-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ET+hJT591N3OD7uJnHUSlmDNbfCIrIb62PDclAYOTEmQaAqLbDp23oObDLKvfHwl kKjWczkO+YphRW/Xs5VeQw== 0000950123-97-009737.txt : 19971119 0000950123-97-009737.hdr.sgml : 19971119 ACCESSION NUMBER: 0000950123-97-009737 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19971118 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEXINGTON CORPORATE PROPERTIES INC CENTRAL INDEX KEY: 0000910108 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 133717318 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-12386 FILM NUMBER: 97723234 BUSINESS ADDRESS: STREET 1: 355 LEXINGTON AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126927260 MAIL ADDRESS: STREET 1: 355 LEXINGTON AVE STREET 2: 14TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 10-K/A 1 LEXINGTON CORPORATE PROPERTIES, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K/A(1) (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee required] For the fiscal year ended December 31, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee required] For the transition period from ______________________ to _______________________ Commission File Number 1-12386 LEXINGTON CORPORATE PROPERTIES, INC. (Exact name of Registrant as specified in its charter) Maryland 13-3717318 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 355 Lexington Avenue New York, NY 10017 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 692-7260 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on which Registered Common Stock, par value $.0001 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 28, 1997 was $117,605,477. Number of shares of common stock outstanding as of February 28, 1997 was 9,439,716. Number of shares of preferred stock outstanding as of February 28, 1997 was 700,000. Documents incorporated by reference: The Definitive Proxy Statement for Registrant's 1997 Annual Meeting of Stockholders is incorporated herein by reference into Part III. 1 Notwithstanding such Amendment, information set forth herein speaks as of and for the dates referred to in the Form 10-K originally filed by the Registrant. Reference is made to annual and current reports filed by the Registrant since December 31, 1996, for information regarding the Registrant. 2 ITEM 6. SELECTED FINANCIAL DATA Item 6 is amended and restated in its entirety as follows. The following sets forth selected consolidated financial data for the Company as of and for each of the years in the five-year period ended December 31, 1996. The selected consolidated financial data for the Company should be read in conjunction with the Consolidated Financial Statements and the related notes appearing elsewhere in this report.
1996 1995 1994 1993 1992 ------------- ------------- ------------- ------------- ------------- Total revenue $ 31,675,355 $ 25,001,762 $ 26,037,906 $ 25,870,791 $ 25,797,248 Gain on sale of properties $ -- $ 1,514,400 $ -- $ -- $ -- Proceeds from lease termination $ -- $ 1,600,000 $ -- $ -- $ -- Expenses of the mergers $ -- $ -- $ -- $ (2,441,008) $ -- Transactional expenses $ (644,047) $ -- $ -- $ -- $ (1,494,515) Loss on extinguish- ment of debt(1) $ -- $ (4,849,226) $ -- $ -- $ -- Expenses, including minority interest $ (25,565,484) $ (19,982,936) $ (20,559,110) $ (18,902,010) $ (19,109,367) ------------- ------------- ------------- ------------- ------------- Net income $ 5,465,824 $ 3,284,000 $ 5,478,796 $ 4,527,773 $ 5,193,366 ============= ============= ============= ============= ============= Net income per share $ 0.58 $ 0.35 $ 0.59 $ 0.48 $ 0.56 ============= ============= ============= ============= ============= Cash dividends de- clared per share $ 1.12 $ 1.08 $ 1.08 $ 0.24 $ -- ============= ============= ============= ============= ============= Net cash provided by operating activities $ 14,972,348 $ 7,216,497 $ 12,423,001 $ 11,151,273 $ 12,001,982 Net cash (used in) provided by investing activities $ (16,951,527) $ 7,886,892 $ -- $ -- $ (2,869,478) Net cash provided by (used in) financing activities $ 1,858,853 $ (15,610,902) $ (12,304,039) $ (12,779,971) $ (8,254,120) ------------- ------------- ------------- ------------- ------------- Net (decrease) increase in cash $ (120,326) $ (507,513) $ 118,962 $ (1,628,698) $ 878,384 ============= ============= ============= ============= ============= Total assets $ 309,126,114 $ 221,216,236 $ 216,019,450 $ 222,466,930 $ 230,386,588 ============= ============= ============= ============= ============= Long-term obligations (including related accrued interest) $ 190,566,884 $ 121,690,421 $ 110,064,581 $ 112,500,673 $ 115,221,696 ============= ============= ============= ============= ============= Funds from operations(2) $ 12,988,901 $ 11,829,937 $ 11,281,948 $ 12,877,703 $ 12,580,306 ============= ============= ============= ============= ============= Rent received above (below) straight line rent $ (104,610) $ 399,812 $ 568,592 $ 419,876 $ (771,139) ============= ============= ============= ============= =============
- -------- (1) Loss on extinguishment of debt is reported as an extraordinary item on the consolidated statements of income. (2) Management believes that Funds From Operations enhances an investor's understanding of the Company's financial condition, results or operations and cash flows and believes it is an appropriate performance measure for an equity REIT which provided an indication of a REIT's ability to make cash distributions. Funds From Operations is defined by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as "net income (or loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures." The Company's method of calculating Funds From Operations excludes other non-recurring revenue and expense items and may be different from methods used by other REITs and, accordingly, is not comparable to such other REITs. Funds From Operations should not be considered an alternative to net income as an indicator of operating performance. Funds from Operations has been calculated without the potential effect of outstanding stock options or the conversion of special limited partnership units. 3 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 7 is amended and restated in its entirety as follows. General The Company was organized to combine, continue and expand the business of the Partnerships, which own, operate and manage a diverse portfolio of real properties. The Company, which has elected to qualify as a real estate investment trust under the Internal Revenue Code of 1986, acquired the Partnerships through mergers which were effected as of October 12, 1993. In connection with the mergers, the Company issued 9,303,409 shares of its Common Stock, 169,109 units of special limited partner interest in the Partnerships (which are exchangeable for an equivalent number of shares of common stock) and $1,877,390 in principal amount of 7.75% Subordinated Notes due 2000. The mergers were accounted for as business combinations of entities under common control using the "as if pooling-of-interest" method of accounting, with the Company as the surviving entity. Under this method, the assets and liabilities of the Partnerships have been recorded by the Company at their carrying values. As of December 31, 1996, the Company was the indirect or direct owner of thirty-eight real estate properties (or interests therein) (the "Properties") triple net leased to corporations. Liquidity and Capital Resources REAL ESTATE ASSETS. As of December 31, 1996, the Company's real estate assets consisted of the Properties. The Properties are located in twenty-three states and contain an aggregate of 5,235,363 square feet of net rentable space. Each Property is subject to a single tenant triple net lease, which is generally characterized as a lease in which the tenant pays all or substantially all of the cost and cost increases for real estate taxes, capital expenditures, insurance and ordinary maintenance of the Property. The Company's principal sources of liquidity are revenue generated from the Properties, interest on cash balances and amounts available under its Credit Facility and amounts that may be raised through the sale of preferred shares described below or other private or public offerings. For the year ended December 31, 1996, such leases on the Properties generated approximately $31,244,000 in revenue compared to $24,523,000 in 1995. Minimum annual rent receivable under non-cancelable leases is $36,342,000 for 1997. DIVIDENDS. The Company paid a dividend of $.27 per share to stockholders in respect of each of the calendar quarters of 1995 and the first quarter of 1996, and $.28 per share in respect of the second and third quarters. The dividend paid in respect of the fourth quarter of 1996, in the amount of $.29 per share, was paid on February 14, 1997 to stockholders of record as of January 31, 1997. The Company's annualized dividend rate is currently $1.16 per share. UPREIT STRUCTURE. The Company's UPREIT structure permits the Company to effect acquisitions by issuing to a seller, as a form of consideration, interests in partnerships controlled by the Company. All of such interests are convertible at certain times into shares of Common Stock on a one-for-one basis and all of such interests require the Company to pay certain distributions to the holders of such interests. The Company accounts for these interests in a manner similar to a minority interest holder. As a result, the Company's net income and funds from operations are reduced proportionally based on the amount of the distributions required to be paid by the terms of such partnership interests. The number of shares of Common Stock that will be outstanding in the future should be expected to increase, and minority interest expense should be expected to decrease, from time to time, as such partnership interests are converted into shares of Common Stock. The table set forth below provides certain information with respect to such partnership interests as of December 31, 1996. 4
1997 CONVERTIBLE NUMBER OF ANNUALIZED SHARES OF TOTAL ANNUAL UNITS PER UNIT COMMON DISTRIBUTION PARTNERSHIP OR CLASS ISSUED DISTRIBUTION STOCK AS OF: IN 1997 - --------------------------------------- ---------- ------------- ----------- ---------- LCIF - Special Limited Partners 112,229 $ 1.16 At any time $ 130,185 LCIF II - Special Limited Partners 56,880 $ 1.16 At any time $ 65,981 --------- ---------- Subtotal: Special Limited Partners 169,109 $ 196,166 --------- ---------- Barnes Partnerships: Barngiant Livingston 52,335 $ 0.27 3/04 $ 14,130 Barnhale Modesto 23,267 $ - 2/06 N/A Barnes Rockshire 36,825 $ - 3/05 N/A Barnvyn Bakersfield 7,441 $ - 1/03 N/A Barnhech Montgomery 11,766 $ 0.29 5/06 $ 3,412 Barnward Brownsville 35,400 $ - 11/04 N/A --------- ---------- Subtotal: Barnes Partnerships 167,034 $ 17,542 --------- ---------- Red Butte Creek Associates 1,715,294 $ 0.66 5/98 $1,132,094 114,006 $ 1.08 5/98 $ 123,126 --------- ---------- Subtotal: Red Butte Creek Associates 1,829,300 $1,255,220 --------- ---------- Fort Street Partners 207,741 $ - 1/06 N/A 17,259 $ 1.12 1/99 $ 19,330 --------- ---------- 225,000 $ 19,330 --------- ---------- Toy Properties Associates II 95,000 $ 1.12 1/99 $ 106,400 Toy Properties Associates V 35,000 $ 1.12 1/99 $ 39,200 --------- ---------- Grand Total 2,520,443 $1,633,858 ========= ==========
Holders of the LCIF and LCIF II special limited partner units receive distributions that are equal to distributions on Common Stock. Holders of the Barnes Partnerships units receive distributions as described in the table above until such units become eligible for conversion to Common Stock, upon which date they will receive distributions based on their respective partnership interest ownership percentages. The distribution to the class of Red Butte Creek Associates units consisting of 1,715,294 units will increase to $1.08 per unit annually in January 1998. The holders of the class of Red Butte Creek Associates units consisting of 114,006 units receive distributions that are equal to distributions on Common Stock, with an annual cap of $1.08 per unit. Holders of the class of Fort Street Partners units consisting of 17,259 units, the Toy Properties Associates II units and Toy Properties Associates V units receive distributions that are equal to distributions on Common Stock, with an annual cap of $1.12. The holders of the class of Fort Street Partners units consisting of 207,741 units will receive distributions that are equal to distributions on Common Stock, with an annual cap of $1.12, when they become eligible for conversion to Common Stock. During 1996, the Company made the following acquisitions: NORTHWEST PIPELINE CORPORATION. On May 22, 1996, the Company, through LCIF, acquired the headquarters of Northwest Pipeline Corporation. Total assets acquired and total liabilities assumed in the exchange were approximately $56.9 million and $38.5 million, respectively. The consolidated statement of income for the year ended December 31, 1996 includes the operating results of the acquired partnership commencing May 22, 1996. The acquisition consisted of a 295,000 square foot office building and a 600 car parking garage located in Salt Lake City, Utah. The property is 100% occupied by and leased to Northwest Pipeline Corporation under a net lease which expires on September 30, 2009, subject to two renewal options for a total of nineteen years. The property is located on land leased through September 17, 2018, subject to a ten year renewal option. The current annual net rent is approximately $8.16 million, net of payments under the land lease. The property is subject to two mortgage notes which have a total outstanding principal balance of approximately $35.6 million as of December 31, 1996. 5 JACKSONVILLE, ALABAMA PROPERTY. On May 31, 1996, the Company acquired a 56,132 square foot retail facility in Jacksonville, Alabama for a purchase price of $2,014,000. The purchase price and related acquisition costs were satisfied with funds from a draw on the Company's Credit Facility, in the amount of $2.1 million. The property is leased to Wal-Mart Stores, Inc. under a net lease which expires on January 31, 2009, with annual net rent of $146,040. PLYMOUTH, MICHIGAN, OBERLIN, OHIO AND NORTH CAROLINA PROPERTIES. On December 23, 1996, the Company acquired three industrial properties for approximately $14.7 million. Two of the properties, located in Plymouth, Michigan and Oberlin, Ohio, were acquired for $11.3 million and net-leased to Johnson Controls, Inc. for a term of ten years. The annual base rent is $1.14 million, or approximately 10.08% of the purchase price, and will be adjusted annually by three times the percentage increase in the Consumer Price Index, not to exceed 4.5% per annum. The two properties total 245, 320 square feet. The aggregate purchase price and related acquisition costs of these two properties were satisfied with funds from a draw on the Company's Credit Facility. The third acquired property, totaling 72,868 square feet and located in Franklin, North Carolina, was net-leased to SKF USA for a term of approximately 18 years. The purchase price was approximately $3.4 million. The annual net rent is equal to approximately 9.46% of the purchase price and will increase every three years by the percentage increase in the Consumer Price Index, not to exceed 3% per annum. The purchase price and related acquisition costs were satisfied by temporary financing in the form of a bridge loan in the amount of approximately $2.8 million, and cash. AFFILIATED PARTNERSHIP ACQUISITIONS. On December 31, 1996, the Company, through LCIF, simultaneously acquired five properties from three partnerships, following which the partnerships were dissolved. The three partnerships involved in the transaction were Toy Properties Associates II ("Toy II"), Toy Properties Associates V ("Toy V") and Fort Street Partners ("Fort Street"). Details of the acquisitions involving the three respective partnerships follows. TOYS R US RETAIL PROPERTIES. In the Toy II transaction, the Company acquired three retail stores located in Tulsa, Oklahoma; Clackamas, Oregon; and Lynwood, Washington; (the "Toy II Properties") containing an aggregate of 129,070 square feet and leased to Toys 'R' Us, Inc. under triple net leases which expire on May 31, 2006 and which are subject to five, five-year renewal options. The current annual aggregate rent is approximately $1,067,000. As of December 31, 1996, the Toy II Properties were subject to mortgage notes with an outstanding aggregate principal balance of $5,827,758, bearing interest at a rate of 12.625% per annum. On January 22, 1997, the aggregate principal balance of these notes, in the amount of $5,801,069, plus an aggregate prepayment premium of approximately $377,000, were all paid in full. TOYS R US DISTRIBUTION FACILITY. In the Toy V transaction, the Company acquired a 123,293 square foot distribution center located in Houston, Texas, (the "Toy V Property") leased to Toys 'R' Us, Inc. under a triple net lease which expires on August 31, 2006, and which is subject to five, five-year renewal options. The current annual rent is approximately $400,000. As of December 31, 1996, the Toy V Property was subject to a mortgage note with an outstanding balance of $2,195,746, bearing interest at a rate of 12.625% per annum. On January 22, 1997, the aggregate principal balance plus a prepayment premium of approximately $143,000 was paid in full. FORT STREET PROPERTY. In the Fort Street transaction, the Company acquired an 85,610 square foot retail facility located in Honolulu, Hawaii (the "Fort Street Property"), leased to Liberty House, Inc. under a triple net lease which expires on September 30, 2009, and which is subject to one 115 month renewal option, one two-year renewal option and three five-year renewal options. The current annual rent is approximately $963,000. As of December 31, 1996, the Fort Street Property was subject to a mortgage note with an outstanding balance of $6,189,675, bearing interest at 10.25% per annum. Equal monthly payments of interest and principal sufficient to fully amortize the note by September 30, 2010 are required. TUSCALOOSA, ALABAMA PROPERTY. On February 20, 1997, the Company completed the acquisition of a 58,800 square foot industrial property (the "Tuscaloosa Property") in Tuscaloosa, Alabama for approximately $2.9 million. The Tuscaloosa Property is leased 6 to Johnson Controls, Inc. for ten years. The annual net rent is $288,608 and escalates annually by three times the percentage change in the Consumer Price Index, not to exceed 4.5%. EXEL LOGISTICS PROPERTIES. On March 19, 1997, the Company acquired three industrial properties (the "Exel Properties") for $27.0 million. The Exel Properties contain 761,200 square feet on 46.56 acres near Harrisburg, Pennsylvania and are subject to net-leases with Exel Logistics, Inc. ("Exel") which expire on November 30, 2006. The current annual net rent is $2,536,941 and will increase by 9.27% on December 1, 1997 and by 9.27% every three years thereafter. The obligations of Exel under the leases are unconditionally guaranteed by its parent company, NFC plc. EXCHANGEABLE REDEEMABLE SECURED NOTES. In connection with the acquisition of certain properties leased to Exel, LCIF sold $25 million of 8% Exchangeable Redeemable Secured Notes (the "Notes") to an institutional investor in a private placement. The Notes require interest only payments at 8% per annum, payable semi-annually in arrears, and have a seven year term. The Notes are secured by first mortgage liens on the Exel Properties, will be guaranteed by Lexington, and can be exchanged for Lexington common stock at $13 per share beginning in the year 2000, subject to adjustment. The Notes may be redeemed at Lexington's option after three years at a price of 103.2% of the principal amount, declining to par after five years. The Notes are subordinated to obligations under Lexington's Credit Facility. PARTNERSHIP MERGER. In connection with the acquisition of the Exel Properties, an unaffiliated partnership (the "Exel Partnership") merged into LCIF. As a result of the merger, LCIF issued 480,000 partnership units exchangeable for Lexington common stock, which units are entitled to distributions at the same dividend rate as common stock. At the time of the merger, the Exel Partnership's sole assets were approximately $6.0 million of cash from the prior sale of a property and the right to acquire the Excel Properties in a tax-free exchange under Internal Revenue Code Section 1031. REVOLVING CREDIT FACILITY. The Company's Credit Facility, in a maximum committed amount of $60,000,000, bears interest at 1.5% over LIBOR. The facility matures on June 1, 1999, but will automatically renew for successive two year terms unless the lender notifies the Company at least twelve months in advance of the scheduled or extended maturity date of its intention to terminate the credit facility. As of December 31, 1996, the Company had borrowed $25 million. As the Credit Facility is collateralized by six of the Company's Properties, this amount is included in the balance of mortgage notes payable as of December 31, 1996. PREFERRED STOCK SALE. On December 31, 1996, the Company entered into an agreement with Five Arrows Realty Securities L.L.C ("Five Arrows") providing for the sale of up to 2,000,000 shares of Senior Cumulative Convertible Preferred Stock ("Preferred Stock"). Under the terms of the agreement, the Company may sell the Preferred Stock to Five Arrows at up to three closings, at Lexington's option, during 1997 for an aggregate price of approximately $25 million. In connection with such sale, the Company has entered into certain related agreements with Five Arrows, providing, among other things, for certain registration rights with respect to such shares and the right to designate a member of the Board of Directors under certain circumstances. The Preferred Stock, which is convertible into common stock on a one-for-one basis, is entitled to quarterly distributions equal to the greater of $.295 or 105% of the common stock dividend. On January 21, 1997, the Company sold 700,000 shares of Preferred Stock to Five Arrows and used the proceeds of $8.75 million to repay $7,996,817 of mortgage debt, including prepayment premiums of $520,000. Such mortgage debt had been bearing interest at 12.625% per annum and would have required interest and principal payments of approximately $1.45 million in 1997. DEBT SERVICE REQUIREMENT. The Company's principal liquidity needs are the payment of interest and principal on outstanding mortgage debt. As of December 31, 1996, a total of thirty-seven properties were subject to outstanding mortgages which had an aggregate principal amount, including accrued interest, of $186,188,387. The weighted average interest rate on the Company's debt on such date was approximately 9.04%. Approximate balloon payment amounts for the next five calendar years are due as follows: $2,829,000 in 1997; $10,007,000 in 1998; $30,563,000 in 1999 (including the $25,000,000 Credit Facility which may be extended) and $7,966,000 in 2000. There are no balloon payments due during 2001. The 7 amount due in 1997 consists of the bridge financing obtained in the acquisition of the Franklin, North Carolina Property, in the amount of $2,828,640, which must be refinanced by June 23, 1997 or repaid in full. See Note 6 of the Company's Consolidated Financial Statements. The ability of the Company to make such balloon payments will depend upon its ability to refinance the mortgage related thereto, sell the related property or have available amounts under its credit facility sufficient to satisfy such balloon payments. The ability of the Company to accomplish such goals will be affected by numerous economic factors affecting the real estate industry, including the available mortgage rates at the time, the Company's equity in the mortgaged properties, the financial condition of the Company, the operating history of the mortgaged properties, the then current tax laws and the general national, regional and local economic conditions at the time. As of December 31, 1996, the Company's total consolidated indebtedness (including origination fees payable and the related accrued interest) was approximately $193 million. See also "Funds From Operations" below. LEASE OBLIGATIONS. Because the Company's tenants bear all or substantially all of the cost of property maintenance and capital improvements, the Company does not anticipate significant needs for cash for property maintenance or repairs. The Company generally funds property expansions with additional secured borrowings, the repayment of which is funded out of rental increases under the leases covering the expanded properties. STOCK REPURCHASE. On November 15, 1994, the Company announced that its Board of Directors had authorized the Company to repurchase, from time to time, up to 1,000,000 shares of its outstanding Common Stock, depending on market conditions and other factors. As of December 31, 1996, the Company had repurchased 172,100 shares, at an average price of approximately $9.80 per share, all of which have been retired. Results of Operations Year ended December 31, 1996 compared to year ended December 31, 1995 Total Revenues. Total revenues for the year ended December 31, 1996 were $31,675,355, an increase of $6,673,593 from the year ended December 31, 1995. The increase in total revenues was attributable to an increase in rental revenue, primarily due to revenues from properties acquired in August and December 1995, and May 1996. Total Expenses. Total expenses for the year ended December 31, 1996 were $25,519,469 an increase of $5,629,284 from the year ended December 31, 1995. The increase was primarily attributable to increases in interest expense, depreciation and general and administrative expenses, and transactional expenses incurred in 1996. Interest expense for the year ended December 31, 1996 was $12,817,528, an increase of $2,522,352 from the year ended December 31, 1995, which was primarily due to interest expense incurred on the mortgage notes assumed in the exchange transaction of May 22, 1996 to acquire the Salt Lake City, Utah Property. Depreciation expense for the year ended December 31, 1996 was $7,627,232, an increase of $1,809,994 from the year ended December 31, 1995, which was primarily due to properties acquired in August and December 1995 and May 1996. General and administrative expenses for the year ended December 31, 1996 were $3,125,100, a $431,340 increase from the year ended December 31, 1995. This increase is due to an increase in performance-based compensation of $146,702 and an increase in professional fees. The transactional expenses totaled $644,047 and were comprised of costs of $169,530 associated with a proposed equity offering which was abandoned in favor of the completed private equity placement, and $474,517 of expenses incurred in connection with transactions in progress for which expenses are required to be charged to current operations. The Company has added two senior corporate officers and one additional employee as employees as of October 1, 1996, in connection with the Company entering into management agreements with two partnerships which own 59 single tenant net-leased office, industrial and retail properties. The cost of the additional overhead is expected to be offset by expenses reimbursed pursuant to the management agreements. 8 Net income. Net income for the year ended December 31, 1996 was $5,465,824 an increase of $2,181,824 from the year ended December 31, 1995. The increase was primarily attributable to a non-recurring loss on extinguishment of debt incurred in 1995 in the amount of $4,849,226, offset by non-recurring items in 1995 relating to the sale of the Eagan Property on March 31, 1995; a gain on the sale of approximately $1.5 million and proceeds from lease termination of $1.6 million, offset by the related write-off of deferred rent receivable of approximately $678,000. Additionally, the increase in rental revenue discussed above also contributed to the increase in net income. Year ended December 31, 1995 compared to year ended December 31, 1994 Total Revenues. Total revenues for the year ended December 31, 1995 were $25,001,762, a decrease of $1,036,144 from the year ended December 31, 1994. The decrease in total revenues resulted from a property sale that occurred in March, 1995. The loss of revenue resulting from the property sale was partially offset by an increase in interest income of $334,648 and revenues from new acquisitions. Total Expenses. Total expenses for the year ended December 31, 1995 were $19,890,185, a decrease of $571,338 from the year ended December 31, 1994. Interest expense for the year ended December 31, 1995 was $10,295,176, a decrease of $687,133 from 1994 as a result of debt refinancing. General and administrative expenses for the year ended December 31, 1995 were $2,693,760, an increase of $277,574 from the year ended December 31, 1994. The increase in general and administrative expense is attributable to an expense of $441,562 relating to performance-based stock compensation. Property operating expenses for the year ended December 31, 1995 were $620,058 a decrease of $188,360, resulting from appraisal and environmental audit work undertaken in 1994. Net Income. Net income for the year ended December 31, 1995 was $3,284,000, a decrease of $2,194,796 from the year ended December 31, 1994. The decrease in net income in 1995 was primarily attributable to a $4,849,226 loss on extinguishment of debt, of which approximately $4.6 million was incurred by the Company in connection with the REMIC Financing, which was partially offset when the Company recognized a $1,514,400 gain and $1,600,000 of lease termination proceeds resulting from the sale of the Company's property in Eagan, Minnesota. FUNDS FROM OPERATIONS Management believes that Funds From Operations enhances an investor's understanding of the Company's financial condition, results of operations and cash flows a believes it is an appropriate performance measure for an equity REIT which provided an indication of a REIT's ability to make cash distributions. Funds From Operations is defined by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as "net income (or loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures." The Company's method of calculating Funds From Operations excludes other non-recurring revenue and expense items and may be different from methods used by other REITs and, accordingly, is not comparable to such other REITs. Funds From Operations should not be considered an alternative to net income as an indicator of operating performance. The following table reflects the Company's FFO for the years ended December 31, 1996, 1995 and 1994.
1996 1995 1994 ----------- ----------- ----------- Income before minority interests $ 6,155,886 3,376,751 5,576,383 Add back: Depreciation of real estate 7,627,232 5,817,238 5,908,922 Depreciation from unconsolidated partnerships 59,062 24,609 -- Loss from debt restructuring 4,849,226 Less: Gain on sale of properties (1,516,400) Write-off of deferred rent receivable related to property sale 678,278 Proceeds from lease termination (1,600,000) Minority interest's share of depreciation (751,482) (150,376) (105,770) Minority interest's share of income (690,062) (92,751) (97,587) ------------ ------------ ----------- Funds from operations before items below 12,400,636 11,388,375 11,281,948 Adjustments of other non-recurring items(1) Non-recurring stock compensation 588,265 441,562 -- ----------- ----------- ---------- Funds from operations 12,988,901 11,829,937 11,281,948 =========== =========== ===========
(1) For purposes of the calculation of Funds From Operations ("FFO"), the Company has added back to net income amounts for non-recurring stock compensation which management believes to be appropriate adjustments based on the non-recurring and unusual nature of such amounts. The Company's method of calculating FFO may be different from methods used by other REITs. Non-recurring stock compensation represents the expense of a simultaneous exercise and re-granting of options to the Company's management during the period between July 1995 and January 1996, which was intended to increase management's ownership in the Company (a practice which has been discontinued). The Board of Directors has determined that the Company will not engage in such practices in the future. In 1996 transactional expenses of $644,047 were incurred. Management believes such expenses were of an unusual and significant nature for the Company at the time they were incurred. If such amount was added back to net income, FFO for 1996 would have been $13,632,948. 9 The Company's dividends paid to stockholders amounted to approximately 76% of the Company's funds from operations for the year ended December 31, 1996. 10 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Item 8 is amended and restated in its entirety as follows. LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES INDEX Page ---- Independent Auditors' Report 28 Consolidated Balance Sheets as of December 31, 1996 and 1995 29 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 30 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 31 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 32-33 Notes to Consolidated Financial Statements 34-49 Financial Statement Schedule Schedule III - Real Estate and Accumulated Depreciation 50-52 - -------------------- All other schedules have been omitted because the required financial information is not applicable or the information is shown in the consolidated financial statements or notes thereto. 11 INDEPENDENT AUDITORS' REPORT The Stockholders Lexington Corporate Properties, Inc.: We have audited the consolidated financial statements of Lexington Corporate Properties, Inc. and consolidated subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement 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 financial position of Lexington Corporate Properties, Inc. and consolidated subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP New York, New York January 21, 1997 12 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 and 1995
ASSETS 1996 1995 ------------ ------------ Real estate, at cost (notes 3 and 6): Buildings and building improvements $287,534,071 $196,431,021 Land and land estates 38,371,974 34,287,129 Land improvements 2,830,339 2,830,339 Fixtures and equipment 10,674,288 10,674,288 ------------ ------------ 339,410,672 244,222,777 Less: accumulated depreciation 51,342,953 43,715,721 ------------ ------------ 288,067,719 200,507,056 Cash and cash equivalents 2,468,189 2,588,515 Restricted cash (note 4) 3,750,138 3,464,554 Deferred expenses (net of accumulated amortization of $ 2,955,205 in 1996 and $2,343,262 in 1995) 3,733,930 3,753,553 Rent receivable (note 2) 7,842,568 7,701,420 Investment in partnerships (note 2) 172,058 170,127 Escrow deposits (note 5) 104,400 654,400 Other assets 2,987,112 2,376,611 ------------ ------------ $309,126,114 $221,216,236 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Mortgage notes payable (note 6) $185,766,458 $121,249,633 Subordinated notes payable, including accrued interest (note 7) 1,973,241 1,973,241 Accrued interest payable on mortgage notes (note 6) 421,929 440,788 Origination fees payable, including accumulated accretion of $394,512 in 1996 (note 9) 457,508 -- Accrued interest on origination fees payable (note 9) 3,920,989 -- Accounts payable and other liabilities 1,394,109 558,617 ------------ ------------ 193,934,234 124,222,279 ------------ ------------ Minority interests (note 10) 22,532,733 475,846 ------------ ------------ 216,466,967 124,698,125 ------------ ------------ Commitments and contingencies (note 3) Stockholders' equity (notes 1 and 12): Preferred stock, par value $0.0001 per share; authorized 10,000,000 shares, issued none -- -- Excess stock, par value $0.0001 per share; authorized 40,000,000 shares, issued none -- -- Common stock, par value $0.0001 per share, authorized 40,000,000 shares, 9,426,900 and 9,331,982 shares issued and outstanding in 1996 and 1995, respectively 943 933 Additional paid-in-capital 136,955,941 135,954,121 Accumulated distributions in excess of net income (44,297,737) (39,436,943) ------------ ------------ Total stockholders' equity 92,659,147 96,518,111 ------------ ------------ $309,126,114 $221,216,236 ============ ============
See accompanying notes to consolidated financial statements. 13 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------ ------------ ------------ Revenues: Rental (note 8) $ 31,244,063 $ 24,522,884 $ 25,893,676 Interest and other 431,292 478,878 144,230 ------------ ------------ ------------ 31,675,355 25,001,762 26,037,906 ------------ ------------ ------------ Expenses: Interest expense (notes 6 and 7) 12,817,528 10,295,176 10,982,309 Depreciation 7,627,232 5,817,238 5,908,922 Amortization of deferred expenses 619,362 463,953 345,688 Property operating expenses 686,200 620,058 808,418 General and administrative expenses (notes 9, 11 and 14) 3,125,100 2,693,760 2,416,186 Transactional expenses 644,047 -- -- ------------ ------------ ------------ 25,519,469 19,890,185 20,461,523 ------------ ------------ ------------ Income before minority interests, gain on sale of properties, lease termination proceeds, and extraordinary item 6,155,886 5,111,577 5,576,383 Minority interests (note 10) 690,062 92,751 97,587 ------------ ------------ ------------ Income before gain on sale of properties, lease termination proceeds and extraordinary item 5,465,824 5,018,826 5,478,796 Gain on sale of properties -- 1,514,400 -- Proceeds from lease termination -- 1,600,000 -- ------------ ------------ ------------ Income before extraordinary item 5,465,824 8,133,226 5,478,796 Extraordinary item - loss on extinguishment of debt -- 4,849,226 -- ------------ ------------ ------------ Net income $ 5,465,824 $ 3,284,000 $ 5,478,796 ============ ============ ============ Income before extraordinary item, per share $ 0.58 $ 0.88 $ 0.59 Extraordinary item - loss on extinguishment of debt, per share -- (0.53) -- ------------ ------------ ------------ Net income per share $ 0.58 $ 0.35 $ 0.59 ============ ============ ============ Weighted average shares outstanding 9,392,727 9,263,169 9,306,173 ============ ============ ============
See accompanying notes to consolidated financial statements. 14 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 1996, 1995 and 1994
Additional Total Number Common paid-in stockholders' of shares stock capital equity ------------- ------------- ------------- ------------- Balance at December 31, 1993 9,303,409 $ 9,303 $ 105,642,554 $ 105,651,857 Net income -- -- 5,478,796 5,478,796 Dividends paid to stockholders ($1.08 per share) -- -- (9,771,306) (9,771,306) Exchange of shares for subordinated notes payable (2,224) -- (22,240) (22,240) Change in par value of stock -- (8,374) 8,374 ------------- Common stock issued 17,275 -- 154,019 154,019 Common stock repurchased and retired (30,100) -- (271,440) (271,440) ------------- ------------- ------------- ------------- Balance at December 31, 1994 9,288,360 929 101,218,757 101,219,686 Net income -- -- 3,284,000 3,284,000 Dividends paid to stockholders ($1.08 per share) -- -- (10,010,808) (10,010,808) Exchange of special limited partnership units for partnership interests -- -- 1,503,315 1,503,315 Common stock issued 185,622 18 1,936,520 1,936,538 Common stock repurchased and retired (142,000) (14) (1,414,606) ------------- ------------- ------------- ------------- (1,414,620) Balance at December 31, 1995 9,331,982 933 96,517,178 96,518,111 Net income -- -- 5,465,824 5,465,824 Dividends paid to stockholders ($1.10 per share) -- -- (10,326,618) (10,326,618) Common stock issued 94,918 10 1,001,820 1,001,830 --------- ------------- ------------- ------------- Balance at December 31, 1996 9,426,900 $ 943 $ 92,658,204 $ 92,659,147 ========= ============= ============= =============
See accompanying notes to consolidated financial statements. 15 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 5,465,824 $ 3,284,000 $ 5,478,796 ------------ ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities net of effects from purchase of partnership assets: Depreciation and amortization 8,246,594 6,281,191 6,254,610 Net gain from sale of properties -- (1,514,400) -- Write-off of deferred rent receivable -- 678,078 -- Write-off of unamortized deferred loan fees -- 323,168 -- (Increase) decrease in rent receivable (141,148) 394,301 570,985 Amortization of discount on mortgage notes payable 8,764 5,478 -- Income from unconsolidated partnerships (12,735) (355) -- Increase (decrease) in accounts payable and other liabilities 746,342 (364,027) 436,853 (Decrease) increase in accrued interest payable (18,859) 93,972 (80,748) Accrued interest added to principal balance of mortgage notes -- 34,192 124,071 Minority interests 690,062 92,751 97,587 Deferred lease costs -- -- (200,000) Increase in other assets (12,496) (2,091,852) (259,153) ------------ ------------ ------------ Total adjustments 9,506,524 3,932,497 6,944,205 ------------ ------------ ------------ Net cash provided by operating activities 14,972,348 7,216,497 12,423,001 ------------ ------------ ------------ Cash flows from investing activities: Net proceeds from sale of properties -- 16,347,058 -- Acquisitions of real estate properties and partnerships, net of cash acquired (16,954,912) (8,460,166) -- Distributions from unconsolidated partnerships 3,385 -- -- ------------ ------------ ------------ Net cash (used in) provided by investing activities (16,951,527) 7,886,892 -- ------------ ------------ ------------
16 2 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued
1996 1995 1994 ------------ ------------ ------------ Cash flows from financing activities: Proceeds of mortgage notes payable $ 19,618,640 $ 84,513,344 $ -- Increase in deferred expenses (294,323) (3,242,138) -- Dividends to stockholders (10,326,618) (10,010,808) (9,771,306) Repayments on mortgage notes (7,533,655) (83,196,026) (2,437,748) (Increase) decrease in restricted cash (285,584) (3,464,554) 200,000 Decrease (increase) in escrow deposits 550,000 (550,000) -- Proceeds from issuance of common stock 1,001,830 1,936,538 154,019 Common stock repurchased -- (1,414,620) (271,440) Cash distributions to minority interests (871,437) (182,638) (177,564) ------------ ------------ ------------ Net cash provided by (used in) financing activities 1,858,853 (15,610,902) (12,304,039) ------------ ------------ ------------ (Decrease) increase in cash (120,326) (507,513) 118,962 Cash and cash equivalents at beginning of year 2,588,515 3,096,028 2,977,066 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 2,468,189 $ 2,588,515 $ 3,096,028 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 12,827,623 $ 10,161,534 $ 10,938,986 ============ ============ ============ Cash paid during the year for taxes $ 155,740 $ 181,921 $ 137,947 ============ ============ ============
Supplemental disclosure of non-cash investing and financing activities: On August 1, 1995, the Company acquired ownership interests in six partnerships in exchange for special limited partnership units. The financial position of four of these partnerships is included in the consolidated balance sheets as of December 31, 1996 and 1995. Total assets and total liabilities acquired in the exchange were $10,231,767 and $10,179,310, respectively. The Company's proportionate share of the remaining two partnerships is included in investment in partnerships. On May 22 and December 31, 1996, the Company completed two separate acquisition transactions involving certain partnerships, whereby six properties were acquired in exchange for special limited partnership units, following which the selling partnerships were dissolved. Total assets acquired and total liabilities assumed in the exchanges were $79,128,985 and $56,890,723, respectively. The difference has been recorded as minority interest. For the year ended December 31, 1994, the Company exchanged common stock with a value of $22,240 for subordinated notes payable. See accompanying notes to consolidated financial statements. 17 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 The Notes to Consolidated Financial Statements are amended and restated in their entirety as follows. (1) THE COMPANY Lexington Corporate Properties, Inc. (the "Company") is a Maryland corporation which was organized to combine and continue to expand the business of two affiliated Delaware limited partnerships (the "Partnerships") which own, operate and manage a diverse portfolio of real properties. The real properties owned by the Company are subject to triple net leases to corporate tenants. References herein to the "Company" shall include references to the Company, the Partnerships and the Company's predecessor, Lexington Corporate Properties, Inc., a Delaware corporation which was organized in October 1993 and was merged into the Company on June 27, 1994. The total number of shares of all classes of capital stock that the Company has authority to issue is 90,000,000 shares, consisting of 40,000,000 shares of common stock with a par value of $.0001 per share, 40,000,000 shares of excess stock with a par value of $.0001 per share and 10,000,000 shares of preferred stock with a par value of $.0001 per share. The excess stock is not entitled to receive dividends, except upon liquidation of the Company. Such shares vote as a single class with holders of shares of the Company's Common Stock. The excess stock and Common Stock are considered equal for purposes of liquidation of the Company. On November 15, 1994, the Company announced that its Board of Directors had authorized the Company to repurchase, from time to time, up to 1,000,000 shares of its outstanding Common Stock, depending on market conditions and other factors. As of December 31, 1996, the Company had repurchased 172,100 shares at an average price of approximately $9.80 per share, all of which have been retired. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company's consolidated financial statements are prepared on the accrual basis of accounting for financial and Federal income tax reporting purposes. Depreciation for financial reporting purposes is determined by the straight-line method over the remaining estimated economic useful lives of the properties. The Company depreciates buildings and building improvements over a 40-year period or the remaining useful lives from the dates of acquisition, land improvements over a 20-year period, and fixtures and equipment over a 12-year period. Acquisition fees incurred in connection with properties acquired have been capitalized as a cost of the properties upon acquisition. Depreciation for tax purposes is determined in accordance with the Modified Accelerated Cost Recovery System. The financial statements reflect the accounts of the Company and its majority-owned subsidiaries, including, Lepercq Corporate Income Fund L.P. ("LCIF") and Lepercq Corporate Income Fund II L.P. ("LCIF II"). The Company is the sole general partner and majority limited partner of LCIF and LCIF II as well as general partner and majority limited partner in four other partnerships and, accordingly, accounts for them on a consolidated basis. Entities in which the Company has an interest of less than 50% are accounted for under the equity method and the investments in these partnerships are included in other assets in the accompanying consolidated balance sheets. The Company has determined that the leases relating to the properties are operating leases. Rental revenue is recognized on a straight-line basis over the minimum lease terms. The Company's rent receivable primarily represents the amounts of the excess of rental revenues recognized on a straight-line basis over the annual rents collectible under the leases. Deferred expenses are composed principally of debt placement, mortgage loan and other 18 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (2), CONTINUED loan fees, and are amortized using the straight-line method, which approximates the interest method, over the terms of the mortgages. Origination fees payable obligations have been discounted using an annual rate of 13%. The Company has qualified as a real estate investment trust under the Code. A real estate investment trust is generally not subject to Federal income tax on that portion of its real estate investment trust taxable income ("Taxable Income") which is distributed to its stockholders, provided that at least 95% of Taxable Income is distributed. No provision for Federal income taxes has been made in the consolidated financial statements, as the Company believes it is in compliance with the Code and has distributed all of its taxable income. A summary of the taxable nature of the Company's dividends for the three years ended December 31 is as follows:
1996 1995 1994 -------- -------- -------- Total dividends per share $ 1.10 $ 1.08 $ 1.08 ======== ======== ======== Percent taxable as ordinary income 95.46% 41.36% 89.90% Percent taxable as long-term capital gains -- 24.71% -- Percent non-taxable as return of capital 4.54% 33.93% 10.10% -------- -------- -------- 100.00% 100.00% 100.00% ======== ======== ========
The Company and its consolidated subsidiaries are required to file tax returns in various states. States vary with respect to the taxation of REITs. Some states have a tax based on capital within the state; other states, not recognizing the REIT dividends paid deduction, have a tax based on apportioned income as it would any corporation. There are states that tax under both methods as well as states that have no additional taxes other than the minimum state tax requirement. The provision for state taxes is included in general and administrative expenses in the consolidated statements of income. There are no significant temporary differences giving rise to deferred taxes. Net income per share is computed on the basis of the weighted average shares of common stock outstanding. The weighted average number of shares outstanding for the years ended December 31, 1996, 1995, and 1994 was 9,392,727, 9,263,169 and 9,306,173, respectively. The assumed exercise of outstanding stock options using the treasury stock method and conversion of special limited partnership units are not considered dilutive. Certain amounts included in the prior years' financial statements have been reclassified to conform with the current year's presentation. The Financial Accounting Standards Board's Statement of Financial Accounting Standards ("SFAS") No. 107, Disclosures about Fair Value of Financial Instruments, defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The Company's cash, mortgage notes payable, subordinated notes payable, and accounts payable and other liabilities are carried at cost, which approximates fair value. 19 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (2), CONTINUED For purposes of the statements of cash flows, the Company considers all highly liquid instruments to be cash equivalents. Cash and cash equivalents on the balance sheet at December 31, 1996 includes $2,177,035 of money market instruments. The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have any impact on the Company's financial position, results of operations, or liquidity. Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (3) INVESTMENTS IN REAL ESTATE The Company's real property portfolio as of December 31, 1996 consists of thirty-eight properties (or interests therein) (the "Properties") located in twenty-three states, including warehousing, distribution and manufacturing facilities, office buildings and retail properties. All of the Company's properties are subject to triple net leases, which are generally characterized as leases in which the tenant bears all, or substantially all, of the costs and cost increase for real estate taxes, insurance and ordinary maintenance. The Company's Properties were acquired between 1986 and 1990 and in 1995 and 1996. The purchase prices on the Properties were satisfied with capital contributions of the Partnerships along with proceeds of mortgage financing, issuance of the Company's common stock and the issuance of special limited partnership units in one of the Partnerships. 20 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (3), CONTINUED During 1996, the Company made the following acquisitions: On May 22, 1996, the Company, through LCIF, acquired the headquarters of Northwest Pipeline Corporation in exchange for an aggregate of 1,715,294 special limited partnership units in LCIF. The units become convertible into the Company's common stock on a one-for-one basis on May 22, 1998, the second anniversary of the transaction. The unitholders will receive a quarterly distribution of $0.165 per unit (or $0.66 per unit per annum) through January 1, 1998, increasing to $0.27 per unit per quarter (or $1.08 per unit per annum) thereafter. Additionally, 114,006 special limited partnership units in LCIF were issued to affiliates of the Company in exchange for the affiliates' contribution of their contractual right to receive certain future management and disposition fees from the selling partnership, and 9,000 shares of Lexington common stock were issued to the affiliates in exchange for accrued but unpaid management fees. The holders of the 114,006 units will have the same conversion rights as described above, and will receive a quarterly distribution of $0.27 per unit (or $1.08 per annum), and the holders of the 9,000 shares of common stock will be entitled to quarterly dividend payments as common stockholders. Total assets acquired and total liabilities assumed in the exchange were approximately $56.9 million and $38.5 million, respectively. The consolidated statement of income for the year ended December 31, 1996 includes the operating results of the acquired partnership commencing May 22, 1996. The acquisition consisted of a 295,000 square foot office building and a 600 car parking garage located in Salt Lake City, Utah. The property is 100% occupied by and leased to Northwest Pipeline Corporation under a net lease which expires on September 30, 2009, subject to two renewal options for a total of nineteen years. The property is located on land leased through September 17, 2018, subject to a ten year renewal option. The current annual net rent is approximately $8.16 million, net of payments under the land lease. The property is subject to two mortgage notes which have a total outstanding principal balance of approximately $35.6 million as of December 31, 1996. On May 31, 1996, the Company acquired a 56,132 square foot retail facility in Jacksonville, Alabama for a purchase price of $2,014,000. The purchase price and related acquisition costs were satisfied with funds from a draw on the Company's revolving credit facility (the "Credit Facility"), in the amount of $2.1 million. The property is leased to Wal-Mart Stores, Inc. under a net lease which expires on January 31, 2009, with annual net rent of $146,040. On December 23, 1996, the Company acquired three industrial properties for approximately $14.7 million. Two of the properties, located in Plymouth, Michigan and Oberlin, Ohio, were acquired for $11.3 million and net-leased to Johnson Controls, Inc. for a term of ten years. The annual base rent is $1.14 million, or approximately 10.08% of the purchase price, and will be adjusted annually by three times the percentage increase in the Consumer Price Index, not to exceed 4.5% per annum. The two properties total 245,320 square feet. The aggregate purchase price and related acquisition costs of these two properties were satisfied with funds from a draw on the Company's Credit Facility. 21 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (3), CONTINUED The third acquired property, totaling 72,868 square feet and located in Franklin, North Carolina, was net-leased to SKF USA for a term of approximately eighteen years. The purchase price was approximately $3.4 million. The annual net rent is equal to approximately 9.46% of the purchase price and will increase every three years by the percentage increase in the Consumer Price Index, not to exceed 3% per annum. The purchase price and related acquisition costs were satisfied by temporary financing in the form of a bridge loan in the amount of approximately $2.8 million, and cash. On December 31, 1996, the Company, through LCIF, simultaneously acquired five properties from three partnerships, in exchange for special limited partnership units in LCIF. These units become convertible into the Company's common stock on a one-for-one basis on various dates. The unitholders will receive a quarterly distribution of $0.28 per unit (or $1.12 per unit per annum), beginning on various dates, subject to decrease by an amount proportionate to any decrease in distributions on shares of the Company's common stock. Additionally, 51,092 special limited partnership units in LCIF were issued to affiliates of the Company in exchange for the affiliates' contribution of their contractual right to receive certain fees for services rendered in connection with the acquisition of the properties. The affiliated holders of these units will have the same conversion rights as previously described, with the initial date for eligible conversion being January 15, 1999, subsequently convertible annually on each January 15 thereafter. These affiliated unitholders will also receive quarterly dividends as previously described. The three partnerships involved in the transaction were Toy Properties Associates II ("Toy II"), Toy Properties Associates V ("Toy V") and Fort Street Partners ("Fort Street"). Details of the acquisitions involving the three respective partnerships follows. In the Toy II transaction, the Company acquired three retail stores located in Tulsa, Oklahoma; Clackamas, Oregon; and Lynwood, Washington; (the "Toy II Properties") containing an aggregate of 129,070 square feet and leased to Toys 'R' Us, Inc. under triple net leases which expire on May 31, 2006 and which are subject to five, five-year renewal options. The current annual aggregate rent is approximately $1,067,000. As of December 31, 1996, the Toy II Properties were subject to mortgage notes with an outstanding aggregate principal balance of $5,827,758, bearing interest at a rate of 12.625% per annum. On January 22, 1997, the aggregate principal balance of these notes, in the amount of $5,801,069, plus an aggregate prepayment premium of approximately $377,000, were all paid in full. In the consummation of the Toy II transaction, 72,580 LCIF units were transferred to the limited and general partners of Toy II, and 22,420 units were transferred to affiliates for their contractual rights to fees from Toy II. The distribution rights on these units began immediately and the initial date for eligible conversion is January 15, 1999, subsequently convertible annually on each January 15 thereafter. In the Toy V transaction, the Company acquired a 123,293 square foot distribution center located in Houston, Texas, (the "Toy V Property") leased to Toys 'R' Us, Inc. under a triple net lease which expires on August 31, 2006, and which is subject to five, five-year renewal options. The current annual rent is approximately $400,000. As of December 31, 1996, the Toy V Property was subject to a mortgage note with an outstanding balance of $2,195,746, bearing interest at a rate of 12.625% per annum. On January 22, 1997, the aggregate principal balance plus a prepayment premium of approximately $143,000 were paid in full. 22 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (3), CONTINUED In the consummation of the Toy V transaction, 23,587 LCIF units were transferred to the limited and general partners of Toy V, and 11,413 units were transferred to affiliates for their contractual rights to fees from Toy V. The distribution and conversion rights on these units are identical to those in the Toy II transaction, previously described. In the Fort Street transaction, the Company acquired an 85,610 square foot retail facility located in Honolulu, Hawaii (the "Fort Street Property"), leased to Liberty House, Inc. under a triple net lease which expires on September 30, 2009, and which is subject to one 115 month renewal option, one two-year renewal option and three five-year renewal options. The current annual rent is approximately $963,000. As of December 31, 1996, the Fort Street Property was subject to a mortgage note with an outstanding balance of $6,189,675, bearing interest at 10.25% per annum. Equal monthly payments of interest and principal sufficient to fully amortize the note by September 30, 2010 are required. In the consummation of the Fort Street transaction, 207,741 LCIF units were transferred to limited and general partners of Fort Street. The distribution and conversion rights on these units are the same as previously described except that the holders of these units do not begin to receive distributions and do not become eligible to convert their units until January 15, 2006. Additionally, 17,259 units were transferred to affiliates for their contractual rights to fees from Fort Street. The distribution and conversion rights (and applicable dates) on these units are identical to those in the Toy II and Toy V transactions, previously described. The acquisitions made during 1996 have been accounted for using the purchase method of accounting. The following unaudited pro forma operating information for the year ended December 31, 1996 has been prepared as if the above acquisitions had been consummated as of January 1, 1996 and does not purport to be indicative of what the operating results would have been had the acquisitions been consummated on that date. Pro forma amounts are as follows:
Unaudited Pro forma Historical December 31, 1996 December 31, 1996 ----------------- ----------------- Revenues $39,022,299 $31,675,355 Net income $ 5,471,349 $ 5,465,824 Net income per share $ 0.56 $ 0.58
The unaudited pro forma net income per share reflects the dilutive effect of certain convertible limited partnership units treated as common stock equivalents as if those units were issued at January 1, 1996. (4) RESTRICTED CASH On May 19, 1995, the Company, through its wholly owned subsidiary, LXP Funding Corp., completed a $70 million secured debt offering (the "REMIC Financing") by issuing commercial mortgage pass-through certificates. As a condition of the REMIC Financing, the trustee, established as part of the REMIC Financing, maintains a restricted cash account. Rent from the fifteen secured properties is required to be deposited into this account. Additionally, there are certain reserves that are required to be funded and maintained in this account. The monthly debt service payments are made from the account and, after considering reserve requirements, any excess funds are transferred to the Company. 23 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (5) ESCROW DEPOSITS On December 7, 1995, the Company, through a wholly owned subsidiary acquired a fitness center in Canton, Ohio. The purchase price was $4,100,000, consisting of 100,000 shares of Common Stock of the Company and $3,012,500 in cash. As a condition relating to the issuance of the Common Stock, the Company was required to register the stock within 90 days of the closing, or it would have been obligated to repurchase all of the Common Stock at $10.875 per share. To secure this obligation, the Company was required at the closing to deposit $550,000 into an escrow account. On March 6, 1996, the registration of the Common Stock was effected, and the escrow monies were returned to the Company. (6) MORTGAGE NOTES PAYABLE The Company's aggregate consolidated mortgage notes payable as of December 31, 1996 was $185,766,458, which consisted of indebtedness outstanding under the REMIC Financing, borrowings outstanding under the Company's Credit Facility and outstanding mortgage indebtedness related to sixteen Properties. As of December 31, 1996, the indebtedness outstanding under the REMIC Financing was $68,804,233, with a weighted average interest rate of approximately 8.10% per annum. The REMIC Financing debt matures on May 25, 2005, with a balloon payment in the amount of $60,001,000 due on that date. An aggregate amount of $6,352,611 in debt service payments will be due in 1997 on the REMIC Financing. The REMIC Financing is secured by mortgages on the following fifteen Properties: Modesto, California; Mansfield, Ohio; Marshall, Michigan (904 Industrial Road); Marshall, Michigan (1601 Pratt Avenue); Memphis, Tennessee; Mechanicsburg, Pennsylvania; Newark, California; Countryside, Illinois; Voorhees, New Jersey; Dewitt, New York; Newport, Oregon; Sacramento, California; Reno, Nevada; Las Vegas, Nevada; and Klamath Falls, Oregon. The Company's Credit Facility, in a maximum committed amount of $60 million, bears interest at 1.5% over LIBOR. The Facility matures on June 1, 1999, but will automatically renew for successive two-year terms unless the lender notifies the Company at least twelve months in advance of the scheduled or extended maturity date of its intention to terminate the Credit Facility. As of December 31, 1996, the Company had borrowed $25 million, with a weighted average interest rate of approximately 7.12% per annum. Based on the weighted average interest rate in effect as of December 31, 1996, debt service payments on the Credit Facility in 1997 would total $1,785,102. The Credit Facility is secured by first mortgage liens on the following six Properties: Glendale, Arizona; Southington, Connecticut; Riverdale, Georgia; Jacksonville, Alabama; Plymouth, Michigan; and Oberlin, Ohio. The Credit Facility requires compensating balances of $250,000. As of December 31, 1996, a total of sixteen properties (in addition to the Properties securing the REMIC Financing and the Credit Facility) were subject to outstanding mortgages with an aggregate outstanding principal balance of $91,962,225. The following table sets forth certain information regarding outstanding mortgage indebtedness on the sixteen properties as of December 31, 1996: 24 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (6) CONTINUED [GRAPHIC OMITTED] * On January 22, 1997, the mortgages on the following four Properties were paid in full: Tulsa, Oklahoma; Clackamas, Oregon; Lynwood, Washington; and Houston, Texas. The aggregate principal amount paid was $7,996,817 and the aggregate prepayment premiums were approximately $520,000. The stated interest rate on these four mortgages was 12.625%. The mortgages on the two Tampa, Florida Properties are cross-collateralized. The weighted average interest rate on the two mortgage notes on the Salt Lake City, Utah Property at December 31, 1996 was 11.038% per annum. The mortgage on the Franklin, NC Property represents temporary bridge financing which, if not refinanced by June 23, 1997, must be repaid in full, including any accrued but unpaid interest. The annual interest rate was 8.25% through January 1, 1997, and was adjusted to 7.1875% as of February 1, 1997. All of the Company's mortgages are nonrecourse and are secured by first mortgage liens on the properties and by collateral assignments of the leases. 25 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (6), CONTINUED Principal paydowns of the mortgage notes payable for the succeeding five years are as follows:
Year ending December 31 Amount 1997 $ 8,205,848 1998 15,748,155 1999 36,654,022 2000 14,389,803 2001 6,530,142
These amounts do not include the repayments of the four mortgages, in the amount of approximately $8 million, on January 22, 1997, as previously discussed. Included in the amount for 1997 is the bridge financing of approximately $2.8 million which must either be refinanced or repaid on June 23, 1997. Included in the amount for 1998 are balloon payments for the Tampa Property - $4,289,775, and the North Tampa Property - $5,717,444. Included in the amount for 1999 is a balloon payment for the Phoenix Property - $5,562,818 and $25 million currently outstanding under the Credit Facility, although it automatically extends for successive two-year periods unless the Company is properly notified by the lender of its intention to terminate the facility, according to the terms of the agreement. Included in the amount for 2000 is a balloon payment for the Marlborough Property - $7,965,712. Balloon payments on the notes issued in the REMIC Financing, in the aggregate of $60 million, are due in 2005. (7) SUBORDINATED NOTES PAYABLE Unitholders of the Partnerships who denied consent to the mergers described in Note 1 and qualified as dissenters received, in lieu of shares of Common Stock, Subordinated Notes of the Company having a principal amount equal to the net asset value of the Units exchanged for such notes. The notes were issued under an indenture between the Company and The Bank of New York, as Trustee. The notes bear interest at 7.75% per annum, payable semi-annually on January 1 and July 1 of each year, and are due on October 12, 2000. 26 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (8) LEASES Minimum future rents receivable under noncancellable operating leases as of December 31, 1996 are as follows:
Year ending December 31 Amount 1997 $ 36,341,863 1998 33,619,067 1999 31,443,518 2000 29,125,641 2001 27,790,302 Thereafter 159,588,231 $ 317,908,622
The leases are triple net leases which generally require the lessee to pay all or substantially all taxes, insurance, maintenance, and all other similar charges and expenses relating to the Properties and their use and occupancy. Percentage rent from the Newport Property for the years ended December 31, 1996, 1995 and 1994 amounted to $55,291, $45,172 and $42,538, respectively. Each of the following properties accounted for 10% or more of consolidated rental revenues for the years ended December 31:
Property 1996 1995 1994 -------- ---- ---- ---- Glendale 8% 13% 13% Newark 10% 13% 13% Utah 16% -- --
Ross Stores, Inc., the tenant of the Newark, California Property, has exercised an option to purchase such property for its fair market value as encumbered by a lease that expires on August 31, 2002 and presently provides for annual rental payments of $3,255,492. California state court ruled in favor of the tenant's motion to confirm an arbitration decision which would allow the tenant to purchase the property for $24.8 million on or about September 1, 1997. This motion was confirmed and the Company is appealing the decision, the outcome of which cannot be determined. The net book value of the assets related to the Newark Property at December 31, 1996 is $25,690,333, which includes approximately $989,000 of straight-line rent receivable and approximately $559,000 of deferred expenses related to the REMIC Financing allocated to the Property. If the Company does not prevail on its appealing of the decision, the potential loss on the property would be approximately $430,000. (9) RELATED PARTY TRANSACTIONS The Company has been granted an option by the LCP Group, L.P. ("LCP"), exercisable any time to acquire (i) general partnership interests currently owned by LCP in two limited partnerships, Net 1 L.P. and Net 2 L.P. (collectively, the "Net Partnerships"), which own net leased office, industrial and retail properties and (ii) a 49% equity interest in an affiliated pension fund advisory company and real estate management company which manages six net leased properties with an aggregate value of approximately $39 million. Under the terms of the option, the Company, subject to review of any such transaction by the independent members of its Board of Directors, may acquire the general partnership interests in either or both of the Net Partnerships at their fair market value based upon a formula relating to partnership cash flows, with the Company retaining the option of paying such fair market value in securities of the Company, units representing interests in partnerships controlled by the Company or cash (or a combination thereof). 27 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (9), CONTINUED On October 1, 1996, the Company hired three former employees of LCP who previously performed certain management duties for the Net Partnerships and entered into a management agreement with LCP with respect to the Net Partnerships pursuant to which the Net Partnerships will pay to the Company management compensation previously paid by the Net Partnerships to LCP (which aggregated approximately $220,000 in 1995). The cost of the new employees is expected to be offset by such management compensation. From the inception of the management agreement (October 1, 1996) to December 31, 1996, such compensation amounted to $48,435. In connection with the origination fees payable obligations, the Company is obligated to pay LCP an aggregate principal amount of $1,778,250 for rendering services in connection with the original acquisitions of certain properties. Simple interest is payable monthly from available net cash flow of the respective original properties on the various unpaid principal portions of the fees, at annual rates ranging from 12.25% to 19%. Monthly installment payments are to commence at various dates to satisfy principal and current interest payments as well as any unpaid accrued interest outstanding. The original principal amounts have been discounted at an annual rate of thirteen percent. A member of the Company's Board of Directors is a partner in the firm that serves as general counsel to the Company. The Company intends to continue to retain the services of this firm for general, corporate and other matters. (10) MINORITY INTERESTS In conjunction with several of the Company's acquisitions, sellers were given interests in partnerships controlled by the Company as a form of consideration. All of such interests are convertible at certain times into shares of Common Stock on a one-for-one basis at various dates through May 2006. The total number of special limited partnership units outstanding as of December 31, 1996 was 2,520,433. These units, subject to certain adjustments through the date of conversion, have distributions per unit in varying amounts up to $1.16 per unit. Minority interests in the accompanying consolidated financial statements relates to interests in such partnerships held by parties other than the Company. (11) EMPLOYEE BENEFIT PLAN Effective January 1, 1994, the Company established a 401(k) retirement savings plan covering all eligible employees. The Company will match 25% of the first 4% of employee contributions. In addition, based on its profitability, the Company may make a discretionary contribution at each fiscal year end to all eligible employees. Approximately $74,501, $59,261 and $41,950 were contributed in 1996, 1995 and 1994, respectively. (12) PREFERRED STOCK On December 31, 1996, the Company entered into a definitive agreement with Five Arrows Realty Securities L.L.C. ("Five Arrows") providing for the sale of up to 2,000,000 shares of Senior Cumulative Convertible Preferred Stock (" Preferred Stock"). In connection with this transaction, the Company designated 2,000,000 shares as "Excess Class A Preferred Stock" and reserved for issuance up to 2,000,000 shares of its Common Stock upon the conversion of the Preferred Stock. Under the terms of the agreement, the Company may sell the Preferred Stock to Five Arrows at up to three closings, at Lexington's option, during 1997 for an aggregate price of approximately $25 million. In connection with such sale, the Company has entered into certain related agreements with 28 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (12), CONTINUED Five Arrows, providing, among other things, for certain registration rights with respect to such shares and the right to designate a member of the Board of Directors under certain circumstances. The Preferred Stock, which is convertible into common stock on a one-for-one basis, is entitled to dividends equal to the greater of $.295 or 105% of the common stock dividend. On January 21, 1997, the Company sold 700,000 shares of Preferred Stock to Five Arrows and used the proceeds of $8.75 million to repay $7,996,817 of mortgage debt, including prepayments of $520,000. Such mortgage debt had been bearing interest at a stated rate of 12.625% per annum and would have required interest and principal payments of approximately $1.45 million in 1997. (13) LEGAL PROCEEDINGS The Company was sued in the United States District Court for the Northern District of Illinois on May 31, 1995, by United Municipal Leasing Corporation. The complaint filed in this case alleges that the Company breached a letter of intent by failing to execute definitive documentation and close a transaction in which the plaintiff proposed to sell property to the Company. The complaint seeks $800,000 in monetary damages. The Company believes that this suit is without merit, and plans to vigorously defend its position and, in any case, would not expect a material adverse effect on the Company in the event of a negative outcome. The Company is involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. (14) STOCK OPTION PLAN On June 17, 1993, the Company's Board of Directors adopted a stock option plan (the "Plan") pursuant to which stock options may be granted to officers and key employees. The Plan authorized grants of options to purchase up to 800,000 shares of authorized but unissued common stock. The Plan was amended on May 23, 1996 to increase by 800,000 the number of shares of Common Stock available for the grant of options thereunder, subject to certain limitations. Stock options are granted with an exercise price equal to the stock's fair market value at the date of grant. All stock options vest immediately and are exercisable over five-year terms. Additionally, each independent director of the Company receives options each year to purchase 2,500 shares of common stock at the fair market value as of the date of grant. Such grants automatically occur on each January 1. An initial grant of options for 2,500 shares of common stock was made to each independent director effective as of November 1, 1993. All options granted to the directors are exercisable, after a one-year holding period, for a period not to exceed five years from the date of grant. At December 31, 1996, there were 298,272 additional options available for grant under the Plan. The per share weighted-average fair value of stock options granted during 1996 and 1995 was $2.60 and $1.85 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: risk-free interest rate of 6.5% and an expected life of five years for both of the years and volatility factors of 16.29% and 15.02% for the years 1996 and 1995, respectively. The model was based on actual dividends paid, which, on an annualized basis were $1.10 and $1.08 per share for the years ended December 31, 1996 and 1995, respectively. 29 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (14), CONTINUED The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts below:
1996 1995 ---- ---- Net income As reported $ 5,465,824 $ 3,284,000 Pro forma 4,993,924 3,270,125
Pro forma net income reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost for options granted prior to January 1, 1995 is not considered. Stock option activity during the periods indicated is as follows:
Number of Weighted-Average Shares Exercise Price ------ -------------- Balance at December 31, 1993 400,000 $ 10.00 Granted 7,500 10.125 Exercised (--) (--) Forfeited (--) (--) Expired (--) (--) -------- ------- Balance at December 31, 1994 407,500 10.00 Granted(1) 586,300 10.46 Exercised(1) (392,500) (10.00) Forfeited (--) (--) Expired (--) (--) -------- ------- Balance at December 31, 1995 601,300 10.45 Granted(1) 367,800 11.56 Exercised(1) (191,300) (9.15) Forfeited (5,300) 11.39 Expired (--) (--) -------- ------- Balance at December 31, 1996 772,500 $ 10.72 ======== =======
(1) In 1996 and 1995, certain officers and employees exchanged existing options for new options with exercise prices equal to the fair market value of the common stock at that time. These options are reflected in the amounts exercised and granted in the table above. The difference between the exercise prices of the original and the new options, which amounted to $588,000 and $442,000 in 1996 and 1995, respectively, has been reflected in general and administrative expenses in the accompanying financial statements. At December 31, 1996, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $9.00 to $11.875 and 3.75 years, respectively. 30 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (14), CONTINUED At December 31, 1996, 1995 and 1994, the number of options exercisable was 775,300, 405,000, and 397,500, respectively, and the weighted-average exercise price of those options was $11.29, $11.09 and $10.00, respectively. (15) SUBSEQUENT EVENTS (UNAUDITED) On February 14, 1997, the Company paid a dividend of $.29 per share to stockholders of record on January 31, 1997. On February 20, 1997, the Company completed the acquisition of a 58,800 square foot industrial property (the "Tuscaloosa Property") in Tuscaloosa, Alabama for approximately $2.9 million. The Tuscaloosa Property is leased to Johnson Controls, Inc. for ten years. The annual net rent is $288,608 and escalates annually by three times the percentage change in the Consumer Price Index, not to exceed 4.5%. On March 19, 1997, the Company acquired three industrial properties (the "Exel Properties") for $27.0 million. The Exel Properties contain 761,200 square feet on 46.56 acres near Harrisburg, Pennsylvania and are subject to net-leases with Exel Logistics, Inc. ("Exel") which expire on November 30, 2006. The current annual net rent is $2,536,941 and will increase by 9.27% on December 1, 1997 and by 9.27% every three years thereafter. The obligations of Exel under the leases are unconditionally guaranteed by its parent company, NFC plc. In connection with the acquisition of the Exel Properties, LCIF sold $25 million of 8% Exchangeable Redeemable Secured Notes (the "Notes") to an institutional investor in a private placement. The Notes require interest only payments at 8% per annum, payable semi-annually in arrears, and have a seven year term. The Notes are secured by first mortgage liens on the Exel Properties, will be guaranteed by Lexington, and be exchanged for Lexington common stock at $13 per share beginning in the year 2000, subject to adjustment. The Notes may be redeemed after three years at a price of 103.2% of the principal amount, declining to par after five years. The Notes are subordinated to Lexington's revolving credit facility. In connection with the acquisition of the Exel Properties, an unaffiliated partnership (the "Exel Partnership") merged into LCIF. As a result of the merger, LCIF issued 480,000 partnership units exchangeable for Lexington common stock, which units are entitled to distributions at the same dividend rate as common stock. At the time of the merger, the Exel Partnership's sole assets were approximately $6.0 million of cash from the prior sale of a property and the right to acquire the Properties in a tax-free exchange under Internal Revenue Code Section 1031. 31 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (16) QUARTERLY FINANCIAL DATA (UNAUDITED)
Three months ended March 31 June 30, 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Revenues $6,799,356 5,862,519 7,682,441 6,187,949 Expenses 5,072,232 4,967,118 5,906,792 4,694,306 ---------- ---------- ---------- ---------- Income before minority interests, gain on sale of properties, lease termination proceeds and extraordinary item 1,727,124 895,401 1,775,649 1,493,643 Minority Interests 53,679 70,172 147,151 (53,982) ---------- ---------- ---------- ---------- Income before gain on sale of properties, lease termination proceeds and extraordinary item 1,673,445 825,229 1,628,498 1,547,625 Gain on sale of properties -- 1,514,400 -- -- Proceeds from lease termination -- 1,600,000 -- -- ---------- ---------- ---------- ---------- Income before extraordinary item 1,673,445 3,939,629 1,628,498 1,547,625 Extraordinary item - loss on extinguishment of debt -- -- -- 4,578,346 ---------- ---------- ---------- ---------- Net income (loss) $1,673,445 3,939,629 1,628,498 (3,030,721) ========== ========== ========== ========== Income before extraordinary item, per share $ 0.18 0.43 0.17 0.16 Extraordinary item - loss on extinguishment of debt, per share -- -- -- (0.49) ---------- ---------- ---------- ========== Net income (loss) per share $ 0.18 0.43 0.17 (0.33) ========== ========== ========== ==========
32 LEXINGTON CORPORATE PROPERTIES, INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements (16) QUARTERLY FINANCIAL DATA (UNAUDITED)
Three months ended September 30, December 31, 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Revenues $8,654,605 6,376,242 8,538,953 6,575,052 Expenses 6,840,267 4,979,411 7,700,178 5,249,350 ---------- ---------- ---------- ---------- Income before minority interests and extraordinary item 1,814,338 1,396,831 838,775 1,325,702 Minority interests 259,771 37,861 229,461 38,700 ---------- ---------- ---------- ---------- Income before extraordinary item 1,554,567 1,358,970 609,314 1,287,002 Extraordinary item - loss on extinguishment of debt -- -- -- 270,880 ---------- ---------- ---------- ---------- Net income $1,554,567 1,358,970 609,314 1,016,122 ========== ========== ========== ========== Income before extraordinary item, per share $ 0.17 0.15 0.06 0.14 Extraordinary item - loss on extinguishment of debt, per share -- -- -- (0.03) ---------- ---------- ---------- ---------- Net income per share $ 0.17 0.15 0.06 0.11 ========== ========== ========== ----------
33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LEXINGTON CORPORATE PROPERTIES, INC. By: /s/ E. Robert Roskind ____________________ E. Robert Roskind Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated. Signature Title _________ _____ /s/ E. Robert Roskind ______________________ E. Robert Roskind Chairman of the Board of Directors and Co-Chief Executive Officer /s/ Richard J. Rouse ______________________ Richard J. Rouse Vice Chairman and Co-Chief Executive Officer and Director /s/ T. Wilson Eglin ______________________ T. Wilson Eglin President and Chief Operating Officer and Director /s/ Antonia G. Trigiani ______________________ Antonia G. Trigiani Chief Financial Officer and Treasurer /s/ Paul R. Wood ______________________ Paul R. Wood Vice President, Chief Accounting Officer and Secretary /s/ Carl D. Glickman ______________________ Carl D. Glickman Director /s/ Kevin W. Lynch ______________________ Kevin W. Lynch Director /s/ John D. McGurk ______________________ John D. McGurk Director /s/ Harry E. Petersen, Jr. ______________________ Harry E. Petersen, Jr. Director /s/ Seth M. Zachary ______________________ Seth M. Zachary Director DATE: November 14, 1997 -----END PRIVACY-ENHANCED MESSAGE-----