Item 1. Business
General
CV Reit, Inc. (hereinafter, together with its subsidiaries, the "Company" or "Registrant") has operated as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code since January 1, 1982. The Company has invested in a portfolio of real estate interests consisting primarily of real estate mortgage notes.
A REIT must be a calendar year unincorporated trust, association or corporation with certain attributes including the following:
* At no time during the last half of its taxable year may more than 50% in value of its outstanding stock be owned directly or indirectly by or for five or fewer individuals. Certain rules regarding constructive ownership and attribution of stock apply for purposes of this test.
* Gross income tests must be met: a) at least 75% must be from specified types of real property related income, b) at least 95% must be from such real property related and other specified investment income, and c) less than 30% must be from short term capital gains from stocks, etc., "prohibited transactions" or gain from the sale or disposition of real property (other than by involuntary conversion or disposition of mortgage foreclosure property) held less than four years.
* At the close of each quarter of the tax year, at least 75% of the value of its total assets must be in real estate assets (including real estate mortgage loans), government securities, and cash and cash items. Not more than 25% of the value of its total assets may be invested in securities other than government securities and real estate assets. It may not invest more than 5% of the value of the total assets of the trust in the securities of any nongovernmental issuer (other than securities qualifying as real estate assets), and, with certain exceptions, may not own more than 10% of the out-standing voting securities of any nongovernmental issuer.
A Company which qualifies as a REIT may, if it distributes at least 95% of its ordinary taxable income for a taxable year, deduct dividends paid to stockholders with respect to such taxable year from taxable income. The Company intends to operate in such a manner that it will continue to qualify as a REIT. In any year in which it so qualifies, the Company itself will not be taxed under the Code on income distributed to its stockholders attributable to that year.
The primary objective of the Company is to provide income for distribution to its stockholders. The Company considers appropriate investments in real estate or interests in real estate and real estate mortgages, and securities or interests in persons engaged in real estate activities. The Company intends to maintain the percentages of its assets in various types of investments necessary to continue to qualify as a REIT. The Company may borrow money and issue additional debt securities, preferred stock, or other equity securities, including securities senior to its Common Stock, in connection with the acquisition of future investments, or to otherwise finance its operations.
Recent Development
On February 3, 1997, the Company announced that it was engaged in discussions with private parties with respect to several related transactions under which the Company would acquire controlling interests in a number of strip shopping centers. Under the proposed transactions, the Company would issue additional shares and would, together with others, transfer real estate interests to an operating partnership of which a principal of one of the other parties would be the chief executive officer. The Company has entered into an agreement with respect to the sharing of certain due diligence expenses relating to the proposed transactions, which are also subject to the negotiation of agreements, board and shareholder approvals, and other conditions. There is no assurance that the proposed transactions will be consummated.
Real Estate Mortgage Notes
At December 31, 1996, total assets of the Company were approximately $119 million, including $84.8 million in real estate mortgage notes, $5.5 million in real estate acquired by foreclosure (net of allowance for losses), $13.2 million of income producing real estate (primarily partnership interests in three self-storage warehouses, a shopping center, a motel and an office building) and $14 million in cash, cash equivalents and short-term investments. The Company's principal investments in real estate mortgage notes are described in detail herein and are summarized as follows (in thousands):
December 31, ------------------ 1996 1995 -------- -------- Long Term Recreation Notes (the "Recreation Notes") $67,302 $68,243 Hilcoast Development Corp. ("Hilcoast"): Lines of Credit 10,039 15,570 Other 6,308 8,039 Century Plaza Note (1) - 6,282 First mortgage notes, maturing through 1998, with interest ranging from 8.9% to 11.5%, collateralized primarily by real property in Palm Beach and Broward Counties, Florida 1,159 1,785 -------- -------- Totals (2) $84,808 $99,919 ======== ======== _________ (1) See Item 3. Legal Proceedings - Century Plaza regarding the acquisition of the Century Plaza Shopping Center in connection with certain litigation.
(2) As of December 31, 1996, none of the above real estate mortgage notes were delinquent.
Recreation Notes
At December 31, 1996, the Recreation Notes consisted of $25 million due from Hilcoast (the "Hilcoast Recreation Note" - see Relationship Between the Company and Hilcoast), collateralized by a first mortgage on certain real estate within the Century Village at Pembroke Pines, Florida adult condominium project ("Pembroke Century Village"), including the recreation facilities at that project (the "Pembroke Recreation Facilities"), and $42.3 million, collateralized by first mortgages on the recreation facilities at the three previously completed Century Village communities, including $11.2 million due from H. Irwin Levy (the "Levy Note"), a principal stockholder and former Chairman of the Board of the Company and a principal stockholder, Chairman of the Board and Chief Executive Officer of Hilcoast.
The Hilcoast Recreation Note bears interest at prime (8.25% at December 31, 1996) plus 3%, but in any event not less than 9% nor more than 11%, and currently requires monthly interest payments only. Upon the earlier to occur of delivery of the last condominium apartment at the Pembroke Century Village or July 31, 1998, the Hilcoast Recreation Note is scheduled to be converted to an 11%, fixed rate, 25 year, $25 million, self-amortizing loan providing for equal monthly payments of principal and interest in the aggregate amount of $2.9 million per annum. This note may not be prepaid by Hilcoast without a prepayment penalty and will be collateralized by a first mortgage on the Pembroke Recreation Facilities.
The remaining Recreation Notes generally arose from the Company's sale of the recreation facilities at the Century Village adult condominium communities in West Palm Beach and Deerfield Beach, Florida to unrelated parties in January 1982 and in Boca Raton, Florida to Mr. Levy in December 1981. The terms of Mr. Levy's acquisition of the recreation facilities, including the terms and security of the Levy Note, were substantially the same as the terms of the sales (negotiated independently) of the other two recreation facilities. These notes principally consist of 30 year non-recourse notes maturing in 2012, with interest rates averaging 13% (13.25% in the case of the Levy Note). Equal monthly self-amortizing installments of principal and interest in the aggregate amount of $6.5 million per annum are required, including $1.7 million from Mr. Levy. The Levy Note may not be prepaid; prepayments on the other Recreation Notes generally are not permitted until 2007. Since 1990, companies owned by Mr. Levy and certain members of his family have leased, managed and operated the recreation facilities at the Century Villages in West Palm Beach, Deerfield Beach and Boca Raton, which are collateral for these notes.
The Recreation Notes, excluding the Hilcoast Recreation Note, are pledged as collateral for Collateralized Mortgage Obligations ("CMO's") issued by the Company which, as of December 31, 1996, had an outstanding balance of $35.1 million (net of $809,000 unamortized discount based on an effective interest rate of 8.84%). See Management's Discussion and Analysis of Results of Operations and Financial Condition - Liquidity and Capital Resources for a description of the CMO's.
The Hilcoast Recreation Note is pledged as collateral for a $2.5 million promissory note to a bank, consisting of a $1 million line of credit through May 1, 1998 which as of December 31, 1996, had no outstanding balance, and a $1.5 million Letter of Credit issued by that bank for the benefit of Hilcoast.
Hilcoast
Lines of Credit
Lines of credit to Hilcoast (the "Lines of Credit" - see Relationship Between the Company and Hilcoast) consist of revolving construction loan commitments which as of December 31, 1996, aggregated $12.9 million of which $10 million was outstanding on that date. The Lines of Credit are collateralized by certain real estate within the Pembroke Century Village; bear interest, payable monthly, ranging from prime plus 3% (but in any event not less than 9% nor more than 11%) to 12.5%; mature gradually through July 1998; provide for unused commitment fees ranging from .9% to 1.8% per annum; and, require specific release prices, principally based on sales of condominium apartments at the Pembroke Century Village, to be applied as permanent reductions of amounts available under the Lines of Credit.
Other
Other real estate mortgage notes due from Hilcoast amounted to $6.3 million as of December 31, 1996 and included $5 million payable July 31, 1998, with interest, payable quarterly, at 10%, collateralized by the Pembroke Recreation Facilities. The remaining mortgage note due from Hilcoast matures in December 1997 and bears interest, payable monthly, at prime plus 3% (but in any event not less than 9% nor more than 11%).
Real Estate Acquired by Foreclosure
Real estate acquired by foreclosure, which consists of various properties acquired by foreclosure or deed in lieu thereof and held for resale, is summarized as follow (in thousands):
December 31, ----------------- 1996 1995 Commercial: ------- ------- Broward County, Florida: Nine acre site in Dania $ 5,000 $ 5,000 29 acre site in Miramar 2,595 2,595 ------- ------- Total commercial 7,595 7,595 Residential 257 381 ------- ------- 7,852 7,976 Less allowance for losses (2,401) (3,107) ------- ------- Totals $ 5,451 $ 4,869 ======= =======
Real Estate and Investments in Real Estate Partnerships
The Company's real estate equities are located in southeast Florida and are summarized as follows (in thousands):
December 31, ----------------- 1996 1995 ------- ------- Century Plaza Shopping Center $ 7,402 $ - Days Inn motel 4,058 4,054 Administration Building 962 959 Other 81 79 ------- ------- 12,503 5,092 Less accumulated depreciation (2,425) (2,202) ------- ------- 10,078 2,890 45%-50% investments in self-storage warehouse partnerships 3,165 3,218 ------- ------- Totals $13,243 $ 6,108 ======= =======
Century Plaza Shopping Center
On September 30, 1996, the Company purchased the Century Plaza Shopping Center (see Item 3. Legal Proceedings - Century Plaza for a detailed discussion), located near the main entrance to Century Village at Deerfield Beach, Florida. The center contains approximately 85,000 square feet and as of December 31, 1996, was 92% leased, including 38% leased to medical and medical-related tenants. The Broward County Library leases the greatest amount of space at the center, occupying approximately 6,200 square feet. The leases are generally for three, five or ten year terms on a triple net basis, with annual increases based on increases in the consumer price index.
Motel
The Company owns a 154-room Days Inn motel, located near the entrance to Century Village at West Palm Beach, Florida. The motel is leased to a corporation controlled by Alan Shulman, a director of the Company.
The lease, as amended, provides for annual rental through the expiration of the lease term on August 31, 1999, equal to a minimum of $330,000, plus 30% of gross room revenues in excess of $1.3 million. The lease also provides for the lessee to pay all operating costs of the motel, including real estate taxes and insurance, and to pay to the Company 50% of certain amounts received by the lessee from the concessionaire who operates the food and beverage facilities at the motel.
Administration Building
The Company owns a two-story office building containing approximately 25,000 square feet (the "Administration Building"), located within the Century Village at West Palm Beach community, a minor portion of which is occupied by the Company as its corporate headquarters. The Company leases approximately 15,000 square feet to an unrelated party for provision of physician and medically related services through May 9, 2000, with five additional five-year options, at a current annual base rent of $10.30 per square foot on a triple net basis plus annual increases of 3%-4%. The Company leases approximately 3,000 square feet on a month to month basis to a company owned by Mr. Levy and a member of his family at a monthly rental of approximately $2,500, plus an allocation of utility expenses.
Self-Storage Warehouses
The Company, through three wholly-owned subsidiaries, has 45%-50% general and limited partnership interests in three partnerships whose principal assets consist of self-storage warehouses, two in Dade County and one in Palm Beach County, Florida with an aggregate of approximately 3,000 units, managed by independent parties. The Company's partners in these partnerships are Felix Granados, Sr. and certain members of his family. The subsidiaries have no financial obligation with respect to such partnerships except under state law, as general partners. The subsidiaries receive monthly distributions from each of the partnerships based on cash flows.
Industry Factors
The results of operations of the Company depend upon the availability of suitable opportunities for investment and reinvestment of its funds and on the yields available from time to time on mortgage and other real estate investments, which in turn depend to a large extent on the type of investment involved, prevailing interest rates, the nature and geographical location of the property, competition and other factors, none of which can be predicted with certainty. The Company competes for acceptable investments with financial institutions, including banks, insurance companies, savings and loan associations, pension funds, and other real estate investment trusts which have investment objectives similar to those of the Company and some of which may have greater financial resources than the Company. The Company is not aware of statistics which would allow it to determine its position with respect to all of its competitors in the real estate investment industry.
Historically, the Company has invested in real estate and mortgages in real estate projects located primarily in the State of Florida. Although certain fundamental aspects of the Florida market, including economic development opportunities and an attractive climate and quality of life, have contributed to Florida's significant population and economic growth, the Florida economy, in general, and the Florida real estate market, specifically, are cyclical.
The Company's mortgage notes receivable are collateralized by land and improvements within residential projects, generally located in southeast Florida. The competitive environment for those projects and the Company's real estate acquired by foreclosure may affect the future income of the Company, and the Company may not be immune from the risks connected with these projects.
Potential competition to the Company's shopping center, motel and self-storage warehouse partnerships comes from similar facilities in the immediate surrounding area. Therefore, the operations of these properties could be adversely affected by the building of additional similar facilities in those areas.
Relationship Between the Company and Hilcoast
On July 31, 1992, Hilcoast, an affiliate of the Company on that date, acquired certain assets from a previous borrower of the Company, pursuant to approval by the Bankruptcy Court of the Southern District of Florida in connection with Chapter 11 proceedings filed by that borrower. The assets were acquired by Hilcoast subject to the borrower's indebtedness to the Company, consisting of a term loan in the amount of $41.7 million which as of December 31, 1996 had an outstanding balance of $25 million (see Real Estate Mortgage Notes - Recreation Notes) and certain lines of credit (see Real Estate Mortgage Notes - Hilcoast - Lines of Credit).
On July 31, 1992, H. Irwin Levy resigned as Chairman of the Board of the Company, Joseph D. Weingard resigned as a director, Michael S. Rubin resigned as Vice President-Real Estate Management and Jack Jaiven resigned as Vice President and Treasurer of the Company. Those individuals were elected to positions as directors and/or officers of Hilcoast.
Effective July 31, 1992, the Company and Hilcoast entered into a consulting and advisory agreement under which Hilcoast provides certain investment advisory, consulting and administrative services to the Company, excluding matters related to Hilcoast's loans from the Company. The agreement, which originally expired on July 31, 1994, has been extended to July 31, 1997 and provides for the payment of $10,000 per month to Hilcoast, plus reimbursement for reasonable out of pocket expenses. The agreement may be terminated by Hilcoast upon 180 days notice and by the Company upon 30 days notice. During 1996, the Company paid $120,000 to Hilcoast under this agreement, plus expense reimbursement.
Employees
On December 31, 1996, the Company employed 3 persons.
Item 2.
Item 2. Properties
See Item 1. Business - Real Estate and Investments in Real Estate Partnerships.
Item 3.
Item 3. Legal Proceedings
TGI Development, Inc. ("TGI")
On October 9, 1989, TGI filed a complaint in the Circuit Court of Palm Beach County against the Company, H. Irwin Levy and certain unrelated parties alleging misrepresentations by the defendants in connection with TGI's purchase and development of land from a previous borrower of the Company. The complaint, as subsequently amended, consisted of counts of common law fraud and breach of contract and sought compensatory damages of approximately $2 million in addition to punitive damages. On October 3, 1990, the Company filed a counterclaim against TGI in connection with an $800,000 promissory note from TGI to the Company. On February 9, 1994, the Circuit Court granted a Final Judgment in favor of the Company, which dismissed TGI's claim of common law fraud against the Company and struck its punitive damage claim. In accordance with an agreement between the parties, on August 23, 1994, the Court dismissed the breach of contract claim with prejudice and entered a judgment in the amount of $1.1 million in favor of the Company on the aforementioned counterclaim. The Company agreed not to execute that judgment until completion of TGI's appeal of the Final Judgment on its claim for compensatory damages. On January 3, 1996, the Fourth District Court of Appeals reversed the Final Judgment. The Company unsuccessfully appealed this reversal to the Florida Supreme Court and the case has been remanded for trial to the Circuit Court. Although the Company believes it has substantial defenses, the ultimate outcome of this litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon final adjudication has been made in the accompanying financial statements. In management's opinion, the final outcome of this litigation will not have a material adverse effect on the Company's financial condition.
Century Plaza
In December 1989, the Company sold its 85,000 square feet Century Plaza Shopping Center ("Century Plaza") in Deerfield Beach, Florida to Century Plaza Investments, Inc., an unrelated party, for $8 million, consisting of $1.6 million cash and a $6.4 million first mortgage note due on December 31, 1994 (the "Century Plaza Note"). On December 5, 1994, the buyer (the "Plaintiff") filed a Complaint, as amended, in the Circuit Court of Broward County, Florida, against the Company seeking a judicial declaration as to the Plaintiff's obligation to provide parking areas to members of a religious institution located adjacent to Century Plaza. The basis for the Complaint was that the Company failed to advise the Plaintiff that in 1978, a former officer of the Company had allegedly consented to a limited number of parking spaces to be allocated by the City of Deerfield Beach to the religious institution. The Plaintiff sought recision of the original sales agreement and the Century Plaza Note, restoration of amounts paid by the Plaintiff to the Company pursuant to the sales agreement, plus interest thereon, and reconveyance of Century Plaza to the Company.
The Century Plaza Note was not paid on its December 31, 1994 maturity date and the Company instituted foreclosure proceedings. During 1995 and through September 30, 1996, the Plaintiff remitted monthly interest payments to the Company. On September 30, 1996, a subsidiary of the Company acquired Century Plaza from the Plaintiff for $1.1 million cash in excess of the approximately $6.3 million outstanding balance of the Century Plaza Note, an amount which is not in excess of fair value. In connection with this acquisition, the Plaintiff and the Company filed voluntary dismissals of their respective claims with prejudice.
Other
The Company is subject to various claims and complaints relative to its business activities. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Security Holders Matters
The Common Stock of the Company is listed for trading on the New York Stock Exchange under the symbol CVI. The following table sets forth the high and low sales prices per share and the dividends per share declared by the Company on the Common Stock, for each quarter during the past two years.
Market Price Range ------------------- Dividends High Low Declared ---- --- ------------
First Quarter 11-7/8 10-5/8 $ .27 Second Quarter 11-1/2 10-3/8 .29 Third Quarter 12-1/8 11 .29 Fourth Quarter 13-3/4 11-7/8 .29 ----- $1.14 =====
First Quarter 9-1/2 8-7/8 $ .27 Second Quarter 9-7/8 8-7/8 .27 Third Quarter 9-3/4 8-7/8 .27 Fourth Quarter 11-1/4 9-3/8 .27 ----- $1.08 =====
As of January 31, 1997, the Company had 7,966,621 shares of Common Stock outstanding and 1,999 holders of record of such stock.
The Company expects to continue to qualify as a REIT. A corporation which qualifies as a REIT may deduct from taxable income dividends paid to stockholders.
Item 6.
Item 6. Selected Financial Data (in millions, except per share data)
Year Ended December 31, -------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------
Total revenues $13.2 $13.4 $13.9 $15.4 $15.1 ====== ====== ====== ====== ======
Income before income taxes $9.4 $8.4 $6.3 $11.3 $13.0 ====== ====== ====== ====== ======
Net income $9.6 $9.4 $6.3 $9.5 $9.9 ====== ====== ====== ====== ======
Net income per common share $1.20 $1.18 $0.79 $1.29 $1.38 ====== ====== ====== ====== ======
Dividends declared per share: Cash $1.14 $1.08 $1.08 $1.00 $0.45 Hilcoast Development Corp. Common Stock - - - - 0.19(1) ------ ------ ------ ------ ------ $1.14 $1.08 $1.08 $1.00 $0.64 ====== ====== ====== ====== ======
At Year End: Total assets $118.9 $120.0 $122.8 $163.2 $160.0 ====== ====== ====== ====== ======
Borrowings $35.1 $37.1 $38.9 $77.2 $83.5 ====== ====== ====== ====== ====== Stockholders' equity: Total $73.7 $73.2 $72.4 $74.7 $66.0 ====== ====== ====== ====== ======
Per common share $9.25 $9.19 $9.09 $9.38 $9.14 ====== ====== ====== ====== ======
________ (1) Based on 75 cents per share market price of Hilcoast Development Corp. ("Hilcoast") Common Stock on October 19, 1992. The distribution was based upon one share of Hilcoast Common Stock for each four shares of the Company's Common Stock owned.
Item 7.
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
Results of Operations
1996 Compared to 1995
Funds From Operations
The Company's Funds From Operations generally consists of net income, excluding reversal of previously recorded losses, gains or losses on the sales of GNMA certificates and real estate, and income tax benefit, plus depreciation of real property (including the Company's share of depreciation in connection with its equity in earnings of unconsolidated partnerships.)
For the year ended December 31, 1996, Funds From Operations was $8.9 million compared to $8.7 million for 1995.
The increase in Funds From Operations reflects reductions in general and administrative expenses, principally personnel costs, professional fees and insurance, partially offset by lower net interest income (interest income less interest expense) resulting from net principal payments received under the Hilcoast mortgage notes, which repayments were generally reinvested in lower yielding short-term investments (see Liquidity and Capital Resources).
As a result of the acquisition of the Century Plaza shopping center on September 30, 1996, the Company expects net rental income (rent income less related operating costs) to increase during 1997. This increase will be partially offset by the elimination of interest income on the Century Plaza Note (see Item 3. Legal Proceedings - Century Plaza).
Net Income
For the year ended December 31, 1996, net income was $9.6 million or $1.20 per share compared to $9.4 million or $1.18 per share for the same period in 1995.
The 1996 net income includes a $906,000 credit, primarily consisting of a reversal of previously recorded losses, and a $121,000 deferred income tax benefit. The 1995 net income includes a $1 million deferred income tax benefit.
1995 Compared to 1994
Funds From Operations
For the year ended December 31, 1995, Funds From Operations was $8.7 million compared to $8.4 million for 1994.
The increase in Funds From Operations reflects a reduction in general and administrative expenses and higher rental income received from the Days Inn motel and the Administration Building. In addition, although there was a $386,000 reduction in net interest income in 1995 resulting from the sale in April 1994 of the Company's leveraged GNMA certificate portfolio, this reduction was offset by an increase in interest income earned on the Company's variable rate mortgage notes receivable, primarily due to increases in the prime rate.
Net Income
For the year ended December 31, 1995, net income was $9.4 million or $1.18 per share compared to $6.3 million or $.79 per share for the same period in 1994.
The 1995 net income includes a $1 million deferred income tax benefit. The 1994 period includes a $2.4 million loss on the aforementioned sale of the Company's GNMA certificate portfolio and a $630,000 reversal of previously recorded losses.
Liquidity and Capital Resources
At December 31, 1996, total assets were $119 million, including $84.8 million in real estate mortgages notes. Approximately $67.3 million of the real estate mortgage notes are collateralized by recreation facilities under long-term leases with unit owners at approximately 29,000 apartments at Century Village adult condominium communities at Pembroke Pines, West Palm Beach, Deerfield Beach and Boca Raton, Florida, and generally provide for self-amortizing, equal monthly installment payments through 2028 (the "Recreation Notes" - see Note 2(b) to Consolidated Financial Statements). The operations of these facilities historically have been profitable and, in the Company's opinion, are not likely to be affected by adverse economic conditions.
The remaining $17.5 million of real estate mortgage notes are collateralized by real estate within residential projects, generally located in southeast Florida, including $16.3 million due from Hilcoast, principally collateralized by first mortgages on certain real estate at the Century Village at Pembroke Pines adult condominium community in Broward County, Florida (the "Pembroke Century Village" - see Note 2(c) to Consolidated Financial Statements). At December 31, 1996, 7,113 units had been sold and delivered at the planned 7,780 unit Pembroke Century Village and the backlog of units under contract for future delivery was 140 units with a sales value of $11.7 million.
Collections on the Company's real estate mortgage notes may be affected by the future success of the projects which collateralize these notes, which may, in turn, be affected by conditions in the housing market.
Operating funds are currently generated from interest income on mortgage notes and rentals from income producing properties. Dividend payments to stockholders, in accordance with the provisions of the Internal Revenue Code, limit the Company from utilizing significant amounts of income-generated funds for investment purposes.
Since its qualification as a REIT and until 1990, monies received from the repayment of existing mortgage notes and borrowings were generally reinvested in new and existing mortgage notes and other real estate related investments, including loans to developers for the purpose of acquiring, developing or constructing real estate. In the past several years, the Company's only new loan commitments have been in connection with its existing borrowers. The Company has generally reinvested its other available funds in high quality short-term corporate and government securities. The Company expects to pursue this strategy while it continues to evaluate alternative real estate investments. See Item 1. Business - Recent Development regarding discussions concerning possible acquisition of controlling interests in a number of shopping centers. During 1996, there were no new loan commitments.
At December 31, 1996, commitments on outstanding real estate loans consisted of $2.9 million under the Hilcoast Lines of Credit. The Company expects to be able to meet these commitments with operating cash flows and existing cash balances. There are currently no material commitments for capital expenditures.
During 1996 and 1995, the Company declared cash dividends of $1.14 and $1.08 per share, respectively, aggregating $9.1 million and $8.6 million, respectively, which approximates the Company's Funds From Operations.
At December 31, 1996, the outstanding balance of the Company's Collateralized Mortgage Obligations (the "CMO's") amounted to $35.1 million (net of unamortized discount of $809,000 based on an effective interest rate of 8.84%). The CMO's are collateralized by $42.3 million of the Recreation Notes and require self-amortizing principal and interest payments through March 2007. During the term of the CMO's, the Company's scheduled annual debt service requirement approximates $5.2 million compared to annual principal and interest payments scheduled to be received under the related mortgage notes receivable of $6.5 million.
Inflation
As of December 31, 1996, the Company had no variable interest rate borrowings; however, the Company's interest-sensitive mortgage notes receivable amounted to $34 million on which the interest rate is limited to the lower of 11% or prime + 3%. As of December 31, 1996, the interest rate on those notes had reached the 11% ceiling; accordingly, in the event of inflation, even if such inflation is accompanied by rising interest rates, the effect on the Company's results of operations is not expected to be material.
Forward Looking Information: Certain Cautionary Statements
Certain statements contained in "Management's Discussion and Analysis of Results of Operations and Financial Condition" and elsewhere in this Form 10-K, that are not related to historical results, are forward looking statements, such as collectibility of the Company's real estate mortgage notes, its anticipated liquidity and capital requirements and the results of legal proceedings. The matters referred to in forward looking statements are based on assumptions of future events which may not prove to be accurate and which could be affected by the risks and uncertainties involved in the Company's business; accordingly, actual results may differ materially from those projected and implied in the forward looking statements. These risks and uncertainties include, but are not limited to, the effect of conditions in the residential and commercial real estate market and the economy in general, the level and volatility of interest rates, Court decisions regarding the Company's litigation, the impact of current or pending legislation and regulation, as well as certain other risks described in the Form 10-K. Subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by cautionary statements in this paragraph and elsewhere described in this Form 10-K and in other reports filed by the Company with the Securities and Exchange Commission.
Item 8.
Item 8. Financial Statements and Supplementary Data
Table of Contents to Consolidated Financial Statements
Page ----
Report of Independent Certified Public Accountants 20
Consolidated Financial Statements:
Balance Sheets - December 31, 1996 and 1995 21
Statements of Income - Years Ended December 31, 1996, 1995 and 1994 22
Statements of Stockholders' Equity - Years Ended December 31, 1996, 1995 and 1994 23
Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 24
Notes to Consolidated Financial Statements 25-37
Consolidated Financial Statements Schedules:
Schedule IV - Mortgage Loans on Real Estate 38
Schedules, other than that listed above, are omitted because of the conditions under which they are required, or because the information required therein is set forth in the consolidated financial statements or the notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of CV Reit, Inc. West Palm Beach, Florida
We have audited the accompanying consolidated balance sheets of CV Reit, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. We have also audited the schedule listed in the accompanying index. These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the 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 and schedule 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 CV Reit, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein.
West Palm Beach, Florida BDO SEIDMAN, LLP February 3, 1997
CV REIT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands)
December 31, ------------------- ASSETS 1996 1995 ------ -------- -------- Real estate mortgage notes (Notes 2 and 8): Long Term Recreation Notes $ 67,302 $ 68,243 Other 17,506 31,676 -------- -------- 84,808 99,919 Real estate acquired by foreclosure (net of allowance for losses of $2,401 and $3,107 - Note 3) 5,451 4,869 Real estate and investments in real estate partnerships, net of accumulated depreciation (Note 4) 13,243 6,108 Cash and cash equivalents (includes $898 and $884 restricted) 7,564 7,633 Short-term investments 6,436 - Other 1,428 1,492 -------- -------- $118,930 $120,021 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities and other credits: Collateralized Mortgage Obligations (Note 5) $ 35,064 $ 37,074 Accounts payable, accruals and other liabilities 599 192 Dividends payable 2,552 2,407 Deferred income taxes (Note 9) 7,041 7,162 -------- -------- Total liabilities and other credits 45,256 46,835 -------- -------- Commitments and contingencies (Notes 2, 5, 6 and 11)
Stockholders' equity: Common stock, $.01 par-shares authorized 10,000,000; outstanding 7,966,621 80 80 Additional paid-in capital 18,490 18,490 Retained earnings 55,104 54,616 -------- -------- Total stockholders' equity 73,674 73,186 -------- -------- $118,930 $120,021 ======== ========
See accompanying notes to consolidated financial statements.
CV REIT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data)
Year Ended December 31, --------------------------------- 1996 1995 1994 Revenues: --------- --------- --------- Interest, substantially from mortgage notes, and dividends (Notes 2, 8 and 10) $ 11,695 $ 12,231 $ 12,796 Rent, income from real estate partnerships and other 1,547 1,194 1,091 --------- --------- --------- 13,242 13,425 13,887 --------- --------- --------- Expenses: Interest (Note 5) 3,232 3,434 4,156 Operating, general and administrative 1,244 1,496 1,615 Depreciation 223 138 161 --------- --------- --------- 4,699 5,068 5,932 --------- --------- --------- 8,543 8,357 7,955
Gain on sales of real estate - - 130 Loss on sales of GNMA certificates (Note 7) - - (2,392) Reversal of provision for losses, net 906 - 630 --------- --------- --------- Income before income tax benefit 9,449 8,357 6,323
Income tax benefit (Note 9) (121) (1,017) - --------- --------- --------- Net income $ 9,570 $ 9,374 $ 6,323 ========= ========= =========
Net income per common share $ 1.20 $ 1.18 $ .79 ========= ========= ========= Dividends declared per common share $ 1.14 $ 1.08 $ 1.08 ========= ========= ========= Average common shares outstanding 7,966,621 7,966,621 7,966,621 ========= ========= =========
See accompanying notes to consolidated financial statements.
CV REIT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands)
Additional Common Paid-in Retained Stock Capital Earnings ------ ---------- --------
Balance at December 31, 1993 $ 80 $ 18,490 $56,126
Net income for the year - - 6,323
Cash dividends declared - - (8,603) ------ --------- --------
Balance at December 31, 1994 80 18,490 53,846
Net income for the year - - 9,374
Cash dividends declared - - (8,604) ------ --------- --------
Balance at December 31, 1995 80 18,490 54,616
Net income for the year - - 9,570
Cash dividends declared - - (9,082) ------ --------- --------
Balance at December 31, 1996 $ 80 $18,490 $55,104 ====== ========= ========
See accompanying notes to consolidated financial statements.
CV REIT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, --------------------------- 1996 1995 1994 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,570 $ 9,374 $ 6,323 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation 223 138 161 Equity in depreciation of real estate partnerships 175 178 179 Gain on sales of real estate - - (130) Deferred income tax benefit (121) (1,017) - Reversal of provision for losses, net (906) - (630) Loss on sales of GNMA certificates - - 2,392 ------- ------- ------- 8,941 8,673 8,295 Changes in operating assets and liabilities: (Increase) decrease in other assets (36) 38 87 Increase (decrease) in accounts payable, accruals and other liabilities 207 (669) (40) ------- ------- ------- Net cash provided by operating activities 9,112 8,042 8,342 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in real estate mortgage notes (16,369) (23,068) (21,469) Collections on real estate mortgage notes 25,732 20,661 33,436 Purchase of real estate (1,154) - - (Purchase) maturity of short-term investments (6,436) 2,920 (2,920) Sale of GNMA certificates - - 32,412 Return of principal of GNMA certificates - - 977 Proceeds from sales of real estate and other (7) (471) 898 ------- ------- ------- Net cash provided by investing activities 1,766 42 43,334 ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings - 500 3,150 Repayments of borrowings (2,010) (2,334) (41,443) Cash dividends paid (8,937) (8,615) (8,435) Increase in restricted cash (14) (16) (46) ------- ------- ------- Net cash used in financing activities (10,961) (10,465) (46,774) ------- ------- ------- Net (decrease) increase in unrestricted cash and cash equivalents (83) (2,381) 4,902 Unrestricted cash and cash equivalents at beginning of the period 6,749 9,130 4,228 ------- ------- ------- Unrestricted cash and cash equivalents at end of the period $ 6,666 $ 6,749 $ 9,130 ======= ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 3,239 $ 3,436 $ 4,307 ======= ======= ======= Supplemental schedule of non-cash investing and financing activities: Mortgage notes received in exchange for investment security $ - $ 5,000 $ - ======= ======= ======= Reduction of mortgage notes receivable in connection with purchase of real estate (Note 6(b)) $ 6,248 $ - $ - ======= ======= =======
See accompanying notes to consolidated financial statements.
CV REIT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Business
CV Reit, Inc. is a real estate investment trust ("REIT") principally engaged in investing in real estate mortgage notes.
Principles of Consolidation
The consolidated financial statements include the accounts of CV Reit, Inc. and all subsidiaries ("the Company"). Certain subsidiaries own 45%-50% interests in partnerships, which are accounted for on the equity method. Significant intercompany accounts and transactions have been eliminated in consolidation.
Real Estate Mortgage Notes, Real Estate Acquired By Foreclosure, and Allowance For Losses
Mortgage notes are carried at the lower of cost or estimated net realizable value. Accrual of interest is discontinued on mortgage notes when management believes, after considering economic and business conditions and collection efforts, that timely collection is doubtful.
Real estate acquired by foreclosure, which consists of various properties acquired through foreclosure or deed in lieu thereof and held for resale, is carried at the lower of cost (fair value at date of acquisition) or fair value less selling costs. Carrying costs and subsequent declines in net realizable value are charged to operations as incurred.
The allowance for losses is established through a provision charged to operations based upon an evaluation by management of the loan portfolio and real estate acquired by foreclosure. In evaluating possible losses, management takes into consideration appropriate information which may include the borrower's cash flow projections, historical operating results and financial strength, pending sales, adverse conditions that may affect the borrower's ability to repay, appraisals and current economic conditions.
New Accounting Pronouncements
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires companies to evaluate long-lived assets for impairment based on the undiscounted future cash flows of the asset. If a long-lived asset is identified as impaired, the value of the asset must be reduced to its fair value. The Company's real estate, including its income producing properties, are considered long-lived assets under this pronouncement. Adoption of this standard did not have a material impact on the Company's financial position or results of operations.
Dividends and Income Taxes
The Company has elected to qualify as a REIT under the provisions of Section 856-860 of the Internal Revenue Code. As a REIT, the Company is required to distribute at least 95% of its ordinary taxable income to stockholders and may deduct such distributions from taxable income. A REIT is not required to distribute capital gain income but to the extent it does not, it must pay the applicable capital gain income tax unless it has ordinary losses to offset such capital gain income.
The federal income tax characteristics of dividends paid by the Company, reported to stockholders in January of the subsequent year, consisted of: 1996 1995 1994
Ordinary income 91.9% 65.6% 80.2% Capital gain distribution 8.1% 34.4% 19.8%
The Company accounts for income taxes based upon SFAS No.109 "Accounting for Income Taxes", which requires, among other things, a liability approach to calculating deferred income taxes.
Real Estate and Investments in Real Estate Partnerships ("Real Estate")
Real Estate, recorded at cost, consists primarily of a shopping center, a motel and an office building, subject to operating leases, and partnership interests in self-storage warehouses. In the event that the net carrying amount exceeds estimated net realizable value, a provision is made to reduce the net carrying amount accordingly. Depreciation is provided over the estimated useful lives of the assets on the straight-line method.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Net Income Per Common Share
Net income per common share is based on the weighted average number of common shares outstanding during each year.
Statements of Cash Flows
For financial statement purposes, the Company considers all highly liquid investments with initial maturities of three months or less to be cash equivalents.
Reclassification
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996 financial statement presentation.
(2) Real Estate Mortgage Notes
(a) Real estate mortgage notes, substantially all of which are collateralized by real estate located in southeast Florida, consist of (in thousands): December 31, ------------------ 1996 1995 Long Term Recreation Notes (the ------- ------- "Recreation Notes") (Note 2(b)) $67,302 $68,243 Hilcoast Development Corp. ("Hilcoast") (Note 2(c)): Lines of Credit 10,039 15,570 Other 6,308 8,039 First mortgage notes, maturing through 1998, with interest ranging from 8.9% to 11.5%, collateralized primarily by real property in Palm Beach and Broward Counties, Florida: Residential 1,159 1,785 Commercial - 6,282 ------- ------- Totals $84,808 $99,919 ======= =======
Interest Sensitivity -------------------- Fixed Variable Rate Rate ------- ------- Maturity of real estate mortgage notes at December 31, 1996: One year or less $ 1,677 $ 1,577 $ 100 After one year through five years 23,399 11,902 11,497 After five years 59,732 59,732 - ------- ------- ------- Totals $84,808 $73,211 $11,597 ======= ======= =======
(b) At December 31, 1996, the Recreation Notes consisted of $25 million due from Hilcoast (the "Hilcoast Recreation Note"), collateralized by a first mortgage on certain real estate within the Century Village at Pembroke Pines, Florida adult condominium project (the "Pembroke Century Village"), including the recreation facilities at that project (the "Pembroke Recreation Facilities") and $42.3 million, collateralized by first mortgages on the recreation facilities at the three previously completed Century Village communities (Note 8).
The Hilcoast Recreation Note bears interest at prime (8.25% at December 31, 1996) plus 3%, but in any event not less than 9% nor more than 11%, and currently requires monthly interest payments only. Upon the earlier to occur of delivery of the last condominium apartment at the Pembroke Century Village or July 31, 1998, the Hilcoast Recreation Note is scheduled to be converted to an 11%, fixed rate, 25 year, $25 million, self-amortizing loan providing for equal monthly payments of principal and interest. This note may not be prepaid by Hilcoast without a prepayment penalty and will be collateralized by a first mortgage on the Pembroke Recreation Facilities.
The remaining Recreation Notes principally provide for self-amortizing equal monthly principal and interest payments due through 2012, with interest rates averaging 13%, and contain certain prepayment prohibitions (Notes 5(a) and 8).
(c) Hilcoast
Lines of credit to Hilcoast consist of revolving construction loan commitments which as of December 31, 1996, aggregated $12.9 million of which $10 million was outstanding on that date. The Lines of Credit are collateralized by real estate within the Pembroke Century Village; bear interest, payable monthly, ranging from prime plus 3% (but in any event not less than 9% nor more than 11%) to 12.5%; mature gradually through July 1998; provide for unused commitment fees ranging from .9% to 1.8% per annum; and, require specific release prices, principally based on sales of condominium apartments at the Pembroke Century Village, to be applied as permanent reductions of amounts available under the Lines of Credit.
Other real estate mortgage notes due from Hilcoast amounted to $6.3 million as of December 31, 1996 and included $5 million payable July 31, 1998, with interest, payable quarterly, at 10%, collateralized by the Pembroke Recreation Facilities. The remaining mortgage note due from Hilcoast matures in December 1997 and bears interest, payable monthly, at prime plus 3% (but in any event not less than 9% nor more than 11%).
(3) Real Estate Acquired by Foreclosure
(a) Real estate acquired by foreclosure consists of (in thousands):
December 31, -------------------- 1996 1995 Commercial: ------- ------- Broward County, Florida: Nine acre site in Dania $5,000 $5,000 29 acre site in Miramar 2,595 2,595 ------ ------ Total commercial 7,595 7,595 Residential 257 381 ------ ------ 7,852 7,976 Less allowance for losses (2,401) (3,107) ------ ------ Totals $5,451 $4,869 ====== ======
(b) Changes in the allowance for losses follow (in thousands):
1996 1995 1994 ------ ------ ------ Balance, beginning of year $3,107 $3,531 $5,119 Reversal of allowance for losses (1,163) - (630) Charge-offs (43) (424) (1,158) Recoveries 500 - 200 ------ ------ ------ Balance, end of year $2,401 $3,107 $3,531 ====== ====== ======
(4) Real Estate and Investments in Real Estate Partnerships
Real estate and investments in real estate partnerships are located in southeast Florida and consist of (in thousands):
December 31, ------------------- 1996 1995 ------- ------ Century Plaza shopping center (Note 6(b)) $ 7,402 $ - Days Inn motel 4,058 4,054 Administration Building 962 959 Other 81 79 ------- ------ 12,503 5,092 Less accumulated depreciation (2,425) (2,202) ------- ------ 10,078 2,890 45%-50% investments in self- storage warehouse partnership 3,165 3,218 ------- ------ Totals $13,243 $6,108 ======= ======
(5) Borrowings
(a) The Collateralized Mortgage Obligations ("CMO's") amounted to $35.1 million at December 31, 1996 and $37.1 million at December 31, 1995 (net of unamortized discounts of $809,000 in 1996 and $950,000 in 1995, based on an effective interest rate of 8.84%), are collateralized by the Recreation Notes, excluding the Hilcoast Recreation Note (Note 2(b)), require quarterly self-amortizing principal and interest payments and mature on March 15, 2007.
(b) Maturities of borrowings are as follows (in thousands):
1997 2,200 1998 2,408 1999 2,633 2000 2,877 2001 3,141 Thereafter 21,805 ------- $35,064 =======
(6) Commitments and Contingencies
(a) TGI Development, Inc. ("TGI")
On October 9, 1989, TGI filed a complaint in the Circuit Court of Palm Beach County against the Company, H. Irwin Levy and certain unrelated parties alleging misrepresentations by the defendants in connection with TGI's purchase and development of land from a previous borrower of the Company. The complaint, as subsequently amended, consisted of counts of common law fraud and breach of contract and sought compensatory damages of approximately $2 million in addition to punitive damages. On October 3, 1990, the Company filed a counterclaim against TGI in connection with an $800,000 promissory note from TGI to the Company. On February 9, 1994, the Circuit Court granted a Final Judgment in favor of the Company, which dismissed TGI's claim of common law fraud against the Company and struck its punitive damage claim. In accordance with an agreement between the parties, on August 23, 1994, the Court dismissed the breach of contract claim with prejudice and entered a judgment in the amount of $1.1 million in favor of the Company on the aforementioned counterclaim. The Company agreed not to execute that judgment until completion of TGI's appeal of the Final Judgment on its claim for compensatory damages. On January 3, 1996, the Fourth District Court of Appeals reversed the Final Judgment. The Company unsuccessfully appealed this reversal to the Florida Supreme Court and the case has been remanded for trial to the Circuit Court. Although the Company believes it has substantial defenses, the ultimate outcome of this litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon final adjudication has been made in the accompanying financial statements. In management's opinion, the final outcome of this litigation will not have a material adverse effect on the Company's financial condition.
(b) Century Plaza
In December 1989, the Company sold its 85,000 square feet Century Plaza Shopping Center ("Century Plaza") in Deerfield Beach, Florida to Century Plaza Investments, Inc., an unrelated party, for $8 million, consisting of $1.6 million cash and a $6.4 million first mortgage note due on December 31, 1994 (the "Century Plaza Note"). On December 5, 1994, the buyer (the "Plaintiff") filed a Complaint, as amended, in the Circuit Court of Broward County, Florida, against the Company seeking a judicial declaration as to the Plaintiff's obligation to provide parking areas to members of a religious institution located adjacent to Century Plaza. The basis for the Complaint was that the Company failed to advise the Plaintiff that in 1978, a former officer of the Company had allegedly consented to a limited number of parking spaces to be allocated by the City of Deerfield Beach to the religious institution. The Plaintiff sought recision of the original sales agreement and the Century Plaza Note, restoration of amounts paid by the Plaintiff to the Company pursuant to the sales agreement, plus interest thereon, and reconveyance of Century Plaza to the Company.
The Century Plaza Note was not paid on its December 31, 1994 maturity date and the Company instituted foreclosure proceedings. During 1995 and through September 30, 1996 the Plaintiff remitted monthly interest payments to the Company. On September 30, 1996, a subsidiary of the Company acquired Century Plaza from the Plaintiff for $1.1 million cash in excess of the approximately $6.3 million outstanding balance of the Century Plaza Note, an amount which is not in excess of fair value. In connection with this acquisition, the Plaintiff and the Company filed voluntary dismissals of their respective claims with prejudice.
(c) Other
The Company is subject to various claims and complaints relative to its business activities. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position.
(7) Loss on Sale of GNMA Certificates
During 1994, the Company sold GNMA certificates with an aggregate book value of $34.8 million and recognized a loss of $2.4 million.
(8) Related Party Transactions
Hilcoast
On July 31, 1992, Hilcoast, an affiliate of the Company on that date, acquired certain assets from a previous borrower of the Company, pursuant to approval by the Bankruptcy Court of the Southern District of Florida in connection with Chapter 11 proceedings filed by that borrower. The assets were acquired by Hilcoast subject to the borrower's indebtedness to the Company, consisting of a term loan in the amount of $41.7 million which as of December 31, 1996 had an outstanding balance of $25 million (Note 2(b)) and certain lines of credit (Note 2(c))
On July 31, 1992, H. Irwin Levy resigned as Chairman of the Board of the Company, Joseph D. Weingard resigned as a director, Michael S. Rubin resigned as Vice President-Real Estate Management and Jack Jaiven resigned as Vice President and Treasurer of the Company. Those individuals were elected to positions as directors and/or officers of Hilcoast.
Effective July 31, 1992, the Company and Hilcoast entered into a consulting and advisory agreement under which Hilcoast provides certain investment advisory, consulting and administrative services to the Company, excluding matters related to Hilcoast's loans from the Company. The agreement, which originally expired on July 31, 1994, has been extended to July 31, 1997, and provides for the payment of $10,000 per month to Hilcoast, plus reimbursement for reasonable out of pocket expenses. The agreement may be terminated by Hilcoast upon 180 days notice and by the Company upon 30 days notice. During the three years ended December 31, 1996, the Company paid $120,000 per year to Hilcoast under this agreement, plus expense reimbursement.
Recreation Notes
Mr. Levy owns the recreation facilities at the Century Village in Boca Raton, acquired from the Company in 1981, which is collateral for one of the Company's Recreation Notes (Note 2(b)), issued in connection with the acquisition, in the original principal amount of $12.6 million. The note bears interest at 13.25%, requires self-amortizing equal monthly payments of principal and interest in the aggregate amount of $1.7 million per annum through 2011 and may not be prepaid. At December 31, 1996, the outstanding balance on the note was $11.2 million. During 1996, 1995 and 1994, the Company recognized interest income of $1.5 million, $1.5 million, $1.6 million, respectively, on this note.
Since 1990, companies owned by Mr. Levy and certain members of his family lease, manage and operate the recreation facilities at the Century Villages in West Palm Beach, Deerfield Beach and Boca Raton, which are collateral for $42.3 million of the Company's Recreation Notes (Note 2(b)).
Days Inn
The Company owns a 154-room Days Inn motel, located near the entrance to Century Village at West Palm Beach, Florida. The motel is leased to a corporation controlled by Alan Shulman, a director of the Company.
The lease, as amended, provides for annual rental through the expiration of the lease term on August 31, 1999, equal to a minimum of $330,000, plus 30% of gross room revenues in excess of $1.3 million. The lease also provides for the lessee to pay all operating costs of the motel, including real estate taxes and insurance, and to pay to the Company 50% of certain amounts received by the lessee from the concessionaire who operates the food and beverage facilities at the motel. In 1996, 1995 and 1994, the Company recognized rent income of $454,000, $472,000 and $343,000, respectively, under the lease.
Administration Building
The Company leases approximately 3,000 square feet of its Administration Building, located within the Century Village at West Palm Beach community, on a month to month basis to a company owned by Mr. Levy and a member of his family at a monthly rental of approximately $2,500, plus an allocation of utility expenses.
(9) Deferred Income Tax Benefit
(a) Deferred income tax benefit differs from the amount computed by applying the statutory federal income tax rate to income before income taxes for the following reasons (in thousands): 1996 1995 1994 ------ ------ ------ Tax expense computed at statutory rate $3,213 $2,841 $2,150 State income tax benefit, net of federal effect (6) (86) (32) Dividends paid deduction (3,266) (3,644) (2,453) Other (62) (128) 335 ------ ------ ------ Totals ($ 121) ($1,017) $ - ====== ====== ====== (b) The components of the net deferred tax liability are as follows (in thousands): December 31, ----------------- 1996 1995 ------- ------- Deferred tax liabilities: Gains on the sales of recreation facilities reported on the install- ment method for tax purposes $13,833 $14,106 Other 235 235 ------- ------- Total deferred tax liabilities 14,068 14,341 ------- ------- Deferred tax assets: Differences in reporting the provision for losses 903 1,169 Net operating loss carryforwards for tax purposes 5,899 5,899 Other 225 111 ------- ------- Total deferred tax assets 7,027 7,179 ------- ------- Net deferred tax liability $ 7,041 $ 7,162 ======= =======
(c) As of December 31, 1996, the Company has aggregate net operating loss carryforwards for tax purposes of approximately $15.7 million, expiring $7.1 million in 2007 and $8.6 million in 2006.
(10) Major Customers
During 1996, interest income from four borrowers provided 38% (Hilcoast), 17%, 14% and 11% (H. Irwin Levy), respectively, of total revenues. During 1995, interest income from four borrowers provided 38% (Hilcoast), 17%, 14% and 12% (H. Irwin Levy), respectively, of total revenues. During 1994, interest income from four borrowers provided 32% (Hilcoast), 16%, 14% and 11% (H. Irwin Levy), respectively, of total revenues. See Note 2 regarding concentration of credit risk.
(11) Financial Instruments with Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers, including commitments to extend credit and standby letters of credit to guarantee the contractual performance of certain borrowers to third parties. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement and the exposure to credit loss the Company has in particular classes of financial instruments. The Company uses the same credit policies and has the same credit risk in making commitments and conditional obligations as it does for on-balance-sheet instruments.
At December 31, 1996, financial instruments whose contract amounts represent credit risk consisted of $2.9 million of commitments to extend credit and $575,000 of standby letters of credit. Commitments to extend credit are agreements to lend to a borrower as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
(12) Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows:
December 31, ------------------------------------- 1996 1995 ------------------ ------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Real estate mortgage notes $84,808 $104,189 $99,919 $125,063 Cash and cash equivalents 7,564 7,564 7,633 7,633 Short-term investments 6,436 6,436 - - CMO's (35,064) (35,894) (37,074) (39,445)
Real estate mortgage notes - Except for the Recreation Notes (Note 2(b)), the Company's real estate mortgage notes principally consist of variable rate loans or loans which mature within two years, and have carrying amounts that approximate fair value. The fair value of the fixed rate, Long Term Recreation Notes is estimated by discounting the future cash flows using the current rates at which similar loans would be made with similar credit ratings and for the same remaining maturities.
Short-term investments - Fair value approximates carrying amounts due to their short-term maturity.
CMO's - Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of the Company's long-term, fixed rate CMO's.
(13) Subsequent Event
On February 3, 1997, the Company announced that it was engaged in discussions with private parties with respect to several related transactions under which the Company would acquire controlling interests in a number of strip shopping centers. Under the proposed transactions, the Company would issue additional shares and would, together with others, transfer real estate interests to an operating partnership of which a principal of one of the other parties would be the chief executive officer. The Company has entered into an agreement with respect to the sharing of certain due diligence expenses relating to the proposed transactions, which are also subject to the negotiation of agreements, board and shareholder approvals, and other conditions. There is no assurance that the proposed transactions will be consummated.
(14) Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data follows (in thousands, except per share data):
Quarter Ended ----------------------------------------- Mar. 31, Jun. 30, Sept.30, Dec. 31,
Revenues $3,290 $3,311 $3,274 $3,367 Net income 2,362 2,140 2,189 2,879 Per common share .30 .27 .27 .36
Revenues $3,321 $3,318 $3,338 $3,448 Net income 2,037 2,037 2,136 3,164 Per common share .26 .26 .27 .40
Item 9.
Item 9. Disagreement on Accounting and Financial Disclosure
None
PART III
Information in response to Items 10, 11, 12 and 13 is not included in this Report, since the Registrant anticipates filing a definitive proxy statement for its next annual meeting of stockholders prior to May 1, 1997. Such definitive proxy statement is incorporated by reference herein.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) List of Consolidated Financial Statements:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) List of Consolidated Financial Statements Schedules:
Schedule IV - Mortgage Loans on Real Estate
(3) List of Exhibits:
(3)(i) Amended Certificate of Incorporation of CV Reit, Inc., filed with Secretary of State of Delaware on June 17, 1991. (Incorporated by reference to Exhibit (3)(i) to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1991.)
(3)(ii) By-laws of CV Reit, Inc. (Incorporated by reference to Exhibit (3)(ii) to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1990.)
(10)(i) Agreement between Cenvill Investors, Inc. and H. Irwin Levy, dated December 31, 1981. (Incorporated by reference to Exhibit (2)(i) to the current report on Form 8-K filed by the Company to report event of December 31, 1981.)
(10)(ii) Agreement of Lease between Cenvill Investors, Inc. and B.R.F., Inc., dated December 30, 1981. (Incorporated by reference to Exhibit (2) (ii) to the current report on Form 8-K filed by the Company to report event of December 31, 1981.)
(10)(iii) Agreement dated January 15, 1982, between Century Village, Inc. and Benenson Capital Company. (Incorporated by reference to Exhibit (2)(i) to the current report on Form 8-K filed by Cenvill Investors, Inc. (File No. 0-03427) to report event of January 15, 1982.)
(10)(iv) Agreement dated January 15, 1982, between Century Village East, Inc. and CVRF Deerfield Limited. (Incorporated by reference to exhibit (2) (ii) to the current report on Form 8-K filed by Cenvill Investors, Inc. (File No. 0-03427) to report event of January 15, 1982.)
(10)(v) Lease dated as of November 8, 1988 between Cenvill Investors, Inc. and Century Inn Operating Corp. (Incorporated by reference to Exhibit (10) (xiii) to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1988.)
(10)(vi) Indenture for Collateralized Mortgage Obligations, dated as of December 30, 1991 between Recreation Mortgages, Inc. (Issuer) and Bankers Trust Company (Trustee). (Incorporated by reference to Exhibit (10)(xvi) to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1991.)
(10)(vii) Restated Loan Agreement, dated July 31, 1992, between CV Reit, Inc. and Cenvill Development Corp. and certain subsidiaries and affiliates thereof. (Incorporated by reference to Exhibit (10)(xi) to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1992.)
(10)(viii) Proposal for the Acquisition of Certain Assets, dated June 19, 1992, by and among CV Reit, Inc., Cenvill Development Corp. and certain subsidiaries and affiliates thereof. (Incorporated by reference to Exhibit (10)(xiv) to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1992.)
(10)(ix) Order granting Motion of Debtor's [sic] for Approval of Sale of Assets dated July 17, 1992. (Incorporated by reference to Exhibit (10)(xv) to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1992.)
(10)(x) Stock Purchase Agreement, dated as of August 5, 1992, between CV Reit, Inc. and Hilcoast Development Corp. (Incorporated by reference to Exhibit (10)(xvii) to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1992.)
(10)(xi) Consulting and Advisory Agreement, dated July 31, 1992, between CV Reit, Inc. and Hilcoast Development Corp. (Incorporated by reference to Exhibit (10)(xviii) to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1992.)
(10)(xii) Loan Agreement, Security Agreement and Collateral Assignment of Loans, Notes, Mortgages and Security Documents with Ohio Savings Bank dated October 26, 1993. (Incorporated by reference to Exhibit 10(a) to the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1993.)
(10)(xiii) $3.0 million Promissory Note and Side Letter, dated September 30, 1993, between CV Reit, Inc. and NewCen Communities, Inc. (Incorporated by reference to Exhibit (10)(xxi) to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1993.)
(10)(xiv) First Amendment to Loan Agreement, Security Agreement and Collateral Assignment of Loans, Notes, Mortgages and Security Documents with Ohio Savings Bank dated February 25, 1994. (Incorporated by reference to Exhibit 10(a) to the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 1994.)
(10)(xv) $2.5 million Future Advance Promissory Note, dated September 15, 1994 from NewCen Communities, Inc. (a subsidiary of Hilcoast Development Corp.) to CV Reit, Inc., Notice and Agreement of Future Advance and Side Letters between CV Reit, Inc. and NewCen Communities, Inc. (Incorporated by reference to Exhibit 10(a) to the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1994.)
(10)(xvi) Letter, dated February 5, 1995, from Hilcoast Development Corp. to CV Reit, Inc. in connection with $3.0 million Promissory Note. (Incorporated by reference to Exhibit 10(xxiii) to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1994.)
(10)(xvii) Letter, dated February 6, 1995, from CV Reit, Inc. to NewCen Communities, Inc. in connection with $3.0 million Promissory Note (Incorporated by reference to Exhibit 10(xxiv) to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1994.)
(10)(xviii) Letter, dated February 5, 1995, from Hilcoast Development Corp. to CV Reit, Inc. in connection with $2.5 million Future Advance Promissory Note. (Incorporated by reference to Exhibit 10(xxv) to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1994.)
(10)(xix) Letter, dated February 6, 1995, from CV Reit, Inc. to NewCen Communities, Inc. in connection with $2.5 million Future Advance Promissory Note. (Incorporated by reference to Exhibit 10(xxvi) to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1994.)
(10)(xx) Agreement dated February 17, 1995, between CV Reit, Inc., NewCen Communities, Inc. and Hilcoast Development Corp. (Incorporated by reference to Exhibit 10(i) to the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 1995.)
(10)(xxi) $5.0 million Promissory Note, dated March 31, 1995, from C.V.P. Community Center, Inc. to Hilcoast Development Corp. (Incorporated by reference to Exhibit 10(ii) to the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31 1995.)
(10)(xxii) Allonge dated March 31, 1995, which assigns the $5.0 million Promissory Note, dated March 31, 1995, from Hilcoast Development Corp. to CV Reit, Inc. (Incorporated by reference to Exhibit 10(iii) to the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 1995.)
(10)(xxiii) Letter, dated August 11, 1995, from Hilcoast Development Corp. to CV Reit, Inc. in connection with $3.0 million Promissory Note. (Incorporated by reference to Exhibit 10(ii) to the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1995.)
(10)(xxiv) Letter, dated August 11, 1995, from CV Reit, Inc. to Hilcoast Development Corp. in connection with $3.0 million Promissory Note. (Incorporated by reference to Exhibit 10(iii) to the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1995.)
(10)(xxv) Letter, dated August 11, 1995, from Hilcoast Development Corp. to CV Reit, Inc. in connection with $2.5 million Promissory Note. (Incorporated by reference to Exhibit 10(iv) to the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1995.)
(10)(xxvi) Letter, dated August 11, 1995, from CV Reit, Inc. to Hilcoast Development Corp. in connection with $2.5 million Promissory Note. (Incorporated by reference to Exhibit 10(v) to the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1995.)
(10)(xxvii) Letter Agreements, dated July 11, 1994 and August 3, 1995, between CV Reit, Inc. and Hilcoast Advisory Services, Inc. extending the Consulting and Advisory Agreement to July 31, 1995 and July 31, 1996, respectively. (Incorporated by reference to Exhibit 10(vi) to the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1995.)
(10)(xxviii) Letter Agreement, dated July 12, 1996, between CV Reit, Inc. and Hilcoast Advisory Services, Inc. extending the Consulting and Advisory Agreement to July 31, 1997. (Incorporated by reference to Exhibit 10(i) to the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 1996.)
(10)(xxix) Second Amendment to Loan Agreement, Security Agreement and Collateral Assignment of Loans, Notes, Mortgages and Security Documents with Ohio Savings Bank dated October 31, 1996.
(11) Statement regarding computation of per share earnings. Omitted; computation can be clearly determined from material contained in the report.
(21) Subsidiaries of the Company.
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CV REIT, INC.
/s/ Elaine Kahant By:__________________________________ Dated: February 27, 1997 Elaine Kahant, Vice President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Alvin Wilensky February 27, 1997 _________________________________ Alvin Wilensky, Chairman of the Board of Directors
/s/ Stanley Brenner February 27, 1997 _________________________________ Stanley Brenner, President and Director
/s/ Elaine Kahant February 27, 1997 _________________________________ Elaine Kahant, Vice President, and Treasurer (Principal Financial Officer and Principal Accounting Officer)
/s/ Mac Gache February 27, 1997 _________________________________ Mac Gache, Director
/s/ Allyn Levy February 27, 1997 _________________________________ Allyn Levy, Director
/s/ Alan L. Shulman February 27, 1997 ________________________________ Alan L. Shulman, Director