 1984 May 1996 8,345,000 10,055,764 200
Parkside at Woodlake...... Durham 1996 September 1996 14,663,886 15,119,409 266
Wind Lake................. Greensboro 1985 April 1995 8,760,000 11,085,542 299
Signature Place........... Greenville 1981 August 1996 5,462,948 7,258,310 171
Highland Hills............ Raleigh 1987 September 1996 12,100,000 14,421,444 264
Clarion Crossing.......... Raleigh 1972 September 1997 10,600,000 11,076,591 228
The Hollows............... Raleigh 1974 June 1993 4,200,000 6,173,553 176
Paces Arbor............... Raleigh 1986 March 1997 5,588,219 5,970,315 101
Paces Forest.............. Raleigh 1986 March 1997 6,473,481 6,958,627 117
Remington Place........... Raleigh 1985 October 1997 7,900,000 8,457,508 136
St. Regis................. Raleigh 1986 October 1997 9,800,000 10,135,730 180
The Trestles.............. Raleigh 1987 December 1994 10,350,000 11,498,537 280
The Timbers .............. Raleigh 1983 June 1998 8,100,000 8,352,596 176
Chase Mooring............. Wilmington 1968 August 1994 3,594,000 5,764,709 224
Osprey Landing............ Wilmington 1974 November 1995 4,375,000 7,248,041 176
Wimbledon Chase........... Wilmington 1976 February 1994 3,300,000 5,674,978 192
Glen Eagles............... Winston Salem 1986 October 1995 7,300,000 9,033,017 166
Mill Creek................ Winston Salem 1984 September 1995 8,550,000 9,584,482 220
December Year-to-Date
Total Average Average Economic
Investment Unit Size Rent Per Month(5) Occupancy
Per Unit at (Square ----------------- ---------
Property 12-31-98 Feet) 1997(2) 1998 1997(2) 1998
-------- -------- ----- ------------ ------------
GEORGIA
- -------
Ashley Run................ $55,984 1150 $704 $743 91% 92%
Stone Brook............... 46,336 937 633 656 84% 89%
Carlyle Club.............. 52,900 1089 705 730 87% 92%
Dunwoody Springs.......... 52,069 948 643 681 91% 92%
Savannah West............. 29,143 877 470 473 84% 83%
West Eagle Greens......... 38,449 796 455 485 84% 90%
Spring Lake 49,803 1009 -- 646 -- 94%
NORTH CAROLINA
- --------------
The Meadows............... 42,287 1068 601 620 96% 95%
Beacon Hill............... 42,108 734 552 587 92% 94%
Bridgetown Bay............ 48,716 867 602 631 94% 95%
Charleston Place.......... 47,713 806 585 613 93% 93%
Hanover Landing........... 38,798 832 513 545 93% 94%
Heatherwood .............. 49,155 1186 578 609 91% 90%
Meadow Creek.............. 50,017 860 476 620 93% 91%
Paces Glen................ 47,264 907 626 640 93% 93%
Sailboat Bay.............. 37,610 906 550 569 86% 91%
Summerwalk................ 47,117 963 575 626 95% 94%
Deerfield................. 54,991 888 751 754 93% 92%
The Landing............... 50,279 960 748 650 97% 93%
Parkside at Woodlake...... 56,840 865 694 686 89% 88%
Wind Lake................. 37,075 727 490 506 88% 92%
Signature Place........... 42,446 1037 497 533 94% 94%
Highland Hills............ 54,627 1000 718 767 97% 96%
Clarion Crossing.......... 48,582 769 603 637 93% 93%
The Hollows............... 35,077 903 630 655 93% 92%
Paces Arbor............... 59,112 899 658 672 92% 89%
Paces Forest.............. 59,475 883 656 665 93% 89%
Remington Place........... 62,188 1098 741 758 96% 92%
St. Regis................. 56,310 840 658 686 93% 93%
The Trestles.............. 41,066 776 582 589 91% 92%
The Timbers............... 47,458 745 -- 614 -- 92%
Chase Mooring............. 25,735 867 513 559 88% 79%
Osprey Landing............ 41,182 981 591 629 91% 88%
Wimbledon Chase........... 29,557 818 561 574 96% 92%
Glen Eagles............... 54,416 952 650 683 94% 93%
Mill Creek................ 43,566 897 557 592 91% 94%
7
Initial Total
Year Date of Acquisition Investment at Number
Property Location Completed Acquisition Cost 12-31-98(1) of Units
-------- -------- --------- ----------- ---- ----------- --------
Stone Point Charlotte 1986 January 1998 9,700,000 10,176,529 192
Pinnacle Ridge Asheville 1951 April 1998 5,731,150 6,048,013 168
SOUTH CAROLINA
- --------------
Westchase................. Charleston 1985 January 1997 $11,000,000 12,811,352 352
Hampton Pointe Charleston 1986 March 1998 12,225,000 14,273,203 304
The Arbors at Windsor
Lake.................... Columbia 1991 January 1997 10,875,000 11,519,973 228
Stone Ridge............... Columbia 1975 December 1993 3,325,000 5,814,292 191
Breckinridge.............. Greenville 1973 June 1995 5,600,000 7,062,749 236
Magnolia Run.............. Greenville 1972 June 1995 5,500,000 6,909,344 212
Polo Club................. Greenville 1972 June 1993 4,300,000 7,505,936 365
Cape Landing Myrtle Beach 1998 October 1998 17,100,000 17,265,961 288
VIRGINIA
- --------
Trophy Chase.............. Charlottesville 1970 April 1996 3,710,000 6,729,365 185
Greenbrier................ Fredericksburg 1970/1990 October 1996 11,099,525 12,491,834 258
Tradewinds................ Hampton 1988 November 1995 10,200,000 11,078,865 284
County Green.............. Lynchburg 1976 December 1993 3,800,000 5,299,670 180
Ashley Park............... Richmond 1988 March 1996 12,205,000 13,147,418 272
Hampton Glen.............. Richmond 1986 August 1996 11,599,931 12,746,609 232
Trolley Square............ Richmond (4) (4) 10,242,575 13,262,283 325
Arbor Trace............... Virginia Beach 1985 March 1996 5,000,000 6,022,029 148
Bay Watch Pointe.......... Virginia Beach 1972 July 1995 3,372,525 4,996,481 160
Harbour Club............. Virginia Beach 1988 May 1994 5,250,000 6,246,147 214
Mayflower Seaside......... Virginia Beach 1950 October 1993 7,634,144 10,191,359 263
The Gables Richmond 1987 July 1998 11,500,000 11,804,432 224
TOTAL/AVERAGE.............. $497,520,664 $587,438,358 13,462
============ ============ ======
December Year-to-Date
Total Average Average Economic
Investment Unit Size Rent Per Month(5) Occupancy
Per Unit at (Square ----------------- ---------
Property 12-31-98 Feet) 1997(2) 1998 1997(2) 1998
-------- -------- ----- ------------ ------------
Stone Point 53,003 848 -- 631 -- 94%
Pinnacle Ridge 36,000 885 -- 528 -- 95%
SOUTH CAROLINA
- --------------
Westchase................. 36,396 706 521 551 95% 96%
Hampton Pointe ........... 46,951 1035 -- 606 -- 98%
The Arbors at Windsor
Lake.................... 50,526 966 626 668 91% 94%
Stone Ridge............... 30,441 1047 506 542 91% 93%
Breckinridge.............. 29,927 726 436 441 90% 90%
Magnolia Run.............. 32,591 993 527 535 94% 91%
Polo Club................. 20,564 807 406 403 87% 84%
Cape Landing ............. 59,951 933 -- 654 -- 84%
VIRGINIA
- --------
Trophy Chase.............. 36,375 803 511 581 89% 94%
Greenbrier................ 48,418 851 611 648 94% 97%
Tradewinds................ 39,010 930 590 624 90% 92%
County Green.............. 29,443 1000 512 525 95% 94%
Ashley Park............... 48,336 765 583 606 95% 95%
Hampton Glen.............. 54,942 788 669 677 96% 94%
Trolley Square............ 40,807 589 526 561 95% 95%
Arbor Trace............... 40,689 850 563 590 95% 91%
Bay Watch Pointe.......... 31,228 911 590 620 93% 95%
Harbour Club............. 29,188 813 565 589 89% 91%
Mayflower Seaside......... 38,750 698 681 715 95% 95%
The Gables 52,698 700 -- 600 -- 94%
TOTAL/AVERAGE.............. $43,637 888 $582 $608 92% 92%
======= === ==== ==== === ===
---------------
Notes to Table of Properties:
(1) "Total Investment" includes the purchase price of the
property plus real estate commissions, closing costs and
improvements capitalized since the date of acquisition.
(2) An open item denotes that the Company did not own the property
during the period indicated.
(3) Heatherwood Apartments is comprised of Heatherwood (completed in
1980) and Italian Village and Villa Marina Apartments (completed
in 1980), acquired in September 1996 and August 1997,
respectively, at a cost of $10,205,457 and $7,425,000. They are
adjoining properties and are operated as one apartment community.
(4) Trolley Square Apartments is comprised of Trolley Square East
Apartments (completed in 1964) and Trolley Square West Apartments
(completed in 1965) acquired in June 1996 and December 1996,
respectively, at a cost of $6,000,000 and $4,242,575. They are
adjacent properties and are operated as one apartment community.
8
(5) Average rent per month reflects December' monthly gross potential
less concessions divided by the property's number of units
(6) Economic occupancy percentage reflects Adjusted Scheduled Rent
divided by Adjusted Gross Potential where Adjusted Gross
Potential consists of Gross Potential net of concessions, model
unit costs, and employee unit costs, and Adjusted Scheduled Rent
consists of Adjusted Gross Potential net of vacancies and bad
debt expense.
9
Item 3. Legal Proceedings
Neither the Company nor any of its apartment properties is presently
subject to any material litigation nor, to the Company's knowledge, is any
litigation threatened against the Company or any of the properties, other
than routine actions arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and all of which
collectively are not expected to have a material adverse effect on the
business or financial condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's common shares are traded on the New York Stock Exchange
("NYSE"). The common shares were listed on the NYSE under the symbol "TCR"
on April 18, 1997. Before that date, there was no active trading market for
the common shares. The following table sets forth the high and low sale
prices on the NYSE for the common shares (as reported by the NYSE) and the
cash distributions declared and paid for each quarterly period indicated.
On March 18, 1999, the last reported sale price on the NYSE was $9.875 per
common share.
- ----------------------------------------------------------------------------------------------------------------------------
Cash Distribution
1997 High Low Per Common Share
---- ---- --- ----------------
- ----------------------------------------------------------------------------------------------------------------------------
First Quarter ..... _ _ $ 0.25
- ----------------------------------------------------------------------------------------------------------------------------
Second Quarter ..... $11.25 $10.25 0.25
- ----------------------------------------------------------------------------------------------------------------------------
Third Quarter ..... 12.50 10.625 0.25
- ----------------------------------------------------------------------------------------------------------------------------
Fourth Quarter ..... 12.4375 10.125 0.25
- ----------------------------------------------------------------------------------------------------------------------------
1998
----
- ----------------------------------------------------------------------------------------------------------------------------
First Quarter ..... $13.25 $11.875 $ 0.25
- ----------------------------------------------------------------------------------------------------------------------------
Second Quarter ..... $12.6875 $11.125 0.26
- ----------------------------------------------------------------------------------------------------------------------------
Third Quarter ..... 12.125 10.25 0.26
- ----------------------------------------------------------------------------------------------------------------------------
Fourth Quarter 11.25 10.25 0.26
- ----------------------------------------------------------------------------------------------------------------------------
Distributions of $38,317,602 and $31,324,870 were made to the shareholders
during 1998 and 1997, respectively.
The timing and amounts of distributions to shareholders are within the
discretion of the Company's board of directors. Future distributions will
depend on the Company's results of operations, cash flow from operations,
economic conditions and other factors, such as working capital, cash
requirements to fund investing and financing activities, capital
expenditure requirements, including improvements to and expansions of
properties and the acquisition of additional properties, as well as the
distribution requirements under federal income tax provisions for
qualification as a REIT.
For federal income tax purposes, distributions paid to shareholders may
consist of ordinary income, capital gains distributions, non-taxable return
of capital, or a combination thereof. Distributions constitute ordinary
income to the extent of the Company's current and accumulated earnings and
profits. Distributions which exceed the Company's current and accumulated
earnings and profits constitute a return of capital rather than a dividend
to the extent of a shareholder's basis in his common shares and reduce the
shareholder's basis in the common shares. To the extent that a distribution
exceeds both the Company's current and accumulated earnings and profits and
the shareholder's basis in his common shares, it is generally treated as
gain from the sale or exchange of that shareholder's common shares. The
Company notifies shareholders annually as to the taxability of
10
distributions paid during the preceding year. In 1998, approximately 20% of
distributions represented a return of capital, and the balance represented
ordinary income.
The Company has adopted a Dividend Reinvestment and Share Purchase Plan
under which any record holder of common shares may reinvest cash dividends
and may invest additional cash payments of up to $15,000 per quarter in
common shares.
The agreement pertaining to the Company's Unsecured Line of Credit contains
certain covenants that, among other things, require maintenance of certain
financial ratios, and include restrictions on the Company's ability to make
distribution to its shareholders over certain amounts.
On March 18, 1999, there were 18,946 shareholders of record of the
Company's common shares.
Item 6. Selected Financial Data
The following table sets forth selected financial data for the registrant
and should be read in conjunction with the financial statements and related
notes of the Company included under Item 8 of this report.
As of December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Results
Rental Income $88,752,254 $70,115,678 $40,261,674 $16,266,610 $8,158,994
Net Income (Loss) 23,210,642 19,225,553 (4,169,849) 5,229,715 2,386,303
Distributions Declared and Paid 38,317,602 31,324,870 15,934,901 6,316,185 2,977,136
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share
Net Income (Loss) $0.62 $0.59 $(0.21) $0.64 $0.60
Distributions $1.03 $1.00 $0.99 $0.96 $0.89
Distributions Representing Return of Capital 20% 23% 14% 17% 21%
Weighted Average Shares Outstanding-Basic 37,630,546 32,617,823 20,210,432 8,176,803 4,000,558
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Investment in Rental Property $587,438,358 $487,575,196 $329,715,853 $129,696,447 $54,107,358
Total Assets $552,347,608 $474,186,450 $322,870,574 $133,181,032 $57,257,950
Notes Payable $201,892,999 $151,569,147 $55,403,000 $8,300,000 $5,000,000
Shareholders' Equity $339,171,496 $315,328,252 $254,569,705 $122,154,420 $51,436,863
Shares Outstanding 39,113,917 35,510,327 28,141,509 12,754,331 5,458,648
- -----------------------------------------------------------------------------------------------------------------------------------
Other Data
Cash Flow from:
Operating Activities $45,027,655 $34,973,533 $20,162,776 $9,618,956 $3,718,086
Investing Activities $(97,863,162) $(161,969,343) $(194,519,406) $(75,589,089) $(28,557,568)
Financing Activities $50,911,886 $128,327,145 $170,466,134 $68,754,842 $25,519,648
Number of Properties Owned at Year-End 58 51 40 19 9
- -----------------------------------------------------------------------------------------------------------------------------------
Funds from Operations Calculation
Net Income (Loss) Before Minority
Interest in Operating Partnership $23,225,335 $19,225,553 $(4,169,849) $5,229,715 $2,386,303
Depreciation of Real Estate 20,741,130 15,163,593 8,068,063 2,788,818 1,210,818
Management Contract Termination (a) -- 402,907 16,526,012 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Funds from Operations (b) $43,966,465 $34,792,053 $20,424,226 $8,018,533 $3,597,121
(a) Included in the 1997 and 1996 operating results are $402,907 and
$16,526,012, respectively, of management contract termination expense
resulting from the company's conversion to "self-administered" and
"self-managed" status. See Note 6 to the consolidated financial statements.
(b) "Funds from operations" is defined as income before gains (losses) on
investments, minority interest of unitholders in operating partnership, and
extraordinary items (computed in accordance with generally accepted
accounting principles), plus real estate depreciation and after adjustment
for significant nonrecurring items, if any. This definition conforms to the
recommendations set forth in a White Paper adopted by the National
Association of Real Estate Investment Trusts (NAREIT). Funds from
operations for years prior to 1996 have been adjusted to conform to the
NAREIT definition. The company considers funds from operations in
evaluating property acquisitions and its operating performance, and
believes that funds from operations should be considered along with, but
not as an alternative to, net income and cash flows as a measure of the
company's operating performance and liquidity. Funds from operations, which
may not be comparable to other similarly titled measures of other REITs,
does not represent cash generated from operating activities in accordance
with generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs.
11
Item 7 and 7A. Management's Discussion and Analysis of Financial Condition
and Results of Operations/Market Risk Disclosure.
Overview
The company operates in 10 major markets and 16 markets overall. At
December 31, 1998, the company did not own more than 20% of its apartment
communities in any one market. The following table summarizes the company's
major apartment market information.
Number of December
Apartment % of Total Cost 1998 Annual Average Monthly
Market Communities Total Cost of Apartments Economic Occupancy Rental Rate
- ----------------------------------------------------------------------------------------------------------------------
Raleigh\Durham, NC 12 $119,438,253 20% 92.0% $676
Charlotte, NC 10 113,412,242 19 92.5 603
Atlanta, GA 5 68,635,552 12 91.6 698
Richmond, VA 4 50,960,742 9 94.5 607
Virginia Beach, VA 5 38,534,881 7 92.8 634
Greenville, SC 3 21,478,029 4 87.7 448
Augusta, GA 2 19,633,483 3 84.8 477
Winston-Salem, NC 2 18,617,499 3 95.6 631
Wilmington, NC 3 18,687,728 3 85.9 584
Columbia, SC 2 17,334,265 3 93.2 610
Other 10 100,705,684 17 94.8 578
- ----------------------------------------------------------------------------------------------------------------------
Total 58 $587,438,358 100% 92.1% $608
The following discussion is based on the financial statements of the
company as of December 31, 1998, 1997, and 1996. This information should be
read in conjunction with the selected financial data and the company's
consolidated financial statements included elsewhere in this annual report.
The company is operated and has elected to be treated as a real estate
investment trust (REIT) for federal income tax purposes.
Results of Operations
Comparison of the year ended December 31, 1998 to
December 31, 1997
Income and Occupancy. The results of the company's property operations for
the year ended December 31, 1998 include the results of operations from the
pre-1998 acquisitions and from the seven properties acquired in 1998 from
their respective acquisition dates. The company's portfolio consisted of 58
properties at December 31, 1998. The increased rental income and operating
expenses for the year ended December 31, 1998, over the year ended December
31, 1997, is primarily due to a full year of operation in 1998 of the 1997
acquisitions as well as the incremental effect of the 1998 acquisitions.
The principal source of the company's revenue is the rental operation of
its apartment communities. Rental income increased 27% in 1998 to
$88,752,254, up $18,636,576 over 1997 due to the factors described above.
Rental income is expected to continue to increase from the impact of
planned improvements, which are being made in an effort to improve the
properties' marketability, economic occupancies, and rental rates.
Overall average economic occupancy was 92% in 1998 and 1997. Rental rates
for the portfolio increased 4% to $608 on December 31,1998 from $582 on
December 31, 1997. This increase is due to a combination of increased
rental rates from new leases and property renovation and the acquisition of
properties with higher average rental rates.
Expenses. Total property expenses, excluding management contract
termination, increased 29% to $58,236,673 in 1998 from $45,111,959 in 1997,
due largely to the increase in the number of apartments. The operating
expense ratio (the ratio of operating expenses, excluding depreciation,
amortization, general and administrative, and other expenses, to rental
income) decreased to 38% in 1998 from 39% in 1997 and is attributable to
economies of scale achieved in property management and certain property
operation functions.
General and administrative expenses totaled 1.9% of revenues in 1998 and
1997. These expenses represent the administrative expenses of the company
as distinguished from the operations of the company's properties. In 1998,
the company has continued to expand its internal administrative
infrastructure to keep pace with its growth.
Depreciation of real estate increased to $20,741,130 in 1998 from
$15,163,593 in 1997, and is directly attributable to the acquisition of
apartment communities in 1998 and a full year of depreciation of properties
acquired in 1997.
Interest and Investment Income and Expense. The company earned interest
income of $71,474 in 1998 and $77,942 in 1997 from the investment of its
cash and cash reserves. The company incurred $12,004,120 and $7,006,182 of
interest expense in 1998 and 1997, respectively, associated with short-term
borrowings under its line of credit. This is a result of the increased use
of
12
its line of credit to fund acquisitions. The weighted average interest rate
on the line of credit was 6.9% and 7.2% during 1998 and 1997, respectively.
Income and Expense from Relationship with Apple Residential Income Trust.
The company or affiliates provides property management, advisory, and real
estate brokerage services for Apple Residential Income Trust, Inc.
("Apple"), a real estate investment trust established by Glade Knight. The
company also owns 417,778 shares of Apple which represents approximately
1.5% of Apple's outstanding shares at December 31, 1998 and has first right
of refusal to purchase Apple.
Property management fees charged to Apple are 5% of monthly gross revenues.
Advisory fees charged to Apple are .1% to .25% of total capital raised by
Apple. Real estate commissions are generally 2% of the purchase price of
each property Apple acquires. The company received $2,220,593 in 1998 and
$822,934 in 1997 for advisory and property management services. The company
received $2,665,100 in 1998 and $1,031,066 in 1997 in real estate brokerage
commissions under separate contract. The company amortized into expense
$1,054,470 in 1998 and $546,000 in 1997 of the $2 million purchase price
the company paid for the acquisition of the brokerage services contract
with Apple. Income from the company's investment in Apple was $340,483 in
1998 and $253,172 in 1997. (See Note 6 to the consolidated financial
statements.)
Same Property Results. On a comparative basis, the 38 properties owned
during all of 1998 and 1997 provided rental and operating income of
$58,849,953 and $37,432,526, respectively, in 1998 and $56,493,897 and
$35,480,876 in 1997. This represents an increase from 1997 to 1998 of 4%
and 6%, respectively. Certain current reported expenses, which approximated
$228,000, have been excluded to make for a more meaningful comparison to
1997.
Comparison of the year ended December 31, 1997 to December 31, 1996
Conversion to Self-Administration. Effective October 1, 1996, the company
agreed with its affiliated advisor and management companies on a series of
transactions, the effect of which was to convert the company into a
"self-administered" and "self-managed" REIT. The Board of Directors of the
company unanimously approved the transactions. The conversion was approved
because it was expected to reduce future operating expenses compared to
what those expenses would have been under the formerly "externally managed
and advised" arrangements. The net effect of these savings on earnings
basic and diluted per share is partially offset by the issuance of common
shares to effect the transaction as described below.
Pursuant to this conversion, the company agreed to issue 1.4 million common
shares, with 700,000 shares issued in October 1996 and 700,000 shares on
September 30, 1997, and paid approximately $1,913,000 to the various
entities for several assets and various contracts. This transaction was
accounted for as the termination of management contracts and resulted in an
expense of $16,526,012 in 1996 and $402,907 in 1997. This expense was the
primary factor in the company's net loss of $4,169,849 ($.21 per share) for
1996 versus net income of $19,225,553 ($.59 per share) in 1997. (See Note 6
to the consolidated financial statements.)
Income and Occupancy. The company had increased rental income and expenses
in 1997 and 1996 due to the full year of operations from the pre-1997
acquisitions and from the 13 properties acquired in 1997 from their
respective acquisition dates. Rental income increased 74% to $70,115,678 in
1997 from $40,261,674 in 1996.
The properties had an average occupancy of 92% during 1997 and 91% in 1996.
Overall, rental rates for the portfolio increased 6% to $582 on December
31,1997 from $549 on December 31, 1996. This increase is due to a
combination of increased rental rates from new leases and property
renovation and the acquisition of properties with higher average rental
rates.
Same Property Results. On a comparative basis, the 19 properties owned
during all of 1997 and 1996 provided rental and operating income of
$27,476,460 and $16,566,239, respectively, in 1997 and $25,508,627 and
$14,587,654 in 1996. This represents an increase from 1996 to 1997 of 8%
and 14%, respectively. The conversion to "self-administration" took place
in October 1996. Therefore, the actual results for property operations
contained a partial year of management fees in 1996. In order to make a
meaningful comparison of operating income for these properties between 1996
and 1997, property management fees were eliminated in 1996. This adjustment
allows for a comparison on a "self-administered" and "self-managed" basis.
As adjusted, the properties provided operating income of $15,429,270 in
1996. This represents an operating increase of 7% for 1997 over 1996. The
eliminated expenses included property management fees of $841,616 in 1996.
Expenses. Total property expenses, excluding management contract
termination, increased 69% to $45,111,959 in 1997 from $26,764,844 in 1996,
due largely to the increase in the number of apartments. The operating
expense ratio (the ratio of operating expenses, excluding depreciation,
amortization, general and administrative expenses, and other expenses to
rental income) was 39% in 1997 and 43% in 1996. The decline in the
operating expense ratio is attributable to the conversion of the company to
"self-administered" and "self-advised" status and increasing economies of
scale based on the company's growing portfolio of properties.
13
General and administrative expenses totaled 1.9% of revenues in 1997 and
3.2% in 1996. These expenses represent the administrative expenses of the
company as distinguished from the operations of the company's properties.
In 1997, the company continued to expand its internal administrative
infrastructure to keep pace with its growth.
Depreciation of real estate increased to $15,163,593 in 1997 from
$8,068,063 in 1996, and the increase is directly attributable to the
acquisition of apartment communities in 1996 and 1997.
Interest and Investment Income and Expense. The company earned interest
income of $75,927 in 1997 and $287,344 in 1996 from the investment of its
cash and cash reserves. The decrease is due to the company's cash
management policy of paying down on the unsecured line of credit which
incurred a higher rate of interest than what the company would have earned.
The company incurred $7,006,182 and $1,272,530 of interest expense in 1997
and 1996, respectively, associated with short-term borrowings under its
line of credit. This is a result of the increased use of its line of credit
to fund acquisitions. The weighted average interest rate on the line of
credit during 1997 and 1996 was 7.2%.
Liquidity and Capital Resources
Equity. During 1998, the company raised $30 million by issuing 2.6 million
common shares through its participation in a Unit Investment Trust, which
resulted in $28.1 million net proceeds to the company after the payment of
underwriting discounts, commissions, and other direct costs. The net
proceeds were used to curtail the company's unsecured line of credit.
During 1998, the company purchased seven properties consisting of 1,540
apartment units for $74 million and made $26 million of property
improvements through use of increases in its line of credit, reinvestment
of distributions, additional equity raises, and issuance of operating
partnership units. These acquisitions brought the total number of
residential rental communities to 58 and the total apartment units owned at
year-end to 13,462.
Notes Payable. The company intends to acquire additional properties and may
seek to fund these acquisitions through a combination of equity offerings
and unsecured corporate debt. In 1997, the company obtained a $175 million
unsecured line of credit (the "Unsecured Line") with a consortium of six
banks. During October 1998, the company closed a $25 million extension on
the Unsecured Line, bringing the maximum permitted borrowing to $200
million. The $25 million extension is due on April 15, 1999, and the
remaining balance expires on October 30, 2000. The company is currently in
negotiations with its lenders to extend the maturities of these
obligations. The line currently bears interest at the LIBOR rate plus 135
basis points. The company anticipates curtailing the line of credit with
the proceeds of future offerings.
In addition to the above, the company also has an additional unsecured line
of credit which is used for general corporate purposes (the "General
Purpose Line") in the amount of $5 million. The General Purpose Line bears
interest at LIBOR plus 160 basis points and is due on March 31, 1999.
At year-end, the company had an outstanding balance of $196 million on the
Unsecured Line and $343,000 on the General Purpose Line.
The company also carried a $5.5 million unsecured debenture bearing an
effective interest rate of 6.65% per annum. This debt is to a private
lender and is due in June 1999.
Capital Requirements. The company has an ongoing capital expenditure
commitment to fund its renovation program for recently acquired properties.
In addition, the company expects to acquire new properties during the year.
The company anticipates that it will continue to operate as it did in 1998
and fund these cash needs from a variety of sources including equity,
excess cash flow from operations over distributions, debt provided by its
line of credit, and issuance of operating partnership units. The company
may seek to obtain additional debt financing to meet its objectives. Given
the company's current debt level, the company is confident that it will be
able to obtain debt financing from a variety of sources, both secured and
unsecured.
The company continues to renovate its properties. In connection with these
renovations, the company capitalized improvements of $26 million in 1998.
Approximately $18 million of additional capital improvements are budgeted
for 1999 on the existing property portfolio.
The company has short-term cash flow needs in order to conduct the
operation of its properties. The rental income generated from the
properties supplies sufficient cash to provide for the payment of these
operating expenses and the payment of distributions.
Capital resources are expected to grow with the future sale of its shares
and from cash flow from operations. Approximately 28% of all 1998
distributions, totaling $10,873,529, were reinvested in additional common
shares. In general, the company's liquidity and capital resources are
believed to be more than adequate to meet its cash requirements during
1999.
14
The company is operated as, and annually elects to be taxed as, a real
estate investment trust under the Internal Revenue Code. As a result, the
company has no provision for taxes and thus there is no effect on the
company's liquidity from taxes.
Apple Residential Income Trust. In 1997, Apple granted the company a
continuing right to own up to 9.8% of the common shares of Apple at the
market price, net of selling commissions. Apple also has granted the
company a first right of refusal to purchase the business or properties of
Apple. (See Note 6 to the consolidated financial statements.)
Impact of Year 2000. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable
year. Any of the company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations including
among other things a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
The company has completed an assessment of its programs and determined that
it will require upgrading portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter, as well as upgrading certain computer hardware. The company is
actively engaged in upgrading the computer systems. The company's
accounting, property management, human resource, and payroll applications
are classified as year 2000 compliant by their respective software vendors
once upgraded. As the software is upgraded, the company will begin testing
their compliancy, which will be included in the overall system testing
which is scheduled to be completed in the second quarter of 1999. To the
extent such vendors are unable to perform services due to their year 2000
related issues, the company will seek other similar vendors who are capable
of providing services.
The company is also exposed to the risk that one or more of its vendors or
service providers could experience year 2000 problems that impact the
ability of such vendor or service provider to provide goods and services.
Though this is not considered as significant a risk with respect to the
suppliers of goods, due to the availability of alternative suppliers, the
disruption of certain services, such as utilities, could, depending upon
the extent of the disruption, have a material adverse impact on the
company's operations. To date, the company is not aware of any vendor or
service provider year 2000 issue that management believes would have a
material adverse impact on the company's operations. However, the company
has no means of ensuring that its vendors or service providers will be year
2000 ready. The inability of vendors or service providers to complete their
year 2000 resolution process in a timely fashion could have an adverse
impact on the company. The effect on non-compliance by vendors or service
providers is not determinable at this time.
The company utilizes microprocessors which are imbedded in systems which
are part of the company's operations. In particular, year 2000 problems in
the HVAC, elevator, telephone, security, or other such systems at the
properties could disrupt operations at the affected properties. The company
completed an assessment of these systems in 1998 and has an ongoing plan to
make all systems compliant. At this point, based on the status of its
assessment, the company does not believe these systems will be materially
non-compliant. Additionally, many of these systems, which operate
automatically, can be operated manually; and consequently in the event
these systems experience a failure as a result of the year 2000 problem,
the disruption caused by such failure should not be material to the
company's operations.
Failure to correct a material year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. The company believes that, with the implementation of new or
upgraded business systems and completion of the year 2000 project as
scheduled, the possibility of significant interruptions of normal
operations due to the failure of those systems will be reduced. However,
the company is also dependent upon the power and telecommunications
infrastructure within the United States. The most reasonable likely
worst-case scenario would be that the company may experience disruption in
its operations if any of these third-party suppliers reported a system
failure. Although the company's year 2000 project will reduce the level of
uncertainty about the compliance and readiness of its material third-party
providers, due to the general uncertainty over year 2000 readiness of these
third-party suppliers, the company is unable to determine at this time
whether the consequences of year 2000 failures will have a material impact.
There should be no additional cost to the company for the software and
computer hardware upgrades. The software upgrades are included in the
annual maintenance fee paid by the company to the vendors and the computer
hardware upgrades are included in the ordinary course of operations
regardless of the year 2000 issue. Substantially all of those costs have
been expensed as incurred in 1998 and the remaining will be expensed as
incurred during the first quarter of 1999.
The company has contingency plans for certain critical applications and is
working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and contracting with vendors capable of
providing services.
Management believes it is devoting the resources necessary to achieve year
2000 readiness in a timely manner.
15
Market Risk Disclosure
Substantially all of the company's market risk is exposure to short-term
interest rates from variable rate borrowings under its line of credit. The
line of credit bears interest at one month LIBOR plus 135 basis points. The
company utilizes variable rate debt up to specified limits to total market
capitalization. The company currently is seeking alternatives to reduce its
interest costs and is considering replacing a portion of the amounts
outstanding under its lines of credit with fixed rate longer maturity debt.
The company has analyzed its interest rate risk exposure. The company
believes that interest rates will remain stable at current levels. However,
if market interest rates for this type of credit facility average 100 basis
points more in 1999 than they did in 1998, the company's interest expense
would increase, and net income would decrease by $1.72 million. These
amounts are determined by considering the impact of hypothetical interest
rates on the company's borrowing cost. These analyses do not consider the
effects of the reduced overall economic activity that could exist in such
an environment. Further, in the event of a change of such magnitude,
management would likely take actions to further mitigate its exposure to
the change. However, due to the uncertainty of the specific actions that
would be taken and their possible effects, the sensitivity analysis assumes
no changes in the company's financial structure.
Impact of Inflation. The company does not believe that inflation had any
significant impact on its operation of the company in 1998. Future
inflation, if any, would likely cause increased operating expenses, but the
company believes that increases in expenses would be more than offset by
increases in rental revenues. Continued inflation may also cause capital
appreciation of the companys properties over time, as rental rates and
replacement costs increase.
16
Item 8. Financial Statements and Supplementary Data
Report of Independent Auditors
The Board of Directors and Shareholders
Cornerstone Realty Income Trust, Inc.
We have audited the accompanying consolidated balance sheets of Cornerstone
Realty Income Trust, Inc. (the "Company") as of December 31, 1998 and 1997,
and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1998. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Cornerstone Realty Income Trust, Inc. at December 31, 1998 and
1997, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Richmond, Virginia
January 25, 1999
17
Financial Information
Consolidated Balance Sheets
December 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------
ASSETS:
Investment in rental property
Land $87,100,659 $76,812,953
Buildings and property improvements 487,972,647 402,545,094
Furniture and fixtures 12,365,052 8,217,149
- ---------------------------------------------------------------------------------------------------------
587,438,358 487,575,196
Less accumulated depreciation (48,227,760) (27,486,630)
- ---------------------------------------------------------------------------------------------------------
539,210,598 460,088,566
Cash and cash equivalents 2,590,364 4,513,986
Prepaid expenses 1,372,498 797,484
Other assets 9,174,148 8,786,414
- ---------------------------------------------------------------------------------------------------------
Total Assets $552,347,608 $474,186,450
=========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Notes payable $201,892,999 $151,569,147
Accounts payable 4,301,682 3,812,578
Accrued expenses 2,730,418 1,158,014
Rents received in advance 506,649 463,997
Tenant security deposits 1,729,671 1,854,462
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 211,161,419 158,858,198
=========================================================================================================
Minority interest of unitholders in operating partnership 2,014,693 --
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, authorized 25,000,000
Shares: issued and outstanding 0 shares -- --
Common stock, no par value, authorized 100,000,000
shares; issued and outstanding 39,113,917 shares
and 35,510,327 shares, respectively 388,131,512 349,135,379
Deferred compensation (108,905) (62,976)
Distributions greater than net income (48,851,111) (33,744,151)
- ---------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 339,171,496 315,328,252
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $552,347,608 $474,186,450
See accompanying notes to consolidated financial statements.
18
Consolidated Statements of Operations
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
REVENUE:
Rental income $88,752,254 $70,115,678 $40,261,674
Other income 4,885,694 1,854,946 --
- -----------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Property and maintenance 24,641,642 19,494,692 11,406,042
Taxes and insurance 6,986,245 6,075,991 3,275,422
Property management fee -- -- 1,243,215
Property management 2,169,552 1,769,272 1,274,203
General and administrative 1,681,810 1,351,667 1,298,970
Amortization expense and other depreciation 47,703 56,075 47,133
Depreciation of rental property 20,741,130 15,163,593 8,068,063
Other 1,968,591 1,200,669 151,796
Management contract termination -- 402,907 16,526,012
- -----------------------------------------------------------------------------------------------------------------------------
Total expenses 58,236,673 45,514,866 43,290,856
Income (loss) before interest income (expense)
and minority interest in operating partnership 35,401,275 26,455,758 (3,029,182)
Interest income 411,957 331,114 287,344
Interest expense (12,587,897) (7,561,319) (1,428,011)
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest in
operating partnership 23,225,335 19,225,553 (4,169,849)
Minority interest of unitholders in operating partnership (14,693) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $23,210,642 $19,225,553 $(4,169,849)
- ------------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per common share $0.62 $0.59 $(0.21)
- ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
19
Consolidated Statements of Shareholders' Equity
Common Stock Distributions
-------------------------- (Greater) Total
Number Deferred Less Than Shareholders'
of Shares Amount Compensation Net Income Equity
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 12,754,331 $123,771,504 $(77,000) $(1,540,084) $122,154,420
Net proceeds from the sale of shares 13,816,973 136,183,048 -- -- 136,183,048
Net loss -- -- -- (4,169,849) (4,169,849)
Cash distributions declared/paid to
shareholders ($.9930 per share) -- -- -- (15,934,901) (15,934,901)
Shares issued in connection with
management contract termination 700,000 7,700,000 -- -- 7,700,000
Amortization of deferred compensation -- -- 22,000 -- 22,000
Shares issued through reinvestment of
distributions 870,205 8,614,987 -- -- 8,614,987
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 28,141,509 276,269,539 (55,000) (21,644,834) 254,569,705
Net proceeds from the sale of shares 5,175,000 49,287,000 -- -- 49,287,000
Net income -- -- -- 19,225,553 19,225,553
Cash distributions declared/paid to
shareholders ($1.00 per share) -- -- -- (31,324,870) (31,324,870)
Restricted stock grant 2,772 29,972 (29,972) -- --
Shares issued for purchase of
Apple Realty Group, Inc. contracts 150,000 1,650,000 -- -- 1,650,000
Shares issued in connection with
management contract termination 700,000 7,700,000 -- -- 7,700,000
Amortization of deferred compensation -- -- 21,996 -- 21,996
Shares issued through reinvestment of
distributions 1,341,046 14,198,868 -- -- 14,198,868
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 35,510,327 349,135,379 (62,976) (33,744,151) 315,328,252
Net proceeds from the sale of shares 2,612,582 28,032,107 -- -- 28,032,107
Net income -- -- -- 23,210,642 23,210,642
Cash distributions declared/paid to
shareholders ($1.03 per share) -- -- -- (38,317,602) (38,317,602)
Restricted stock grant 7,350 90,497 (90,497) -- --
Amortization of deferred compensation -- -- 44,568 -- 44,568
Shares issued through dividend reinvestment
plan 983,657 10,873,529 -- -- 10,873,529
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 39,113,916 $388,131,512 $(108,905) $(48,851,111) $339,171,496
===================================================================================================================================
See accompanying notes to consolidated financial statements.
20
Consolidated Statements of Cash Flows
1998 1997 1996
----------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $23,210,642 $19,225,553 $(4,169,849)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 20,788,833 15,219,668 8,115,196
Minority interest of unitholders in operating partnership 14,693 -- --
Amortization of deferred compensation 44,568 21,996 22,000
Amortization of deferred financing costs 272,795 212,802 91,592
Management contract termination -- 402,907 14,997,093
Amortization of Apple Realty Group, Inc. contract 1,054,470 546,000 --
Changes in operating assets and liabilities:
Prepaid expenses (575,014) (239,940) (390,392)
Other assets (1,762,702) (2,103,728) (1,377,028)
Accounts payable 489,104 1,724,905 1,531,982
Accrued expenses 1,572,404 (208,839) 109,622
Rent received in advance 42,652 (27,931) 362,280
Tenant security deposits (124,791) 200,140 870,280
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 45,027,655 34,973,533 20,162,776
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisitions of rental property, net of debt assumed (71,883,993) (134,900,712) (175,471,367)
Capital improvements (25,979,169) (22,958,631) (19,048,039)
Investment in Apple Residential Income Trust, Inc. -- (3,760,000) --
Apple Realty Group, Inc. contract purchase -- (350,000) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (97,863,162) (161,969,343) (194,519,406)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 118,289,852 442,927,152 135,653,144
Repayments of short-term borrowings (67,966,000) (346,761,005) (94,050,144)
Net proceeds from issuance of shares 38,905,636 63,485,868 144,798,035
Cash distributions paid to shareholders (38,317,602) (31,324,870) (15,934,901)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 50,911,886 128,327,145 170,466,134
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,923,622) 1,331,335 (3,890,496)
Cash and cash equivalents, beginning of year 4,513,986 3,182,651 7,073,147
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $2,590,364 $4,513,986 $3,182,651
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
21
Notes to Consolidated Financial Statements
Note 1 General Information and Summary of Significant Accounting Policies
Business. Cornerstone Realty Income Trust, Inc. (together with its
subsidiaries, the "company"), a Virginia corporation, is an owner-operator
of one business segment consisting of residential apartment communities in
the mid-Atlantic and southeastern regions of the United States. The
accompanying consolidated financial statements include the accounts of the
company along with its subsidiaries, Cornerstone REIT Limited Partnership,
Apple Residential Advisors, Inc., Apple Residential Management Group, Inc.,
and CRIT-NC, LLC. As of December 31, 1998, Cornerstone Realty Income Trust,
Inc. owns 1,403,445 operating units representing an 88% interest in
Cornerstone REIT, L.P. All significant intercompany accounts and
transactions have been eliminated in consolidation. The company's common
stock trades on the New York Stock Exchange under the ticker symbol "TCR."
Certain previously reported amounts have been reclassified to conform to
the current year presentation.
Summary of New Accounting Pronouncements. As of January 1, 1998, the
company adopted Statement 130, "Reporting Comprehensive Income." Statement
130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no
impact on the company's net income or shareholders' equity. The company
does not currently have any items of comprehensive income requiring
separate reporting and disclosure.
Cash and Cash Equivalents. Cash equivalents include highly liquid
investments with original maturities of three months or less. The fair
market value of cash and cash equivalents approximates their carrying
value.
Investment in Rental Property. The investment in rental property is
recorded at the cost, net of depreciation, and includes real estate
brokerage commissions paid to Cornerstone Realty Group, a related party,
for purchases prior to October 1, 1996. (See Note 6 to the consolidated
financial statements.)
The company records impairment losses on rental property used in the
operations if indicators of impairment are present, and the undiscounted
cash flows estimated to be generated by the respective properties are less
than their carrying amount. Impairment losses are measured as the
difference between the asset's fair value less cost to sell, and its
carrying value. No impairment losses have been recorded to date.
Repairs and maintenance costs are expensed as incurred while significant
improvements, renovations, and replacements are capitalized. Depreciation
is computed on a straight-line basis over the estimated useful lives of the
related assets which are 27.5 years for buildings and major improvements
and a range from five to seven years for furniture and fixtures.
Income Recognition. Rental income, interest, and other income are recorded
on an accrual basis. The company's properties are leased under leases that,
typically, have terms that do not exceed one year.
Stock Incentive Plans. The company elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25)
and related Interpretations in accounting for its employee stock options.
As discussed in Note 5, the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
("FASB 123") requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Advertising Costs. Costs incurred for the production and distribution of
advertising are expensed as incurred.
Earnings Per Common Share. Basic and diluted earnings per common share are
calculated in accordance with FASB Statement No. 128 "Earnings Per Share."
Basic earnings per common share is computed based upon the weighted average
number of shares outstanding during the year. Diluted earnings per share is
calculated after giving effect to all potential common shares that were
dilutive and outstanding for the year. Operating Partnership units are not
included in diluted earnings per share calculations since the impact is not
dilutive.
Federal Income Taxes. The company is operated as, and annually elects to be
taxed as, a real estate investment trust under the Internal Revenue Code of
1986, as amended (the "Code"). Generally, a real estate investment trust
which complies with the provisions of the Code and distributes at least 95%
of its taxable income to its shareholders does not pay federal income taxes
on its distributed income. Accordingly, no provision has been made for
federal income taxes.
For income tax purposes, distributions paid to shareholders consist of
ordinary income and return of capital or a combination thereof.
Distributions per share were $1.03, $1.00, and $.993 in the years ended
December 31, 1998, 1997, and 1996, respectively. In 1998, of the total
distribution, 80% was taxable as ordinary income, and 20% was a non-taxable
return of capital.
22
In 1997, of the total distribution, 77% was taxable as ordinary income, and
23% was a non-taxable return of capital. In 1996, 86.4% was taxable as
ordinary income, and 13.6% was a non-taxable return of capital.
Use of Estimates. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results may differ from
those estimates.
Note 2 Investment in Rental Property
The following is a summary of rental property owned at December 31, 1998.
Initial Total Accumulated Date
Description Acquisition Cost Investment* Depreciation Acquired
- ----------------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA
RALEIGH/DURHAM, NORTH CAROLINA
The Hollows $4,200,000 $6,173,553 $1,083,582 June 1993
The Trestles 10,350,000 11,498,537 1,518,361 December 1994
The Landing 8,345,000 10,055,764 910,146 May 1996
Highland Hills 12,100,000 14,421,444 1,238,766 September 1996
Parkside at Woodlake 14,663,886 15,119,409 1,106,811 September 1996
Deerfield 10,675,000 11,218,179 878,888 November 1996
Paces Arbor 5,588,219 5,970,315 335,625 March 1997
Paces Forest 6,473,481 6,958,627 393,683 March 1997
Clarion Crossing 10,600,000 11,076,591 392,229 September 1997
St. Regis 9,800,000 10,135,730 348,402 October 1997
Remington Place 7,900,000 8,457,508 299,125 October 1997
The Timbers 8,100,000 8,352,596 139,998 June 1998
CHARLOTTE, NORTH CAROLINA
Hanover Landing 5,725,000 7,449,266 825,849 August 1995
Sailboat Bay 9,100,000 13,464,303 1,414,467 November 1995
Bridgetown Bay 5,025,000 5,845,929 565,523 April 1996
Meadow Creek 11,100,000 12,504,352 1,170,665 May 1996
Beacon Hill 13,579,203 14,695,613 1,176,300 May 1996
Summerwalk 5,660,000 7,538,671 622,468 May 1996
Paces Glen 7,425,000 8,129,400 554,771 July 1996
Heatherwood 17,630,457 23,397,697 1,312,815 **
Charleston Place 9,475,000 10,210,482 559,521 May 1997
Stone Point 9,700,000 10,176,529 345,740 January 1998
WINSTON-SALEM, NORTH CAROLINA
Mill Creek 8,550,000 9,584,482 1,012,893 September 1995
Glen Eagles 7,300,000 9,033,017 947,596 October 1995
WILMINGTON, NORTH CAROLINA
Wimbledon Chase 3,300,000 5,674,978 1,032,249 February 1994
Chase Mooring 3,594,000 5,764,709 874,015 August 1994
Osprey Landing 4,375,000 7,248,041 861,051 November 1995
OTHER NORTH CAROLINA
Wind Lake 8,760,000 11,085,542 1,313,936 April 1995
The Meadows 6,200,000 7,442,434 857,142 January 1996
Signature Place 5,462,948 7,258,310 675,438 August 1996
Pinnacle Ridge 5,731,150 6,048,013 142,257 April 1998
- -----------------------------------------------------------------------------------------------------------------------------
GEORGIA
ATLANTA, GEORGIA
Ashley Run 18,000,000 19,482,278 1,046,144 April 1997
Carlyle Club 11,580,000 12,854,800 641,638 April 1997
Dunwoody Springs 15,200,000 18,224,312 827,490 July 1997
Stone Brooke 7,850,000 8,711,137 328,088 October 1997
Spring Lake 9,000,000 9,363,025 128,844 August 1998
23
Initial Total Accumulated Date
Description Acquisition Cost Investment* Depreciation Acquired
GEORGIA (CONTINUED)
Other Georgia
West Eagle Greens 4,020,000 6,344,127 691,426 March 1996
Savannah West 9,843,620 13,289,356 1,158,056 July 1996
- ----------------------------------------------------------------------------------------------------------------------------
VIRGINIA
RICHMOND, VIRGINIA
Ashley Park 12,205,000 13,147,418 1,302,148 March 1996
Trolley Square 10,242,575 13,262,283 1,058,022 ***
Hampton Glen 11,599,931 12,746,609 1,061,727 August 1996
The Gables 11,500,000 11,804,432 180,293 July 1998
VIRGINIA BEACH, VIRGINIA
Mayflower Seaside 7,634,144 10,191,359 1,409,626 October 1993
Harbour Club 5,250,000 6,246,147 923,702 May 1994
Bay Watch Pointe 3,372,525 4,996,481 619,857 July 1995
Tradewinds 10,200,000 11,078,865 1,220,735 November 1995
Arbor Trace 5,000,000 6,022,029 568,303 March 1996
OTHER VIRGINIA
County Green 3,800,000 5,299,670 1,031,996 December 1993
Trophy Chase 3,710,000 6,729,365 694,015 April 1996
Greenbrier 11,099,525 12,491,834 1,532,856 October 1996
- ----------------------------------------------------------------------------------------------------------------------------
SOUTH CAROLINA
GREENVILLE, SOUTH CAROLINA
Polo Club 4,300,000 7,505,936 1,770,648 June 1993
Breckinridge 5,600,000 7,062,749 786,475 June 1995
Magnolia Run 5,500,000 6,909,344 933,528 June 1995
COLUMBIA, SOUTH CAROLINA
Stone Ridge 3,325,000 5,814,292 1,215,180 December 1993
The Arbors at Windsor Lake 10,875,000 11,519,973 810,376 January 1997
OTHER SOUTH CAROLINA
Westchase 11,000,000 12,811,352 837,847 January 1997
Hampton Pointe 12,225,000 14,273,203 385,775 March 1998
Cape Landing 17,100,000 17,265,961 152,653 October 1998
- ----------------------------------------------------------------------------------------------------------------------------
$497,520,664 $587,438,358 $48,227,760
- ----------------------------------------------------------------------------------------------------------
* Includes real estate commissions, closing costs, and improvements
capitalized since the date of acquisition.
** Heatherwood Apartments is comprised of Heatherwood and Italian
Village/Villa Marina Apartments acquired in September 1996 and August 1997,
respectively, at a cost of $10,205,457 and $7,425,000. They are adjoining
properties and are operated as one apartment community.
*** Trolley Square Apartments is comprised of Trolley Square East and
Trolley Square West Apartments acquired in June 1996 and December 1996,
respectively, at a cost of $6,000,000 and $4,242,575. They are adjacent
properties and are operated as one apartment community.
24
Note 2
Continued
The following is a reconciliation of the carrying amount of real estate
owned:
1998 1997 1996
-------------------------------------------------------------
BALANCE AT JANUARY 1 $487,575,196 $329,715,853 $129,696,447
Real estate purchased 73,883,993 134,900,712 180,971,367
Improvements, furniture, and fixtures 25,979,169 22,958,631 19,048,039
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31 $587,438,358 $487,575,196 $329,715,853
The following is a reconciliation of accumulated depreciation:
1998 1997 1996
-------------------------------------------------------------
BALANCE AT JANUARY 1 $27,486,630 $12,323,037 $4,254,974
Depreciation expense 20,741,130 15,163,593 8,068,063
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31 $48,227,760 $27,486,630 $12,323,037
Note 3 Notes Payable
During 1997, the company obtained a $175 million unsecured line of credit
("Unsecured Line") with a consortium of six banks. During October 1998, the
company closed a $25 million extension on the Unsecured Line, bringing the
maximum permitted borrowing to $200 million. The Unsecured Line bears
interest at one month LIBOR plus 135 basis points at December 31, 1998 and
1997. In addition, the company is obligated to pay lenders a quarterly
commitment fee equal to .20% per annum of the unused portion of the line.
The $25 million extension is due on April 15, 1999 and the remaining
balance is due on October 30, 2000. At December 31,1998 and 1997,
borrowings under the agreement were $196 million and $144 million,
respectively. The weighted average interest rates incurred under the lines
of credit were 6.9% in 1998 and 7.2% in 1997.
The line of credit agreement contains certain covenants which, among other
things, require maintenance of certain financial ratios and includes
restrictions on the company's ability to make distributions to its
shareholders over certain amounts. At December 31, 1998, the company was in
compliance with these covenants.
During 1997, the company obtained a $5 million unsecured line of credit for
general corporate purposes ("General Purpose Line"). The general purpose
line of credit bears interest at LIBOR plus 160 basis points and is due on
March 31,1999. At December 31, 1998 and 1997, borrowings under this
arrangement were $343,000 and $2.5 million, respectively.
On June 25, 1996, in connection with the acquisition of rental property, an
unsecured note was executed by the company in the amount of $5.5 million.
The note bears an effective interest rate of 6.65% per annum. Annual
interest payments are due on January 1, 1999 and the principal balance with
any accrued interest is due on June 1, 1999. The note is prepayable at any
time, without penalty.
The fair market value of the borrowings approximate the recorded amounts.
No interest was capitalized in 1998, 1997, or 1996. Interest paid was
$11,636,307, $7,221,104, and $1,075,360 for 1998, 1997, and 1996,
respectively.
Note 4 Common Stock
During 1998, the company raised $30 million by issuing 2.6 million common
shares through its participation in a Unit Investment Trust, which resulted
in $28 million net proceeds to the company, after underwriting discounts,
commissions, and other direct costs. The company used the proceeds to pay
down its line of credit, for the acquisition of additional apartment
communities, and for working capital.
In April 1997, the company completed its firm-commitment initial public
offering of 5,175,000 shares of its common stock at $10.50 per share. Net
proceeds, after deducting underwriting discounts and commissions and direct
offering costs, aggregated approximately $49 million and were used to repay
$44 million of a previous line of credit.
25
The company raised capital through a series of continuous "best-efforts"
offerings of shares during 1996. The company received gross proceeds of
$161,558,958 from the sale of 14,687,178 shares at $11 per share, including
shares sold through the reinvestment of distributions for the year ended
December 31, 1996. The underwriter received selling commissions and a
marketing expense allowance equal to 7.5% and 2.5%, respectively, of the
gross proceeds of shares sold. During 1996, the underwriter earned
$16,159,634. The net proceeds of the offering, after deducting selling
commissions and other offering expenses, were $144,798,035 in 1996.
The company provides a plan, which allows shareholders to reinvest
distributions in the purchase of additional shares of the company. In 1997,
the company adopted a Dividend Reinvestment and Share Purchase Plan,
("Plan"), which allows any recordholder to reinvest distributions without
payment of any brokerage commissions or other fees. Of the total proceeds
raised from common shares during the years ended December 31, 1998, 1997,
and 1996, $10,873,529, $14,198,868, and $9,572,255, respectively, were
provided through the reinvestment of distributions.
As of December 31, 1998, the company has an approximately 88% interest as a
general partner in Cornerstone REIT Limited Partnership., a Virginia
limited partnership ( the "Limited Partnership") which was organized by the
company to acquire Cape Landing Apartments, a 288-unit apartment community
located in Myrtle Beach, South Carolina. The purchase price of the property
was $17.1 million. The company entered into an agreement of limited
partnership (the "Agreement") with Cape Landing Apartments, LLC, a North
Carolina limited liability company (the "Limited Partner"). Pursuant to the
Agreement, the Limited Partner contributed an approximately 12% interest in
the property to the Limited Partnership in exchange for 185,887 partnership
units valued at $2 million. The Limited Partner sold its remaining interest
in the property to the Limited Partnership for $15.1 million. The operating
partnership units can be exchanged at the option of the holder. The company
determines if the options will be converted to cash or common stock, at a
ratio of one share of common stock for every operating partnership unit.
Note 5 Benefits Plans
Stock Incentive Plan
Based on the outstanding shares under the 1992 Incentive Plan, as amended,
a maximum of 1,650,054 options could be granted, at the discretion of the
Board of Directors, to certain officers and key employees of the company.
Also under the Directors Plan, as amended, a maximum of 702,315 options
could be granted to the directors of the company. In 1998, the company
granted 38,605 options to purchase shares under the Directors Plan and
460,000 options to purchase shares under the incentive plan.
Both of the plans generally provide, among other things, that options be
granted at exercise prices not lower than the market value of the shares on
the date of grant. Under the Incentive Plan, options become exercisable at
the date of grant. Generally the optionee has up to 10 years from the date
on which the options first become exercisable during which to exercise the
options. Activity in the company's share option plans during the three
years ended December 31, 1998 is summarized in the following table:
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 405,491 $11.07 371,256 $10.99 292,967 $10.98
Granted 498,605 11.96 34,235 11.38 78,289 11.00
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 904,096 $11.73 405,491 $11.07 371,256 $10.99
Exercisable at end of year 904,096 $11.73 364,591 $11.07 289,456 $10.99
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE FAIR VALUE OF
OPTIONS GRANTED DURING THE YEAR $.32 $1.00 $.69
Pro forma information regarding net income and earnings per share is
required by FASB 123, which also requires that the information be
determined as if the company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method
described in that statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1998, 1997, and 1996,
respectively: risk-free interest rates of 5.5% for 1998, 6.7% for 1997, and
6.4% for 1996; a dividend yield of 9.0% for 1998 and 7.0% for 1997 and
1996; volatility factors of the expected market price of the company's
common stock of .160 for 1998, .161 for 1997 and .122 for 1996; and a
weighted-average expected life of the option of 10 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect
26
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of FASB 123 pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. As
the options are immediately exercisable, the full impact of the pro forma
adjustment to net income is disclosed below.
1998 1997
-----------------------------
Pro forma FASB 123 net income $23,040,840 $19,148,373
As reported net income $23,210,642 $19,225,553
Pro forma FASB 123 diluted earnings per common share $.61 $.59
As reported diluted earnings per common share $.62 $.59
401(K) Savings Plan
Eligible employees of the company participate in a contributory employee
savings plan. Under the plan, the company may match a percentage of
contributions made by eligible employees, such percentage to apply to a
maximum of 1% of their annual salary. Expenses under this plan for 1998
were $42,288.
Note 6 Related-Party Transactions
Relationship with Apple Residential Income Trust
Apple Residential Income Trust, Inc. ("Apple") is a real estate investment
trust whose operations began in 1997. Mr. Knight, Chairman and Chief
Executive Officer of the company, also serves as the Chairman and Chief
Executive Officer of Apple. Common equity is being raised by Apple on a
"best efforts" basis in a manner similar to that used by the company from
1993 through 1996.
During 1997, the company purchased 417,778 common shares of Apple for
$3,760,000, which represents approximately 1.5% of Apple's common shares
outstanding at December 31, 1998. The company has a right to purchase up to
9.8% of the common shares of Apple and has a first right of refusal to
purchase the assets and business of Apple. The company received
distributions on this investment of $340,483 in 1998 and $253,172 in 1997.
The company or its affiliates provides real estate brokerage, property
management, and advisory services to Apple. In March 1997, the company
purchased the right to provide brokerage services to Apple by purchasing
the assets of Apple Realty Group, Inc., for $2 million, $350,000 in cash,
and 150,000 company common shares valued at $1,650,000. The principal asset
of Apple Realty Group, Inc. was its brokerage contract with Apple. Under
the terms of the brokerage contract with Apple, the company receives a real
estate commission equal to 2% of the purchase price of the properties
acquired plus reimbursement of certain expenses. During 1998 and 1997, the
company earned $2,665,100 and $1,031,066, respectively, in real estate
brokerage commissions. The company amortized $1,054,470 and $546,000, in
1998 and 1997, respectively, of the purchase price for the brokerage
contract. The company is amortizing the purchase price of the contract in
relationship to the assets acquired.
The company provides property management services for Apple for a fee of 5%
of monthly rental revenues plus reimbursement of certain expenses. The
company provides advisory services to Apple for a fee of .1% to .25% based
on total capital raised by Apple and the financial performance of Apple.
During 1998 and 1997, the company earned $2,220,593 and $822,497,
respectively, for management and advisory services.
Relationship with Advisory, Management, and Acquisition Companies
Prior to September 30, 1996, the company operated as an "externally
advised" and "externally managed" REIT. Cornerstone Advisors, Inc. served
as the advisor, Cornerstone Management Group, Inc. served as the property
manager, and acquisition services were provided by Cornerstone Realty
Group, Inc. Glade M. Knight, Chairman and Chief Executive Officer of the
company, held all of the stock of Cornerstone Advisors, Inc., Cornerstone
Management Group, Inc., and Cornerstone Realty Group, Inc. (collectively,
the "External Companies"). By agreement, Mr. Knight held part of the stock
of the External Companies for the account and interest of Stanley J.
Olander, Jr., Chief Financial Officer of the company, and Debra A. Jones,
Chief Operating Officer of the company.
As of October 1, 1996, the company entered into a series of related-party
transactions with the External Companies, the effect of which was to
convert the company into a "self-administered" and "self-managed" REIT. The
transactions were unanimously approved by the independent members of the
company's Board of Directors.
27
To effect the transaction, the company agreed to issue 1.4 million shares
to Cornerstone Management Group, Inc. in exchange for the assignment of all
of its rights and interest in, to and under, its management agreements with
the company. The company issued 700,000 shares on October 1,1996 and
700,000 shares on September 30, 1997. The consideration for the transaction
totaled approximately $15.4 million based upon the fair market value of $11
per share of the company's common stock. Imputed interest of $402,907 and
$134,302 were recognized in 1997 and 1996, respectively, related to
issuance of 700,000 shares in September 1997. In addition, on October 1,
1996, the company paid to Cornerstone Realty Group, Inc. and Cornerstone
Advisors, Inc. $1,325,000 in exchange for the assignment by them of all of
their rights and interests in, to and under, their property acquisition
agreement and advisory agreement with the company. Immediately following
the assignment by each of the External Companies of its rights and interest
in, to and under, its respective agreements, the company terminated such
agreements. The consideration for all of the above transactions, plus
related transaction costs and imputed interest, was accounted for as a
termination of the management administration contracts.
Also on October 1, 1996, the company paid to Cornerstone Realty Group, Inc.
$100,000 and paid to Glade Knight $350,000 for the personal property and
building, respectively, located at 306 E. Main Street, Richmond, Virginia,
which serves as the principal executive office of the company. The company
also paid approximately $138,000 to certain lenders, representing the
balance owed on certain automobile loans, in exchange for the conveyance by
Cornerstone Realty Group, Inc., to the company of such automobiles.
Prior to the October 1, 1996 transaction, Cornerstone Advisors, Inc. (The
"Advisor") was the advisor to the company and provided its day-to-day
management. The Advisor earned a quarterly fee not to exceed .25% of the
company's assets based on the company's financial performance as defined in
the agreement with the Advisor. The Advisor earned $295,759 in 1996.
As properties were acquired, the company paid real estate commissions of 2%
of the purchase prices of properties to Cornerstone Realty Group, Inc., and
Cornerstone Realty Group, Inc. earned commissions of $1,957,624 in 1996. In
addition the company entered into agreements with Cornerstone Management
Group, Inc. (the "Management Company") to manage the properties. The
Management Company earned a management fee equal to 5% of rental income and
was entitled to be reimbursed for certain expenses. The Management Company
earned management fees of $1,243,215 in 1996.
Other Relationships
Leslie A. Grandis, a director of the company, is also a partner in McGuire,
Woods, Battle & Boothe LLP, which serves as counsel to the company. Martin
Zuckerbrod and Harry S. Taubenfeld, directors of the company, provide real
estate legal services to the company.
Note 7 Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Numerator:
Net income (loss) $23,210,642 $19,225,553 $(4,169,849)
Numerator for basic and diluted earnings per
share-income available to common stockholders
after assumed conversions 23,210,642 19,225,553 (4,169,849)
Denominator:
Denominator for basic earnings per
share-weighted-average shares 37,630,546 32,617,823 20,210,432
Effect of dilutive securities:
Stock options 20,402 2,014 --
- ------------------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 37,650,948 32,619,837 20,210,432
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per common share $.62 $.59 $(.21)
- ------------------------------------------------------------------------------------------------------------------------------------
28
Note 8 Quarterly Financial Data (Unaudited)
The following is a summary of quarterly results of operations for the years
ended December 31, 1998 and 1997:
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $20,962,469 $22,721,906 $24,999,279 $24,954,294
Income before
interest income (expense) 7,963,956 8,572,162 9,405,990 9,459,167
Net income 5,236,048 5,512,931 6,289,373 6,172,290
Basic and diluted earnings per
common share .15 .15 .16 .16
Distributions per share
.25 .26 .26 .26
1997(a)
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $15,385,285 $17,354,804 $18,967,143 $20,263,392
Income before
interest income (expense) 5,592,743 6,005,325 6,900,266 7,957,424
Net income 4,001,740 4,529,304 5,336,846 5,357,663
Basic and diluted earnings
per common share .14 .14 .15 .15
Distributions per share .25 .25 .25 .25
(a) Included in the 1997 operating results is $402,907 of management
contract termination expense resulting from the company's conversion
to "self-administered" and "self-managed" status. See Note 6 to the
consolidated financial statements.
Note 9 Pro Forma Information (Unaudited)
The following unaudited pro forma information for the year ended December
31, 1997 reflects adjustments for the actual rental income and rental
expenses of 11 of the 13 properties acquired in 1997 for the respective
periods in 1997 prior to acquisition by the company. The unaudited pro
forma information is presented as if (a) the company had qualified as a
REIT, distributed all of its taxable income and, therefore, incurred no
federal income tax expense during the period; and (b) the company had used
proceeds from its best efforts offering to acquire the properties, for
properties acquired before the completion of the offering. Properties
acquired after the completion of the offering were assumed to be acquired
using the company's line of credit or from proceeds of an equity offering
completed in April 1997. The pro forma information does not purport to
represent what the company's results of operations would have been if such
transactions, in fact, had occurred on January 1, 1997, nor does it purport
to represent the results of operations for future periods.
Unaudited Pro Forma Totals 1997
----
Income $80,147,371
Net income 20,342,399
Basic and diluted earnings per common share .58
Net income has been adjusted as follows: (1) interest expense has been
increased for the properties funded by the company's line of credit based
on market rates at the time of acquisition available to the company for
applicable properties; (2) the number of weighted average common shares
outstanding was increased for properties funded by proceeds from equity
offerings; and (3) depreciation has been adjusted based on the company's
basis in the properties.
The 1998 acquisitions were not material to require pro forma disclosure.
Note 10 Subsequent Events (Unaudited)
The Company's Board of Directors met on March 30, 1999, and voted to
approve a merger with Apple Residential Income Trust, Inc. subject to,
among other requirements, an affirmative vote of the Company's
shareholders.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
29
PART III
Item 10. Directors and Executive Officers of the Registrant
Ownership of Equity Securities
"Beneficial Ownership" as used herein has been determined in accordance with the
rules and regulations of the Securities and Exchange Commission and is not to be
construed as an admission that any of such Common Shares are in fact
beneficially owned by any person. As of the Record Date, there are no
shareholders known to the Company who own beneficially more than 5% of the
outstanding Common Shares.
Beneficial Ownership of Common Shares held by directors and executive officers
of the Company as of the Record Date is indicated in the table below. Each
person named in the table and included in the director/officer group has sole
voting and investment powers as to such Common Shares, or shares such powers
with his or her spouse or minor children, if any.
Number of
Common Shares
Beneficially
Name Owned(1) Percent of Class
---- ------------- ----------------
Glenn W. Bunting, Jr...................................... 27,762 *
Leslie A. Grandis......................................... 27,820 *
Glade M. Knight........................................... 1,650,096 4.22%
Penelope Ward Kyle........................................ 27,800 *
Stanley J. Olander, Jr.................................... 260,901 *
Harry S. Taubenfeld....................................... 67,307 *
Martin Zuckerbrod......................................... 66,319 *
Debra A. Jones............................................ 259,901 *
All directors and executive officers as a group........... 2,387,906 6.11%
- -----------------------
* Less than one percent of outstanding Common Shares.
(1) Includes Common Shares that may be acquired upon the exercise of stock
options, as follows: Messrs. Bunting and Grandis and Ms. Kyle - 26,329
Common Shares each; Mr. Knight -280,440 Common Shares; Mr. Olander and Ms.
Jones - 144,310 Common Shares each; and Messrs. Taubenfeld and Zuckerbrod -
52,413 Common Shares each.
Election of Directors
Nominees for Directors. At the Annual Meeting three directors of Class II are to
be elected, each to hold office for an ensuing three-year term, or until his or
her successor is duly elected and qualified, except in the event of death,
resignation or removal. The nominees for election to the three positions on the
Board of Directors to be voted upon at the Annual Meeting are Glade M. Knight,
Glenn W. Bunting and Leslie A. Grandis. If elected, Messrs. Knight, Bunting and
Grandis will serve until the Annual Meeting of Shareholders in the year 2002.
Of the directors whose terms do not expire in 1999, Messrs. Olander and
Zuckerbrod (the Class I directors) will serve until the 2000 Annual Meeting of
Shareholders, and Ms. Kyle and Mr. Taubenfeld will serve until the 2001 Annual
Meeting of Shareholders.
Unless otherwise specified, Common Shares represented by the proxies will be
voted for the election of the nominees listed, except that in the event either
of those named should not continue to be available for election, discretionary
authority may be exercised to vote for a substitute. No circumstances are
presently known that would render any nominee named herein
30
unavailable. Each of the nominees is now a member of the Board of Directors. If
a quorum is present, the two candidates receiving the greatest number of
affirmative votes of Common Shares represented and voting at the Annual Meeting
will be elected directors of the Company.
The nominees, their ages, the year of election of each to the Board of Directors
of the Company, their principal occupations during the past five years or more,
and directorships of each in public companies in addition to the Company are as
follows:
Glenn W. Bunting, Jr., 54, is a director of the Company. He has been President
of American KB Properties, Inc., which develops and manages shopping centers,
since 1985. He has been President of G.B. Realty Corporation, which brokers
shopping centers and apartment communities, since 1980. Mr. Bunting was first
elected to the Board of the Company in 1993 and his term expires in 1999.
Leslie A. Grandis, 54, is a director of the Company. He has been a partner in
the law firm of McGuire, Woods, Battle & Boothe LLP in Richmond, Virginia since
1974. Mr. Grandis concentrates his practice in the areas of corporate finance
and securities law. He is a director of Markel Corporation and CSX Trade
Receivables Corporation. Mr. Grandis was first elected to the Board of the
Company in 1993 and his term expires in 1999.
Glade M. Knight, 55, is a director, Chairman, Chief Executive Officer and
President of the Company. Since 1972, Mr. Knight has held executive and/or
ownership positions in several corporations involved in the management of and
investment in real estate, and has served, directly or indirectly, as a general
or limited partner of 71 limited partnerships owning 80 properties comprising
over 13,000 apartment units. Mr. Knight is also a director, Chairman of the
Board and President of Apple Residential Income Trust, Inc. Mr. Knight was first
elected to the Board of the Company in 1989 and his term expires in 1999. Mr.
Knight serves as Chief Executive Officer and President of the Company under an
employment agreement which has a one-year term ending on August 31, 1999, and
which may be extended by the Company for up to two additional one-year terms.
Other Directors and Officers. The following are the directors of the Company
whose terms expire after 1999 and the executive officers of the Company:
Debra A. Jones, 44, is the Chief Operating Officer of the Company. From June
1991 through August 1996, Ms. Jones was employed by Cornerstone Realty Group,
Inc. Through Cornerstone Realty Group, Inc., Cornerstone Management Group, Inc.
and Cornerstone Advisors, Inc., which had contracts to provide management and
administration services to the Company, Ms. Jones provided the same general
types of services as she now provides as the Company's Chief Operating Officer.
Ms. Jones has held executive positions in real estate companies organized by Mr.
Knight since 1979. Ms. Jones has been the Company's Chief Operating Officer
since September 1, 1996, and serves in such capacity under an employment
agreement which has a five-year term ending on August 31, 2001.
Stanley J. Olander, Jr., 44, is a director, Chief Financial Officer and
Secretary of the Company. From June 1991 through August 1996, Mr. Olander was
employed by Cornerstone Realty Group, Inc. Through Cornerstone Realty Group,
Inc., Cornerstone Management Group, Inc. and Cornerstone Advisors, Inc., which
had contracts to provide management and administration services to the Company,
Mr. Olander provided the same general types of services as he now provides as
the Company's Chief Financial Officer. Mr. Olander has held various executive
positions in real estate companies organized by Mr. Knight since 1981. Mr.
Olander was first elected to the Board of the Company in 1992 and his term
expires in 2000. Mr. Olander has been the Company's Chief Financial Officer
since September 1, 1996, and serves in such capacity under an employment
agreement which has a five-year term ending on August 31, 2001.
Martin Zuckerbrod, 68, is a director of the Company. He has practiced law, and
been involved in mortgage and real estate investment activities, in the firm of
Zuckerbrod & Taubenfeld of Cedarhurst, New York since 1959. He has practiced law
since 1956. Mr. Zuckerbrod's areas of professional concentration are real estate
and commercial law. Mr. Zuckerbrod also serves as a judge in the Village of
Cedarhurst, New York. Mr. Zuckerbrod was first elected to the Board of the
Company in 1992 and his term expires in 2000.
Penelope W. Kyle, 51, has been the director of the Virginia Lottery since
September 1, 1994. Ms. Kyle worked in various capacities for CSX Corporation and
its affiliated companies from 1981 until August 1994. She served as Vice
President, Administration and Finance for CSX Realty, Inc. beginning in 1991, as
Vice President, Administration for CSX Realty, Inc. from 1989 to 1991, and as
Assistant Vice President and Assistant to the President for CSX Realty, Inc.
from 1987 to 1989. Ms. Kyle is also a director of Apple Residential Income
Trust, Inc. Ms. Kyle was first elected to the Board of the Company in 1993 and
her term expires in 2001.
Harry S. Taubenfeld, 69, has practiced law, and been involved in mortgage and
real estate investment activities, in the firm of Zuckerbrod & Taubenfeld of
Cedarhurst, New York since 1959, and has practiced law since 1956. Mr.
Taubenfeld specializes in real estate and commercial law. Mr. Taubenfeld is a
Trustee of the Village of Cedarhurst, New York, and a past President of the
Nassau County Village Officials. Mr. Taubenfeld was first elected to the Board
of the Company in 1992 and his term expires in 2001.
31
Executive Officers
The Company's executive officers are Glade M. Knight, Debra A. Jones and Stanley
J. Olander, Jr. Information with regard to Messrs. Knight and Olander and Ms.
Jones is set forth above under the caption "Election of Directors."
Item 11. Executive Compensation
Compensation of Directors
During 1998, independent directors (all directors other than Messrs. Knight and
Olander) received annual directors' fees of $10,000 payable $5,000 in cash and
$5,000 in Common Shares (valued at the current market price at the time of
issuance), plus $500 for each meeting of the Board and $100 for each committee
meeting attended; however independent directors did not receive any compensation
for attending a committee meeting if it occurred on the same day as a meeting of
the entire Board of Directors. Independent directors received an additional
$1,000 for serving on the Executive Committee in 1998. Non-independent directors
received no compensation from the Company for their service as directors. All
directors were reimbursed by the Company for their travel and other
out-of-pocket expenses incurred in attending meetings of the directors or a
committee and in conducting the business of the Company.
In addition, in 1998, each independent director received an option to purchase
7,721 Common Shares, exercisable at $11.68per Common Share. Independent
directors will receive additional Common Share options in 1999.
Compensation of Executive Officers
General. The following table sets forth the compensation awarded during the
fiscal years ended December 31, 1998, 1997 and 1996, to the Company's Chief
Executive Officer and all executive officers of the Company whose total salary
and bonus exceeded $100,000 (collectively the "Named Executive Officers") during
the fiscal year ending December 31, 1998. The Company did not pay salaries to
its officers for the period before September 1, 1996. During such prior period,
the Company operated as an "externally-advised" and "externally-managed" real
estate investment trust ("REIT"). Effective October 1, 1996, the Company
converted to "self-administered" and "self-managed" status.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------- -----------------------------
NAME AND SECURITIES
-------- OTHER ANNUAL RESTRICTED SHARE UNDERLYING
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(1) COMPENSATION (2) AWARDS ($)(3) OPTIONS (#)
------------------ ---- ---------- ------------ ---------------- -------------- -----------
Glade M. Knight 1998 210,000 --- --- 19,082 ---
Chairman and Chief 1997 210,000 --- --- 11,000 ---
Executive Officer 1996 70,000 --- --- 11,000 ---
Debra A. Jones 1998 120,000 --- --- 10,325 ---
Chief Operating Officer 1997 120,000 --- --- 5,500 ---
1996 40,000 --- --- 5,500 ---
Stanley J. Olander, Jr. 1998 120,000 --- --- 10,325 ---
Chief Financial Officer 1997 120,000 --- --- 5,500 ---
1996 40,000 --- --- 5,500 ---
- ----------------------
(1) Bonuses may be awarded in 1999 and in future years in the discretion of the
Board of Directors.
(2) The Company provides each of the Named Executive Officers with use of a
Company automobile, and pays premiums for term life, disability and health
insurance for the Named Executive Officers. The value of such items was
less than the lesser of either $50,000 or 10% of the total salary and bonus
of the Named Executive Officer in 1998.
32
(3) At December 31, 1998, Mr. Knight held 8,350 restricted Common Shares (with
an aggregate value as of December 31, 1998 of $87,675) issued under the
Company's Incentive Plan and each of Ms. Jones and Mr. Olander held 4,500
restricted Common Shares (each with an aggregate value as of December 31,
1998 of $47,250) issued under the Incentive Plan. All of these restricted
Common Shares were issued on July 1, 1995 and March 24, 1998 and vest in
equal 1/5 portions in each of the five years from the date of issuance. If
the holder of such restricted Common Shares ceases to be either an officer
or employee of the Company for any reason other than death or permanent
disability, the unvested restricted Common Shares will revert to the
Company. Distributions are payable on all of these restricted Common
Shares, both vested and unvested. The table set forth above shows only the
vested restricted Common Shares and reflects the fair market value of the
vested restricted Common Shares on the date of their issuance.
The following table sets forth information with respect to the Common Share
options held by the Named Executive Officers during the year ended December 31,
1998. There were no option grants to the Named Executive Officers during the
year ended December 31, 1998.
AGGREGATED OPTION EXERCISES IN 1998
AND 1998 YEAR-END OPTION VALUES
SHARES ACQUIRED VALUE NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
NAME ON EXERCISE REALIZED UNEXERCISED OPTIONS AT YEAR-END OPTIONS AT YEAR END ( $)
---- ----------- -------- ------------------------------- ------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE(1)
----------- ------------- -------------- ----------------
Glade M. Knight........... --- --- 280,440 --- --- ---
Debra A. Jones............ --- --- 144,310 --- --- ---
Stanley J. Olander, Jr. .. --- --- 144,310 --- --- ---
---------------------------
(1) NAME GRANT DATE OPTION EXERCISE PRICE*
---- ---------- ------ ---------------
Glade M. Knight 9/08/98 13,088 $11.12
3/24/98 200,000 $12.06
9/08/97 13,088 $12.13
All Prior 54,264 $11.00
Debra A. Jones 9/08/98 7,362 $11.12
and 3/24/98 100,000 $12.06
Stanley J. Olander, Jr. 9/08/97 7,362 $12.13
All Prior 29,586 $11.00
--------------------------
* The fair market value based on closing sale price of Common Shares on
date of grant.
Employment Agreements. Each of Glade M. Knight, Stanley J. Olander, Jr. and
Debra A. Jones has, effective September 1, 1996, entered into an employment
agreement with the Company. Mr. Knight's employment agreement had a term of one
year, was extended for one additional one-year term and may be extended by the
Company for up to three additional one-year terms. The employment agreements
with Ms. Jones and Mr. Olander have five year terms ending on August 31, 2001.
Mr. Olander and Ms. Jones are obligated to devote all of their business time to
the Company. Mr. Knight is not similarly restricted, although he has agreed to
devote as much of his attention and energies to the business of the Company as
is reasonably required in the judgment of him and the Board of Directors.
Each employment agreement contains a limited non-compete provision. The officer
agrees that during the term of his or her employment, and for a period of one
year thereafter if the officer terminates his or her employment, such officer
will not be employed by or affiliated with a business that competes with the
Company in Virginia, North Carolina, or South Carolina, or solicit or attempt to
solicit any person employed by the Company to leave such employment for
employment with a competing business. Notwithstanding the foregoing, Mr. Knight
will be permitted (1) to continue to act as a general partner of various real
estate partnerships in which he was a general partner as of September 1, 1996,
and (2) to pursue other ventures, including without limitation real estate
ventures, except any such ventures that compete with the Company in Virginia,
North Carolina or South Carolina.
33
Each employment agreement terminates automatically upon the officer's death. The
Company is obligated to pay to the decedent's personal representative an amount
equal to the decedent's current annual salary in a one-time lump sum payment.
The Company may terminate the officer's employment and the Company's obligations
under the employment agreement in the event of the "disability" of the officer
or for "cause," as defined in the agreement. "Disability" means inability to
perform the essential functions of the position, after reasonable accommodation
in accordance with the Americans with Disabilities Act, if such a disability
results from a physical or mental impairment which can be expected to result in
death or to continue for at least six consecutive months. In the event of
termination for disability, the Company must pay the officer or his
representative an amount equal to the officer's current annual salary in a
one-time lump sum payment. "Cause" is defined in the employment agreement as
including continued or deliberate neglect of duties, willful misconduct of the
officer injurious to the Company, violation of any code or standard of ethics
applicable to Company employees, active disloyalty to the Company, conviction of
a felony, habitual drunkenness or drug abuse, excessive absenteeism unrelated to
a disability, or breach by the officer of the employment agreement. If the
Company terminates the officer for "cause," it will have no further obligation
to the officer except under any applicable benefits policy.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information on security ownership of certain beneficial owners and management is
included in Item 10.
Item 13. Certain Relationships and Related Transactions
Messrs. Zuckerbrod and Taubenfeld are principals in the law firm of Zuckerbrod &
Taubenfeld of Cedarhurst, New York, which acted as counsel to the Company in
connection with the Company's acquisition of certain of its real properties in
1998 and received legal fees totaling approximately $118,000. This law firm is
expected to render additional services to the Company in 1999 and will receive
compensation for such services.
Mr. Grandis, who is a director of the Company, is also a partner in the law firm
of McGuire, Woods, Battle & Boothe LLP, which serves as general counsel to the
Company and certain of its affiliates and received legal fees for its services.
Such representation is expected to continue in 1999. The husband of Penelope W.
Kyle, who is a director of the Company, is also a partner in McGuire, Woods,
Battle & Boothe LLP.
34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of the report
1. Financial Statements
The following consolidated financial statements of the registrant
are included in Item 8:
Independent Auditors' Report
Ernst & Young LLP
Consolidated Balance Sheets
December 31, 1998 and 1997
Consolidated Statements of Operations
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Schedule III - Real Estate and Accumulated
Depreciation (Included on pages 36 through 40 of this
Form 10-K Report)
All other financial statement schedules have been omitted because
they are not applicable or not required or because the required
information is included elsewhere in the financial statements or
notes thereto.
3. Exhibits
Incorporated herein by reference are the exhibits listed under
"Exhibits Index" on pages 42 through 46 of this Form 10-K
Report.
(b) Reports on Form 8-K
During the last quarter of 1998, the Company filed the
following Current Reports on Form 8-K:
On October 26, 1998, the registrant filed a Report on Form
8-K/A to a Report on Form 8-K dated August 12, 1998. The item
reported was Item 7.
On December 28, 1998, the registrant filed a Report on Form
8-K dated October 16, 1998. The items reported were Items 2,
5, and 7. The financial statement filed was a Statement of
Income and Direct Operating Expenses (exclusive of certain
items) for Cape Landing Apartments for the twelve months ended
September 30, 1998.
35
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998)
DECEMBER
Subsequently
Initial Cost Capitalized
Encum- -------------------------------------------------
Description brances Land Bldg. Impr. Land
- --------------------------------------------------------------------------------
1) Polo Club $- $ 264,698 $4,035,302 $3,205,936 $ 264,698
* Greenville, SC
* Multi-family housing
2) The Hollows $- $1,374,840 $2,825,160 $1,973,553 $1,390,671
* Raleigh, NC
* Multi-family housing $-
3) Mayflower Seaside $2,258,169 $5,375,975 $2,557,214 $2,258,248
* Virginia Beach, VA
* Multi-family housing
* Retail shops
4) Stone Ridge $- $ 374,271 $2,950,729 $2,489,292 $ 374,293
* Columbia, SC
* Multi-family housing
5) County Green $- $ 319,250 $3,480,750 $1,499,670 $ 327,484
* Lynchburg, VA
* Multi-family housing
6) Wimbledon Chase $- $ 304,590 $2,995,410 $2,374,978 $ 304,815
* Wilmington, NC
* Multi-family housing
7) Harbour Club $- $1,019,895 $4,230,105 $ 996,147 $1,020,274
* Virginia Beach, VA
* Multi-family housing
8) Chase Mooring $- $ 258,126 $3,335,874 $2,170,709 $ 258,209
* Wilmington, NC
* Multi-family housing
9) The Trestles $- $2,650,884 $7,699,116 $1,148,537 $2,686,006
* Raleigh, NC
* Multi-family housing
10) Wind Lake $- $1,051,200 $7,708,800 $2,325,542 $1,088,780
* Greensboro, NC
* Multi-family housing
11) Magnolia Run $- $ 495,000 $5,005,000 $1,409,344 $ 509,001
* Greenville, SC
* Multi-family housing
12) Breckinridge $- $1,512,000 $4,088,000 $1,462,749 $1,558,060
* Greenville, SC
* Multi-family housing
Gross Amount Carried
- ----------------------------- Date of Date
Bldg. & Impr. Total Acc. Dep. Const. Acquired Dep. Life
- --------------------------------------------------------------------------------
$ 7,241,238 $ 7,505,936 $ 1,770,648 1972 June 3, 1993 27.5 yrs.
$ 4,782,882 $ 6,173,553 $ 1,083,582 1974 June 1, 1993 27.5 yrs.
$ 7,933,111 $10,191,359 $ 1,409,626 1950 Oct. 26, 1993 27.5 yrs.
$ 5,439,998 $ 5,814,292 $ 1,215,180 1975 Dec. 8, 1993 27.5 yrs.
$ 4,972,186 $ 5,299,670 $ 1,031,996 1976 Dec. 1, 1993 27.5 yrs.
$ 5,370,163 $ 5,674,978 $ 1,032,249 1976 Feb. 1, 1994 27.5 yrs.
$ 5,225,874 $ 6,246,147 $ 923,702 1988 May 1, 1994 27.5 yrs.
$ 5,506,501 $ 5,764,709 $ 874,015 1968 Aug. 1, 1994 27.5 yrs.
$ 8,812,531 $11,498,537 $ 1,518,361 1987 Dec. 30, 1994 27.5 yrs.
$ 9,996,762 $11,085,542 $ 1,313,936 1985 April 1, 1995 27.5 yrs.
$ 6,400,343 $ 6,909,344 $ 933,528 1972 June 1, 1995 27.5 yrs.
$ 5,504,689 $ 7,062,749 $ 786,475 1973 June 21, 1995 27.5 yrs.
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998)
Subsequently
Initial Cost Capitalized
Encum- -------------------------------------------------
Description brances Land Bldg. Impr. Land
- --------------------------------------------------------------------------------
13) Bay Watch Pointe $- $ 775,680 $ 2,596,845 $1,623,956 $ 813,936
* Virginia Beach, VA
* Multi-family housing
14) Hanover Landing $- $ 801,500 $ 4,923,500 $1,724,266 $ 822,285
* Charlotte, NC
* Multi-family housing
15) Mill Creek $- $1,368,000 $ 7,182,000 $1,034,482 $1,417,614
* Winston-Salem, NC
* Multi-family housing
16) Glen Eagles $- $1,095,000 $ 6,205,000 $1,733,017 $1,595,458
* Winston-Salem, NC
* Multi-family housing
17) Sailboat Bay $- $2,002,000 $ 7,098,000 $4,364,303 $2,066,930
* Charlotte, NC
* Multi-family housing
18) Tradewinds $- $1,428,000 $ 8,772,000 $ 878,865 $1,436,890
* Hampton, VA
* Multi-family housing
19) Osprey Landing $- $ 393,750 $ 3,981,250 $2,873,041 $ 403,842
* Wilmington, NC
* Multi-family housing
20) The Meadows $- $ 186,000 $ 6,014,000 $1,242,434 $ 190,568
* Asheville, NC
* Multi-family housing
21) West Eagle Green $- $ 326,400 $ 3,693,600 $2,324,127 $ 316,095
* Augusta, GA
* Multi-family housing
22) Ashley Park $- $1,586,650 $10,618,350 $ 942,418 $1,589,251
* Richmond, vA
* Multi-family housing
23) Arbor Trace $- $1,100,000 $ 3,900,000 $1,022,029 $1,130,749
* Virginia Beach, VA
* Multi-family housing
24) Bridgetown Bay $- $ 603,000 $ 4,422,000 $ 820,929 $ 624,169
* Charlotte, NC
* Multi-family housing
Gross Amount Carried
- ----------------------------- Date of Date
Bldg. & Impr. Total Acc. Dep. Const. Acquired Dep. Life
- --------------------------------------------------------------------------------
$ 4,182,544 $ 4,996,481 $ 619,857 1972 July 18, 1995 27.5 yrs.
$ 6,626,980 $ 7,449,266 $ 825,849 1972 Aug. 22, 1995 27.5 yrs.
$ 8,166,868 $ 9,584,482 $ 1,012,893 1984 Sept. 1, 1995 27.5 yrs.
$ 7,437,558 $ 9,033,017 $ 947,596 1990 Oct. 1, 1995 27.5 yrs.
$11,397,373 $13,464,303 $ 1,414,467 1972 Nov. 1, 1995 27.5 yrs.
$ 9,641,975 $11,078,865 $ 1,220,735 1988 Nov. 1, 1995 27.5 yrs.
$ 6,844,199 $ 7,248,041 $ 861,051 1973 Nov. 1, 1995 27.5 yrs.
$ 7,251,866 $ 7,442,434 $ 857,142 1974 Jan. 31, 1996 27.5 yrs.
$ 6,028,032 $ 6,344,127 $ 691,426 1974 March 1, 1996 27.5 yrs.
$11,558,167 $13,147,418 $ 1,302,148 1988 March 1, 1996 27.5 yrs.
$ 4,891,281 $ 6,022,029 $ 568,303 1985 March 1, 1996 27.5 yrs.
$ 5,221,760 $ 5,845,929 $ 565,523 1986 April 1, 1996 27.5 yrs.
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998)
Subsequently
Initial Cost Capitalized
Encum- -------------------------------------------------
Description brances Land Bldg. Impr. Land
- --------------------------------------------------------------------------------
25) Trophy Chase $- $ 853,300 $ 2,856,700 $3,019,365 $ 880,843
* Charlottesville, VA
* Multi-family housing
26) Beacon Hill $- $3,121,587 $10,457,616 $1,116,410 $ 3,075,732
* Charlotte, NC
* Multi-family housing
27) Summerwalk $- $1,528,200 $ 4,131,800 $1,878,671 $ 1,565,051
* Concord, NC
* Multi-family housing
28) The Landing $- $1,001,400 $ 7,343,600 $1,710,764 $ 1,023,951
* Raleigh, NC
* Multi-family housing
29) Meadowcreek $- $1,110,000 $ 9,990,000 $1,404,352 $ 1,134,435
* Pineville, NC
* Multi-family housing
30) Trolley Square East $- $1,620,000 $ 4,380,000 $3,019,708 $ 2,817,605
Trolley Square West $1,145,495 $ 3,097,080
* Richmond, VA
* Multi-family housing
31) Savannah West $- $ 627,860 $ 9,215,760 $3,445,736 $ 1,161,511
* Augusta, GA
* Multi-family housing
32) Paces Glen $- $2,153,250 $ 5,271,750 $ 704,400 $ 2,226,399
* Charlotte, NC
* Multi-family housing
33) Signature Place $- $ 491,665 $ 4,971,283 $1,795,362 $ 502,648
* Greenville, NC
* Multi-family housing
34) Hampton Glen $- $1,391,992 $10,207,939 $1,146,678 $ 1,414,237
* Richmond, VA
* Multi-family housing
35) Heatherwood $- $2,449,310 $ 7,756,147 $5,767,240 $ 4,186,842
Italian Village/Villa Marina $ 1,707,750 $ 5,717,250
* Charlotte, NC
* Multi-family housing
Gross Amount Carried
- ----------------------------- Date of Date
Bldg. & Impr. Total Acc. Dep. Const. Acquired Dep. Life
- --------------------------------------------------------------------------------
$ 5,848,522 $ 6,729,365 $ 694,015 1970 April 1, 1996 27.5 yrs.
$11,619,880 $14,695,613 $ 1,176,300 1985 May 1, 1996 27.5 yrs.
$ 5,973,619 $ 7,538,671 $ 622,468 1983 May 1, 1996 27.5 yrs.
$ 9,031,813 $10,055,764 $ 910,146 1984 May 1, 1996 27.5 yrs.
$11,369,917 $12,504,352 $ 1,170,665 1984 May 31, 1996 27.5 yrs.
$10,444,677 $13,262,283 $ 1,058,022 1968 June 25, 1996 27.5 yrs.
1964 Dec. 31, 1996 27.5 yrs.
$12,127,845 $13,289,356 $ 1,158,056 1976 July 1, 1996 27.5 yrs.
$ 5,903,002 $ 8,129,400 $ 554,771 1986 July 19, 1996 27.5 yrs.
$ 6,755,662 $ 7,258,310 $ 675,438 1981 August 1, 1996 27.5 yrs.
$11,332,372 $12,746,609 $ 1,061,727 1986 August 1, 1996 27.5 yrs.
$19,210,856 $23,397,697 $ 1,312,815 1980 Sept. 1, 1996 27.5 yrs.
1980 Aug. 29, 1997
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998)
Subsequently
Initial Cost Capitalized
Encum- -------------------------------------------------
Description brances Land Bldg. Impr. Land
- --------------------------------------------------------------------------------
36) Highland Hills $- $1,210,000 $10,890,000 $2,321,444 $1,198,724
* Carrboro, NC
* Multi-family housing
37) Parkside at Woodlake $- $2,932,778 $11,731,108 $ 455,523 $2,884,355
* Durham, NC
* Multi-family housing
38) Greenbrier $- $ 998,957 $10,100,568 $1,392,309 $1,009,698
* Fredericksburg, VA
* Multi-family housing
39) Deerfield $- $ 427,000 $10,248,000 $ 543,179 $ 430,416
* Durham, NC
* Multi-family housing
40) The Arbors at Windsor $- $ 978,750 $ 9,896,250 $ 644,973 $ 994,426
Lake
* Columbia, SC
* Multi-family housing
41) Westchase $- $1,980,000 $ 9,020,000 $1,811,352 $2,012,327
* Charleston, SC
* Multi-family housing
42) Paces Arbor $- $1,173,526 $ 4,414,693 $ 382,096 $1,181,172
* Raleigh, NC
* Multi-family housing
43) Paces Forest $- $1,359,431 $ 5,114,050 $ 485,146 $1,370,590
* Raleigh, NC
* Multi-family housing
44) Carlyle Club $- $3,589,800 $ 7,990,200 $1,274,800 $3,607,026
* Lawrenceville, GA
* Multi-family housing
45) Ashley Run $- $3,780,000 $14,220,000 $1,482,278 $3,793,621
* Norcross, GA
* Multi-family housing
46) Charleston Place $- $1,516,000 $ 7,959,000 $ 735,482 $1,534,603
* Charlotte, NC
* Multi-family housing
47) Dunwoody Springs $- $3,648,000 $11,552,000 $3,024,312 $3,666,146
* Dunwoody, GA
* Multi-family housing
Gross Amount Carried
- ----------------------------- Date of Date
Bldg. & Impr. Total Acc. Dep. Const. Acquired Dep. Life
- --------------------------------------------------------------------------------
$13,222,720 $14,421,444 $1,238,766 1987 Sept. 27, 1996 27.5 yrs.
$12,235,054 $15,119,409 $1,106,811 1996 Aug. 31, 1996 27.5 yrs.
$11,482,137 $12,491,834 $1,532,856 1980 Oct. 1, 1996 27.5 yrs.
$10,787,763 $11,218,179 $ 878,888 1985 Nov. 1, 1996 27.5 yrs.
$10,525,547 $11,519,973 $ 810,376 1991 Jan. 1, 1997 27.5 yrs.
$10,799,026 $12,811,352 $ 837,847 1985 Jan. 15, 1997 27.5 yrs.
$ 4,789,142 $ 5,970,315 $ 335,625 1986 March 1, 1997 27.5 yrs.
$ 5,588,037 $ 6,958,627 $ 393,683 1986 March 1, 1997 27.5 yrs.
$ 9,247,774 $12,854,800 $ 641,638 1974 Apr. 30, 1997 27.5 yrs.
$15,688,657 $19,482,278 $1,046,144 1987 Apr. 30, 1997 27.5 yrs.
$ 8,675,879 $10,210,482 $ 559,521 1986 May 13, 1997 27.5 yrs.
$14,558,166 $18,224,312 $ 827,490 1981 July 25, 1997 27.5 yrs.
REAL ESTATE AND ACCUMULATED DEPRECIATION (As of December 31, 1998)
Subsequently
Initial Cost Capitalized
Encum- -----------------------------------------------
Description brances Land Bldg. Impr. Land
- --------------------------------------------------------------------------------
48) Clarion Crossing $- $ 3,180,000 $ 7,420,000 $ 476,591 $ 3,235,960
* Raleigh, NC
* Multi-family housing
49) Stone Brook $- $ 1,570,000 $ 6,280,000 $ 861,137 $ 1,582,468
* Norcross, GA
* Multi-family housing
50) St. Regis $- $ 2,156,000 $ 7,644,000 $ 335,730 $ 2,170,353
* Raleigh, NC
* Multi-family housing
51) Remington Place $- $ 1,422,000 $ 6,478,000 $ 557,508 $ 1,433,609
* Raleigh, NC
* Multi-family housing
52) Stone Point $- $ 1,164,000 $ 8,536,000 $ 476,529 $ 1,170,756
* Charlotte, NC
* Multi-family housing
53) Pinnacle Ridge $- $ 1,547,411 $ 4,183,740 $ 316,863 $ 1,572,517
* Ashville, NC
* Multi-family housing
54) Hampton Point $- $ 1,589,250 $ 10,635,750 $ 2,048,203 $ 1,648,342
* Charleston, NC
* Multi-family housing
55) The Timbers $- $ 1,944,000 $ 6,156,000 $ 252,596 $ 1,955,632
* Raleigh, NC
* Multi-family housing
56) The Gables $- $ 2,185,000 $ 9,315,000 $ 304,432 $ 2,200,603
* Richmond, VA
* Multi-family housing
57) Spring Lake $- $ 900,000 $ 8,100,000 $ 363,025 $ 907,555
* Morrow, GA
* Multi-family housing
58) Cape Landing $- $ 1,026,000 $ 16,074,000 $ 165,961 $ 1,015,486
* Myrtle Beach, SC
* Multi-family housing
--------------------------------------------------------
$- $85,028,615 $412,492,050 $89,917,693 $87,013,965
========================================================
Gross Amount Carried
- ----------------------------- Date of Date
Bldg. & Impr. Total Acc. Dep. Const. Acquired Dep. Life
- --------------------------------------------------------------------------------
$ 7,840,631 $ 11,076,591 $ 392,229 1972 Sept. 30, 1997 27.5 yrs.
$ 7,128,669 $ 8,711,137 $ 328,088 1986 Oct. 31, 1997 27.5 yrs.
$ 7,965,377 $ 10,135,730 $ 348,402 1986 Oct. 31, 1997 27.5 yrs.
$ 7,023,899 $ 8,457,508 $ 299,125 1985 Oct. 31, 1997 27.5 yrs.
$ 9,005,773 $ 10,176,529 $ 345,740 1986 Jan.15, 1998 27.5 yrs.
$ 4,475,496 $ 6,048,013 $ 142,257 1951 April 1, 1998 27.5 yrs.
$ 12,624,861 $ 14,273,203 $ 385,775 1986 Mar 31, 1998 27.5 yrs.
$ 6,396,963 $ 8,352,596 $ 139,998 1983 June 4, 1998 27.5 yrs.
$ 9,603,829 $ 11,804,432 $ 180,293 1987 July 2, 1998 27.5 yrs.
$ 8,455,469 $ 9,363,025 $ 128,844 1986 Aug. 12, 1998 27.5 yrs.
$ 16,250,475 $ 17,265,961 $ 152,653 1997/98 Oct. 16, 1998 27.5 yrs.
- -------------------------------------------
$500,424,393 $587,438,358(1) $48,227,760
===========================================
(1) Represents the aggregate cost for Federal Income tax purposes.
(2) The reconciliations of the carrying amount of real estate owned and
accumulated depreciation is contained in Note 2 of the audited financial
statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, this 29th day of March
1999.
CORNERSTONE REALTY INCOME TRUST, INC.
By: /s/ Glade M. Knight
-------------------------
Glade M. Knight,
Chairman of the Board,
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ Glade M. Knight Director, Chief Executive Officer March 29, 1999
- -------------------------------- and President
Glade M. Knight
/s/ Stanley J. Olander, Jr. Director, Chief Financial Officer March 29, 1999
- -------------------------------- and Principal Accounting Officer
Stanley J. Olander, Jr.
/s/ Harry S. Taubenfeld Director March 29, 1999
- --------------------------------
Harry S. Taubenfeld
/s/ Leslie A. Grandis Director March 29, 1999
- --------------------------------
Leslie A. Grandis
/s/ Glenn W. Bunting, Jr. Director March 29, 1999
- --------------------------------
Glenn W. Bunting, Jr.
/s/ Penelope W. Kyle Director March 29, 1999
- --------------------------------
Penelope W. Kyle
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1 Amended and Restated Articles of Incorporation of Cornerstone
Realty Income Trust, Inc., as amended. (Incorporated by
reference to Exhibit 3.1 included in the Company's Report on
Form 8-K dated May 12, 1998; File No. 1-12875.)
3.2 Bylaws of Cornerstone Realty Income Trust, Inc. (Amended
Through May 12, 1998) (Incorporated by reference to Exhibit
3.2 included in the Company's Report on Form 8-K dated May
12, 1998; File No. 1-12875).
4.1 Credit Agreement dated as of October 30, 1997, by and among
Cornerstone Realty Income Trust, Inc., and any Additional
Borrowers party thereto, as Borrowers, the Lenders referred
to therein, and First Union National Bank, as Agent
(Incorporated by reference to Exhibit 4.1 included in the
Registrant's Report on Form 8-K dated December 30, 1997; File
No. 0-23954).
4.2 Joinder Agreement dated as of December 31, 1997 to the Credit
Agreement dated as of October 30, 1997, by and Among
Cornerstone Realty Income Trust, Inc., each Additional
Borrower party thereto, CRIT-NC, LLC, the lenders party
thereto, and First Union National Bank, as Agent
(Incorporated by reference to Exhibit 4.2 included in the
Registrant's Report on Form 8-K dated December 30, 1997; File
No. 0-23954).
4.3 (1) Amended and Restated Revolving Credit Note dated December
31, 1997 in the principal amount of up to $65,000,000 made
payable by Cornerstone Realty Income Trust, Inc. and CRIT-NC,
LLC to the order of First Union National Bank, and (2)
Amended and Restated Revolving Credit Note dated December 31,
1997 in the principal amount of up to $35,000,000 made
payable by Cornerstone Realty Income Trust, Inc. and CRIT-NC,
LLC to the order of AmSouth Bank, and (3) Amended and
Restated Revolving Credit Note dated December 31, 1997 in the
principal amount of up to $25,000,000 made payable by
Cornerstone Realty Income Trust, Inc. and CRIT-NC, LLC to the
order of Crestar Bank, and (4) Amended and Restated Revolving
Credit Note dated December 31, 1997 in the principal amount
of up to $20,000,000 made payable by Cornerstone Realty
Income Trust, Inc. and CRIT-NC, LLC to the order of Fleet
National Bank, and (5) Amended and Restated Revolving Credit
Note dated December 31, 1997 in the principal amount of up to
$30,000,000 made payable by Cornerstone Realty Income Trust,
Inc. and CRIT-NC, LLC to the order of Guaranty Federal Bank,
F.S.B. (Incorporated by reference to Exhibit 4.3 included in
the Registrant's Report on Form 8-K dated December 30, 1997;
File No. 0-23954).
The Company agrees to furnish the Commission on request a copy of any
instrument with respect to long-term debt of the Company or its subsidiaries the
total amount of securities authorized under which does not exceed 10% of the
total assets of the Company and its subsidiaries on a consolidated basis.
Exhibit Number Description
- -------------- -----------
10.1 Amendment and Restatement of Cornerstone Realty Income Trust,
Inc. 1992 Incentive Plan. (Exhibit 10.14)(1) This is a
management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of
Form 10-K.
10.2 Amendment and Restatement of Cornerstone Realty Income Trust,
Inc. 1992 Non-Employee Directors Stock Option Plan. (Exhibit
10.15)(1) This is a management contract or compensatory plan
or arrangement required to be filed as an exhibit pursuant to
Item 14 (c) of Form 10-K.
10.3 Agreement for Appointment of Transfer Agent and Registrar
between the Company and First Union National Bank of North
Carolina. (Incorporated herein by reference to Exhibit 10.19
to the Company's Report on Form 10-K for the Year Ended
December 31, 1994; File No. 0-23954).
10.4 Agreement and Bill of Transfer and Assignment dated October
1, 1996 between Cornerstone Management Group, Inc. and
Cornerstone Realty Income Trust, Inc.(2)
10.5 Agreement and Bill of Transfer and Assignment dated October
1, 1996 between Cornerstone Advisors, Inc. and Cornerstone
Realty Income Trust, Inc.(2)
10.6 Agreement and Bill of Transfer and Assignment dated October
1, 1996 between Cornerstone Realty Group, Inc. and
Cornerstone Realty Income Trust, Inc.
(Acquisition/Disposition Agreement).(2)
10.7 Agreement and Bill of Transfer and Assignment dated October
1, 1996 between Cornerstone Realty Group, Inc. and
Cornerstone Realty Income Trust, Inc. (Personal Property).
(2)
10.8 Employment Agreement dated September 1, 1996 between
Cornerstone Realty Income Trust, Inc. and Glade M. Knight.
This is a management contract or compensatory plan or
arrangement required to be filed as an exhibit pursuant to
Item 14 (c) of Form 10-K. (Incorporated by reference to
Exhibit 10.8 to the Company's Report on Form 10-K for the
Year Ended December 31, 1997; File No. 1-12875.)
10.9 Employment Agreement dated September 1, 1996 between
Cornerstone Realty Income Trust, Inc. and Debra A. Jones.
This is a management contract or compensatory plan or
arrangement required to be filed as an exhibit pursuant to
Item 14 (c) of Form 10-K. (2)
Exhibit Number Description
- -------------- -----------
10.10 Employment Agreement dated September 1, 1996 between
Cornerstone Realty Income Trust, Inc. and Stanley J. Olander,
Jr . This is a management contract or compensatory plan or
arrangement required to be filed as an exhibit pursuant to
Item 14 (c) of Form 10-K. (2)
10.11 Advisory Agreement between Apple Residential Income Trust,
Inc. and Apple Residential Advisors, Inc. (Incorporated
herein by reference to Exhibit 10.1 of Amendment No. 2 to
Form S-11 of Apple Residential Income Trust, Inc. (File No.
333-10635) filed on November 14, 1996).
10.12 Form of Property Management Agreement between Apple
Residential Income Trust, Inc. and Apple Residential
Management Group, Inc. (Incorporated herein by reference to
Exhibit 10.2 of Form S-11 of Apple Residential Income Trust,
Inc. (File No. 333-10635) filed on August 22, 1996).
10.13 Property Acquisition/Disposition Agreement between Apple
Residential Income Trust, Inc. and Apple Realty Group, Inc.
(Incorporated herein by reference to Exhibit 10.3 of Form
S-11 of Apple Residential Income Trust, Inc. (File No.
333-10635) filed on November 14, 1996).
10.14 Advisory Agreement Subcontract among Apple Residential Income
Trust, Inc., Apple Residential Advisors, Inc. and Cornerstone
Realty Income Trust, Inc. (Incorporated herein by reference
to Exhibit 10.14 to the Company's Report on Form 10-K for the
Year Ended December 31, 1997; File No. 1-12875.)
10.15 Property Management Agreement Subcontract among Apple
Residential Income Trust, Inc., Apple Residential Management
Group, Inc., and Cornerstone Realty Income Trust, Inc.
(Incorporated herein by reference to Exhibit 10.15 to the
Company's Report on Form 10-K for the Year Ended December 31,
1997; File No. 1-12875.)
10.16 Agreement and Bill of Transfer and Assignment among Apple
Residential Income Trust, Inc., Apple Realty Group, Inc. and
Cornerstone Realty Income Trust, Inc. (Incorporated herein by
reference to Exhibit 10.16 to the Company's Report on Form
10-K for the Year Ended December 31, 1997; File No. 1-12875.)
10.17 Right of First Refusal Agreement between Apple Residential
Income Trust, Inc. and Cornerstone Realty Income Trust, Inc.
(Incorporated herein by reference to Exhibit 10.7 of
Amendment No. 2 to Form S-11 of Apple Residential Income
Trust, Inc. (File No. 333-10635) filed on November 14, 1996.)
10.18 Common Share Purchase Option Agreement between Apple
Residential Income Trust, Inc. and Cornerstone Realty Income
Trust, Inc. (Incorporated herein by reference to Exhibit
10.18 to the Company's Report on Form 10-K for the Year Ended
December 31, 1997; File No. 1-12875.)
10.19 Assignment Relating to Property Management Agreements among
Apple Residential Income Trust, Inc., Apple Residential
Management Group, Inc., Apple REIT Limited Partnership and
Cornerstone Realty Income Trust, Inc. (Incorporated herein by
Exhibit Number Description
- -------------- -----------
reference to Exhibit 10.19 to the Company's Report on Form
10-K for the Year Ended December 31, 1997; File No. 1-12875.)
10.20 [Intentionally Omitted.]
10.21 Articles of Organization of CRIT-NC, LLC. (Incorporated by
reference to Exhibit 10.1 included in the Company's Current
Report on Form 8-K dated December 30, 1997; File No.
0-23954.)
10.22 Operating Agreement of CRIT-NC, LLC dated as of December 9,
1997. (Incorporated by reference to Exhibit 10.2 included in
the Company's Current Report on Form 8-K dated December 30,
1997; File No. 0-23954.)
10.23 Form of Property Management Agreement between Apple REIT
Limited Partnership and Apple Residential Income Trust, Inc.
(Incorporated herein by reference to Exhibit 10.23 to the
Company's Report on Form 10-K for the Year Ended December 31,
1997; File No. 1-12875.)
10.24 First Amendment to the Cornerstone Realty Income Trust, Inc.
1992 Incentive Plan. This is a management contract or
compensatory plan or arrangement required to be filed as an
exhibit pursuant to Item 14 (c) of Form 10-K. (Incorporated
herein by reference to Exhibit 10.24 to the Company's Report
on Form 10-K for the Year Ended December 31, 1997; File No.
1-12875.)
10.25 First Amendment to the 1992 Incentive Plan Nonstatutory Stock
Option Agreement between Cornerstone Realty Income Trust,
Inc. and Martin Zuckerbrod. This is a management contract or
compensatory plan or arrangement required to be filed as an
exhibit pursuant to Item 14 (c) of Form 10-K. (Incorporated
herein by reference to Exhibit 10.25 to the Company's Report
on Form 10-K for the Year Ended December 31, 1997; File No.
1-12875.)
10.26 First Amendment to the 1992 Incentive Plan Nonstatutory Stock
Option Agreement between Cornerstone Realty Income Trust,
Inc. and Harry S. Taubenfeld. This is a management contract
or compensatory plan or arrangement required to be filed as
an exhibit pursuant to Item 14 (c) of Form 10-K.
(Incorporated herein by reference to Exhibit 10.26 to the
Company's Report on Form 10-K for the Year Ended December 31,
1997; File No. 1-12875.)
10.27 First Amendment to the Cornerstone Realty Income Trust, Inc.
1992 Non-Employee Directors Stock Option Plan. This is a
management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of
Form 10-K. (Incorporated by reference to Exhibit 10.1
included in the Company's Current Report on Form 8-K dated
May 12, 1998; File No. 1-12875.)
10.28 Agreement of Limited Partnership of Cornerstone Partners, L.
P. (Incorporated by reference to Exhibit 10.2 included in the
Company's Current Report on Form 8-K dated October 16, 1998;
File No. 1-12875.)
10.29 Credit Agreement among Cornerstone Realty Income Trust, Inc.,
CRIT- NC, LLC and First Union National Bank. (Incorporated by
reference to Exhibit 10.3 included in the Company's Current
Report on Form 8-K dated October 16, 1998; File No. 1-12875.)
Exhibit Number Description
- -------------- -----------
10.30 Revolving Credit Note made by Cornerstone Realty Income
Trust, Inc. and CRIT-NC, LLC. (Incorporated by reference to
Exhibit 10.4 included in the Company's Current Report on Form
8-K dated October 16, 1998; File No. 1-12875.)
10.31 Termination of Advisory Agreement Subcontract. (Incorporated
by reference to Exhibit 10.5 included in the Company's
Current Report on Form 8-K dated October 16, 1998; File No.
1-12875.)
10.32 Termination of Property Management Agreement Subcontract.
(Incorporated by reference to Exhibit 10.6 included in the
Company's Current Report on Form 8-K dated October 16, 1998;
File No. 1-12875.)
10.33 Bill of Sale and Note Pertaining to Property
Acquisition/Disposition Agreement. (Incorporated by reference
to Exhibit 10.7 included in the Company's Current Report on
Form 8-K dated October 16, 1998; File No. 1-12875.)
10.34 Assignment and Assumption Agreement (Pertaining to Advisory
Agreement for Apple Residential Income Trust, Inc.).
(Incorporated by reference to Exhibit 10.8 included in the
Company's Current Report on Form 8-K dated October 16, 1998;
File No. 1-12875.)
10.35 Amended and Restated Property Acquisition/Disposition
Agreement. (Incorporated by reference to Exhibit 10.9
included in the Company's Current Report on Form 8-K dated
October 16, 1998; File No. 1-12875.)
21 Subsidiaries of Cornerstone Realty Income Trust, Inc. FILED
HEREWITH.
23 Consent of Independent Auditors. FILED HEREWITH.
27 Financial Data Schedule. FILED HEREWITH.
99.1 Pages 3 through 7 of the Current Report on Form 8-K of
Cornerstone Realty Income Trust, Inc. dated January 15, 1998.
FILED HEREWITH.
99.2 Pages 4 through 11 of the Current Report on Form 8-K of
Cornerstone Realty Income Trust, Inc. dated March 31, 1998.
FILED HEREWITH.
99.3 Pages 3 through 6 of the Current Report on Form 8-K of
Cornerstone Realty Income Trust, Inc. dated June 4 , 1998.
FILED HEREWITH.
99.4 Pages 3 through 6 of the Current Report on Form 8-K of
Cornerstone Realty Income Trust, Inc. dated July 2, 1998.
FILED HEREWITH.
99.5 Pages 4 through 8 of the Current Report on Form 8-K of
Cornerstone Realty Income Trust, Inc. dated August 12, 1998.
FILED HEREWITH.
Exhibit Number Description
- -------------- -----------
99.6 Pages 4 through 8 of the Current Report on Form 8-K of
Cornerstone Realty Income Trust, Inc. dated October 16, 1998.
FILED HEREWITH.
(1) Incorporated herein by reference to the Exhibit referred to in
parentheses which was filed as an Exhibit to the Company's
Post-Effective Amendment No. 5 to its Registration Statement on
Form S-11 (File No. 33-51296), as filed with the Securities and
Exchange Commission on April 28, 1994.
(2) Incorporated herein by reference to the Exhibit of the same number
filed as an Exhibit to the Company's Report on Form 8-K dated
September 26, 1996 (File No. 0-23954).