Item 1. Business --------
Registrant has two principal activities, Residential Land Development and Construction and Rental Property Ownership and Management, primarily in Maryland, Virginia and the District of Columbia.
Residential Land Development and Construction - ---------------------------------------------
Registrant owns several partially developed residential tracts of land within the greater Washington, D.C. area. On these tracts, it develops residential lots for sale and to construct and develop single family homes and townhouses as part of residential subdivisions. Registrant may decide to sell certain of its land if it determines that it is in the best interest of Registrant to do so.
Registrant also has general and limited partnership interests in entities which are operating properties located in the Northern Virginia suburbs of Washington, DC and Orlando, Florida.
While the following information represents Registrant's current intentions, the number of units, commencement dates, and other specific details of a project may vary, depending on Registrant's ability to secure adequate financing on acceptable terms, labor conditions, approval of land use plans, and other regulatory requirements, general economic conditions, demand for housing and other factors.
Registrant designs and constructs its homes in accordance with its periodic evaluation of the prevailing market for new homes. Its current plan is to continue to build homes that appeal to the entry level homeowner, which will give the purchaser the maximum amount of space for the purchase price. Registrant generally avoids custom features and offers a limited number of home models. It also generally does not build homes in advance of sales contracts other than models and certain units for immediate sales.
A. Registrant's Homebuilding Projects ----------------------------------
1. Skyline Hill's, Prince George's County, Maryland. ------------------------------------------------ Clearing, grading, sewers and construction of model homes have been completed for this 179 single family homes and 43 townhomes project. During 1996 three single family homes and 16 townhomes were sold and settled. As of February 28, 1997, one single family home and three townhomes were under contract of sale.
2. Terraco Acres, Prince George's County, Maryland. ----------------------------------------------- This 134 single family home development has been completed. The last three homes were sold in 1996.
3. St. Mary's County, Maryland. This project originally consisted of --------------------------- 64 subdivided lots, which range in size from .87 acres to 6.36 acres and 31 farmsteads, of 15 to 30 acres each, totalling 949 acres. As of February 28, 1997, 11 farmsteads totalling 254 acres remain to be sold.
4. Oak Hill Towns, Prince George's County, Maryland. ------------------------------------------------ The final development plan for 83 townhouses on this 11.1 acre tract has been approved and recorded. Clearing, grading and installation of sewers and construction of model homes have been completed. During 1996, 18 townhomes were sold and settled. As of February 28, 1997, six homes are under contract of sale.
5. Yorkshire Knolls, Prince George's County, Maryland. The final -------------------------------------------------- development plan for 252 townhouses on this 31.5 acre tract has been approved and recorded. Clearing and grading has been completed and four model homes have been completed. During 1996, 22 homes were sold and settled. As of February 28, 1997, 11 homes are under contract of sale.
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In the sale of homes by Registrant and entities controlled by it, Registrant has utilized furnished model homes at each site. Sales are made by independent real estate brokers to whom a commission is paid. In its production of homes for sale, Registrant competes with numerous builders, which range
from well-financed and managed regional and national firms to small speculative builders.
When Registrant enters into an agreement of sale for a home, it generally receives a deposit of $500 to $2,000 as is customary in its area of business. These deposits may be refundable under certain circumstances, including Registrant's inability to complete construction within specified time periods, or the purchaser's inability to secure financing. Registrant generally receives the balance of the purchase price in cash upon the closing of the sale, but has in the past occasionally taken a note secured by a junior mortgage for a portion of the purchase price.
Although it is the responsibility of the home purchaser to obtain financing for his purchase, Registrant seeks to obtain mortgage commitments from lending institutions for its customers (subject to verification of individual customer credit status) for purchases of homes in its developments. Registrant may also be required to pay the lender a discount or points at the closing of each loan, which in the case of loans insured by the Federal Housing Administration, or the Veterans Administration, cannot be charged to customers.
There can be no assurances that Registrant will in the future be able to secure acceptable permanent mortgage commitments, and the absence of such commitments could adversely affect its sale of homes.
Because of its seasonal nature, home sales generally decline in the first quarter of Registrant's fiscal year.
B. Joint Ventures with Sequoia Building Corporation of Virginia ------------------------------------------------------------ ("Sequoia") at Manassas, Virginia. - ---------------------------------
Starting in 1984, Registrant entered into a series of joint ventures and partnerships with Sequoia in Manassas, Prince William County, Virginia. In 1984, Registrant and Sequoia organized a limited partnership known as Paradise Developers ("Paradise") to develop a 418 acre tract of land in Manassas, Virginia (the "Tract"). The Tract yielded approximately 243
acres of residential land and 100 acres of commercial land after streets, recreation facilities, parks and schools.
Registrant's subsidiary is the sole general partner and managing general partner, owning a 50% partnership interest. Sequoia is a limited partner owning a 50% partnership interest.
Registrant originally owned the Tract and Paradise purchased the Tract in two stages from Registrant in December, 1985 and September, 1986. The consideration for this purchase was a subordinated non-recourse mortgage and note ("purchase money mortgage") in the original principal amount of $11,525,616. As of December 31, 1996, the balance due Registrant on the purchase money mortgage was $1,898,808. In addition, Registrant was due $1,188,895 in unpaid interest, which will be recognized in income when received.
All of the residential land and 51 acres of the commercial land was sold prior to 1993. Paradise developed 18 acres of land into three commercial projects; the 7800 Building, a bank building and Paradise Sudley North Office Park. 31 acres of commercial land remain to be sold or developed.
1. 7800 Building. Paradise constructed a 15,460 square foot office ------------- building known as the 7800 Building on 1.52 acres of the Tract.
Paradise deeded the property to Registrant's subsidiary in December, 1991. The building is 89% leased.
2. Bank Building. This building of 3,478 rentable square feet on ------------- two-thirds of an acre is fully occupied by a branch of Nations Bank.
3. Paradise Sudley North Office Buildings. In March, 1987, -------------------------------------- Registrant, through a subsidiary, and various officers and employees of Sequoia, formed Paradise Sudley North Limited Partnership ("Sudley") to develop a 16.35 acre parcel of the Tract. In December, 1991, these officers assigned their interests in Sudley to Registrant in return for a release from bank debt and guarantees. Registrant's subsidiary is the sole general partner of the Partnership, owning a 55% partnership
interest, and Registrant also owns a 43.75% limited partnership interest. A former employee of Sequoia owns the remaining 1.25% interest.
Sudley has developed on this site four office buildings, which contain approximately 187,000 square feet of space, known as Buildings A, B, C and D.
Building A, 22,608 square feet, is 63% leased. Registrant has entered into two leases for 4,369 square feet which will increase occupancy to 83% by April, 1997.
Building B, 62,420 square feet, is 47% leased.
Building C, 33,120 square feet, is 62% leased.
Building D, 69,374 square feet, is 100% leased. In January, 1988, Sudley contributed the 6.9 acres of land under Building D to a new limited partnership, Paradise Sudley North Building D Partnership. Sudley is a 50% partner in the new partnership with a right to a return of the value of its capital contribution before distributions to other partners. The other partners are non-affiliates. Sudley is responsible for managing the new partnership's day-to-day operations.
Rental Property Ownership and Management - ----------------------------------------
Registrant owns and manages apartment buildings, for itself and others. In the Southwest Washington, DC urban renewal area, as described below, Registrant holds a 46% interest in an office building, and owns and manages a portion of an enclosed shopping-office center. It is the policy of Registrant to manage and lease these rental properties through its own personnel. Registrant also is a limited partner in certain properties described below, which are operated by others.
Apartments. Registrant owns and operates two apartment complexes, ---------- with a total of 294 units in Greenbelt, Maryland, and in the southwest Washington, DC urban renewal area. (See "Southwest Washington, DC Urban Renewal Area", below). Registrant constructed these apartment buildings.
As of December 31, 1996, approximately 95% of Registrant's apartment units were rented. In renting apartment units Registrant employs rental agents and uses model apartments, advertising in local newspapers and displays on the site. Each building or complex has a project manager employed by Registrant who supervises rentals and general operations.
Apartment leases generally provide for a fixed monthly rental over a one year term and the tenant normally gives a security deposit. Registrant estimates that the average length of occupancy of an apartment by its tenants is approximately 30 months. Registrant pays for all utilities, except that certain tenants pay for their own electricity. All of Registrant's properties are in good condition, and in the opinion of Registrant, are adequately covered by fire and other casualty insurance.
Southwest Washington, D.C. Urban Renewal Area. Since 1964, Registrant --------------------------------------------- has been the redeveloper of a portion of the Southwest Washington, D.C. Urban Renewal Area (the "Area"), located immediately south of the "mall" which extends from the United States Capitol Building to the Washington Monument. Registrant has performed each of its principal business activities, as well as building construction for others, in this Area.
High Rise Office Buildings. Located in the Area are two matching 14 -------------------------- story office buildings, which are leased and managed by Registrant. One building is owned by Trilon Plaza Company ("Trilon") an affiliate; the other building is owned by Town Center East Investors ("TCELP"), a limited partnership in which Registrant holds a 46% interest, and serves as the general partner.
Trilon is a limited partnership, in which a substantial majority interest is owned by Messrs. Bresler and Reiner, whose wholly owned corporation is the general partner (other officers of Registrant hold minor interests) and the balance is owned by non-affiliates. Trilon's principal assets are its leasehold interests in the Area and the projects developed thereon.
GSA Lease. The United States General Services Administration ("GSA") --------- leases the two high rise buildings, as well as the second and third floors of the adjacent shopping-office center and a portion of another smaller structure (see "Shopping Center") at an annual rental of approximately $19.5 million for approximately 905,000 square feet plus 216,000 square feet of parking space (the "GSA Lease"). Approximately 282,000 square feet of the portion of the shopping center owned by Registrant is included in the lease at an annual rental of approximately $5.6 million, as is 56,000 square feet owned by S.E.W. Investors, another affiliate, and 172,000 square feet owned by TCELP, in which Registrant has a 46% interest. Registrant acts as managing and leasing agent for Trilon, TCELP and S.E.W. Investors for their portions of the leased space. All four owners, including Registrant, are jointly and severally liable as landlord to GSA under the Lease. See "Management of Rental Properties".
The GSA Lease was renewed in June, 1993 for a five year term, which commenced as of September, 1992.
In November, 1994, GSA elected to extend the lease for a further five years to September, 2002. As required by the lease, the annual rental was reduced, retroactive to the September, 1992 commencement date, from $21.8 million to $19.5 million. GSA has the option to cancel the lease on certain space during the second five years and on certain other space at any time after the eighth year.
Shopping-Office Center. An enclosed shopping-office center is located ---------------------- between the two high rise buildings containing approximately 750,000 square feet of space. The center includes approximately 1,100 parking spaces located in an underground parking garage and adjacent parking areas.
Registrant acts as managing and leasing agent for Trilon and for S.E.W. Investors, a limited partnership ("S.E.W. Investors") (see "Southeast Section" below) for their portions of the shopping-office center, part of which is leased to the GSA as described above and the balance is leased to other commercial tenants. See "Management of Rental Properties".
Registrant's portion of the shopping-office center, consisting of 231,023 square feet, is leased by Registrant from the District of Columbia Redevelopment Land Agency ("RLA") for a term expiring in 2058. Under the lease, Registrant is responsible for all expenses related to the land, including real estate taxes and utilities. Registrant must obtain the approval of RLA before constructing additional improvements on these tracts.
Southeast Section. On October 10, 1980, Registrant assigned its ----------------- leasehold interest in a portion ("Southeast Section") of the shopping-office center to S.E.W. Investors. The Southeast Section contains approximately 105,000 square feet of rentable space in the three story and basement building, of which approximately 49,000 square feet were completed prior to 1981. Tenant occupancy commenced in February, 1982, including 56,000 square feet leased to the GSA. S.E.W. Investors was organized by Registrant to acquire the Southeast Section. Registrant is the sole general partner, with a 1% interest. Of the limited partnership interests, 62% is held by non-affiliates and the remaining 37% is held by certain directors and officers of Registrant, including Charles S. Bresler, its Chairman of the Board and principal shareholder, and Burton J. Reiner, its President, director and principal shareholder. Registrant manages this building. See "Management of Rental Properties".
Town Center East Apartment Buildings. On August 1, 1979, Registrant ------------------------------------ assigned its leasehold interest in two high rise apartment buildings in the redevelopment area, with 256 units, known as Town Center East Apartments, to Third Street Southwest Investors, a limited partnership. Registrant is the sole general partner in this limited partnership, with a 1% interest, and acts as management agent for the project. In this partnership, 90% of the limited partnership interests are held by unaffiliated persons, and the remaining 9% of the limited partnership interests are held by certain directors and officers of Registrant, including Charles S. Bresler, Chairman and Chief Executive Officer of Registrant and Burton J. Reiner, its President. Registrant manages these buildings. See "Management of Rental Properties".
Low Income Housing. Registrant has interests in the following limited ------------------ partnerships which are operating low-income housing units:
1. Multi-State Projects. On November 15, 1988, Registrant purchased -------------------- 99% limited partnership interests in each of seven limited partnerships, which collectively have constructed 266 rental apartments. The projects are located in small communities in Maryland (3), Pennsylvania (1), Virginia (2) and West Virginia (1). At March 1, 1996, the projects were 95% occupied. The projects are financed by Farmers Home Administration mortgages and enjoy the benefits of low income housing credits against federal income tax authorized under Section 42 of the Internal Revenue Code of 1986, as amended, (the "Code"). The purchase price for such limited partnership interests is approximately $5,168,000 in the aggregate, of which $4,058,719 has been paid as of March 19, 1997. It is payable in annual installments over the ten years such tax credit is available, commencing in March 1990, and is to be adjusted annually based on the annual tax benefits generated.
2. Windsor, Connecticut Project. On April 27, 1989, Registrant ---------------------------- purchased a 97% limited partnership interest in a Connecticut limited partnership. This partnership converted a former school house into 40 residential apartments in Windsor, Connecticut, a suburb of Hartford. The partnership received the certificate of occupancy for the apartments and is eligible for both Federal historic tax credit and Federal low income housing credits against Federal income tax as authorized under Section 42 of the Code. The purchase price for the partnership interest, payable in installments over the ten (10) years the credits are available, is approximately $1,130,000 of which $664,000 was paid as of December 31, 1996. The purchase price is to be adjusted based on the tax benefits generated annually. The project is 90% occupied.
3. Orlando, Florida Project. On July 17, 1989, Registrant purchased ------------------------ a 90% limited partnership interest in a Florida limited partnership. The general partners of the partnership are three individuals and PAC Land Development corporation, a Florida real estate development company ("PAC"). The partnership developed and constructed a 28 acre, 312 unit
apartment project in Orlando, Florida, of which 63 units are eligible for Federal low income housing credits and the balance of 249 units are market rate apartments. The purchase price for the partnership interest was $1,600,000. The purchase price, other than the first installment, is to be adjusted based on the tax benefits generated annually, which may result in additional payments in the future. Ninety-three percent of the apartments were occupied as of December 31, 1996.
4. St. Mary's County, Maryland Project. On November 22, 1989, ----------------------------------- Registrant purchased a 79% limited partnership interest in Foxchase Village Associates Limited Partnership, which has constructed a 134 unit apartment project in St. Mary's County, Maryland. The project is eligible for Federal low income housing credits against Federal income tax authorized under Section 42 of the Code over the first ten years after occupancy. Ninety percent of the apartments were occupied as of December 31, 1996.
Competition. In each of the areas where Registrant's rental ----------- properties are located, there are buildings which offer similar accommodations at approximately the same rentals. The rents charged by Registrant for its properties in the District of Columbia are subject to rent control regulation.
Management of Rental Properties. Registrant, through a subsidiary, ------------------------------- has contracts to act as managing agent and, in certain cases, leasing agent, for residential and commercial projects of certain partnerships in which Registrant is a general partner, and of certain partnerships in which Charles S. Bresler and Burton J. Reiner, officers, directors, and principal shareholders of Registrant, have substantial interests and other directors and officers have minor interests as follows:
(1) As a percentage of gross rent collected.
(2) These contracts renew automatically for additional five year terms unless either party gives notice of termination at the end of the term stated above.
(3) This contract may be terminated at any time by the Federal Housing Commissioner or the mortgagee.
(4) These contracts may be terminated by the owners on 60 days prior written notice, subject to payment of the present value of the leasing fees (see note 9 below) for the remainder of the contract term.
(5) These properties are located in the Southwest Washington, D.C. Urban Renewal Area and are managed for Trilon Plaza Company, an affiliate.
(6) The project is described in "Southwest Washington, D.C. Urban Renewal Area" and is managed for TCELP, a partnership in which Registrant has a 46% interest and is the general partner.
(7) These buildings are the Town Center East Apartments described in "Southwest Washington, D.C. Urban Renewal Area" and are managed for a partnership in which Registrant has a 1% interest and is general partner.
(8) This property is managed for a partnership in which Registrant has a 1% interest and is a general partner. (See "Southwest Washington, D.C. Urban Renewal Area - Southeast Section" above.)
(9) In addition, Registrant earns leasing fees of 5% of gross rents collected on the GSA Lease for these properties.
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Operation of Holiday Inn. Registrant owns and operates a 151 room ------------------------- Holiday Inn motel located in Camp Springs, Maryland, suburban Washington, D.C., opposite the main entrance to Andrews Air Force Base and an interchange of the Capital Beltway. The motel commenced business in March, 1970.
Occupancy averaged 51% in 1996.
In March, 1997 Registrant agreed with Holiday Inns to convert the facility to a Holiday Inn Express. The conversion requires substantial renovation of the existing facility, and will be effective when the renovations are completed. Renovation is ongoing, and completion is scheduled for approximately July, 1997.
Under Registrant's franchise license agreement with Holiday Inns, Inc., Registrant pays Holiday Inns a monthly royalty, and additional payments for advertising and trading services. The new Holiday Inn Express license agreement will expire in March, 2007.
There are three other motels in the immediate vicinity of Registrant's motel in suburban Washington, D.C. The motel business in Washington, D.C. area is highly competitive.
The Colonnade, Baltimore, Maryland. The Colonnade is a multi-purpose ---------------------------------- condominium apartment, hotel, office and retail building adjacent to the Johns Hopkins University in Baltimore, Maryland. The building consists of 119 condominium apartments owned by others on the fourth through twelfth floors; 125 hotel rooms operated by Registrant as a Doubletree Hotel on the first three floors, 252 condominium parking spaces (of which the
Registrant's affiliate owns 21), a restaurant, a small amount of retail and office space and a parking garage.
Hotel occupancy averaged 69% in 1996.
On July 12, 1993, Uptown Hotel Corporation ("Uptown"), a wholly owned subsidiary of Registrant, purchased the secured mortgage on the Colonnade from the lender for its then outstanding balance of $15,336,290.86. To finance the purchase, Uptown borrowed $13,836,291 from the lender, due in September 1995 (with the right to extend to 1998 under certain conditions), secured by an assignment of the Colonnade mortgage and a guaranty by Registrant. To secure its guarantee, Registrant in May 1992 granted lender a mortgage on the apartment property known as "The Commons" in the Southwest Washington, D.C. Urban Renewal Area to the extent of $6,000,000, and its Holiday Inn property to the extent of $4,000,000. Registrant's guaranty was further secured by mortgages on the Paradise Bank property (see "Paradise Bank at Bull Run" above) and 11 convenience stores (see "Convenience Stores" below). On December 27, 1996, Registrant paid the mortgage in full.
Pine Club Phase II Limited Partnership, Orlando, Florida. Registrant -------------------------------------------------------- holds a 64.35% limited partnership interest in Pine Club Phase II, Ltd., a Florida limited partnership. The general partners of this partnership are three unaffiliated individuals and PAC, who own with others, in the aggregate, a 35.65% partnership interest.
The partnership has constructed 160 residential apartment units on approximately 14 acres of land in Orlando, Orange County, Florida. This land is contiguous to Registrant's low-income housing and market rate housing project in Orlando, Florida previously discussed under "Low Income Housing - Orlando, Florida Project". The Project was completed in January, 1991, and is 91% occupied as of February 28, 1996.
Convenience Stores. In June, 1986, Registrant acquired 16 convenience ------------------ stores, primarily located in southern and southeastern states, for an aggregate consideration of approximately $3,390,000. Registrant acquired title to each store building, but holds leasehold interests in the underlying
parcels of land. All of the stores were under lease through February, 2000, on a net basis, to Circle K Corporation, a large convenience store chain which operates the stores under the name "Circle K." On May 15, 1990, Circle K and certain of its affiliates filed Petitions under Chapter 11 of the Bankruptcy Code. One of Circle K's rights under the Bankruptcy Code was to affirm or reject the rental leases on its stores. At various times, Circle K rejected a total of 12 of the sixteen leases owned by Registrant. As of February 28, 1997, Registrant has rented four of these stores and has sold five stores. Registrant is attempting to relet or sell the other three stores.
Nursing Home. Registrant owns a New Jersey nursing home facility, ------------ Lakewood Manor, which it leases to an unaffiliated operating company.
Lakewood Manor is a 120-bed nursing home facility in Lakewood, New Jersey. The skilled and intermediate care facility is located on State Road 88, Ocean County, New Jersey, approximately 60 miles south of New York City. The one-story building of approximately 37,000 square feet, with brick exterior, is situated on 11 acres of land.
Since it acquired the property on December 31, 1984, Registrant has leased the nursing home to an unaffiliated operator. The monthly rent is $48,295 for the first five years of a ten year term, with increased rent thereafter. Tenant has several renewal options for up to 20 additional years. The lessee pays taxes and other operating expenses, and all structural and nonstructural repairs and replacements. The lessee has a right of first refusal in the event Registrant seeks to sell the property. The lessee may assign the lease to another experienced nursing home operator, subject to certain conditions. The facility is now 97% occupied.
There are several other nursing homes in Lakewood, New Jersey. The Nursing Home business is highly competitive. Nursing homes operate under state licenses and are subject to extensive governmental regulations. Should Lakeview Manor not be in compliance with these regulations, it would be subject to termination of its qualification for federal assistance payment
or termination of its operating license by federal or state regulators.
Equipment Leasing and Vending - -----------------------------
Registrant previously engaged in personal property leveraged equipment leasing, both directly and through subsidiaries and general partnerships. It also acted as broker in arranging equipment sale and leaseback transactions for a fee.
In December, 1983, Registrant, with others, organized a general partnership to engage in equipment leasing known as Builders Leasing Company, and agreed to act as its managing partner with a 20% interest. The initial $2 million capital of the partnership was contributed by each partner, in proportion to his percentage interest, over five years in semiannual installments. In addition to the initial capitalization, the partners contributed $1,150,000 to the capital of the partnership in 1988, 1989 and 1990. Registrant's capital contribution to date totals $630,000. Certain directors and officers of Registrant also hold an aggregate of 27% of the partnership interests, including Charles S. Bresler, Chairman of the Board and principal shareholder (20%), and Burton J. Reiner, President, director and principal shareholder (5%).
Builders Leasing Company owns transportation barges and petroleum transportation vehicles. The partners are personally liable for debt of Builders Leasing, with a balance at December 31, 1996 of about $2,753,000.
In February 1984 Registrant organized Tech-High Leasing Company, a general partnership in which it holds a 50% interest. The other 50% is held by a non-affiliated corporation. Registrant and its partner have each contributed $1,100,000. Tech-High currently owns heavy duty construction and transportation equipment with a net book value as of December 31, 1996, of approximately $1,782,000. The partnership debt on these acquisitions as at December 31, 1996, was approximately $1,380,000 of which Registrant is personally liable for approximately $267,000.
Registrant is no longer entering into new equipment leases. The lease portfolio has been substantially reduced.
Registrant, through a wholly owned subsidiary, has since August, 1987, conducted a coin operated telephone business, primarily in Florida and Maryland. The telephones are now being serviced by a management company in Maryland and by a partnership, of which Registrant's subsidiary is a 50% partner, in Florida.
Employment - ----------
On February 21, 1997, Registrant and its subsidiaries employed approximately 125 persons.
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Registrant borrows money from time to time on general credit and it expects to continue such open account borrowing in the future. It has also granted mortgages or deeds of trust on its real estate and security interests in its equipment leases and leased equipment. Registrant's business and earnings are dependent in part on its ability to obtain interim construction and permanent financing on acceptable terms for its construction and sale of single family residences and for its development of rental property. Certain of Registrant's borrowing is tied to the prime interest rate.
Registrant's business is substantially dependent on general economic conditions, and the availability of construction labor and materials in the area served. Registrant's business is materially affected by federal housing programs. To the extent that Registrant's financing of projects is insured by the Federal Housing Administration ("FHA"), Registrant is subject to FHA construction, operation and other requirements, including provisions relating to rentals, management agreements, various reserves, employment and leasing practices. The development of unimproved real estate is subject to Registrant's obtaining appropriate governmental approvals, and availability of utilities, including sewers.
Item 2.
Item 2. Properties. ----------
Rental properties of Registrant are described under "Rental Property Ownership and Management" in Item 1.
Item 3.
Item 3. Legal Proceedings. -----------------
Registrant, S.E.W. Investors, Town Center Management Company (a subsidiary of Registrant), Bresler and Reiner Companies (a subsidiary of Registrant), and Trilon Plaza Company are defendants in a civil suit case no. 90-CA10594 filed October 12, 1990 in the Superior Court of the District of Columbia by Joanne Bahura, et. al. (the "Plaintiffs"). The Plaintiffs are 19 individuals who state they are all present or former employees of the Environmental Protection Agency, which leases certain office space at a high rise office building in Washington, D.C. known as the "Waterside Mall Complex." Four spouses of such employees are also plaintiffs. See "Management of Rental Properties", "Southwest Washington, D.C. Urban Renewal Area", "High Rise Office Buildings", "Shopping-Office Center" and "Southeast Section" in Item 1 above. The Complaint, as amended (the "Complaint"), alleges that (i) the defendants are the owners of the Waterside Mall Complex and (ii) certain renovations and reconstruction to the Waterside Mall Complex were done in such a manner as to cause the Plaintiffs multiple physiological and physical symptoms.
The Complaint seeks damages aggregating $40,000,000 under claims of negligence, breach of warranty of habitability, breach of contract, strict liability, loss of consortium and punitive damages. The claims of six plaintiffs were tried to a jury from October 25 to December 23, 1993, with verdicts for plaintiffs totalling $948,000. No punitive damages were awarded. Defendants filed motions for judgment notwithstanding the verdict, which the Court granted in November 1995, as to $716,000. Plaintiffs have filed a notice of appeal. The cases of the other plaintiffs remain to be tried. Management believes the claims are without merit and intends to continue to contest the case vigorously.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------
Not Applicable.
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Executive Officers of Registrant (included pursuant to instruction 3 to Item 401(b) of Regulation S-K)
In accordance with Article V of the By-Laws of Registrant, each officer was elected to serve until his successor is chosen and shall have qualified or until his earlier resignation or removal.
There is no family relationship as defined in the instructions to this Item between any of the above officers, except Mr. Oshinsky is the brother-in- law of Mr. Reiner.
Each officer has held the above positions as his principal occupation for more than the past five years, except Mr. Oshinsky, who, prior to his election as Treasurer, served as an officer of subsidiaries of Registrant for more than the past five years.
PART II -------
Item 5.
Item 5. Market for Registrants Common Equity and Related Stockholder Matters. ----------------------------------------------------
Registrant's Common Stock is traded in the over-the-counter market. The following table presents the high and low bid quotations for the periods shown, as reported by the National Quotation Bureau, Inc. No dividends were declared or paid during the years reported.
Year Ended December 31, 1995 - ----------------------------
Quarter Price ---------------------------------------------
1st High 11 Low 10 ---------------------------------------------
2nd High 11 Low 10 ---------------------------------------------
3rd High 10 Low 9 ---------------------------------------------
4th High 10.50 Low 10 ---------------------------------------------
Year Ended December 31, 1996 - ----------------------------
Quarter Price ---------------------------------------------
1st High 10.50 Low 10.50 ---------------------------------------------
2nd High 10.50 Low 10.50 ---------------------------------------------
3rd High 10.75 Low 10.75 ---------------------------------------------
4th High 11 Low 10.75 ---------------------------------------------
The above quotations represent prices between dealers and do not include retail markup, markdown or commissions and do not represent actual transactions.
As of March 11, 1997, there were 156 record holders of Common Stock.
Item 6.
Item 6. Selected Financial Data -----------------------
(1) No dividends have been declared or paid.
/*/ Restated to reflect reclassifications.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------
Results of Operations - ---------------------
Sales of Homes and Lots - -----------------------
During 1996, Registrant sold 63 homes for $8,669,000 as compared with 56 homes and three lots in 1995 totalling $8,117,000 and 65 homes and six condominium units totalling $11,236,000 in 1994. Continued slow economic growth, employment uncertainty and proposed government reduction in the Washington, DC metropolitan area affected sales at Registrant's projects, and has resulted in increased inventory of homes as purchasers have terminated sales agreements.
Rentals Income - Apartments and Commercial - ------------------------------------------
The lease with the General Services Administration ("GSA") of the Waterside Mall office area provided that the rent was to be reduced, if GSA elected before December 31, 1994 to extend the lease for a further five years. GSA exercised the option in November 1994. The reduction will be about $895,000 per year in the Registrant's revenues from the lease, plus $350,000 per year in leasing and management fees and income from Town Center office building discussed below. GSA has the option to cancel the lease on certain space effective any time during the second five years and on certain other space at any time after the eighth year.
Hotel Income - ------------
Included in the 1996 results is $4,217,000 of income and $3,289,000 of expenses relating to the Colonnade, as compared to 1995 income of $3,570,000 and expenses of $3,317,000.
Due to the remodeling of the Holiday Inn, operating income for 1996 decreased to $1,672,000 as compared to $1,963,000 in 1995. Expenses for 1996 were $1,651,000 versus $1,767,000 in 1995. Income for 1997 is being impacted by the renovation.
Leasing Fees, Affiliates - ------------------------
The 1994, 1995 and 1996 results consist of a 5% real estate leasing fee earned by Registrant resulting from the GSA lease. These fees are recorded as earned over the life of the lease, as rent is collected. See "Rentals -- Apartments and Commercial".
Interest, Other - ---------------
During 1994, there was a reduction in notes receivable, other due to the refinancing of those notes, thus reducing Interest, Other. The 1995 increase resulted from higher cash balances.
The 1996 results reflect higher interest income on invested funds as compared with interest income in prior years. Registrant has greater cash balances in interest bearing accounts and in U.S. Treasury instruments.
Gain on Sales of Realty Interests, Net - --------------------------------------
On June 30, 1992, Registrant sold its Philadelphia nursing home to an unaffiliated nursing home operator. The sale price was $4,200,000, of which Registrant received $500,000 in cash and a wrap-around mortgage of $3,700,000. In May 1994 the nursing home was sold and the outstanding balance of $3,574,500 was paid off. A gain of $1,145,000 was recorded in 1994.
Income from Equity Investments - ------------------------------
The components of this Item are as follows:
Registrant has a 46% partnership interest in Town Center East Office Building at Waterside Mall. Registrant's share of the earnings from that partnership decreased in 1995 and 1996, due to decreased revenues from the GSA lease. See, "Rentals, Apartments and Commercial" above.
Revenue - Other - ---------------
Included for 1996 is a non-recurring claim recovery of about $232,000.
General and Administrative - --------------------------
The lower expense in 1996, compared to 1995, reflects lower executive and administrative expenses.
Costs and Expenses - Other - --------------------------
Included in Receivables - Other at December 31, 1994 were amounts due ------------------- Registrant from a state Department of Public Welfare with respect to a nursing home previously owned by Registrant. At September 30, 1995 Registrant reduced this receivable by $545,000 to reflect the amount allowed by the Department of Public Welfare.
Provision for Loss on Real Estate - ---------------------------------
In 1994 Registrant wrote off the carrying value of the Fairfax, Virginia property, which the Frying Pan partnership returned to the sellers. This resulted in a charge of $16,834,000, and a gain on elimination of debt of $5,200,000 (before income tax effect).
On February 10, 1994, Registrant entered into an agreement with the holder of the first and second mortgages relating to the property owned by Country Club Associates Partnership whereby Registrant paid $3,500,000, including a two year secured note for $1,000,000, which was retired in 1996, for the release of Registrant's guaranty of the first trust loan, the second trust
note, the land exchange liability, any mechanics liens, real estate taxes and unknown recourse claims.
In accordance with generally accepted accounting principles, Registrant reduced the carrying value of Country Club as at December 31, 1993, resulting in a charge of $9,898,000. In accordance with generally accepted accounting principles, Registrant recorded a $6,398,000 gain on elimination of the Country Club debt in the first quarter of 1994 to reflect the February, 1994 transaction.
Extraordinary Item-Debt Elimination - -----------------------------------
In January, 1994 the holder of the note on the Country Club Associates property foreclosed and obtained possession of the property. On February 10, 1994, Registrant entered into an agreement with the holder of the first and second mortgages relating to the property owned by Country Club Associates Partnership whereby Registrant paid $3,500,000, including a two year secured note for $1,000,000, for the release of Registrant's guaranty of the first trust loan, the second trust note, the land exchange liability, any mechanics liens, real estate taxes and unknown recourse claims. At that time Registrant recorded the disposition of the property. This transaction resulted in a pre-tax extraordinary gain of $6,398,000 in the first quarter of 1994.
Registrant also recorded pre-tax extraordinary gain of $5,200,000 in December 1994 with respect to the disposition of the Fairfax, Virginia property.
In 1992 Registrant tendered a deed to the holder of the loan on Allentown Apartments. In September 1993 the holder refused the deed offered by Registrant, had a receiver appointed and took possession of the property. In May 1995 the holder foreclosed on the property. In August 1995 the Circuit Court for Prince George's County, Maryland ratified the foreclosure sale. This transaction resulted in a pre-tax extraordinary gain of $2,678,000 after payment of $480,000 guaranteed by Registrant and related expenses.
Liquidity and Capital Resources - -------------------------------
Registrant continues to fund its obligations out of current cash flow. The banking and finance communities continue to be adverse to most real estate lending, requiring increased coverage on debt and significant owner investment in properties. There is no assurance that Registrant will be able to meet all of its needs out of cash flow or that additional funding will be available to Registrant if needed.
During the year ended December 31, 1995, Registrant generated cash flow from operating activities of $11,264,000. Cash flow from operating activities was used in investing activities of $778,000, which consisted of investments in U.S. Treasury instruments, purchase of treasury stock and other activities of $2,263,000, less proceeds of $1,485,000 related to investments in joint ventures. The remaining cash flow from operating activities was used in financing activities for the repayment of notes payable. Overall, cash flow from operating, investing and financing resulted in an increase of $6,397,000 in cash and cash equivalents and cash deposits held in escrow during the year ended December 31, 1995.
During the year ended December 31, 1996, Registrant generated cash flow from operating activities of $13,210,000. Cash flow from operating activities was used in investing activities of $11,793,000, which consisted of investments in U.S. Treasury instruments and other activities of $12,481,000, less proceeds of $688,000 related to investment in joint ventures. The remaining cash flow from operating activities was used in financing activities for the repayment of notes payable. Overall, cash flow from operating, investing and financing resulted in a decrease of $10,574,000 in cash and cash equivalents and cash deposits held in escrow during the year ended December 31, 1996.
Item 8.
Item 8. Financial Statements and Supplementary Data. -------------------------------------------
The financial statements are listed under Item 14 in this annual report and are included therein.
No supplementary data are supplied because none are required.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure ----------------------------------------------------
None.
PART III --------
Item 10.
Item 10. Directors and Executive Officers of Registrant. -----------------------------------------------
The information required by this item will be incorporated by reference to a definitive proxy statement involving the election of directors which is expected to be filed by the Company pursuant to Regulation 14A within 120 days after the close of its fiscal year.
Item 11.
Item 11. Executive Compensation. ----------------------
The information required by this item will be incorporated by reference to a definitive proxy statement involving the election of directors which is expected to be filed by the Company pursuant to Regulation 14A within 120 days after the close of its fiscal year, except for the information contained under such definitive proxy statement under the captions "Board Compensation Committee Report on Executive Compensation" and "Performance Graph."
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. ---------------------------------------------------
The information required by this item will be incorporated by reference to a definitive proxy statement involving the election of directors which is expected to be filed by the Company pursuant to Regulation 14A within 120 days after the close of its fiscal year.
Item 13.
Item 13. Certain Relationships and Related Transactions. ----------------------------------------------
The information required by this item will be incorporated by reference to a definitive proxy statement involving the election of directors which is expected to be filed by the Company pursuant to Regulation 14A within 120 days after the close of its fiscal year.
Part IV
Item 14
Item 14
Exhibits and Financial Statement Schedules
Page ---- A. The following documents are filed as part of this report:
1. Financial Statements
Bresler & Reiner, Inc. Consolidated Financial Statements:
Report of Independent Public Accountants 31 Consolidated Balance Sheets 32-33 Consolidated Statements of Income 34 Consolidated Statements of Changes in Shareholders' Equity 35 Consolidated Statements of Cash Flows 36-37 Notes to Consolidated Financial Statements 38
2. Financial Statement Schedules III and IV 55
Schedules other than those listed above have been omitted because they are not required, not applicable, or the required information is set forth in the financial statements or notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Bresler & Reiner, Inc.:
We have audited the accompanying consolidated balance sheets of Bresler & Reiner, Inc. (a Delaware corporation, the "Company") and subsidiaries, as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years ended December 31, 1996. These consolidated financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an 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 financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiaries as of 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 .
Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in the index of financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not a required part of the basic consolidated financial statements. This information has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen, LLP
Washington, D.C.
March 24, 1997
BRESLER & REINER, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS
BRESLER & REINER, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
=========== ============
BRESLER & REINER, INC.
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
BRESLER & REINER, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
BRESLER & REINER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
BRESLER & REINER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (CONTINUED)
BRESLER & REINER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Bresler & Reiner, Inc., and its wholly and majority-owned subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated.
The Company's activities include residential land development and construction and rental property ownership and management primarily in Maryland, Virginia and the District of Columbia.
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES AND PARTNERSHIPS
The Company includes its share of the earnings or losses of unconsolidated joint ventures and partnerships under the equity method of accounting.
REVENUE RECOGNITION
The Company accounts for revenue from sales of homes and condominiums and sales of real property in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 66, "Accounting for Sales of Real Estate." Rental, construction, and management service fees are generally recorded when earned. Leasing fees are recorded over the life of the lease.
RENTAL PROPERTY AND EQUIPMENT AND DEPRECIATION
Rental property and equipment are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed of," was issued in March 1995. This statement establishes accounting standards for the impairment of long-lived assets. It requires that long-lived assets, which are held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. It also requires that long-lived assets to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. SFAS No. 121 was implemented by the Company in 1996 and did not have a material effect on the 1996 consolidated financial statements.
CONSTRUCTION IN PROCESS
When construction commences, costs are transferred to construction in process where they are accumulated by project. Other project costs included in construction in process include property taxes, materials, labor, and allocated overhead. These costs are charged to costs of homes sold on a pro rata basis as homes are sold, in accordance with SFAS No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects." The Company generally finances its homebuilding operations from internal cash flow. The Company reviews its accumulated costs to determine that costs in excess of net realizable value are charged to operations.
DIRECT FINANCING LEASES
The Company's leasing operations consist principally of the leasing of computer equipment, tractors and trailers, rental store fixtures, and manufacturing plant equipment. The Company accounts for these leases as direct financing leases in accordance with SFAS No. 13, "Accounting for Leases."
INCOME TAXES
Deferred income taxes result principally from temporary differences related to the timing of the recognition of real estate sales, lease income, interest expense and real estate taxes during development, and depreciation for tax and financial reporting purposes.
EARNINGS PER COMMON SHARE
Earnings per common share is based upon the weighted average number of shares outstanding during each year (2,792,653 shares in 1996, 2,823,866 shares in 1995, and 2,836,481 shares in 1994).
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
CASH DEPOSITS HELD IN ESCROW
The Company treats the cash accounts of its management companies as restricted for the exclusive use of the properties under management.
INVESTMENTS
At December 31, 1996, all investment securities are classified as held-to- maturity and are therefore reported at amortized cost. Fair value of these instruments approximates carrying value at year end. There were no unrealized holding gains or losses. All of the instruments mature within one year. There were no sales of investment securities during 1996.
MANAGEMENT'S 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.
RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified in order to conform to the 1996 presentation.
2. RENTAL PROPERTY AND EQUIPMENT, NET:
Buildings and improvements and equipment are depreciated over the useful lives of the related assets ranging from 5 to 40 and 3 to 12 years, respectively.
Substantially all rental property and equipment is pledged as collateral for financing.
3. LAND HELD FOR SALE:
Land held for sale represents land intended to be sold on the open market. The land is recorded at the lower of cost or fair value less cost to sell.
4. HOMES HELD FOR SALE:
Homes held for sale represents homes that have been substantially completed for over one year and are held for sale on the open market. These homes are recorded at the lower of cost or fair value less cost to sell.
5. GAIN ON SALES OF REALTY INTERESTS, NET:
(a) The Company sold one convenience store property in 1995 and three convenience store properties in 1994 which are accounted for using the full accrual method.
(b) During 1992, the Company sold a nursing home to an unaffiliated nursing home operator. The Company received a note, and therefore accounted for the gain on the transaction under the installment method of accounting and deferred profit to the extent of the note received. In 1994, the Company received the balance on the note and, therefore, the remaining deferred profit related to this transaction of $1,145,000 was recognized.
6. OTHER CONSTRUCTION, NET:
The Company engages in certain construction activities for the benefit of its tenants. Revenues and costs related to these activities are as follows:
7. NOTES PAYABLE:
* Interest rates relate to the 1996 balances.
In connection with the assignment of leasehold interests in certain properties, the Company received notes secured by the interests assigned. The proceeds of the notes received, as the result of the assignment of these interests, are used to pay the original underlying mortgages on these properties. These mortgages remain on the Company's books, as of December 31, 1996 and 1995, at balances of $6,670,000 and $7,713,000, respectively, and are included in mortgages payable above.
Of the mortgages and notes payable, $36,000 are recourse to the Company at December 31, 1996. In addition, the Company has recourse obligations totaling $402,000 related to guarantees given to creditors in certain of the Company's investments in joint ventures. See Note 10.
Annual contractual principal payments are as follows.
. During 1996, the Company retired approximately $10 million in debt due in March 1998. There was no extraordinary gain or loss associated with this transaction.
. Included in Mortgages payable, collateralized by rental properties, above is a renegotiated mortgage secured by an office building in Manassas, Virginia, which is substantially leased. At December 31, 1993, the note was in default and had a balance of $2,121,000. The mortgage was extended in 1994 at a 9.75% interest rate, due December 1, 1998. As of December 31, 1996, the loan was current and had an outstanding balance of $2,052,000.
. Included in Mortgages payable, collateralized by rental properties, as of December 31, 1994, was a $4,177,000 mortgage in default on a property for which the Company had not made required principal
and interest payments since June 1992. The Company guaranteed the loan in an amount not to exceed $480,000. During 1992, the Company offered to tender a deed to the property in partial satisfaction of the debt, which was refused by the note holder. The note was then acquired by a note holder who purchased the note from the Resolution Trust Corporation. The new note holder had a receiver appointed who took possession of the property on September 22, 1993. The note holder then brought suit against the Company under the mortgage and guarantee. in May 1995, the note holder foreclosed on the property, and in August 1995, the Court ratified the foreclosure sale. At the time of foreclosure, the outstanding mortgage balance was $4,177,000 and the related net book value of the property, which approximated management's estimate of fair value, plus the guarantee and related expenses was $1,499,000 resulting in an extraordinary gain of $2,678,000. The gain is presented as an extraordinary item net of tax in 1995 on the accompanying consolidated statements of income.
. Included in Notes Payable, Land, at December 31, 1993, was $25,399,000, which was settled on February 10, 1994. The Company entered into an agreement with the holder of the first and second mortgages relating to the property owned by Country Club Associates Partnership whereby the Company paid $3,500,000, including a two-year secured note for $1,000,000, for the release of the Company's guaranty of the first trust loan, the second trust note, the land exchange liability, any mechanics liens, real estate taxes, and unknown recourse claims. Based on continuing negotiations to tender the asset in satisfaction of the debt, the Company recorded a provision for loss on real estate of $9,898,000 in 1993 to reduce the asset to its estimated fair value of $19,000,000 at December 31, 1993. In accordance with generally accepted accounting principles, the Company recorded an extraordinary gain of approximately $6,398,000 due to satisfaction of the debt in the first quarter of 1994. The gain is presented as an extraordinary item net of tax in 1994 on the accompanying consolidated statements of income.
. Included in Notes Payable, Land, at December 31, 1993, were nonrecourse mortgage notes totaling $18,452,000 that were secured by approximately 57 acres of land held for development. During 1994, the Company reevaluated its investment and concluded that the long-term development plans for the property were no longer warranted given the continued softness in the commercial real estate market and the inability of the lenders to agree to continued debt modifications. As a result, the Company recorded a write down of $16.8 million representing the Company's estimate of the property value based on immediate liquidation. In December 1994, one of the lenders took a deed in lieu of foreclosure on a 17 acre tract and took possession of the property. The Company tendered the deed in lieu of foreclosure to the seller on the remaining 40 acres. As a result of this debt defeasance, the Company recognized an extraordinary gain of $5.2 million. The gain is presented as an extraordinary item net of tax in 1994 on the accompanying consolidated statements of income.
8. MORTGAGES AND NOTES RECEIVABLES, AFFILIATES:
(A) In payment of construction costs, the Company accepted a second mortgage note with an office building pledged as collateral. The note is due in monthly installments of principal and interest of $10,000, at 8.5 percent, from a limited partnership in which the Company is the general partner and has a 46 percent interest. Certain of the Company's officers and directors own 4.5 percent of the limited partnership. The note matures in 2001.
(B) Amounts due are net of deferred gains of $1,398,000 and $1,454,000 in 1996 and 1995, respectively. The amounts are due in monthly installments of $36,600, including interest at 9.5 percent through 1999, with a final payment due 1999 of approximately $2,838,000, from a limited partnership in which the Company is the sole general partner and has a 1 percent interest. The building sold is pledged as collateral for the note with no further recourse to the partnership. Certain of the Company's officers and directors own 9 percent of the limited partnership.
(C) Amounts due are net of deferred gain of $2,357,000 and $2,725,000 in 1996 and 1995, respectively. The amounts are due in monthly installments of $95,700, including interest at 10 percent, through 2000, with a final payment of approximately $1,031,000, from a limited partnership in which the Company is a sole general partner and has a 1 percent interest. The building sold is pledged as collateral for the note with no further recourse to the partnership. Certain of the Company's officers and directors own 37 percent of the limited partnership.
9. MORTGAGES AND NOTES RECEIVABLES, OTHER:
Substantially all notes are collateralized by first trusts on houses, residential property or undeveloped land.
10. INVESTMENT IN AND ADVANCES TO JOINT VENTURES AND PARTNERSHIPS:
The Company has general and limited partnership interests in entities that are developing or operating properties located in Northern Virginia, Washington, D.C., Baltimore, Maryland, and Orlando, Florida.
The following is a summary of joint ventures and partnerships in which the Company holds ownership interests.
11. COMMITMENTS AND CONTINGENCIES:
FINANCIAL COMMITMENTS
The Company is contingently liable for $402,000 of outstanding liabilities of nonconsolidated partnerships and joint ventures in which it has investments at December 31, 1996. The Company also pledged its interests in the General Services Administration's ("GSA") lease to the lender as security for Town Center East, L.P.'s mortgage and Trilon Plaza Company's (an entity affiliated with the Company) mortgages totaling $7.2 million.
During 1990 and 1989, the Company purchased limited partnership interests in limited partnerships which operate low income housing units. The required capital contributions over the next 5 years are projected to aggregate $1,749,000. The amount of projected contributions are to be adjusted annually to be a percentage of tax benefits derived.
The Company anticipates that the annual tax benefits will be more than sufficient to fund the annual capital contributions.
At December 31, 1996, the Company had approximately $3,025,000 of outstanding letters of credit representing performance guarantees for land improvements in home building and land development operations.
LITIGATION
The Company and other related entities are defendants in a suit filed in October 1990 by certain present and former employees of the Environmental Protection Agency ("EPA"), which leases office space at the Waterside Mall Complex (a portion of which is owned by the Company). The complaint alleges claims of negligence, breach of contract, and other allegations relating to certain renovations performed at the Waterside Mall Complex. The complaint seeks $40,000,000 in damages. The claims of six plaintiffs were heard in a jury trial in 1993, with verdicts for the plaintiffs totaling $948,000. The Company appealed the verdicts and, in 1995, received a judgment that reduced the total damages to $232,000. No punitive damages were awarded. The cases of the other plaintiffs remain to be tried. Management believes, based on consultations with outside counsel, that the claims are without merit and that the litigation should not have a material adverse effect on results of operations or the financial position of the Company.
Also, in the normal course of business, the Company is involved in other types of litigation. In the opinion of management, based on its assessment and consultation with outside counsel, the litigation that is currently pending against the Company will not have a material impact on the financial condition or future operations of the Company as a whole.
SIGNIFICANT LEASE
The EPA occupies a significant amount of the space in the Company's portion of the Waterside Mall. The EPA also occupies a significant amount of space of several affiliated entities in which the Company has an equity interest. In total, approximately 1.2 million square feet in the Waterside Mall Complex are leased by the GSA. The EPA is the GSA's tenant. The lease expired in September 1992; however, in June 1993 the Company negotiated a new lease with GSA effective retroactively for the five-year period beginning September 1992.
This GSA lease provided that the rent was to be reduced, if the GSA elected, prior to December 31, 1994, to extend the lease an additional five years. In November 1994, the GSA elected to extend the lease. This resulted in a reduction of the annual rent. The lease extension and resulting reduction in rent is accounted for prospectively over the remaining lease term.
The GSA has the option to cancel the lease with twelve months' notice under certain conditions prior to that date. As of March 24, 1997, the GSA has not exercised this option.
In aggregate, approximately 22% of the Company's revenues, including related leasing and management fees and construction income, are from office space leased by the GSA. As such, a significant portion of the Company's operations are dependent on the continuation of the lease and if the lease is not renewed or replaced by new tenants at similar terms, the Company's financial position could be adversely affected.
12. DIRECT FINANCING LEASES:
The Company engages in personal property leveraged equipment leasing. These leases involve computer equipment, tractors and trailers, rental store fixtures, and manufacturing plant equipment.
Future minimum lease payments to be received under the above noncancelable lease agreements as of December 31, 1996, are as follows:
13. INCOME TAXES:
The Company follows SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 establishes financial accounting and reporting standards for the effects of income taxes that result from the Company's activities during the current and preceding years. It requires an asset and liability approach in accounting for income taxes, as such, balance sheet accruals for income taxes are adjusted to reflect changes in tax rates in the period such changes are enacted.
The Company and its subsidiaries file a consolidated Federal income tax return. The provision (benefit) for income taxes includes the following components:
A reconciliation between the amount of income tax computed by multiplying income before income taxes by the applicable statutory Federal income tax rate and the income tax provision (benefit) shown on the consolidated income statements follows:
Deferred income taxes result from temporary differences in the recognition of revenue and expense for income tax and financial statement reporting purposes. The sources of these differences and the estimated tax effect of each are as follows:
Also, included in Deferred charges and other assets on the accompanying consolidated balance sheets are deferred tax credits earned as a result of the Company's involvement in low income housing projects. The realizability of these credits is dependent upon the Company's ability to produce taxable income in the future.
14. OPERATING LEASES:
AS A LESSEE
At December 31, 1996, the Company was obligated under a land lease, on which the Company owns commercial properties, with the District of Columbia Redevelopment Land Agency with aggregate annual rental payments of approximately $43,000 plus certain expenses. The lease expires in 2058.
At December 31, 1996, the Company was obligated under a land lease for 8 parcels, on which the Company owns commercial property. The lease expires in 2000 and contains three renewal options of five years. Pursuant to the terms of the lease, the aggregate annual rental is approximately $39,000, and the Company has the option to purchase the land parcels at any time during the initial lease term or renewal periods.
Rent expense for the years ended 1996, 1995, and 1994 was approximately $88,000, $78,000, and $93,000, respectively.
Although certain leases require the Company to pay real estate taxes, insurance and certain other operating expenses of the properties, the basic rental payment for each lease is used in presenting minimum rentals below.
Minimum rentals to be paid under all noncancelable leases at December 31, 1996, are as follows:
AS A LESSOR
Substantially all noncancelable leases of residential property are for a term of one year or less. Other leases are subject to cancellation at the Lessee's option under certain conditions. Minimum future rentals to be received for commercial property subject to noncancelable and other leases are as follows:
15. TRANSACTIONS WITH AFFILIATES:
The Company has business transactions with several affiliates that are owned in part by certain of the Company's shareholders, officers, and/or directors. These transactions are summarized as follows:
See Notes 7, 8, 10, and 11 for additional information regarding related party transactions.
16. PENSION PLAN:
The Company and certain of its subsidiaries have a noncontributory defined benefit pension plan (the "Plan") covering substantially all full-time employees. The Plan provides for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and their compensation rates for the five years preceding retirement. The Company's funding policy is consistent with the funding requirements of Federal law and regulations. Plan assets consist principally of mortgage notes receivable and cash equivalents.
The net periodic pension costs for 1996, 1995, and 1994 are computed as follows:
The following table details the Plan's net pension asset at December 31, 1996 and 1995:
The net periodic pension cost is treated as a reduction of the net pension asset in the accompanying consolidated financial statements.
17. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
In December 1991, the Financial Accounting Standards Board issued SFAS No. 107, "Disclosure about Fair Value of Financial Instruments." SFAS No. 107 requires all entities to disclose the fair value of financial instruments, both assets and liabilities, recognized and not recognized in the statements of financial condition, for which it is practicable to estimate fair value. If estimating fair value is not practicable, SFAS No. 107 requires disclosure of descriptive information pertinent to estimating the fair value of a financial instrument. SFAS No. 107 is generally effective for financial statements issued for fiscal years ending after December 15, 1992.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
. CASH AND CASH EQUIVALENTS, AND CASH DEPOSITS HELD IN ESCROW
Cash balances represent demand and short-term deposits with depository institutions as well as short-term liquid investments. The carrying amount is a reasonable estimate of fair value.
. INVESTMENTS
The carrying amount approximates fair value because of the short maturity of these instruments.
. RECEIVABLES
The fair value of mortgage receivables is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. For short-term loans, defined as those maturing or repricing in 90 days or less, the carrying amount is a reasonable estimate of fair value. Other receivables represent short-term receivables for which the carrying amount is a reasonable estimate of fair value.
. NOTES PAYABLE
Based on borrowing rates currently available to the Company for financing on similar terms for borrowers with similar credit ratings, the fair value of the notes payable approximates their carrying value at December 31, 1996. Additionally, for short-term notes payable, the carrying amount is a reasonable estimate of fair value.
. ACCOUNTS PAYABLE, TRADE AND DUE TO AFFILIATES
The fair value of accounts payable, trade and due to affiliates is the carrying amount payable at the reporting date.
The estimated fair values of the Company's financial instruments are as follows:
Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. Management is concerned that reasonable comparability between companies may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
BRESLER & REINER, INC. ----------------------
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS)
(a) Asset acquisition recorded December 31, 1993.
BRESLER & REINER, INC. ----------------------
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS)
(a) Asset acquisition recorded December 31, 1993.
BRESLER & REINER, INC. ----------------------
NOTES TO SCHEDULE III (DOLLARS IN THOUSANDS)
BRESLER & REINER, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
BRESLER & REINER, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
BRESLER & REINER, INC.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
BRESLER & REINER, INC.
NOTES TO SCHEDULE IV
(a) The terms of this agreement call for a final payment of $2,838,000 due in 1999.
(b) The terms of this agreement call for a final payment of $1,031,000 due in 2000.
(c) The terms of this agreement call for a final payment of $1,082,000 due in 2009.
(b) Reports on Form 8-K. Registrant filed a Form 8-K on December 30, 1996 ------------------- with regard to Item 1 "Changes in Control of Registrant". The date of the earliest event reported was December 23, 1996.
(c) Exhibits.
Index to Exhibits -----------------
Exhibit 3
(i) Articles of Incorporation
A. Restated Certificate of Incorporation of Registrant filed February 23, 1971, Amendment filed August 12, 1987, and Amendment filed May 31, 1991.
(Incorporated by reference to Exhibit 3A of Registrant's Quarterly Report on Form 10Q for the second quarter of 1991, dated August 14, 1991, filed with the Securities and Exchange Commission.)
(ii) By-Laws
B. Revised By-laws of Registrant.
(Incorporated by reference to Exhibit 3B of Registrant's Report on Form 10-K for 1994, dated March 31, 1995, filed with the Securities and Exchange Commission.)
Exhibit 10 - Material Contracts.
C. (i) Amendment No. 1 to Agreement of December 2, 1974 among Trilon Plaza Company, Town Center East Investors and Registrant, dated April 14, 1982.
(ii) Amendment dated March 10, 1983 to Agreement of December 2, 1974, among Trilon Plaza Company, Town Center East Investors and Registrant. (Exhibits C(i) and C(ii) are incorporated by reference to Exhibits 19A and B to Registrant's Report on Form 10-K for 1982, dated March 23, 1983, filed with the
Securities and Exchange Commission).
D. Partnership Agreement of Builders Leasing Company dated December 14, 1983 among the Registrant and Robert J. Schattner, Charles Bresler, Philip Friedman, Edwin Horowitz, Lloyd Needle and Burton J. Reiner.
(Incorporated by reference to Exhibit 10D to Registrant's Report on Form 10-K for 1983, dated March 21, 1984, filed with the Securities and Exchange Commission).
E. (i) Deed of Trust Note dated September 3, 1986 from Paradise Developers to Paradise Associates, Inc. (Manassas property)
(Incorporated by reference to Exhibit 10E(i) to Registrant's Report on Form 10-K for 1986, dated March 24, 1987, filed with the Securities and Exchange Commission.)
(ii) Deferred Purchase Money Deed of Trust dated September 3, 1986 from Paradise Developers to Paradise Associates, Inc.
(Incorporated by reference to Exhibit 10E(ii) to Registrant's Report on Form 10-K for 1986 dated March 24, 1987, filed with the Securities and Exchange Commission.)
Exhibit 21 Subsidiaries of Registrant. 66
Exhibit 27 Financial Data Schedule. 67
S I G N A T U R E S -------------------
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BRESLER & REINER, INC. ---------------------- (Registrant)
Date: March 25, 1997 /s/ Charles S. Bresler ------------------------------ Charles S. Bresler, Chairman of the Board (Chief Executive Officer)
Date: March 25, 1997 /s/ William L. Oshinsky ------------------------------ William L. Oshinsky, Treasurer (Chief Financial and Chief Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated.
The following persons constitute a majority of the Board of Directors of Registrant.
Date: March 25, 1997 /s/ Charles S. Bresler ------------------------------ Charles S. Bresler, Director
Date: March 25, 1997 /s/ William L. Oshinsky ------------------------------ William L. Oshinsky, Director
Date: March 25, 1997 /s/ Edwin Horowitz ------------------------------ Edwin Horowitz, Director
Date: March 25, 1997 /s/ Burton J. Reiner ------------------------------ Burton J. Reiner, Director
Date: March 25, 1997 /s/ Stanley S. DeRisio ------------------------------ Stanley S. DeRisio, Director
Date: March 25, 1997 /s/ Ralph S. Childs, Jr. ------------------------------ Ralph S. Childs, Jr., Director