-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RMO4OVTy952B5RxgYkJUW5lNaBJukcFT5RsQrsvGLW2dZZeL5WWCb/CjPrqL8QkY aH09pWb/Y6LXBgOeDrOZFQ== 0000912057-00-015051.txt : 20000331 0000912057-00-015051.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-015051 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEGIS REALTY INC CENTRAL INDEX KEY: 0001043324 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 133916825 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13239 FILM NUMBER: 587781 BUSINESS ADDRESS: STREET 1: 625 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2124215333 MAIL ADDRESS: STREET 1: 625 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the fiscal year ended December 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 Commission File Number 1-13239 AEGIS REALTY, INC. ------------------ (Exact name of Registrant as specified in its Charter) Maryland 13-3916825 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 625 Madison Avenue, New York, New York 10022 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 421-5333 Securities registered pursuant to Section 12(b) of the Act: Title of each class -------------------------------------- Common Stock, par value $.01 per share Name of each exchange on which registered: ------------------------------------------ American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The approximate aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of March 9, 2000 was $66,550,376, based on a price of $8 7/16 per share, the closing sales price for the Registrant's Common Stock on the American Stock Exchange on that date. As of March 9, 2000, there were 8,049,179 outstanding shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Part III: Those portions of the Registrant's Proxy Statement for Annual Meeting of Shareholders to be held on June 14, 2000, which are incorporated into Items 10, 11, 12 and 13. Index to exhibits may be found on page 43 Page 1 of 53 CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. -2- PART I Item 1. Business. GENERAL Aegis Realty, Inc. (the "Company") is a Maryland corporation that has qualified as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986 as amended (the "Code"). The Company was formed to acquire, renovate, own and operate primarily supermarket-anchored neighborhood and community shopping centers. As of December 31, 1999, the Company owned a portfolio of 28 retail properties (the "Retail Properties") containing a total of approximately 3.0 million gross leaseable square feet ("GLA"), held partnership interests in two suburban garden apartment properties (the "Multifamily Properties") and held one FHA insured participating mortgage secured by a suburban garden apartment property (the "FHA Mortgage"). The locations of the assets in 14 states provide the Company with a geographically diverse portfolio. Moreover, the Company has a predictable and stable revenue stream that, for the year ended December 31, 1999, was derived approximately 47% from either base rent from anchor tenants or from interest payments on the FHA Mortgages. No single asset accounted for more than 8% of total revenues for the year ended December 31, 1999. The Retail Properties are well located neighborhood shopping centers anchored by nationally recognized credit tenants such as Kroger, Publix, Safeway, Food Lion, A&P, Flemming Foods, Bi-Lo, Hy-Vee, Walgreens and CVS Stores. The neighborhood centers are typically open air centers ranging in size from 55,000 GLA to approximately 214,000 GLA, with an average of approximately 107,000 GLA, and are anchored by supermarkets and/or drug stores. These centers are usually leased to tenants that provide consumers with convenient access to every day necessity items, such as food and pharmacy items. Therefore, the Company believes that the economic performance of these centers is less affected by downturns than other retail property types. As of December 31, 1999, the Retail Properties had an average physical occupancy of 92.4%. Through 2006 no more than 9.6% of leased GLA is subject to expiration in any one year. The Multifamily Properties total 290 units and had an average physical occupancy of 94.2% as of December 31, 1999. The FHA mortgage has a principal balance of approximately $2.9 million and carries an annual interest rate of 8.95%. The underlying FHA property had an average physical occupancy of 86.4% as of December 31, 1999. ORGANIZATION The Company was formed on October 1, 1997 as the result of the consolidation (the "Consolidation") of four publicly registered, non-listed limited partnerships, Summit Insured Equity L.P. ("Insured I"), Summit Insured Equity L.P. II ("Insured II"), Summit Preferred Equity L.P. ("Summit Preferred") and Eagle Insured, L.P. ("Eagle") (the "Partnerships", and each individually a "Partnership"). One of the general partners of the Partnerships was an affiliate of Related Capital Company ("Related"), a nationwide, fully integrated real estate financial services firm. Unless otherwise indicated, the "Company", as hereinafter used, refers to Aegis Realty, Inc. and its consolidated subsidiaries and, for references prior to October 1, 1997, refers to Insured I. Pursuant to the Consolidation, the Company issued shares of its common stock, par value $.01 per share (the "Common Stock") to all partners in the Partnerships in exchange for their interests in the Partnerships based upon each partner's proportionate interest in the Common Stock issued to their Partnership in the Consolidation. The Common Stock commenced trading on the American Stock Exchange on October 10, 1997 under the symbol "AER". As of December 31, 1999, there were 8,046,859 shares of Common Stock outstanding (an additional 777,213 shares were reserved for issuance upon conversion of OP Units, as defined below). For financial accounting and reporting purposes, the Consolidation was accounted for using the purchase method of accounting. Under this method, the Partnership with the investor group receiving the largest ownership in the Company, in this case Insured I, was deemed to be the acquirer. As the surviving entity for accounting purposes, Insured I's assets and liabilities were recorded by the Company at their historical cost, with the assets and liabilities of the other Partnerships recorded at their estimated fair values for each Partnership as set forth in the Solicitation Statement of the Company dated June 18, 1997 (the "Solicitation Statement"). No goodwill was recorded in the Consolidation. Results of operations and other operating financial data for the Company prior to October 1, 1997 (the date of the Consolidation) is only with respect to Insured I. Information subsequent to September 30, 1997 is with respect to the Company and its consolidated subsidiaries which include Insured I and the other Partnerships pursuant to the Consolidation. Insured I is a Delaware limited partnership formed on December 12, 1985 which, subsequent to the Consolidation, became an indirectly wholly-owned subsidiary of the Company. Prior to the Consolidation, the general partners of Insured I were Related Insured Equity Associates, Inc., a Delaware corporation and Prudential-Bache Properties, Inc., a Delaware corporation ("PBP"). The general partners managed and controlled the affairs of Insured I prior to the Consolidation. The Company is governed by a board of directors comprised of two independent directors and three directors who are affiliated with Related. The Company has engaged Related Aegis LP (the "Advisor"), a Delaware limited partnership and an affiliate of Related, to manage its day to day affairs. Through the Advisor, Related offers the Company a core group of experienced staff and executive management, who provide the Company with services on both a full and part-time basis. These services include, among other things, acquisition, financial, accounting, capital markets, asset monitoring, portfolio management, investor relations and public relations services. The Company believes that it benefits significantly from its relationship with Related, since Related provides the Company with resources that are not generally available to small capitalized, self-managed REITs. In addition, RCC Property Advisors (the "Property Manager"), also an affiliate of Related, has been retained by the Company to provide property management and leasing services to the Retail Properties. The Property Manager is a full service retail management company which has 29 employees, employed in the areas of leasing, accounting, management and redevelopment. The Company represents substantially all of the Property Manager's property management revenue and therefore substantially all of its staff is engaged, on a full-time basis, providing services to the Company. -3- The Company owns all of its assets directly or indirectly through Aegis Realty Operating Partnership, LP, a Delaware limited partnership (the "Operating Partnership" or "OP"), of which the Company is the sole general partner and holder of 91.19% of the units of partnership interest (the "OP Units") at December 31, 1999. Also, at December 31, 1999, 5.68% and 3.13% of the OP Units are held by the sellers of three of the Retail Properties and by affiliates of Related, respectively. BUSINESS PLAN The Company has initiated a focused business/strategic plan designed to increase funds from operations ("FFO") and enhance the value of its stock. The plan concentrates principally on external growth and internal growth. The Company's external growth will be accomplished through continued acquisitions of Retail Properties either directly or in joint venture on an individual or bulk basis. The Company believes that there are significant opportunities available to acquire undervalued, undermanaged and/or underutilized neighborhood and community shopping centers. Unlike most small capitalized REITs, the Company has the ability to benefit from its affiliation with a much larger company, Related, with a national presence. The Company is using its affiliation with Related to acquire properties on a national basis. The Company believes that by acquiring shopping centers on a national basis, rather than targeting a few markets or a region, it will be able to grow at a meaningful rate, without the need for it to compromise asset quality or current return. In addition, a national acquisition program allows the Company to maintain geographic diversity, which the Company believes reduces the risk otherwise associated with focusing on one region. The Company seeks to acquire primarily, but not exclusively, supermarket-anchored shopping centers, which are well located in primary and secondary markets. Acquisitions will be balanced between stabilized centers that the Company believes are undervalued and centers that may be enhanced through intensive management, leasing, redevelopment or expansion efforts. In all such cases, the Company generally seeks to acquire only those centers that are expected to immediately increase FFO. In addition, the Company will consider strategic combinations in the form of portfolio acquisitions, joint ventures or mergers in order to maximize shareholder value. The Company's growth will be financed through proceeds of an expandable $70 million senior revolving credit facility shared among BankBoston (28.57%), KeyBank National Association (28.57%), Citizens Bank of Rhode Island (28.57%) and Sovereign Bank (14.29%) (the "Credit Facility"), the issuance of shares of the Company's Common Stock or OP Units in exchange for real estate, funds generated from operations in excess of dividend payments and through placements of equity. Although the Credit Facility may be increased, the Company's Charter dictates leverage of no more than 50% of the Company's Total Market Value defined as the greater of (i) the sum of (a) the aggregate market value of the Company's outstanding shares of Common Stock and (b) the total debt of the Company or (ii) the aggregate value of the Company's assets as determined by the Advisor based upon third-party or management appraisals and other criteria as the Board of Directors shall determine in its sole discretion. During the period October 1, 1997 through December 31, 1999, the Company acquired 14 Retail Properties and an out-parcel of developable land contiguous to one Retail Property (see "Item 2. Properties"). Internal growth will occur from the re-deployment of proceeds from the sale or other disposition of non-core assets currently in the portfolio and through intensive management, leasing and redevelopment services provided to the Company by the Property Manager and the Advisor. The Company considers non-core assets to be those assets the Company has enhanced and no longer offer above market rates of return or those assets which due to location, configuration or tenant profile no longer offer the Company the prospects of better than market rates of growth. The Company regularly reviews its portfolio to identify non-core assets and to determine whether the time is appropriate to sell or otherwise dispose of such assets whose characteristics are no longer suited to the Company's overall growth strategy or operating goals. During the period October 1, 1997 through December 31, 1999, the Company disposed of three non-core assets (see "Mortgage Loans" below and "Item 2. Properties"). RETAIL PROPERTIES As of December 31, 1999, the Company owned 28 neighborhood shopping centers. See "Item 2. Properties" for a description of each property. The following table lists each of the Company's investment properties whose rental revenues accounted for 10% or more of the Company's total gross revenues for any of the three years in the period ended December 31, 1999:
1999 1998 1997* ---- ---- ---- 1. Westbird/Miami, FL 4% 6% 10% 2. Winery Square/Fairfield, CA 5% 7% 10% 3. Mountain View Village/Snellville, GA 4% 6% 10% 4. Forest Park Square/Cincinnati, OH 4% 6% 10%
*Information prior to October 1, 1997 (the date of the Consolidation) is only with respect to Insured I. Information subsequent to September 30, 1997 is with respect to the Company and its consolidated subsidiaries which include Insured I and the other Partnerships pursuant to the Consolidation. During the years ended December 31, 1999, 1998 and 1997, the Kroger Company, which is a tenant at six shopping centers, accounted for approximately 12%, 17% and 28%, respectively, of the Company's total gross revenues. Based on the carrying value at December 31, 1999 and 1998, approximately 15% of the Company's investment properties are located in Ohio, 11% are located in Florida, 11% are located in North Carolina and 10% are located in Virginia. No other states comprise more than 10% of the total carrying value. -4- INVESTMENTS IN PARTNERSHIPS As of December 31, 1999, the Company owned equity interests in two partnerships, each of which owns a multi-family residential garden apartment property. See "Item 2. Properties" for a description of each property. MORTGAGE LOANS As of January 1, 1998, the Company held three FHA Mortgages and three equity loans (the FHA Mortgages and the equity loans together, the "Mortgage Loans"); two of the Mortgage Loans were repaid in 1998. All base interest and the principal amount of the FHA Mortgages were coinsured by the FHA (80%) and an affiliate of the Advisor (20%). The equity loans were made to the same developers as the FHA Mortgages. These equity loans, in the aggregate original amount of $3,018,800, represented noninterest-bearing advances made to the developers for such items as initial operating deficit escrow requirements and Housing and Urban Development ("HUD") related contingencies such as working capital escrow and cash requirements. Such amounts were due on demand upon six months notice at any time after the tenth anniversary of the initial endorsement of the loan by HUD. These loans were uninsured, but were secured by the partnership interests of the entities which own the underlying properties (the "Developments"). In addition to the stated interest rates, the Company was entitled to receive additional interest on the FHA Mortgages from a percentage of the annual net cash flow of the Developments and from a percentage of the residual proceeds upon a sale or refinancing. The Company accepted lower base interest rates than were otherwise available in the market at the time of the origination with respect to the FHA Mortgages in exchange for the potential to receive additional interest payments. The notes evidencing the FHA Mortgages relating to Cross Creek and Woodgate Manor, two of the Developments, bore interest at 8.95% with the potential to receive an additional 0.84% to 1.68% on the FHA Mortgages plus 30% of any remaining cash flow from the underlying Developments and 35% of capital proceeds. The FHA Mortgage for Weatherly Walk, a third Development, was structured in the same manner except that the Company was entitled to receive up to 50% of both any remaining cash flow and of capital proceeds. Additional interest was due no later than upon the prepayment or other satisfaction of the FHA Mortgages or the sale of the Developments. The receipt of additional interest was dependent upon the economic performance of the underlying Developments. Additional interest was not insured by the FHA or an affiliate of the Advisor. In addition to the Mortgage Loans, the Company held a loan of $3,060,000 (the "Cross Creek Loan") to Walsh/Cross Creek Limited Partnership (the "Cross Creek Obligor"), one of the FHA Mortgagors, which was used to pay for costs incurred to complete construction and to fund operating deficits. The Cross Creek Loan bore interest at the prime rate plus 1% and was due on January 1, 2030 or on the occurrence of certain events. The amount loaned to the Cross Creek Obligor was classified as a loan receivable from affiliate and was anticipated to be repaid from cash flows from the Cross Creek property. Stephen M. Ross holds a majority interest in the Advisor and had guaranteed the repayment of the principal and interest on the Cross Creek Loan (as amended, the "Guarantee Agreement") to the Company, subject to certain conditions. On June 24, 1998, the Cross Creek Obligor, the owner of Cross Creek Apartments ("Cross Creek") and an affiliate of the Advisor, sold Cross Creek to a third party for $23.4 million. The Cross Creek Obligor then fully repaid its outstanding debt due to the Company totaling $22,199,045 including a $16,971,528 FHA Mortgage, a $1,783,900 equity loan, the $3,060,000 Cross Creek Loan, a $286,948 prepayment penalty due the Company on the FHA Mortgage and accrued interest through the closing date of $96,669 resulting in a loss on the repayment (including the prepayment penalty) in the amount of $92,504 (due to purchase accounting premiums recorded pursuant to the Consolidation) which is included in other expenses. On August 26, 1998, FAI, Ltd. ("FAI"), the limited partnership which owns Weatherly Walk Apartments and one of the FHA Mortgagors, repaid in full (after completing a refinancing with an unaffiliated third party) the outstanding balance of its Mortgage Loan in the amount of $8,380,752 plus accrued interest of $48,189 resulting in a loss on the repayment in the amount of $45,934 (due to purchase accounting premiums recorded pursuant to the Consolidation) which is included in other expenses. Simultaneously, the Company invested $895,200 for a 40% interest as a limited partner in FAI (see "Item 2. Properties"). As of December 31, 1999 and 1998, the Company held one Mortgage Loan. Further information regarding the Mortgage Loan is as follows:
Original Stated Funding Original Original Total Interest FHA Comple- FHA Equity Mortgage Rate on Mortgage Project Closing tion Mortgage Loan Loan Mortgage Maturity - ------- Date Date Amount Amount Amount Loan (2) Date (3) ------- ------- -------- -------- -------- -------- -------- Woodgate Manor 12/12/ 12/13/ $3,110,300 $339,700 $3,450,000 8.95% 1/1/ Gainesville, FL (1) 1988 1988 2024
(1) The general partner interest in the entity holding title to this Development is held by an affiliate of the Advisor. (2) Includes a servicing fee of 0.07% paid by the developer to Related Mortgage Corporation, an affiliate of the Advisor, and excludes additional interest which may be payable under certain circumstances. (3) As of December 13, 1998, the Company may call for prepayment of the entire outstanding principal amount at any time. The Company, in order to call for prepayment, would be required to terminate the mortgage insurance contract with FHA and the other co-insurer not later than the accelerated payment date. Since the exercise of such option would be at the Company's discretion, it is intended to be exercised only where the Company determines that the value of the underlying Development has in- -5- creased by an amount which would justify accelerating payment in full and assuming the risks of foreclosure if the mortgagor failed to make the accelerated payment. As of December 13, 1998, the Borrower may elect to prepay at any time without incurring prepayment penalties. As of December 31, 1999, the balance of the Mortgage Loan recorded on the Company's financial statements was $3,220,191. INSURANCE POLICIES Insured I and Insured II, which are indirectly wholly-owned subsidiaries of the Company, are the record owners of 14 of the Retail Properties. Insured I and II are each the beneficiary of an insurance policy (the "Policies") from Continental Casualty Company ("CNA") which, in effect, will insure that the cumulative amount of cash available for distribution, from all sources, as determined in accordance with the Policies and related agreement together with the appraised values of the Retail Properties then owned by Insured I and Insured II, will equal at least 100% of the aggregate original capital contributions to Insured I and Insured II allocated to investment in properties ("Original Contributions") on the day on which the last such Retail Property was acquired by Insured I and Insured II (the "Final Acquisition Date"). The maximum liability of CNA under the Policies will increase pursuant to a formula based upon the length of time such Retail Properties are held by Insured I and Insured II up to a maximum of 125% of Original Contributions on the tenth anniversary of the Final Acquisition Date (the "Guaranty Payment Date"). The Policies are intended to cover various economic risks of the ownership of such Retail Properties, but do not apply to certain losses, costs, penalties or expenses, including, among others, those arising out of any physical loss, damage, loss of use or other physical deterioration of such properties. Payment of any amounts due under the Policies will be made to Insured I and/or Insured II after the Guaranty Payment Date and the Policies are not a guaranty that shareholders of the Company will receive a return equal to 125% of the Original Contributions to either Insured I or Insured II, as applicable, or any lesser amount insured under the Policy. In November 1999, the insurance policy issued in connection with Summit Insured I expired pursuant to its terms. The insurance policy issued in connection with Summit Insured II will expire in May 2001. No payments were received on the Summit Insured I policy and none are expected on the Summit Insured II policy. COMPETITION The real estate business is highly competitive and substantially all of the properties owned by the Company have active competition from similar properties in their respective vicinities. See the table in "Item 2. Properties" for additional competitive information. With respect to the Mortgage Loan, the Company's business is affected by competition to the extent that the Development from which it derives interest and principal payments may be subject to competition from neighboring properties. In particular, additional interest payments which are not insured are dependent upon the economic performance of the Development and may be affected by competitive conditions. In addition, various other entities have been or may, in the future, be formed by affiliates of the Advisor to engage in businesses which may be competitive with the Company or compete for the time and services of management of the Advisor. REGULATIONS A current or previous owner or operator of real property may be legally liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such liability may exist whether or not the owner or operator knew of, or was responsible for, such hazardous or toxic substances. In addition, the presence of hazardous or toxic substances may adversely affect the owner's ability to borrow funds using such real property as collateral. Certain environmental laws impose liability for release of asbestos-containing materials ("ACMs") into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company may be liable for removal or remediation costs, as well as certain other potential costs which could relate to such hazardous or toxic substances or ACMs (including governmental fines and injuries to persons and property). To date, the Company has not incurred any costs of removal or remediations of such hazardous or toxic substances. However, the presence, with or without the Company's knowledge, of hazardous or toxic substances at any property held or operated by the Company could have an adverse effect on the Company's business, operating results and financial condition. Phase I Environmental Site Assessments have been undertaken on all of the Company's properties. In certain cases, additional Phase II site investigations have also been undertaken where deemed appropriate. Based on these reports, no on-site hazardous chemicals or petroleum products were detected or found to exist in the soil or in the groundwater at those properties which would result in action by state environmental agencies and which would require additional investigation and/or remediation, with the exception of the Mountain Park Plaza property. A Phase II investigation at this property, in February 1998, determined that there were detectable levels of certain hazardous materials above threshold levels which are ascertained by the Georgia State Department of Natural Resources Environmental Protection Division ("GAEPD"). Based on this report and notification to GAEPD, additional investigation, monitoring and/or remediation may be required by GAEPD. These hazardous materials were determined to derive from an on-site dry cleaner and an adjacent service station with a pre-existing, documented underground leaking storage tank. Property management and the Company have taken preliminary steps in providing appropriate notification to GAEPD on these matters together with notification and possible remedies against both the on-site dry cleaner and adjacent service station. Dependent on a numerical score "ranking" for the site which is dependent on several factors (the most important being the potential for human exposure to occur) the GAEPD may require additional investigation and/or remediation. On May 28, 1999 management received notification form GAEPD that the site is now listed on the GAEPD Hazardous Site Inventory ("HSI") due, in part, to the presence of detectable levels of certain hazardous materials at slightly higher than maximum allowable levels. Management has recently undertaken a re-sampling to determine if such levels continue to exist in order to potentially qualify for a de-listing from the HSI. The re-sampling indicated that no hazardous materials remain detectable above the threshold levels which are ascertained -6- by GAEPD to require remediation and a formal report has been submitted to GAEPD to indicate such and to qualify the property for de-listing. Management has installed wells on the site to monitor ongoing levels of hazardous materials in the ground water pursuant to GAEPD policy. Management, at this time, is unable to predict further requirements. NOTES PAYABLE For information regarding the Company's notes payable, see Note 7 of Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data". EMPLOYEES The Company does not directly employ anyone. All services are performed for the Company by the Advisor and its affiliates. The Advisor receives compensation in connection with such activities as set forth in Items 8, 11 and 13. In addition, the Company reimburses the Advisor and certain of its affiliates for expenses incurred in connection with the performance by their employees of services for the Company in accordance with the Advisory Agreement between the Company, the OP and the Advisor dated October 1, 1997. The 28 Retail Properties owned by the Company are managed by the Property Manager, an affiliate of the Advisor, for a fee equal to 4.5% of the gross rental receipts from the Retail Properties, which is competitive with such fees paid in the areas in which the properties are located. The Property Manager also receives standard leasing commissions for space leased to new tenants and for lease renewals and is reimbursed for certain expenses. Management fees earned by the Property Manager for the years ended December 31, 1999, 1998 and 1997 totaled approximately $1,037,000, $735,000 and $445,000, respectively. Item 2. Properties. RETAIL PROPERTIES As of December 31, 1999, the Company owned 28 neighborhood shopping centers. The following is a description of these shopping centers:
% Square Comparable Feet Annualized Competition Gross Leased at Base Rent at Main within a Purchase Date Leasable December December Anchor three-mile Name and Location Price Purchased Square Feet 31, 1999 31, 1999 Tenant radius - ----------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ Cactus Village $ 6,330,000 7/25/87 72,598 95% $460,000 Safeway(g) 11 shopping Glendale, AZ & Walgreens centers Hickory Plaza 4,902,000 4/23/87 67,336 100 501,000 Kroger & 8 shopping Nashville, TN CVS centers Highland Fair 5,950,000 7/24/87 74,764 100 548,000 Safeway 7 shopping Gresham, OR centers Pablo Plaza 7,500,000 2/18/87 141,565 83 691,000 Publix(a) 11 shopping Jacksonville, FL & Eckerds centers Southhaven 5,666,000 2/28/87 83,750 96 474,000 Kroger 1 shopping Southhaven, MS center Town West 4,932,000 5/11/87 88,200 95 445,000 Kroger & 5 shopping Indianapolis, IN Office Max centers Westbird 7,000,000 12/31/86 100,087 88 619,000 Publix & 7 shopping Miami, FL Eckerds centers Winery Square 12,801,700 12/22/87 121,950 89 962,000 Food 4 5 shopping Fairfield, CA Less & centers Walgreens Mountain View Village 10,350,000 7/25/88 99,908 89 709,000 Kroger 4 shopping Snellville, GA centers Forest Park Square 8,950,000 5/19/89 92,824 100 792,000 Kroger 2 shopping Cincinnati, OH centers Kokomo Plaza 6,987,000 5/19/89 89,546 93 538,000 Kroger 6 shopping Kokomo, IN centers Rolling Hills Square 6,100,000(f)08/18/88 101,864 96 693,000 Fry's 6 shopping Tuscon, AZ Food centers & Drug -7- % Square Comparable Feet Annualized Competition Gross Leased at Base Rent at Main within a Purchase Date Leasable December December Anchor three-mile Name and Location Price Purchased Square Feet 31, 1999 31, 1998 Tenant radius - ----------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ Mountain Park Plaza 6,650,000 12/14/89 77,686 89 479,000 A&P(b), 9 shopping Atlanta, GA Future centers Store & Eckerds Applewood Centre 7,700,000 11/08/90 101,130 97 705,000 Hy-Vee 5 shopping Omaha, NE Food centers Store Birdneck Center 3,115,000 12/31/97 67,060 96 457,000 Eckerds & 8 shopping Virginia Beach, VA Food Lion centers The Market Place 5,400,000 12/31/97 125,095 69 522,000 Bi-Lo & 3 shopping Newton, NC Big Lots centers Barclay Place 3,800,000 3/31/98 81,459 85 427,000 Food Lion 13 shopping Lakeland, FL centers The Village At Waterford 6,250,000 4/22/98 79,162 97 569,000 Winn-Dixie 1 shopping Midlothian, VA center Governor's Square 8,200,000 5/28/98 183,339 73 725,000 Odd Lots 5 shopping Montgomery, AL centers Marion City Square 5,100,000 6/25/98 163,970 84 628,000 Roses, Bi-Lo 1 shopping Marion, NC & CVS center Dunlop Village 5,000,000 9/1/98 77,315 88 469,000 Food Lion 6 shopping Colonial Heights, VA & CVS centers Centre Stage 6,990,000 9/2/98 146,549 100 767,000 K-Mart & 2 shopping Springfield, TN Food Lion centers White Oaks Plaza 8,125,000 9/9/98 186,758 99 720,000 Winn-Dixie & 2 shopping Spindale, NC Wal-Mart centers Cape Henry 3,900,000 9/29/98 55,075 96 438,000 Food Lion & 8 shopping Virginia Beach, VA Rite-Aid centers Emporia West 2,900,000 11/17/98 76,705 96 311,000 Dillon Food 6 shopping Emporia, KS Store centers Oxford Mall 8,650,000 11/24/98 166,880 92 952,000 Goody's, 2 shopping Oxford, MS JC Penney, centers Stage & Wal-Mart(d) Southgate 15,100,000 12/9/98 214,321 98 1,504,000 Big Bear 4 shopping Heath, OH Stores(e), centers Dunham's Sporting, Odd-Lots & Rite-Aid Crossroads East 4,800,000 12/9/98 71,925 74 477,000 (c) 3 shopping Columbus, OH centers
(a) Tenant has vacated and has subleased the space to Office Depot. The tenant continues to be liable for all amounts due under its lease. Payments due under sublease were current as of December 31, 1999. (b) Tenant has vacated but continues to be liable for all amounts due under its lease. Lease payments are current as of December 31, 1999. (c) The current configuration of the shopping center does not include an anchor tenant. (d) The portion of the property occupied by Wal-Mart is not owned by the Company. (e) The tenant's parent corporation, Penn Traffic Co. filed for Chapter 11 bankruptcy on March 1, 1999. Lease payments are current as of December 31, 1999. (f) The purchase price does not include the acquisition, on September 8, 1999, of an out-parcel of developable land contiguous to the shopping center for a purchase price of $325,000. (g) Tenant has vacated but continues to be liable for all amounts due under its lease. The tenant is currently in arrears as it relates to a contractual increase in minimum rent of $.10 per square foot per year (approximately $4,200 per year). The aggregate arrears as of December 31, 1999 is $19,237. The arrears is due to different interpretations of the lease which is expected to be resolved in 2000. With the exception of this amount, lease payments are current as of December 31, 1999. -8- On December 9, 1998, in connection with the acquisition of two Retail Properties, the Company made loans (the "OP Unit Loans") totaling $2,081,015 to Standard Investment Company ("SIC"), a partner in the partnerships which owned the properties; SIC is not affiliated with the Advisor or its affiliates but affiliates of the Advisor were also partners in such partnerships. The loans are secured by the 163,517 OP Units which were issued to SIC in exchange for its partnership interests in the partnerships which owned the properties and also by guarantees from the principals of SIC for 25% of the total loan amounts. The OP Unit Loans bear interest at 7.613% and mature on December 9, 2015 or earlier if the underlying shopping centers are sold. Interest and principal on the OP Unit Loans are payable only to the extent of distributions with respect to the OP Units. Such distributions will be retained by the Company until all accrued interest and the outstanding balances of the loans are repaid. As of December 31, 1999 and 1998, the balances of these OP Unit Loans totaled $2,077,886 and $2,081,015, respectively, and are shown as loans receivable from affiliates on the consolidated balance sheets. For further information regarding the Company's Retail Properties, including information regarding the mortgage indebtedness encumbering certain properties, see "Item 8. Financial Statements and Supplementary Data" and "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - Financial Statement Schedules - Schedule III". INVESTMENTS IN PARTNERSHIPS As of December 31, 1999 and 1998, the Company owned partnership interests in two partnerships, each of which holds a multi-family residential garden apartment property. The Company owns a limited partnership interest in the TCR-Pinehurst Limited Partnership ("Pinehurst"), which acquired and operates the Pinehurst apartment complex in Kansas City, Missouri. Under the original terms of this investment, the Company is entitled to a preferred equity return of 8.8% per annum on an initial investment of $3,799,620, and 9.85% on a subsequent investment of $1,949,805. These preferred equity returns are cumulative and non interest-bearing. The cumulative, unrecorded and undistributed preferred equity returns to the Company totaled $1,763,772 and $1,610,549 at December 31, 1999 and 1998, respectively. These preferred equity returns are payable from excess cash flow from operations or proceeds from a sale or refinancing of Pinehurst's rental property. The Pinehurst apartment complex contains 96 apartment units and was approximately 91.0% occupied as of March 1, 2000. The Company's percentage of ownership in Pinehurst is 98.99%. The Company owned a limited partnership investment in the Dominion Totem Park Limited Partnership ("Dominion"), which acquired and operated the Chateau Creste apartment complex in Kirkland, Washington. Under the terms of this investment, the Company was entitled to receive a preferred equity return of 9.625% per annum on an initial cash contribution of $4,149,585. On March 20, 1998, Dominion Chateau Creste Limited Partnership, the general partner of Dominion, purchased the Company's limited partnership interest in Dominion pursuant to its rights under the partnership agreement. The purchase price was determined by independent appraisals and resulted in a cash payment to the Company of $4,727,500, which was $779,893 in excess of the carrying value of this investment at the date of sale. The Chateau Crest apartment complex contained 90 apartment units and the Company's percentage of ownership in Dominion was 99%. On August 26, 1998, the Company invested $895,200 for a 40% interest as a limited partner in FAI, Ltd. ("FAI"), the limited partnership which owns Weatherly Walk Apartments (see Item 1. Business.-Mortgage Loans). This equity interest earns an annual preferred return of 10.5% on $895,200, paid monthly, plus 40% of excess cash flow and sale or refinancing proceeds. As of December 31, 1999, the Company had received all of the preferred returns due from FAI. Weatherly Walk Apartments contains 194 apartment units and was approximately 97.4% occupied as of March 1, 2000. Item 3. Legal Proceedings. The Company is not a party to any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Shareholders. None. PART II Item 5. Market for the Company's Common Stock and Related Shareholder Matters As of March 9, 2000, there were 1,598 registered shareholders of record owning 8,049,179 shares of Common Stock. The Company's Common Stock has been listed on the American Stock Exchange since October 10, 1997 under the symbol "AER". Prior to October 10, 1997, there was no established public trading market for the Company's Common Stock. -9- The high and low prices for each quarterly period of the last two years for which the shares of Common Stock were traded were as follows:
1999 1999 1998 1998 Quarter Ended Low High Low High - ------------- --- ---- --- ---- March 31 9 5/16 10 3/8 11 3/4 12 1/2 June 30 9 3/8 10 5/16 10 3/16 12 1/4 September 30 9 10 1/4 9 9/16 10 3/4 December 31 8 5/8 9 5/16 8 5/8 10 1/8
The last reported sale price of Common Stock on the American Stock Exchange on March 9, 2000 was $8 7/16. INCENTIVE STOCK OPTION PLAN The Company has adopted an incentive stock option plan (the "Incentive Stock Option Plan"), the purpose of which is to (i) attract and retain qualified persons as directors and officers and (ii) to incentivize and more closely align the financial interests of the Advisor and its affiliates and their respective employees and officers with the interests of the stockholders by providing the Advisor and its affiliates with substantial financial interest in the Company's success. The Compensation Committee administers the Incentive Stock Option Plan. Pursuant to the Incentive Stock Option Plan, if the Company's distributions per share of Common Stock in the immediately preceding calendar year exceed $0.9869 per share, the Compensation Committee has the authority to issue options to purchase, in the aggregate, that number of shares of Common Stock which is equal to three percent of the shares outstanding as of December 31 of the immediately preceding calendar year (or in the initial year, as of October 1, 1997), provided that the Compensation Committee may only issue, in the aggregate, options to purchase a maximum number of shares of Common Stock over the life of the Incentive Stock Option Plan equal to 10% of the shares outstanding on October 1, 1997 (805,073 shares). Subject to the limitations described in the preceding paragraph, if the Compensation Committee does not grant the maximum number of options in any year, then the excess of the number of authorized options over the number of options granted in such year will be added to the number of authorized options in the next succeeding year and will be available for grant by the Compensation Committee in such succeeding year. All options granted will have an exercise price equal to or greater than the fair market value of the shares of Common Stock on the date of the grant. The maximum option term is ten years from the date of grant. All stock options granted pursuant to the Incentive Stock Option Plan may vest immediately upon issuance or in accordance with the determination of the Compensation Committee. The Company's distributions per share of Common Stock for the years ended December 31, 1999 and 1997 did not exceed $.9869 per share. In 1998, the Company distributed $1.035 per share of Common Stock ($0.96 from continuing operations and a $0.075 special capital gains distribution), thus enabling the Compensation Committee, at their discretion, to issue options. Three percent of the shares outstanding as of December 31, 1998 are equal to 241,346 shares. On August 6, 1999, options to purchase 30,000 shares of Common Stock were granted to an officer of the Company and certain employees of an affiliate of the Advisor, who are not employees of the Company. The exercise price of these options is $9.50 per share. The term of each option is ten years. The options will vest in equal installments on August 6, 2000, 2001 and 2002. None of the options granted during 1999 were exercised or expired. STOCK REPURCHASE PLAN On October 9, 1998, the Board of Directors authorized the implementation of a stock repurchase plan, enabling the Company to repurchase, from time to time, up to 500,000 shares of its Common Stock. The repurchases will be made in the open market and the timing will be dependent on the availability of shares and other market conditions. As of both December 31, 1999 and 1998, the Company had acquired 6,300 shares of its Common Stock for an aggregate purchase price of $58,579 (including commissions and service charges). Repurchased shares are accounted for as treasury stock. SHAREHOLDER RIGHTS PLAN On January 29, 1999, the Company adopted a shareholder rights plan (the "Shareholder Rights Plan"), the purpose of which is to better protect shareholders and assure that they receive the full value of their investment in the event of any proposed takeover of the Company. The Company noted that the adoption of the Shareholder Rights Plan was not in response to any specific attempt to acquire control of the Company and that the Company had no knowledge of any such interest on the part of any person or entity. The Shareholder Rights Plan, which is similar to plans adopted by many other U.S. companies, strengthens the ability of the Board of Directors to assure that the Company's shareholders receive fair and equal treatment and protects the interests of the Company's shareholders in the event of an unsolicited offer to acquire control of the Company. Importantly, it is intended to encourage any potential acquirer to negotiate the manner and terms of any proposed acquisition with the Board of Directors. Terms of the Shareholder Rights Plan provide for a distribution to common shareholders of record at the close of business on February 16, 1999 of one Right for each outstanding share of Common Stock of the Company. Subject to limited exceptions, the Rights will be exercisable if a person or group acquires 15% or more of the Company's Common Stock or announces a tender offer for 15% or more of the Common Stock. Depending on the circumstances, the effect of the exercise of the Rights will be to permit each holder of a Right to either purchase stock in the Company or stock of the buyer, at a substantial discount, and, in so doing, materially dilute the level of ownership of the buyer in the Company. The Company will be entitled to redeem the Rights at $.01 per -10- Right at any time before a person has acquired 15% or more of the outstanding Common Stock. The Shareholder Rights Plan will expire on February 16, 2009. OTHER Through calendar year 1999, each independent director was entitled to receive annual compensation for serving as a director in the aggregate amount of $15,000 payable in cash (maximum of $5,000 per year) and/or shares of Common Stock valued based on the fair market value at the date of issuance. Beginning in calendar year 2000, the annual compensation for each independent director was increased from $15,000 to $17,500 and the maximum payable in cash was increased from $5,000 to $7,500. As of December 31, 1999 and 1998, 1,216 and 216 shares, respectively, having an aggregate value of $12,500 and $2,500, respectively, have been issued to each of the Company's two independent directors as compensation for their services. The Company was created as part of the settlement in 1997 of class action litigation against, among others, the sponsors of the Partnerships which were consolidated to form the Company. As part of that settlement, counsel ("Class Counsel") for the partners of the Partnerships had the right to petition the United States District Court for the Southern District of New York (the "Court") for additional attorneys' fees ("Counsel's Fee Shares") in an amount to be determined in the Court's sole discretion. The Counsel's Fee Shares would have been based upon a percentage of the increase in value of the Company, ("the Added Value") if any, as of October 10, 1998 based upon the difference between (i) the trading prices of the Company's shares of Common Stock during the six month period ended October 10, 1998 and (ii) the trading prices of the limited partnership units and the asset values of the Partnerships prior to 10/1/97. As of October 10, 1998, there was no Added Value and therefore, Class Counsel did not file a petition for Counsel's Fee Shares. DISTRIBUTION INFORMATION DISTRIBUTIONS PER SHARE Quarterly cash distributions per share for the years ended December 31, 1999 and 1998 were as follows:
Cash Distribution Total Amount for Quarter Ended Date Paid Per Share Distributed - ----------------- --------- --------- ------------ March 31, 1999 5/14/99 $ .240 $1,931,246 June 30, 1999 8/15/99 .240 1,931,246 September 30, 1999 11/14/99 .240 1,931,246 December 31, 1999 2/14/00 .240 1,931,247 ----- --------- Total for 1999 $ .960 $7,724,985 ===== ========= March 31, 1998 5/15/98 $ .240 $1,932,174 June 30, 1998 8/14/98 .240 1,932,278 September 30, 1998 11/14/98 .240 1,932,278 December 31, 1998 1/29/99 .315 (1) 2,534,135 ----- --------- Total for 1998 $1.035 $8,330,865 ===== =========
(1) Includes a capital gain distribution of $603,369 ($.075 per share) relating to the sale of three non-core assets (see "Item 1. Business.-Mortgage Loans" and "Item 2. Properties"). There are no material legal restrictions upon the Company's present or future ability to make distributions in accordance with the provisions of the Company's Articles of Amendment and Restatement. Future distributions paid by the Company will be at the discretion of the Directors and will depend on the actual cash flow of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Directors deem relevant. -11- RECENT SALES/ISSUANCE OF UNREGISTERED EQUITY SECURITIES (i) Securities Issued The following table sets forth the date of issuance, title and amount of unregistered securities issued by the Company's subsidiary, the Operating Partnership, since December 31, 1997:
Date of Sale/issuance Title Number - --------------------- ----- ------ 05/28/98 OP Units 94,726 12/09/98 OP Units 208,914 12/09/98 OP Units 167,149 05/28/99 OP Units 28,187 12/09/99 OP Units 92,439 12/09/99 OP Units 73,957 12/09/99 OP Units 15,030 12/09/99 OP Units 23,716 12/09/99 OP Units 26,259
The acquisitions of Governor's Square, Southgate and Crossroad East, three Retail Properties with purchase prices of $8,200,000, $15,100,000 and $4,800,000, respectively, were partially financed through the issuance of 94,726, 208,914 and 167,149 OP Units (subject to adjustment) valued at $1,231,438, $2,715,882 and $2,172,937. These 470,789 OP Units were convertible to shares of Common Stock on a one-to-one basis, subject to adjustment, on the one year anniversary of their respective closing dates. The OP Units were issued at an agreed upon value of $13 per OP Unit. If as of the last trading day prior to the first anniversary of the closing date (the "Post-Closing Adjustment Date"), the "Average Price Per Share" (as defined below) was less than $13, the Company was obligated to issue additional OP Units to the respective sellers in the amount of the difference between (i) the quotient obtained by dividing the OP Unit value at $13 per OP Unit by the Average Price Per Share as of the Post-Closing Adjustment Date and (ii) the number of OP Units issued on the closing date. The Average Price Per Share means, with respect to any given date, the average final closing price per share of Common Stock during the twenty trading day period ending on such date. An additional 28,187 OP Units were issued to the seller of Governor's Square on the Post-Closing Adjustment Date (May 28, 1999) based on an Average Price Per Share of $10.01875. An additional 92,439 and 73,957 OP Units were issued to the sellers of Southgate and Crossroads East, respectively, on the Post-Closing Adjustment Date (December 9, 1999) based on an Average Price Per Share of $9.0125. In addition, a note payable to the sellers of Southgate and the two notes payable to the sellers of Crossroads East in the amounts of $200,000, $230,000 and $275,000, respectively, were partially repaid in the amounts of $135,400, $213,708 and $236,646 through the issuance of 15,030, 23,716 and 26,259 OP Units on December 9, 1999 based on an Average Price Per Share of $9.0125. (ii) Underwriters and Other Purchasers Underwriters were not retained in connection with the issuance of these securities. (iii) Consideration See (i) above. (iv) Exemption from Registration Claimed The OP Units were issued to "accredited investors" in transactions which were exempt from registration under Section 4 (2) of the Securities Act of 1933. -12- Item 6. Selected Financial Data. The information set forth below presents selected financial data of the Company. Additional financial information is set forth in the audited financial statements and notes thereto contained in "Item 8. Financial Statements and Supplementary Data".
Year ended December 31, ------------------------------------------------------------------------------------------- OPERATIONS 1999 1998 1997* 1996* 1995* - ---------- ----------- ------------ ------------- ------------- ----------- Total revenues $25,354,501 $19,504,803 $10,755,797 $9,224,030 $9,081,226 Total expenses (19,133,837) (13,544,516) (7,309,038) (6,797,394) (6,790,935) ----------- ----------- ----------- ----------- ---------- Income before gain on sale of 6,220,664 5,960,287 3,446,759 2,426,636 2,290,291 investment Gain on sale of investment in partnership***** 0 779,893 0 0 0 ----------- ----------- ----------- ----------- ---------- Income before minority interest 6,220,664 6,740,180 3,446,759 0 0 Minority interest in income of the (397,583) (93,547) (8,263) 0 0 Operating Partnership ----------- ----------- ----------- ----------- ---------- Net income $ 5,823,081 $ 6,646,633 $3,438,496 $2,426,636 $2,290,291 ========== ========== ========= ========= ========= Net income applicable to common $ 5,823,081 $ 6,646,633 $1,420,370*** shareholders ========== ========== ========= Net income per share (1) Basic** $ .72 $ .83 $ .18*** ========== ========== ========= Diluted** $ .72 $ .82 $ .18*** ========== ========== ========= Weighted average shares outstanding: Basic** 8,046,574 8,049,987 8,050,727*** ========= ========= ========= Diluted** 8,046,574 8,075,390 8,050,727*** ========= ========= ========= Year ended December 31, ------------------------------------------------------------------------------------------- FINANCIAL POSITION 1999 1998 1997* 1996* 1995* - ------------------- ----------- ------------ ------------- ------------- ----------- Total assets $193,392,424 $195,389,970 $148,639,328 $75,842,337 $77,862,045 =========== =========== =========== ========== ========== Notes payable $ 59,239,944 $ 58,864,099 $ 18,544,242 $ 5,565,841 $ 5,792,615 =========== =========== =========== ========== ========== Total liabilities $ 64,830,450 $ 65,402,567 $ 22,866,886 $ 6,746,907 $ 7,121,610 =========== =========== =========== ========== ========== Minority interest $ 7,260,370 $ 6,803,895 $ 727,431 =========== =========== =========== Total shareholders' $121,301,604 $123,183,508 $125,045,011 $69,095,430 $70,740,435 =========== =========== =========== ========== ========== equity/partners' capital DISTRIBUTIONS Total BUC$holder distributions N/A N/A $ 2,700,004**** $3,600,005 $ 3,600,005 =========== ========= ========== Total shareholder distributions $ 7,724,985 $ 8,330,865 $ 1,932,174*** =========== ============ =========== Distributions per share** $ .96 $ 1.04 $ .24*** =========== ============ ===========
-13- OTHER DATA
Year Year Three Months Ended Ended Ended December 31, December 31, December 31, 1999 1998 1997 - ----------- ------------ ------------- ------------ Funds From Operations ("FFO") (2) $ 10,646,024 $ 9,974,863 $ 2,268,839 ============ ============= ========== Funds Available for Distribution ("FAD") (2) $ 8,254,454 $ 8,969,572 $ 2,171,071 ============ ============= ========== FFO payout ratio 72.6% 83.5% 85.2% ============ ============= ========== Cash flows from: Operating activities $ 9,567,923 $ 9,584,324 $ 2,308,465 ============ ============= ========== Investing activities $ (1,970,601) $(20,087,699) $(8,829,861) ============ ============= ========== Financing activities $ (8,374,501) $ 6,778,799 $10,297,819 ============ ============= ==========
*Information prior to October 1, 1997 (the date of the Consolidation) is only with respect to Insured I. Information subsequent to September 30, 1997 is with respect to the Company and its consolidated subsidiaries which include Insured I and the other Partnerships pursuant to the Consolidation. **Net income and distribution per share information for periods before October 1, 1997 is not presented because it is not indicative of the Company's continuing capital structure. ***Represents amount for the three months ended December 31, 1997. ****Represents amount for the nine months ended September 30, 1997. *****The 1998 results of operations reflect a gain of $779,893 recognized upon the sale of the Company's limited partnership interest in Dominion Totem Park Limited Partnership. (1) Net income per share equals net income divided by the weighted average shares outstanding for the period. (2) See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a definition and calculation of Funds From Operations and Funds Available for Distribution. -14- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. LIQUIDITY AND CAPITAL RESOURCES Aegis Realty, Inc. (the "Company") is a Maryland corporation that has qualified as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986 as amended (the "Code"). The Company was formed to acquire, own, operate and renovate primarily supermarket-anchored neighborhood and community shopping centers. As of December 31, 1999, the Company owned a portfolio of 28 retail properties (the "Retail Properties") containing a total of approximately 3.0 million gross leaseable square feet ("GLA"), held partnership interests in two suburban garden apartment properties (the "Multifamily Properties"), held one FHA insured participating mortgage secured by a suburban garden apartment property (the "FHA Mortgage") and had net assets of approximately $121,302,000. The Company was formed on October 1, 1997 as the result of the consolidation (the "Consolidation") of four publicly registered, non-listed limited partnerships, Summit Insured Equity L.P. ("Insured I"), Summit Insured Equity L.P. II ("Insured II"), Summit Preferred Equity L.P. ("Summit Preferred") and Eagle Insured, L.P. ("Eagle") (the "Partnerships"). One of the general partners of the Partnerships was an affiliate of Related Capital Company ("Related") a nationwide, fully integrated real estate financial services firm. As of December 31, 1999, there were 8,046,859 shares of Common Stock outstanding (an additional 777,213 shares were reserved for issuance upon conversion of OP Units). The Company has initiated a focused business/strategic plan designed to increase funds from operations ("FFO") and to enhance the value of its stock. The plan concentrates principally on external growth and internal growth. The Company's external growth will be accomplished through continued acquisitions of Retail Properties either directly or in joint venture on an individual or bulk basis. The Company believes that there are significant opportunities available to acquire undervalued, undermanaged and/or underutilized neighborhood and community shopping centers. Unlike most small capitalized REITs, the Company has the ability to benefit from its affiliation with a much larger company, Related, with a national presence. The Company is using its affiliation with Related to acquire properties on a national basis. The Company believes that by acquiring shopping centers on a national basis, rather than targeting a few markets or a region, it will be able to grow at a meaningful rate, without the need for it to compromise asset quality or current return. In addition, a national acquisition program allows the Company to maintain geographic diversity, which the Company believes reduces the risk otherwise associated with focusing on one region. The Company seeks to acquire primarily, but not exclusively, supermarket-anchored shopping centers, which are well located in primary and secondary markets. Acquisitions will be balanced between stabilized centers that the Company believes are undervalued and centers that may be enhanced through intensive management, leasing, redevelopment or expansion efforts. In all such cases, the Company generally seeks to acquire only those centers that are expected to immediately increase FFO. In addition, the Company will consider strategic combinations in the form of portfolio acquisitions, joint ventures or mergers in order to maximize shareholder value. On September 8, 1999, the Company acquired an out-parcel of developable land contiguous to the Rolling Hills Square Retail Property for a purchase price of $325,000, not including acquisition fees and expenses of approximately $16,000. Internal growth will occur from the re-deployment of proceeds from the sale or other disposition of non-core assets currently in the portfolio and through intensive management, leasing and redevelopment services provided to the Company by the Property Manager and the Advisor. The Company considers non-core assets to be those assets the Company has enhanced and no longer offer above market rates of return or those assets which due to location, configuration or tenant profile no longer offer the Company the prospects of better than market rates of growth. The Company regularly reviews its portfolio to identify non-core assets and to determine whether the time is appropriate to sell or otherwise dispose of such assets whose characteristics are no longer suited to the Company's overall growth strategy or operating goals. The Company requires long-term financing in order to invest in and hold its portfolio of Retail Properties and other investments. To date, this long-term liquidity has come from proceeds from the Credit Facility, notes payable assumed upon the purchase of certain properties and the issuance of shares of the Company's Common Stock or OP Units in exchange for real estate. Although the Credit Facility may be increased, the Company's Charter dictates leverage of no more than 50% of the Company's Total Market Value. On a short-term basis, the Company requires funds to pay its operating expenses and those of the Retail Properties, to make improvements to the Retail Properties, pay its debt service and make distributions to its shareholders. The primary source of the Company's short-term liquidity needs are the cash flow received from the Retail Properties and interest income. On August 6, 1999, options to purchase 30,000 shares of Common Stock were granted to an officer of the Company and certain employees of an affiliate of the Advisor, who are not employees of the Company. Vesting of the options is contingent upon the recipient continuing to provide services to the Company to the vesting date. The exercise price of these options is $9.50 per share. The term of each option is ten years. The options will vest in equal installments on August 6, 2000, 2001 and 2002. On December 1, 1998, the Company entered into an interest rate swap agreement with a notional amount of $10,000,000, intended to reduce the impact of changes in interest rates on the Credit Facility. This agreement effectively changes the Company's interest rate on $10,000,000 of the Credit Facility debt to a fixed rate of 5.44% and matures on December 1, 2000. The Company accounts for the net cash settlements under this swap agreement as adjustments to the interest expense on the Credit Facility. The Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement; however, the Company does not anticipate nonperformance by the counter party. As a REIT, the Company is required to distribute at least 95% of its taxable income to maintain REIT status. Funds generated from operations are expected to be sufficient to allow the Company to meet this requirement. -15- The Advisor believes that the stability of the Company's operations and its ability to maintain liquidity are enhanced by: (i) Geographic diversity of its portfolio of real estate and its mortgage note. (ii) 47% of total revenues for the year ended December 31, 1999 were earned from shopping center anchor tenants which are national credit tenants and from interest on an FHA Mortgage. (iii) No single asset accounts for more than 8% of total revenues for the year ended December 31, 1999. (iv) Leases that provide for recovery of actual common area maintenance charges and real estate taxes, thereby minimizing any effects from inflation. (v) Leases that provide for increases in rents based on a percentage of tenants' sales. (vi) A mortgage note which is substantially guaranteed by FHA and a co-insurer and that provides for participation in increases in operating results and market value of the underlying collateral. During the year ended December 31, 1999, cash and cash equivalents of the Company and its consolidated subsidiaries decreased approximately $777,000. This decrease was primarily due to improvements to real estate ($1,308,000), acquisitions of real estate including acquisition expenses ($714,000), distributions paid to shareholders ($8,328,000), an increase in deferred loan costs ($553,000) and distributions paid to minority interest ($455,000) which exceeded net cash provided by operating activities ($9,568,000) and net proceeds from notes payable ($962,000). Included in the adjustments to reconcile the net income to cash provided by operating activities is depreciation and amortization in the amount of $4,955,000. The Company anticipates that cash generated from operations will provide for all major repairs, replacements and tenant improvements on its real estate and will provide sufficient liquidity to fund, in future years, the Company's operating expenditures, debt service and distributions. The Company has the following problem assets which may adversely affect future operations and liquidity: (i) Safeway, the anchor tenant of Cactus Village Shopping Center closed its facility in December 1991 due to poor sales. The tenant is currently in arrears as it relates to a contractual increase in minimum rent of $.10 per square foot per year (approximately $4,200 per year). The aggregate arrears as of December 31, 1999 is $19,237. The arrears is due to different interpretations of the lease which is expected to be resolved in 2000. With the exception of this amount, the tenant continues to fully abide by all aspects of its lease which will expire in September 2006. There have been proposals received for leasing this space, but as of March 1, 2000, this space has not been re-leased. (ii) In July 1994, A&P closed its store in the Mountain Park Plaza Shopping Center due to reduced sales and increased competition. The Company continues to receive rental payments from the vacated tenant pursuant to the terms of the lease which will expire in June 2007 and both the tenant and the Company are actively pursuing potential sub-tenants or replacement tenants. As of March 1, 2000, this space has not been re-leased. (iii) On March 1, 1999, Penn Traffic Co., parent of Big Bear Stores, an anchor tenant in the Southgate Shopping Center, filed for Chapter 11 bankruptcy. As of March 17, 2000 (a) the lease was not formally rejected, (b) Penn Traffic's reorganization plan was approved by the court on May 27, 1999 and has been implemented, except for the completion of final creditor negotiations with rejected lease holders, (c) Penn Traffic's stock has been relisted on the NASDAQ National Market System and (d) the rent for the period March 2, 1999 through March 31, 2000 has been paid. Counsel to the Company has advised the Company that, (i) failure of Penn Traffic to reject the lease combined with (ii) item b above, constitutes affirmation of the lease pursuant to the Bankruptcy Court and the Company can consider this matter closed. For a discussion of environmental issues affecting one of the Company's Retail Properties see "Item 1. Business - Regulations". In February 2000, a distribution of $1,931,246 ($.24 per share), which was declared in December 1999, was paid to the shareholders from cash flow from operations for the quarter ended December 31, 1999. Management is not aware of any trends or events, commitments or uncertainties, which have not otherwise been disclosed that will or are likely to impact liquidity in a material way. RESULTS OF OPERATIONS The following is a summary of the results of operations of the Company for the years ended December 31, 1999, 1998 and 1997. The net income for the years ended December 31, 1999, 1998 and 1997 was $5,823,081, $6,646,633 and $3,438,496, respectively. 1999 VS. 1998 For the year ended December 31, 1999 as compared to 1998, total revenues and total expenses increased due to the acquisition of 12 Retail Properties during 1998. The Company's results of operations for the year ended December 31, 1999 consisted primarily of the results of the Company's investment in 28 Retail Properties, two partnership interests in Multifamily Properties and one FHA Mortgage. The Company's results of operations for the year ended December 31, 1998 consisted primarily of the results of the -16- Company's investment in 28 Retail Properties, three partnership interests in Multifamily Properties, three FHA Mortgages, a gain on the sale of a partnership interest in one Multifamily Property and a loss on the repayment of two FHA Mortgages. Rental income increased approximately $6,277,000 for the year ended December 31, 1999 as compared to 1998. An increase of $6,322,000 was due to the acquisition of 12 Retail Properties during 1998 (the "1998 Acquisitions"). Excluding these acquisitions, rental income decreased less than 1% for the year ended December 31, 1999 as compared to 1998. Tenant reimbursements increased approximately $767,000 for the year ended December 31, 1999 as compared to 1998. An increase of $1,576,000 was due to the 1998 Acquisitions. Excluding these acquisitions, tenant reimbursements decreased approximately $809,000 for the year ended December 31, 1999 as compared to 1998 primarily due to additional billings to tenants and increases in estimates for recoverable amounts in 1998. Income from equity investments decreased approximately $133,000 for the year ended December 31, 1999 as compared to 1998 primarily due to the sale of the Company's limited partnership interest in Dominion on March 20, 1998 and a decrease in income from Pinehurst in 1999. Interest income decreased approximately $1,167,000 for the year ended December 31, 1999 as compared to 1998 primarily due to the repayment of the Cross Creek FHA Mortgage and the Cross Creek Loan in June 1998 and the repayment of the Weatherly Walk FHA Mortgage in August 1998. Other income increased approximately $104,000 for the year ended December 31, 1999 as compared to 1998. An increase of $95,000 was due to the 1998 Acquisitions. Excluding these acquisitions, other income increased approximately $9,000 for the year ended December 31, 1999 as compared to 1998. Repairs and maintenance increased approximately $406,000 for the year ended December 31, 1999 as compared to 1998. An increase of $656,000 was due to the 1998 Acquisitions. Excluding these acquisitions, repairs and maintenance decreased approximately $250,000 for the year ended December 31, 1999 as compared to 1998 primarily due to a decrease in parking lot light repairs at Westbird and Birdneck Center, a decrease in roofing repairs at Pablo Plaza, Winery Square and Rolling Hills Square and a decrease in painting expenses at Townwest, Kokomo Plaza and Mountain Park Plaza. Operating expenses increased approximately $864,000 for the year ended December 31, 1999 as compared to 1998. An increase of $849,000 was due to the 1998 Acquisitions. Excluding these acquisitions, operating expenses increased approximately 1% for the year ended December 31, 1999 as compared to 1998. Real estate taxes increased approximately $712,000 for the year ended December 31, 1999 as compared to 1998. An increase of $673,000 was due to the 1998 Acquisitions. Excluding these acquisitions, real estate taxes increased approximately 3% for the year ended December 31, 1999 as compared to 1998. Interest expense increased approximately $2,558,000 for the year ended December 31, 1999 as compared to 1998 primarily due to a higher outstanding balance of the Credit Facility during the year ended December 31, 1999 and the assumption of existing debt with respect to four of the 1998 Acquisitions. General and administrative expenses increased approximately $178,000 for the year ended December 31, 1999 as compared to 1998 primarily due to an increase in audit/tax fees and an increase in asset management fees incurred to the Advisor and its affiliates due to the 1998 Acquisitions. Depreciation and amortization increased approximately $1,049,000 for the year ended December 31, 1999 as compared to 1998. An increase of $1,173,000 was due to the 1998 Acquisitions, an increase of $149,000 was due to an increase in amortization of deferred loan costs relating to the Credit Facility and a decrease of $404,000 was due to deferred insurance costs becoming fully amortized during the second quarter of 1999. Excluding these increases and decreases, depreciation and amortization increased approximately 4% for the year ended December 31, 1999 as compared to 1998. Other expenses decreased approximately $178,000 for the year ended December 31, 1999 as compared to 1998. An increase of $184,000 was due to the 1998 Acquisitions. Excluding these acquisitions, other expenses decreased approximately $362,000 for the year ended December 31, 1999 as compared to 1998 primarily due to a decrease in bad debt expense resulting from a decrease in reserves at Westbird, Pablo Plaza, Winery Square and Forest Park Square and losses on the repayment of the Cross Creek and Weatherly Walk Mortgage Loans during the second and third quarter of 1998, respectively. A gain on sale of investment in partnership in the amount of approximately $780,000 was recorded for the year ended December 31, 1998 relating to the sale of the Company's limited partnership interest in Dominion in the first quarter of 1998. Minority interest in the income of the Operating Partnership increased approximately $304,000 for the year ended December 31, 1999 as compared to 1998 primarily due to the issuance of OP Units with respect to three of the 1998 Acquisitions. 1998 VS. 1997 For the year ended December 31, 1998 as compared to 1997, total revenues, total expenses and net income increased and the results of operations are not comparable due to (i) the Consolidation of Insured I with three other Partnerships on October 1, 1997 which resulted in the formation of the Company and (ii) the purchase of 14 shopping centers after the Consolidation. The Company's results of operations for the year ended December 31, 1998 consisted primarily of the results of the Company's investment in 28 Retail Properties, three partnership interests in Multifamily Properties, three FHA Mortgages, a gain on the sale of a partnership -17- interest in one Multifamily Property and a loss on the repayment of two FHA Mortgages. The Company's results of operations for the year ended December 31, 1997 consisted primarily of the results of the Company's investment in 11 Retail Properties for the nine months ended September 30, 1997 and the results of the Company's investment in fourteen Retail Properties, two partnership interests in Multifamily Properties and three FHA Mortgages for the three months ended December 31, 1997. In addition, the results of operations are not reflective of future operations due to the anticipated continued acquisition of shopping centers. Rental income increased approximately $5,641,000 for the year ended December 31, 1998 as compared to 1997. An increase of $1,437,000 was due to the three shopping centers acquired from Insured II in the Consolidation (the "Insured II Acquisitions") and an increase of $4,003,000 was due to the acquisition of 14 shopping centers after the Consolidation (the "New Acquisitions"). Excluding these acquisitions, rental income increased approximately $201,000 for the year ended December 31, 1998 as compared to 1997 primarily due to an increase in rental rates at Pablo Plaza and Winery Square and an increase in percentage rents received at Mountain Park Plaza. Tenant reimbursements increased approximately $1,961,000 for the year ended December 31, 1998 as compared to 1997. Increases of $451,000 and $697,000 were due to the Insured II Acquisitions and the New Acquisitions, respectively. Excluding these acquisitions, tenant reimbursements increased approximately $813,000 for the year ended December 31, 1998 as compared to 1997 primarily due to additional billings to tenants and increases in estimates for recoverable amounts in 1998. Income from equity investments increased approximately $230,000 for the year ended December 31, 1998 as compared to 1997 primarily due to the two equity interests in Multifamily Properties acquired from Summit Preferred in the Consolidation and the purchase of another equity interest in a Multifamily Property on August 26, 1998. Interest income increased approximately $898,000 for the year ended December 31, 1998 as compared to 1997. An increase of $843,000 was due to interest income relating to the three FHA Mortgages and the Cross Creek Loan acquired from Eagle. Excluding such income, interest income increased approximately $55,000 for the year ended December 31, 1998 as compared to 1997 primarily due to higher invested cash balances in 1998. Other income increased approximately $19,000 for the year ended December 31, 1998 as compared to 1997. Increases of $23,000 and $15,000 were due to the Insured II Acquisitions and the New Acquisitions, respectively. Excluding these acquisitions, other income decreased approximately $19,000 for the year ended December 31, 1998 as compared to 1997 primarily due to decreases in late charges at Westbird, Pablo Plaza and Highland Fair and a decrease in lease settlement income at Mountain Park Plaza in 1998. Repairs and maintenance increased approximately $572,000 for the year ended December 31, 1998 as compared to 1997. Increases of $214,000 and $304,000 were due to the Insured II Acquisitions and the New Acquisitions, respectively. Excluding these acquisitions, repairs and maintenance increased approximately 6% for the year ended December 31, 1998 as compared to 1997. Operating expenses increased approximately $860,000 for the year ended December 31, 1998 as compared to 1997. Increases of $168,000 and $476,000 were due to the Insured II Acquisitions and the New Acquisitions, respectively. Excluding these acquisitions, operating expenses increased approximately $216,000 for the year ended December 31, 1998 as compared to 1997 primarily due to an increase in security expenses at Winery Square and Westbird, an increase in water and sewer expenses at Highland Fair, Mountain View Village, Winery Square and Forest Park Square and an increase in property management fees at Pablo Plaza, Winery Square and Mountain View Village. Real estate taxes increased approximately $534,000 for the year ended December 31, 1998 as compared to 1997. Increases of $207,000 and $325,000 were due to the Insured II Acquisitions and the New Acquisitions, respectively. Excluding these acquisitions, real estate taxes increased less than 1% for the year ended December 31, 1998 as compared to 1997. Interest expense increased approximately $1,373,000 for the year ended December 31, 1998 as compared to 1997 primarily due to interest expense relating to the Credit Facility and the assumption of existing debt with respect to four of the New Acquisitions. General and administrative expenses increased approximately $987,000 for the year ended December 31, 1998 as compared to 1997 primarily due to fees relating to the unused portion of the Credit Facility, state income taxes resulting from qualification as a REIT, asset management fees incurred to the Advisor, an increase in printing and investor service expenses resulting from an increase in investors, an increase in audit/tax fees and expense reimbursements to the Advisor and its affiliates due to the Insured II Acquisitions and the New Acquisitions and fees to the independent directors relating to their services for 1998. Depreciation and amortization increased approximately $1,194,000 for the year ended December 31, 1998 as compared to 1997. An increase of $295,000 was due to the Insured II Acquisitions, an increase of $777,000 was due to the New Acquisitions and an increase of $144,000 was due to an increase in amortization of deferred loan costs relating to the Credit Facility. Excluding these increases, depreciation and amortization decreased approximately 1% for the year ended December 31, 1998 as compared to 1997. Minority interest in the income of the Operating Partnership increased approximately $85,000 for the year ended December 31, 1998 as compared to 1997 primarily due to the issuance of OP Units with respect to three of the New Acquisitions. Other expenses increased approximately $715,000 for the year ended December 31, 1998 as compared to 1997. Increases of $116,000 and $149,000 were due to the Insured II Acquisitions and the New Acquisitions, respectively. Excluding these acquisitions, other expenses increased approximately $450,000 for the year ended December 31, 1998 as compared to 1997 primarily due to losses on the repayment of the Cross Creek and Weatherly Walk Mortgage Loans and an increase in bad debt expense resulting from an increase in reserves at Westbird, Pablo Plaza, Winery Square and Forest Park Square. -18- A gain on sale of investment in partnership in the amount of approximately $780,000 was recorded for the year ended December 31, 1998 relating to the sale of the Company's limited partnership interest in Dominion. Westbird, Pablo Plaza, Highland Fair, Town West, Mountain Park Plaza, Winery Square, Cactus Village, Kokomo Plaza, Forest Park Square, Hickory Plaza, and Southhaven were the shopping centers which were owned by the Company during all of 1998 and 1997. FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION Funds from operations ("FFO"), represents net income (computed in accordance with generally accepted accounting principles) ("GAAP"), excluding gains (or losses) from debt restructuring or repayments and sales of property, plus depreciation and amortization and including funds from operations for unconsolidated joint ventures calculated on the same basis. Net income computed in accordance with GAAP includes straight-lining of property rentals for rent escalations in the amounts of $367,078, $191,057 and $66,331 for the years ended December 31, 1999 and 1998 and the three months ended December 31, 1997, respectively. FFO is calculated in accordance with the National Association of Real Estate Investment Trusts ("NAREIT") definition. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs which is disclosed in the Consolidated Statements of Cash Flows included in the financial statements, for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers FFO a supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. Funds available for distribution ("FAD") represents FFO plus recurring principal receipts from mortgage loans less reserves for lease commissions, recurring capital expenditures (excluding property acquisitions) and debt principal amortization. FAD should not be considered an alternative to net income as a measure of the Company's financial performance or to cash flow from operating activities (computed in accordance with GAAP) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. FFO, as calculated in accordance with the NAREIT definition, and FAD for the years ended December 31, 1999 and 1998 and the three months ended December 31, 1997 are summarized in the following table:
Year Year Three Months Ended Ended Ended December 31, December 31, December 31, 1999 1998 1997 - ----------- ------------ ------------- ------------ Net income $ 5,823,081 $ 6,646,633 $ 1,420,370 Gain on sale of investment in partnership 0 (779,893) 0 Loss on repayment of Cross Creek receivable 0 92,504 0 Loss on repayment of Weatherly Walk receivable 0 45,934 0 Depreciation and amortization of real property 4,377,099 3,143,873 617,567 Amortization of insurance contract 200,195 600,580 150,145 Proportionate share of adjustments to equity in income from equity investments to arrive at funds from operations 245,649 225,232 80,757 ------------ ------------ ----------- Funds From Operations ("FFO") 10,646,024 9,974,863 2,268,839 Amortization of deferred financing costs 377,665 222,538 72,036 Principal payments received on mortgage loans 32,416 105,124 39,994 Straight-lining of property rentals for rent escalations (367,078) (191,057) (66,331) Improvements to real estate (1,308,093) (695,177) (36,283) Principal repayments on notes payable (538,401) (280,463) (64,717) Leasing commissions (588,079) (166,256) (42,467) ----------- ------------ ----------- Funds Available for Distribution ("FAD") $ 8,254,454 $ 8,969,572 $ 2,171,071 ============ ============ ========== Distributions to shareholders $ 7,724,985 $ 8,330,865 $ 1,932,174 ============ ============ ========== FFO payout ratio 72.6% 83.5% 85.2% ============ ============ ========== Cash flows from: Operating activities $ 9,567,923 $ 9,584,324 $ 2,308,465 ============ ============ ========== Investing activities $ (1,970,601) $(20,087,699) $ (8,829,861) ============ ============ ========== Financing activities $ (8,374,501) $ 6,778,799 $ 10,297,819 ============ ============ ==========
RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative in- -19- struments, including certain derivative instruments embedded in other contracts, and for hedging activities. As amended, it is effective for the Company beginning with the first quarter of 2001. Currently, the only derivative instrument owned by the Company is an interest rate swap agreement. SFAS No. 133 will require the Company to carry such swap agreement at its fair value at the balance sheet date, which was approximately $75,000 at December 31, 1999. FORWARD-LOOKING STATEMENTS Certain statements made in this report may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include statements regarding the intent, belief or current expectations of the Company and its management and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: general economic and business conditions, which will, among other things, affect the demand for retail space or retail goods, availability and creditworthiness of prospective tenants, lease rents and the terms and availability of financing; adverse changes in the real estate markets including, among other things, competition with other companies; risks of real estate development and acquisition; governmental actions and initiatives; and environment/safety requirements. INFLATION Inflation did not have a material effect on the Company's results for the periods presented. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The debt financing used to raise capital for the acquisition of the Company's investments expose the Company to fluctuations in market interest rates. Market interest rates are highly sensitive to many factors, including governmental policies, domestic and International political considerations and other factors beyond the control of the Company. Cash flows from the Company's investments do not fluctuate with changes in market interest rates. In addition, as of December 31, 1999, approximately 48% of the Company's total notes payable outstanding are either fixed rate or non-interest bearing, and so the payments on these instruments do not fluctuate with changes in market interest rates. In contrast, payments required under the Credit Facility vary based on market interest rates, primarily the 30 day Euro-contract rate. Thus, an increase in market interest rates would result in increased payments under the Credit Facility, without a corresponding increase in cash flows from the Company's investments in the same amounts. For example, based on the $30,818,000 outstanding under the Credit Facility at December 31, 1999, and taking into account the interest rate swap agreement in place throughout 1999 as described, the Company estimates that an increase of 1% in the 30 day Euro-contract rate would decrease the Company's annual net income by approximately $208,000; a 2% increase in the 30 day Euro-contract rate would decrease annual net income by approximately $416,000. These estimates include the impact of the interest rate swap agreement discussed below. For the same reasons, a decrease in market interest rates would generally benefit the Company, as a result of decreased payments under the Credit Facility without corresponding decreases in cash flows from the Company's investments. Various financial vehicles exist which would allow Company management to mitigate the impact of interest rate fluctuations on the Company's cash flows and earnings. On December 1, 1998, the Company entered into an interest rate swap agreement with a notional amount of $10,000,000 to reduce the impact of changes in interest rates on the Credit Facility floating rate debt. Management may engage in additional hedging strategies in the future, depending on management's analysis of the interest rate environment and the costs and risks of such strategies. -20- Item 8. Financial Statements and Supplementary Data. PAGE (a) 1. FINANCIAL STATEMENTS Independent Auditors' Report 22 Consolidated Balance Sheets as of December 31, 1999 and 1998 23 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 24 Consolidated Statements of Changes in Shareholders' Equity/Partners' Capital (Deficit) for the years ended December 31, 1999, 1998 and 1997 25 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 26 Notes to Consolidated Financial Statements 28 -21- INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Aegis Realty, Inc. New York, New York We have audited the accompanying consolidated balance sheets of Aegis Realty, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity/partners' capital (deficit) and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedules listed in Item 14(a)2. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Aegis Realty, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. DELOITTE & TOUCHE LLP New York, New York March 20, 2000 -22- AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- 1999 1998 ----------- ------------ ASSETS Real estate, net $172,784,964 $174,876,580 Investment in partnerships 5,923,199 6,095,543 Mortgage loan receivable 3,220,191 3,267,037 Loans receivable from affiliates 2,077,886 2,081,015 Cash and cash equivalents 2,226,295 3,003,474 Accounts receivable-tenants, net of allowance for doubtful accounts of $343,000 and $383,000, respectively 2,958,033 2,442,896 Deferred costs, net 2,800,537 2,387,683 Other assets 1,401,319 1,235,742 ----------- ----------- Total Assets $193,392,424 $195,389,970 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes payable $ 59,239,944 $ 58,864,099 Accounts payable and other liabilities 3,169,953 3,575,499 Due to Advisor and affiliates 344,428 355,915 Distributions payable 2,076,125 2,607,054 ------------ ------------ Total Liabilities 64,830,450 65,402,567 ------------ ------------ Minority interest of unitholders in the Operating Partnership 7,260,370 6,803,895 ------------ ------------ Commitments and Contingencies Shareholders' equity: Common stock; $.01 par value; 50,000,000 shares authorized; 8,053,159 issued and 8,046,859 outstanding and 8,051,159 issued and 8,044,859 outstanding in 1999 and 1998, respectively 80,531 80,511 Treasury stock; $.01 par value; 6,300 shares (63) (63) Additional paid in capital 125,319,076 125,299,096 Distributions in excess of net income (4,097,940) (2,196,036) ----------- ----------- Total Shareholders' Equity 121,301,604 123,183,508 ----------- ----------- Total Liabilities and Shareholders' Equity $193,392,424 $195,389,970 =========== ===========
See accompanying notes to consolidated financial statements -23- AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ---------- Revenues: Rental income $19,680,116 $13,402,982 $7,761,826 Tenant reimbursements 4,682,075 3,914,656 1,953,948 Income from equity investments 291,082 423,624 193,511 Interest income 482,442 1,649,071 751,142 Other 218,786 114,470 95,370 ---------- ---------- ---------- Total revenues 25,354,501 19,504,803 10,755,797 ---------- ---------- ---------- Expenses: Repairs and maintenance 1,910,194 1,503,746 931,588 Operating 2,650,579 1,786,619 926,426 Real estate taxes 2,436,047 1,724,424 1,190,345 Interest 4,489,556 1,931,874 558,994 General and administrative 1,998,052 1,819,556 832,290 Depreciation and amortization 4,897,811 3,849,190 2,655,049 Other 751,598 929,107 214,346 ---------- ---------- ---------- Total expenses 19,133,837 13,544,516 7,309,038 ---------- ---------- ---------- Income before gain on sale of investment 6,220,664 5,960,287 3,446,759 Gain on sale of investment in partnership 0 779,893 0 ---------- ---------- ---------- Income before minority interest 6,220,664 6,740,180 3,446,759 Minority interest in income of the Operating Partnership (397,583) (93,547) (8,263) ---------- ---------- ---------- Net income $ 5,823,081 $ 6,646,633 $3,438,496 ========== ========== ========== Net income per share: Basic $ .72 $ .83 $ .18* ========== ========== ========== Diluted $ .72 $ .82 $ .18* ========== ========== ========== Weighted average shares outstanding: Basic 8,046,574 8,049,987 8,050,727* ========== ========== ========== Diluted 8,046,574 8,075,390 8,050,727* ========== ========== ==========
*Represents amount for the three months ended December 31, 1997. Net income per unit information for the period before October 1, 1997 is not presented because it is not indicative of the Company's continuing capital structure. See accompanying notes to consolidated financial statements -24-
AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY/PARTNERS' CAPITAL (DEFICIT) Common Stock Treasury Stock Limited General ------------------ ------------------- Partners Partners Shares Amount Shares Amount -------- -------- ------ ------ ------ ------ Balance at January 1, 1997 $69,352,193 $(256,763) 0 0 0 0 Net income - January 1, 1997 to September 30, 1997 1,674,755 343,371 0 0 0 0 Distributions - January 1, 1997 to September 30, 1997 (3,600,005) (362,818) 0 0 0 0 Consolidation and issuance of shares (67,426,943) 276,210 8,050,727 $80,507 0 0 Consolidation costs 0 0 0 0 0 0 Net income - October 1, 1997 to December 31, 1997 0 0 0 0 0 0 Distributions - October 1, 1997 to December 31, 1997 0 0 0 0 0 0 ----------- ------------ ---------- ---------- ---------- -------- Balance at December 31, 1997 0 0 8,050,727 80,507 0 0 Net income 0 0 0 0 0 0 Issuance of shares of common stock 0 0 432 4 0 0 Purchase of treasury shares 0 0 0 0 (6,300) $ (63) Consolidation costs 0 0 0 0 0 0 Distributions 0 0 0 0 0 0 ----------- ------------ ---------- ---------- ---------- --------- Balance at December 31, 1998 0 0 8,051,159 80,511 (6,300) (63) Net income 0 0 0 0 0 0 Issuance of shares of common stock 0 0 2,000 20 0 0 Distributions 0 0 0 0 0 0 ----------- ------------ ---------- ---------- ---------- -------- Balance at December 31, 1999 $ 0 $ 0 8,053,159 $80,531 (6,300) $ (63) =========== ============ ========= ====== ====== ====== Additional Distributions Paid-in in Excess of Capital Net Income TOTAL ------------- ------------- ------------ Balance at January 1, 1997 0 0 $ 69,095,430 Net income - January 1, 1997 to September 30, 1997 0 0 2,018,126 Distributions - January 1, 1997 to September 30, 1997 0 0 (3,962,823) Consolidation and issuance of shares $126,719,503 0 59,649,277 Consolidation costs (1,243,195) 0 (1,243,195) Net income - October 1, 1997 to December 31, 1997 0 $ 1,420,370 1,420,370 Distributions - October 1, 1997 to December 31, 1997 0 (1,932,174) (1,932,174) ------------- ---------- ------------ Balance at December 31, 1997 125,476,308 (511,804) 125,045,011 Net income 0 6,646,633 6,646,633 Issuance of shares of common stock 4,996 0 5,000 Purchase of treasury shares (58,516) 0 (58,579) Consolidation costs (123,692) 0 (123,692) Distributions 0 (8,330,865) (8,330,865) ------------- ---------- ------------ Balance at December 31, 1998 125,299,096 (2,196,036) 123,183,508 Net income 0 5,823,081 5,823,081 Issuance of shares of common stock 19,980 0 20,000 Distributions 0 (7,724,985) (7,724,985) ------------- ----------- ----------- Balance at December 31, 1999 $125,319,076 $(4,097,940) $121,301,604 =========== =========== ===========
See accompanying notes to consolidated financial statements -25- AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------------ 1999 1998 1997 ---------- --------- ---------- Cash flows from operating activities: Net income $5,823,081 $6,646,633 $3,438,496 --------- --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of investment in partnership 0 (779,893) 0 Loss on repayments of mortgage loans receivable 0 138,438 0 Depreciation and amortization 4,954,959 3,966,178 2,702,274 Minority interest in income of the Operating Partnership 397,583 93,547 8,263 Distributions from equity investments in excess of (exceeded by) income 129,626 97,954 (19,448) Changes in operating assets and liabilities: Accounts receivable-tenants (474,991) (1,353,348) 15,090 Allowance for doubtful accounts (40,146) 79,978 (907) Other assets (165,577) (696,092) (213,902) Due to Advisor, general partners and affiliates 8,513 (146,920) 159,251 Accounts payable and other liabilities (405,546) 1,704,105 491,380 Leasing commissions and costs (659,579) (166,256) (191,730) ---------- ---------- ---------- Total adjustments 3,744,842 2,937,691 2,950,271 ---------- ---------- ---------- Net cash provided by operating activities 9,567,923 9,584,324 6,388,767 ---------- ---------- ---------- Cash flows from investing activities: Proceeds from sale of investment in partnership 0 4,727,500 0 Improvements to real estate (1,308,093) (695,177) (33,486) Acquisitions of real estate including acquisition expenses (653,015) (51,598,294) (8,912,945) Increase in deferred acquisition expenses (45,038) (114,229) (47,459) Repayments of loans receivable from affiliates 3,129 3,060,000 0 Loans made to affiliate 0 (2,081,015) 0 Principal payments received on mortgage loans 32,416 27,528,253 39,994 Closing costs relating to the repayment of mortgage loan receivable 0 (19,537) 0 Investment in partnership 0 (895,200) 0 ---------- ---------- ---------- Net cash used in investing activities (1,970,601) (20,087,699) (8,953,896) ---------- ---------- ---------- Cash flows from financing activities: Repayments of notes payable (538,401) (28,905,463) (1,720,907) Proceeds from notes payable 1,500,000 44,568,000 13,375,000 Distributions paid to shareholders (8,327,874) (7,728,904) (5,099,300) Increase in deferred loan costs (553,324) (896,901) (919,302) Distributions paid to minority interest (454,902) (74,942) 0 Cash effect of Consolidation and issuance of shares 0 0 2,510,103 Purchase of treasury shares 0 (58,579) 0 Consolidation costs 0 (123,692) (1,243,195) Consolidation costs allocated to minority interest 0 (720) (7,233) ---------- ---------- ---------- Net cash (used in) provided by financing activities (8,374,501) 6,778,799 6,895,166 ---------- ---------- ----------
(continued) -26- AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------------- 1999 1998 1997 ----------- ----------- ---------- Net increase (decrease) in cash and cash equivalents (777,179) (3,724,576) 4,330,037 Cash and cash equivalents at the beginning of the year 3,003,474 6,728,050 2,398,013 --------- --------- --------- Cash and cash equivalents at the end of the year $2,226,295 $3,003,474 $6,728,050 ========== ========== =========== Supplemental information: Interest paid $4,841,223 $1,626,784 $ 562,240 ========== ========== =========== Supplemental disclosure of noncash activities: Notes payable assumed in acquisition of real estate $ 0 $23,952,320 $ 0 ========== ========== =========== Real estate acquired for units in the Operating Partnership $ 0 $ 6,120,257 $ 0 ========== ========== =========== Payable to directors liquidated through the issuance of shares of common stock $ 20,000 $ 5,000 $ 0 ========== ========== =========== Reclassification of deferred acquisition expenses to real estate upon purchase $ 61,278 $ 47,459 $ 0 ========== ========== =========== Real estate acquired through issuance of purchase money notes to sellers $ 0 $ 705,000 $ 0 ========== ========== =========== Repayment of purchase money notes to sellers through the issuance of units in the Operating Partnership $ 585,754 $ 0 $ 0 ========== ========== =========== Consolidation and issuance of shares: Increase in real estate $ 0 $ 0 $(16,856,558) Increase in investment in partnerships 0 0 (9,295,706) Increase in mortgage loans receivable 0 0 (31,049,146) Increase in loan receivable from affiliate 0 0 (3,060,000) Increase in accounts receivable-tenants 0 0 (380,490) Increase in other assets 0 0 (243,231) Increase in notes payable 0 0 1,324,308 Increase in accounts payable and other liabilities 0 0 340,138 Increase in due to Advisor, general partners and affiliates 0 0 207,392 Increase in distributions payable 0 0 1,136,477 Decrease in limited partners' capital 0 0 (67,426,943) Increase in general partners' capital 0 0 276,210 Increase in minority interest 0 0 737,642 Issuance of shares of common stock 0 0 124,289,907 --------- --------- ----------- $ 0 $ 0 $ 0 ========== ========== =========== Distributions to shareholders declared $(7,724,985) $(8,330,865) $(5,894,997) Increase (decrease) in distributions payable to shareholders/partners (602,889) 601,961 795,697 --------- --------- --------- Distributions paid to shareholders $(8,327,874) $(7,728,904) $(5,099,300) ========== ========== ===========
See accompanying notes to consolidated financial statements -27- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - General Aegis Realty, Inc. (the "Company") is a Maryland corporation that has qualified as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986 as amended (the "Code"). The Company was formed to acquire, own, operate and renovate primarily supermarket-anchored neighborhood and community shopping centers. As of December 31, 1999, the Company owned a portfolio of 28 retail properties (the "Retail Properties") containing a total of approximately 3.0 million gross leaseable square feet, held partnership interests in two suburban garden apartment properties (the "Multifamily Properties") and held one FHA insured participating mortgage secured by a suburban garden apartment property (the "FHA Mortgage"). The Company was formed on October 1, 1997 as the result of the consolidation (the "Consolidation") of four publicly registered, non-listed limited partnerships, Summit Insured Equity L.P. ("Insured I"), Summit Insured Equity L.P. II ("Insured II"), Summit Preferred Equity L.P. ("Summit Preferred") and Eagle Insured, L.P. ("Eagle") (the "Partnerships", and each individually a "Partnership"). One of the general partners of the Partnerships was an affiliate of Related Capital Company ("Related"), a nationwide, fully integrated real estate financial services firm. Unless otherwise indicated, the "Company", as hereinafter used, refers to Aegis Realty, Inc. and its consolidated subsidiaries and, for references prior to October 1, 1997, refers to Insured I. Pursuant to the Consolidation, the Company issued shares of its common stock, par value $.01 per share (the "Common Stock") to all partners in the Partnerships in exchange for their interests in the Partnership based upon each partner's proportionate interest in the Common Stock issued to their Partnership in the Consolidation. The Common Stock commenced trading on the American Stock Exchange on October 10, 1997 under the symbol "AER". As of December 31, 1999, there were 8,046,859 shares of Common Stock outstanding (an additional 777,213 shares were reserved for issuance upon conversion of OP Units, as defined below). The Company is governed by a board of directors comprised of two independent directors and three directors who are affiliated with Related. The Company has engaged Related Aegis LP (the "Advisor"), a Delaware limited partnership and an affiliate of Related, to manage its day to day affairs. The Company owns all of its assets directly or indirectly through Aegis Realty Operating Partnership, LP, a Delaware limited partnership (the "Operating Partnership" or "OP"), of which the Company is the sole general partner and holder of 91.19% of the units of partnership interest (the "OP Units") at December 31, 1999. Also, at December 31, 1999, 5.68% and 3.13% of the OP Units are held by the sellers of three of the Retail Properties and by affiliates of Related, respectively. NOTE 2 - Summary of Significant Accounting Policies a) Basis of Accounting The books and records of the Company are maintained on the accrual basis of accounting in accordance with generally accepted accounting principles ("GAAP"). For financial accounting and reporting purposes, the Consolidation was accounted for using the purchase method of accounting. Under this method, the Partnership with the investor group receiving the largest ownership in the Company, in this case Insured I, was deemed to be the acquirer. As the surviving entity for accounting purposes, Insured I's assets and liabilities were recorded by the Company at their historical cost, with the assets and liabilities of the other Partnerships recorded at their estimated fair values for each Partnership (an aggregate of approximately $60,387,000) as set forth in the Solicitation Statement of the Company dated June 18, 1997 (the "Solicitation Statement"). No goodwill was recorded in the Consolidation. Results of operations and other operating financial data for the Company prior to October 1, 1997 (the date of the Consolidation) is only with respect to Insured I. Information subsequent to September 30, 1997 is with respect to the Company and its subsidiaries which include Insured I and the other Partnerships pursuant to the Consolidation. Insured I is a Delaware limited partnership formed on December 12, 1985 which, subsequent to the Consolidation, became an indirectly wholly-owned subsidiary of the Company. b) Basis of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiary partnerships. All intercompany accounts and transactions with the subsidiary partnerships have been eliminated in consolidation. c) Real Estate The carrying amount of real estate includes the purchase price, acquisition fees and expenses, and any other costs incurred in acquiring the properties less amounts received from sellers' rental guarantees. Buildings are depreciated on a straight line basis over their estimated useful lives, generally 40 years. Maintenance and repairs are charged to expense as incurred. Renewals and betterments that significantly extend the useful life of a property are capitalized. d) Investment in Partnerships The Company accounts for its investment as a limited partner in partnerships, which own the Multifamily Properties, using the equity method of accounting because it exercises significant influence over, but does not control, these limited partnerships. -28- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS e) Mortgage Loans Receivable Amounts received or receivable for interest payments on loans are reflected as interest income. f) Impairment The Company reviews each of its property investments, including those held by the partnerships which own the Multifamily Properties, for possible impairment at least annually, and more frequently if circumstances warrant. Impairment of properties to be held and used is determined to exist when estimated amounts recoverable through future operations on an undiscounted basis are below the properties' carrying value. If a property is determined to be impaired, it is written down to its estimated fair value. At least annually, and more frequently if circumstances warrant, the Company evaluates the collectibility of both interest and principal of its mortgage loan receivable to determine whether it is impaired. A loan is considered to be impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due according to the existing contractual terms. When a loan is considered to be impaired, the amount of the loss accrual is determined by discounting the expected future cash flows at the loan's effective interest rate or, for practical purposes, from the estimated fair value of the collateral. The determination of impairment is based not only upon future cash flows, which rely upon estimates and assumptions including expense growth, occupancy and rental rates, but also upon market capitalization and discount rates as well as other market indicators. The Advisor believes that the estimates and assumptions used are appropriate in evaluating the carrying amount of the Company's properties and loan. However, changes in market conditions and circumstances may occur in the near term which would cause these estimates and assumptions to change, which, in turn, could cause the amounts ultimately realized upon the sale or other disposition of the investments to differ materially from their estimated fair value. Such changes may also require write-downs in future years. No write-downs for impairment have been recorded during the years ended December 31, 1999, 1998 and 1997. g) Cash and Cash Equivalents Cash and cash equivalents include cash in banks and money market funds, for which cost approximates market value. h) Deferred Insurance Costs Costs related to an insurance policy from Continental Casualty Company for the benefit of Insured I (see Note 3) were being amortized over a 10 year period which expired in April 1999. i) Deferred Loan Costs Costs incurred in connection with the Company's debt have been capitalized and are being amortized over the life of the respective debt using the effective yield method. j) Deferred Leasing Commissions Costs incurred in connection with the lease-up of vacant space and lease renewals have been capitalized and are being amortized over the term of the underlying leases. Amortization related to the deferred costs described in (h), (i) and (j) above is included in depreciation and amortization expense. k) Deferred Acquisition Expenses Direct costs incurred in connection with the proposed purchase of Retail Properties are deferred. Upon acquisition of Retail Properties, the associated costs are capitalized as real estate. Direct costs incurred in connection with Retail Properties which are not acquired, and all indirect acquisition costs, are charged to operations. l) Consolidation Costs Costs incurred in the Consolidation including legal, accounting and registration fees, amounting to $1,366,887 and $7,953, were charged to shareholders' equity and minority interest of unitholders in the OP, respectively. m) Rental Income Rental income includes amounts received and accrued from operating leases as well as amounts related to the reimbursement of common area maintenance charges, real estate taxes and insurance. The straight-line basis is used to recognize base rents under leases which provide for varying rents over the lease terms. -29- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS n) Income Taxes The Company has qualified as a REIT under the Code. A REIT is generally not subject to federal income tax on that portion of its REIT taxable income ("Taxable Income") which is distributed to its shareholders provided that at least 95% of Taxable Income is distributed and provided that such income meets certain other conditions. Accordingly, no provision for federal income taxes is required. The Company may be subject to state taxes in certain jurisdictions. During 1999, the Company declared distributions of $.96 per share. For federal income tax purposes, $.26 per share of ordinary income was carried over from 1998, $.66 and $.32 per share of ordinary income and return of capital, respectively, was reported to shareholders for 1999 and $.24 per share of ordinary income was carried over to 2000. o) Comprehensive Income Because the Company has no items of other comprehensive income, the Company's net income and comprehensive income are the same for all periods presented. p) Use of Estimates The preparation of financial statements in conformity with GAAP requires the Advisor to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. q) Segment Information SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", requires enterprises to report certain financial and descriptive information about their reportable operating segments, and certain enterprise-wide disclosures regarding products and services, geographic areas and major customers. The Company is an investor in real estate related assets and operates in only one reportable segment. The Company does not have or rely upon any major customers. All of the Company's investments are, or are secured by, real estate properties located in the United States; accordingly, all of its revenues were derived from U.S. operations. r) New Pronouncements The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As amended, it is effective for the Company beginning with the first quarter of 2001. Currently, the only derivative instrument owned by the Company is an interest rate swap agreement (see Note 7). SFAS No. 133 will require the Company to carry such swap agreement at its fair value at the balance sheet date, which was approximately $75,000 at December 31, 1999. s) Reclassifications Certain amounts in the 1998 and 1997 financial statements have been reclassified to conform to the 1999 presentation. NOTE 3 - Real Estate The components of real estate are as follows:
December 31, -------------------------- 1999 1998 ------------ ------------ Land $ 39,798,459 $ 39,467,426 Buildings and improvements 156,239,538 154,677,484 ----------- ----------- 196,037,997 194,144,910 Less: Accumulated depreciation (23,253,033) (19,268,330) ------------ ----------- $172,784,964 $174,876,580 ============ ===========
On September 8, 1999, the Company acquired an out-parcel of developable land contiguous to the Rolling Hills Square Retail Property for a purchase price of $325,000, not including acquisition fees and expenses of approximately $16,000. The acquisitions of Governor's Square, Southgate and Crossroad East, three Retail Properties with purchase prices of $8,200,000, $15,100,000 and $4,800,000, respectively, were partially financed through the issuance of 94,726, 208,914 and 167,149 OP Units (subject to adjustment) valued at $1,231,438, $2,715,882 and $2,172,937. These 470,789 OP Units were convertible to shares of Common Stock on a one-to-one basis, subject to adjustment, beginning on the one year anniversary of their respective closing dates. The OP Units were issued at an agreed upon value of $13 per OP Unit. If, as of the last trading day prior to the first anni- -30- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS versary of the closing date (the "Post-Closing Adjustment Date"), the "Average Price Per Share" (as defined) was less than $13, the Company was obligated to issue additional OP Units to the respective sellers in the amount of the difference between (i) the quotient obtained by dividing the OP Unit value at $13 per OP Unit by the Average Price Per Share as of the Post-Closing Adjustment Date and (ii) the number of OP Units issued on the closing date. An additional 28,187 OP Units were issued to the seller of Governor's Square on the Post-Closing Adjustment Date (May 28, 1999) based on an Average Price Per Share of $10.01875. An additional 92,439 and 73,957 OP Units were issued to the sellers of Southgate and Crossroads East, respectively, on the Post-Closing Adjustment Date (December 9, 1999) based on an Average Price Per Share of $9.0125. Amounts estimated to be recoverable from future operations and ultimate sales are greater than the carrying value of each property owned at December 31, 1999 and 1998. However, the carrying value of certain properties may be in excess of their fair values as of such dates. The following table lists each of the Company's investment properties whose rental revenues accounted for 10% or more of the Company's total gross revenues for any of the three years in the period ended December 31, 1999.
1999 1998 1997* ---- ---- ---- 1. Westbird/Miami, FL 4% 6% 10% 2. Winery Square/Fairfield, CA 5% 7% 10% 3. Mountain View Village/Snellville, GA 4% 6% 10% 4. Forest Park Square/Cincinnati, OH 4% 6% 10%
*Information prior to October 1, 1997 (the date of the Consolidation) is only with respect to Insured I. Information subsequent to September 30, 1997 is with respect to the Company and its consolidated subsidiaries which include Insured I and the other Partnerships pursuant to the Consolidation. During the years ended December 31, 1999, 1998 and 1997, the Kroger Company, which is a tenant at six shopping centers, accounted for approximately 12%, 17% and 28%, respectively, of the Company's total gross revenues. Based on the carrying value at December 31, 1999 and 1998, approximately 15% of the Company's investment properties are located in Ohio, 11% are located in Florida, 11% are located in North Carolina and 10% are located in Virginia. No other states comprise more than 10% of the total carrying value. Insured I and Insured II, which are indirectly wholly-owned subsidiaries of the Company, are the record owners of fourteen of the Retail Properties. Insured I and II are each the beneficiary of an insurance policy (the "Policies") from Continental Casualty Company ("CNA") which, in effect, will insure that the cumulative amount of cash available for distribution, from all sources, as determined in accordance with the Policies and related agreement together with the appraised values of the Retail Properties then owned by Insured I and Insured II, will equal at least 100% of the aggregate original capital contributions to Insured I and Insured II allocated to investment in properties ("Original Contributions") on the day on which the last such Retail Property was acquired by Insured I and Insured II (the "Final Acquisition Date"). The maximum liability of CNA under the Policies will increase pursuant to a formula based upon the length of time such Retail Properties are held by Insured I and Insured II up to a maximum of 125% of Original Contributions on the tenth anniversary of the Final Acquisition Date (the "Guaranty Payment Date"). The Policies are intended to cover various economic risks of the ownership of such Retail Properties, but do not apply to certain losses, costs, penalties or expenses, including, among others, those arising out of any physical loss, damage, loss of use or other physical deterioration of such properties. Payment of any amounts due under the Policies will be made to Insured I and/or Insured II after the Guaranty Payment Date and the Policies are not a guaranty that shareholders of the Company will receive a return equal to 125% of the Original Contributions to either Insured I or Insured II, as applicable, or any lesser amount insured under the Policy. In November 1999, the insurance policy issued in connection with Summit Insured I expired pursuant to its terms. The insurance policy issued in connection with Summit Insured II will expire in May 2001. No payments were received on the Summit Insured I policy and none are expected on the Summit Insured II policy. -31- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - Deferred Costs
The components of deferred costs are as follows: December 31, ------------------------- 1999 1998 ----------- ---------- Deferred insurance costs $ 0 $6,005,804 Deferred loan costs 2,395,925 1,842,601 Deferred leasing commissions and costs 1,426,098 928,148 Deferred acquisition expenses 97,989 114,229 ---------- ---------- 3,920,012 8,890,782 Less: Accumulated amortization (1,119,475) (6,503,099) ---------- ---------- $2,800,537 $2,387,683 ========= =========
During the year ended December 31, 1999, fully amortized deferred insurance costs in the amount of $6,005,804 were written off. NOTE 5 - Investments in Partnerships The Company owns a limited partnership interest in the TCR-Pinehurst Limited Partnership ("Pinehurst"), which acquired and operates the Pinehurst apartment complex in Kansas City, Missouri. Under the original terms of this investment, the Company is entitled to a preferred equity return of 8.8% per annum on its initial investment of $3,799,620, and 9.85% on a subsequent investment of $1,949,805. These preferred equity returns are cumulative and non interest-bearing. The cumulative, unrecorded and undistributed preferred equity returns to the Company totaled $1,763,772 and $1,610,549 at December 31, 1999 and 1998, respectively. These preferred equity returns are payable from excess cash flow from operations or proceeds from a sale or refinancing of Pinehurst's rental property. The Company's percentage of ownership in Pinehurst is 98.99%. The Company owned a limited partnership investment in the Dominion Totem Park Limited Partnership ("Dominion"), which acquired and operated the Chateau Creste apartment complex in Kirkland, Washington. Under the terms of this investment, the Company was entitled to receive a preferred equity return of 9.625% per annum on an initial cash contribution of $4,149,585. On March 20, 1998, Dominion Chateau Creste Limited Partnership, the general partner of Dominion, purchased the Company's limited partnership interest in Dominion pursuant to its rights under the partnership agreement. The purchase price was determined by independent appraisals and resulted in a cash payment to the Company of $4,727,500, which was $779,893 in excess of the carrying value of this investment at the date of sale. On August 26, 1998, the Company invested $895,200 for a 40% interest as a limited partner in FAI Ltd. ("FAI"), the limited partnership which owns Weatherly Walk Apartments (see Note 6). This equity interest earns an annual preferred return of 10.5% on $895,200, paid monthly, plus 40% of excess cash flow and sale or refinancing proceeds. As of December 31, 1999, the Company had received all of the preferred returns due from FAI. Amounts estimated to be recoverable from future operations and ultimate sales are greater than the carrying value of the Company's investments in partnerships at December 31, 1999. NOTE 6 - Mortgage Loans Receivable As of January 1, 1998, the Company held three FHA Mortgages and three equity loans (the FHA Mortgages and the equity loans together, the "Mortgage Loans"); two of the Mortgage Loans were repaid in 1998. All base interest and the principal amount of each of the FHA Mortgages were coinsured by the FHA (80%) and an affiliate of the Advisor (20%). The FHA Mortgages required monthly payments of principal and interest over the life of the loans. The FHA Mortgages bore interest at 8.95% and were scheduled to mature during the period January 2024 to January 2030. The interest rate of 8.95% included a servicing fee of 0.07% paid by the developer to Related Mortgage Corporation, an affiliate of the Advisor, and excluded additional interest which may have been payable under certain circumstances. The equity loans were made to the same developers as the FHA Mortgages. These equity loans, in the aggregate original amount of $3,018,800, represented noninterest-bearing advances made to the developers for such items as initial operating deficit escrow requirements and Housing and Urban Development ("HUD") related contingencies such as working capital escrow and cash requirements. Such amounts were due on demand upon six months notice at any time after the tenth anniversary of the initial endorsement of the loan by HUD. These loans were uninsured, but were secured by the partnership interests of the entities which own the underlying properties. In addition to the Mortgage Loans, the Company held a loan of $3,060,000 (the "Cross Creek Loan") to Walsh/Cross Creek Limited Partnership (the "Cross Creek Obligor"), one of the FHA Mortgagors, which was used to pay for costs incurred to complete construction and to fund operating deficits. The Cross Creek Loan bore interest at the prime rate plus 1% and was due on January 1, 2030 or on the occurrence of certain events. The amount loaned to the Cross Creek Obligor was classified as a loan receivable from affiliate and was anticipated to be repaid from cash flows from the Cross Creek property. Stephen M. Ross holds a majority inter- -32- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS est in the Advisor and had guaranteed the repayment of the principal and interest on the Cross Creek Loan (as amended, the "Guarantee Agreement") to the Company, subject to certain conditions. On June 24, 1998, the Cross Creek Obligor, the owner of Cross Creek Apartments ("Cross Creek") and an affiliate of the Advisor, sold Cross Creek to a third party for $23.4 million. The Cross Creek Obligor then fully repaid its outstanding debt due to the Company totaling $22,199,045, including a $16,971,528 FHA Mortgage, a $1,783,900 equity loan, the $3,060,000 Cross Creek Loan, a $286,948 prepayment penalty due the Company on the FHA Mortgage and accrued interest through the closing date of $96,669 resulting in a loss on the repayment (including the prepayment penalty) in the amount of $92,504 (due to purchase accounting premiums recorded pursuant to the Consolidation) which is included in other expenses. On August 26, 1998, FAI, Ltd. ("FAI"), the limited partnership which owns Weatherly Walk Apartments and one of the FHA Mortgagors, repaid in full (after completing a refinancing with an unaffiliated third party) the outstanding balance of its Mortgage Loan in the amount of $8,380,752 plus accrued interest of $48,189 resulting in a loss on the repayment in the amount of $45,934 (due to purchase accounting premiums recorded pursuant to the Consolidation) which is included in other expenses. Simultaneously, the Company invested $895,200 for a 40% interest as a limited partner in FAI (see Note 5). As of December 31, 1999 and 1998, the Company held one Mortgage Loan (Woodgate Manor). As of December 13, 1998, the Company may call for prepayment of the entire outstanding principal amount at any time. The Company, in order to call for prepayment, would be required to terminate the mortgage insurance contract with FHA (and/or the co-insurer) not later than the accelerated payment date. Since the exercise of such option would be at the Company's discretion, it is intended to be exercised only where the Company determines that the value of the underlying property has increased by an amount which would justify accelerating payment in full and assuming the risks of foreclosure if the mortgagor failed to make the accelerated payment. As of December 13, 1998, the borrower may elect to prepay at any time without incurring prepayment penalties. The general partner interest in the obligor of the Company's remaining Mortgage Loan is held by an affiliate of the Advisor. The carrying value of the Mortgage Loan (the FHA Mortgage and equity loan) secured by Woodgate Manor was $3,220,191 and $3,267,037 at December 31, 1999 and 1998, respectively; the FHA Mortgage loan balance was $2,873,868 and $2,906,284, respectively. The difference between the carrying value and the FHA Mortgage loan balance is due to the purchase accounting premiums recorded pursuant to the Consolidation. At December 31, 1999 and 1998, the estimated fair value of the Company's Mortgage Loan receivable approximated its carrying value. -33- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - Notes Payable As of December 31, 1999 and 1998, the Company had notes payable with outstanding balances totaling $59,239,944 and $58,864,099, respectively. Further information regarding the notes is as follows:
Collateral/ Date of Monthly Carrying Note/ Payment Outstanding Outstanding Value at Maturity Interest of Principal Balance Balance December Noteholder Date Rate and Interest At 12/31/99 At 12/31/98 31, 1999 - ---------- ---------- --------- ------------ ----------- ----------- ----------- New York Life 7/11/95 9.25% $55,984 $ 4,726,178 $ 4,967,164 Forest Park & Insurance 6/10/00 Highland Fair/ Company $11,987,229 (a) 12/30/97 (b) Interest 30,818,000 29,318,000 (c) (i) 12/30/00 (j) only Heller 6/24/97 (d) 8.50% $19,992 2,547,557 2,571,651 Barclay Place/ Financial, Inc. 7/1/17 $4,015,163 Nomura 10/28/97 (e) 7.54% $33,130 3,902,472 4,004,897 Village At Asset Capital 11/11/22 Waterford/ Corporation $6,323,560 Chase Bank 12/16/96 (f) 8.875% $51,717 6,350,323 6,409,003 Oxford Mall/ 1/1/07 $8,808,020 Merrill Lynch 9/18/97 (g) 7.73% $79,509 10,776,168 10,888,384 Southgate/ Credit 10/1/07 $15,319,576 Corporation Sellers of 12/10/98 (h) $0 64,600 (k) 200,000 None Southgate 12/10/99 Sellers of 12/10/98 (h) $0 16,292 (k) 230,000 None Crossroads East 12/10/99 Sellers of 12/10/98 (h) $0 38,354 (k) 275,000 None Crossroads East 12/9/99 ------------ ----------- $59,239,944 $58,864,099 ============ ===========
(a) The Credit Facility is shared among BankBoston, N.A. (28.57%), KeyBank National Association (28.57%), Citizens Bank of Rhode Island (28.57%) and Sovereign Bank (14.29%). (b) The interest rate under the Credit Facility can float 1/2% under BankBoston's base rate or can be fixed in 30, 60, 90 and 180 day periods at 1.625% over the indicated Euro-contract rate at the option of the Company. The Company has currently elected the 30 day rate which was 5.81% at December 31, 1999. (c) Outstanding balance of a $70 million senior revolving credit facility ("Credit Facility"). (d) Note was assumed upon purchase of the property by the Company on March 31, 1998. (e) Note was assumed upon purchase of the property by the Company on April 22, 1998. (f) Note was assumed upon purchase of the property by the Company on November 24, 1998. (g) Note was assumed upon purchase of the property by the Company on December 9, 1998. (h) Note is non-interest bearing. (i) The Credit Facility was collateralized at December 31, 1999 by thirteen Retail Properties, one investment in a partnership and one Mortgage Loan with carrying values of $76,700,206, $5,207,982 and $3,220,191, respectively. In addition, the obligation under the Credit Facility is guaranteed by the Company, Insured I, Insured II and TCR-Pinehurst Limited Partnership. (j) The Company has an option to extend the maturity date to 12/30/03 upon payment of certain fees. -34- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (k) The note payable to the sellers of Southgate and the two notes payable to the sellers of Crossroads East in the amounts of $200,000, $230,000 and $275,000, respectively, were partially repaid in the amounts of $135,400, $213,708 and $236,646 through the issuance of 15,030, 23,716 and 26,259 OP Units on December 9, 1999 based on an Average Price Per Share (see Note 3) of $9.0125. The balances due of $64,600, $16,292 and $38,354, respectively, were repaid in cash on January 4, 2000. On December 1, 1998, the Company entered into an interest rate swap agreement with a notional amount of $10,000,000, intended to reduce the impact of changes in interest rates on the Credit Facility. This agreement effectively changes the Company's interest rate on $10,000,000 of the Credit Facility debt to a fixed rate of 5.44% and matures on December 1, 2000. The Company accounts for the net cash settlements under this swap agreement as adjustments to the interest expense on the Credit Facility. The Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement; however, the Company does not anticipate nonperformance by the counter party. The Company estimates that if it decided to terminate this swap agreement at December 31, 1999, the counter party would be required to pay the Company approximately $75,000; however, the Company currently has no intention of terminating this agreement. Annual principal payment requirements as of December 31, 1999 for each of the next five fiscal years and thereafter are as follows:
Year Ending Amount - ----------- ----------- 2000 $ 35,936,221* 2001 322,817 2002 349,726 2003 378,907 2004 407,394 Thereafter 21,844,879 ---------- $59,239,944 ==========
*Includes the maturity of the Credit Facility (see note (j) to the table above), the New York Life Insurance Company note and the notes to the sellers of Southgate and Crossroads East. The Company has determined that the carrying value of the notes payable approximates their fair value at December 31, 1999 and 1998, either because the interest rate on such notes fluctuates according to a market index, or because the fixed rate notes bear interest at rates comparable to market rates for similar instruments. NOTE 8 - Related Party Transactions AEGIS REALTY, INC. (AFTER THE CONSOLIDATION) Pursuant to the Advisory Agreement, the Advisor receives (i) acquisition fees equal to 3.75% of the acquisition prices of properties acquired; (ii) mortgage selection fees based on the principal amount of Mortgage Loans funded; (iii) asset management fees equal to .375% of the total invested assets of the Company; (iv) a liquidation fee based on the gross sales price of the assets sold by the Company in connection with a liquidation of the Company's assets; and (v) reimbursement of certain administrative costs incurred by the Advisor on behalf of the Company. The original term of the Advisory Agreement will terminate on October 1, 2001. Thereafter, the Advisory Agreement will be renewed annually by the Company and the OP, subject to the majority approval of the Company's Board of Directors and the OP. The Advisory Agreement cannot be terminated by the Company prior to October 1, 2001, other than for gross negligence or willful misconduct of the Advisor and by a majority vote of the Company's independent directors. The Advisory Agreement may be terminated without cause by a majority vote of the Company's independent directors following October 1, 2001 or by the Advisor at any time. The Company's Retail Properties are managed by RCC Property Advisors (the "Property Manager"), an affiliate of the Advisor, for a fee equal to 4.5% of the gross rental receipts from the Retail Properties, which is competitive with such fees paid in the areas in which the properties are located. The Property Manager also receives standard leasing commissions for space leased to new tenants and for lease renewals and is reimbursed for certain expenses. -35- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The costs incurred to related parties for the years ended December 31, 1999 and 1998 and the three months ended December 31, 1997 (after the Consolidation) were as follows:
Year Year Three Months Ended Ended Ended December 31, December 31, December 31, 1999 1998 1997 - ------------ -------------- ------------ -------------- Acquisition fees $ 23,805 $2,707,157 $ 322,606 Expense reimbursement 271,972 290,639 28,000 Property management fees 1,037,014 735,338 135,759 Leasing commissions and costs 471,888 178,509 38,774 Asset management fee 779,561 630,661 142,105 --------- ---------- ---------- $2,584,240 $4,542,304 $ 667,244 ========= ========= ==========
On December 9, 1998, in connection with the acquisition of two Retail Properties, the Company made loans (the "OP Unit Loans") totaling $2,081,015 to Standard Investment Company ("SIC"), a partner in the partnerships which owned the properties; SIC is not affiliated with the Advisor or its affiliates but affiliates of the Advisor were also partners in such partnerships. The loans are secured by the 163,517 OP Units which were issued to SIC in exchange for its partnership interests in the partnerships which owned the properties and also by guarantees from the principals of SIC for 25% of the total loan amounts. The OP Unit Loans bear interest at 7.613% and mature on December 9, 2015 or earlier if the underlying shopping centers are sold. Interest and principal on the OP Unit Loans are payable only to the extent of distributions with respect to the OP Units. Such distributions will be retained by the Company until all accrued interest and the outstanding balances of the loans are repaid. As of December 31, 1999 and 1998, the balances of these OP Unit Loans totaled $2,077,886 and $2,081,015, respectively, and are shown as loans receivable from affiliates on the consolidated balance sheets. INSURED I (PRIOR TO THE CONSOLIDATION) Prior to the Consolidation, the general partners of Insured I were Related Insured Equity Associates, Inc., a Delaware corporation and Prudential-Bache Properties, Inc., a Delaware corporation ("PBP"). The general partners managed and controlled the affairs of Insured I prior to the Consolidation. The general partners and their affiliates performed services for Insured I which included: accounting and financial management; registrar; transfer and assignment functions; asset management; investor communications; printing and other administrative services. The amount of reimbursement from Insured I was limited by the provisions of Insured I's Partnership Agreement. Insured I's eleven properties were being managed by the Property Manager. The expenses incurred by Insured I to related parties for the nine months ended September 30, 1997 were as follows:
Nine Months Ended September 30, 1997 ------------- Expense reimbursement $ 79,935 Property management fees 309,632 Leasing commissions and costs 99,042 -------- $488,609 ========
The distributions earned by the general partners of Insured I for the nine months ended September 30, 1997 were as follows:
Nine Months Ended September 30, 1997 ------------- Special Distributions $326,454 Regular Distributions of Adjusted Cash from Operations 27,273 -------- $353,727 ========
NOTE 9 - Earnings Per Share, Profit and Loss Allocations and Distributions AEGIS REALTY, INC. (AFTER THE CONSOLIDATION) Basic net income per share in the amount of $.72, $.83 and $.18 for the years ended December 31, 1999 and 1998 and the three months ended December 31, 1997, respectively, equals net income for the periods ($5,823,081, $6,646,633 and $1,420,370, respec- -36- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS tively), divided by the weighted average number of shares outstanding for the periods (8,046,574, 8,049,987 and 8,050,727, respectively). Diluted net income per share in the amount of $.72, $.82 and $.18 for the years ended December 31, 1999 and 1998 and the three months ended December 31, 1997, respectively, equals net income for the periods, divided by the weighted average number of diluted shares outstanding for the periods (8,046,574, 8,075,390 and 8,050,727, respectively). The weighted average number of diluted shares outstanding for the year ended December 31, 1998 reflects the weighted average impact of an additional 148,984 OP Units which would have to be issued to the sellers of three Retail Properties on the Post-Closing Adjustment Date based on the closing price per share on December 31, 1998 (see Note 3). For purposes of this calculation, the additional OP Units were assumed to be immediately converted to shares of Common Stock. The stock options issued during 1999 (see Note 11) did not have a dilutive effect under the treasury stock method, because the average market price of the Company's Common Stock during the period from issuance to December 31, 1999 did not exceed the exercise price of the options. There is no difference between basic and diluted net income per share with respect to the conversion of the minority interests' OP Units outstanding at December 31, 1999, 1998 and 1997 into an additional 777,213, 517,625 and 46,836 shares, respectively, of Common Stock because the earnings of an OP Unit are equivalent to the earnings of a share of Common Stock. Net income per unit information for the period before the Consolidation is not presented because it is not indicative of the Company's continuing capital structure. INSURED I (PRIOR TO THE CONSOLIDATION) For financial reporting purposes, net profits or losses, after the Special Distributions to the general partners, were allocated 99% to the limited partners and 1% to the general partners. The general partners were paid a Special Distribution of adjusted cash from operations equal to 0.5% of invested assets per annum, as defined in the Partnership Agreement of Insured I, for managing the affairs of Insured I. Distributions of cash based on adjusted cash from operations, after payment of Special Distributions as defined in the Partnership Agreement of Insured I, were allocated 99% to the limited partners and 1% to the general partners. NOTE 10 - Leases Future minimum base rentals due from tenants under non-cancelable operating leases as of December 31, 1999 are as follows:
Year Ending December 31 Amount - ----------------------- ---------- 2000 $ 17,582,000 2001 16,079,000 2002 13,908,000 2003 12,103,000 2004 10,642,000 Thereafter 40,957,000 ------------ Total $111,271,000 ============
Certain leases require the lessees to reimburse the Company for real estate taxes, insurance costs and certain other reimbursable expenses. All 28 Retail Properties have tenants with leases that require payment of percentage rent. Percentage rent is an amount paid by the tenant which represents a portion of its sales over a specified threshold amount as called for in the lease. Percentage rent received during the years ended December 31, 1999, 1998 and 1997 was approximately $183,000, $132,000 and $121,000, respectively. NOTE 11 - Common Stock The Company has adopted an incentive stock option plan (the "Incentive Stock Option Plan"), the purpose of which is to (i) attract and retain qualified persons as directors and officers and (ii) to incentivize and more closely align the financial interests of the Advisor and its affiliates and their respective employees and officers with the interests of the stockholders by providing the Advisor and its affiliates with substantial financial interest in the Company's success. The Compensation Committee administers the Incentive Stock Option Plan. Pursuant to the Incentive Stock Option Plan, if the Company's distributions per share of Common Stock in the immediately preceding calendar year exceed $0.9869 per share, the Compensation Committee has the authority to issue options to purchase, in the aggregate, that number of shares of Common Stock which is equal to three percent of the shares outstanding as of December 31 of the immediately preceding calendar year (or in the initial year, as of October 1, 1997), provided that the Compensation Committee may only issue, in the aggregate, options to purchase a maximum number of shares of Common Stock over the life of the Incentive Stock Option Plan equal to 10% of the shares outstanding on October 1, 1997 (805,073 shares). -37- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Subject to the limitations described in the preceding paragraph, if the Compensation Committee does not grant the maximum number of options in any year, then the excess of the number of authorized options over the number of options granted in such year will be added to the number of authorized options in the next succeeding year and will be available for grant by the Compensation Committee in such succeeding year. All options granted will have an exercise price equal to or greater than the fair market value of the shares of Common Stock on the date of the grant. The maximum option term is ten years from the date of grant. All stock options granted pursuant to the Incentive Stock Option Plan may vest immediately upon issuance or in accordance with the determination of the Compensation Committee. The Company's distributions per share of Common Stock for the years ended December 31, 1999 and 1997 did not exceed $.9869 per share. In 1998, the Company distributed $1.035 per share of Common Stock ($0.96 from continuing operations and a $0.075 special capital gains distribution), thus enabling the Compensation Committee, at their discretion, to issue options. Three percent of the shares outstanding as of December 31, 1998 are equal to 241,346 shares. On August 6, 1999, options to purchase 30,000 shares of Common Stock were granted to an officer of the Company and certain employees of an affiliate of the Advisor, who are not employees of the Company. The exercise price of these options is $9.50 per share. The term of each option is ten years. The options will vest in equal installments on August 6, 2000, 2001 and 2002. The Company has adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" for its stock options issued to non-employees. Accordingly, compensation cost is accrued based on the estimated fair value of the options issued, and amortized over the vesting period. Because vesting of the options is contingent upon the recipient continuing to provide services to the Company until the vesting date, the Company estimates the fair value of the non-employee options at each period end up to the vesting date, and adjusts expensed amounts accordingly. The compensation cost will be amortized over the vesting period of the options. The 30,000 options granted on August 6, 1999 had an estimated fair value at that date of $0.59 per option grant, or a total of $17,607. The fair value of each option grant is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1999: dividend yield of 8%, expected volatility of 18%, risk-free interest rate of 6% and expected lives of ten years. None of the options granted during 1999 were exercised or expired. Through calendar year 1999, each independent director was entitled to receive annual compensation for serving as a director in the aggregate amount of $15,000 payable in cash (maximum of $5,000 per year) and/or shares of Common Stock valued based on the fair market value at the date of issuance. Beginning in calendar year 2000, the annual compensation for each independent director was increased from $15,000 to $17,500 and the maximum payable in cash was increased from $5,000 to $7,500. As of December 31, 1999 and 1998, 1,216 and 216 shares, respectively, having an aggregate value of $12,500 and $2,500, respectively, have been issued to each of the Company's two independent directors as compensation for their services. On October 9, 1998, the Board of Directors authorized the implementation of a stock repurchase plan, enabling the Company to repurchase, from time to time, up to 500,000 shares of its Common Stock. The repurchases will be made in the open market and the timing will be dependent on the availability of shares and other market conditions. As of both December 31, 1999 and 1998, the Company had acquired 6,300 shares of its Common Stock for an aggregate purchase price of $58,579 (including commissions and service charges). Repurchased shares are accounted for as treasury stock. On January 29, 1999, the Company adopted a shareholder rights plan (the "Shareholder Rights Plan"). Terms of the Shareholder Rights Plan provide for a distribution to common shareholders of record at the close of business on February 16, 1999 of one Right for each outstanding share of Common Stock of the Company. Subject to limited exceptions, the Rights will be exercisable if a person or group acquires 15% or more of the Company's Common Stock or announces a tender offer for 15% or more of the Common Stock. Depending on the circumstances, the effect of the exercise of the Rights will be to permit each holder of a Right to either purchase stock in the Company or stock of the buyer, at a substantial discount, and, in so doing, materially dilute the level of ownership of the buyer in the Company. The Company will be entitled to redeem the Rights at $.01 per Right at any time before a person has acquired 15% or more of the outstanding Common Stock. The Shareholder Rights Plan will expire on February 16, 2009. The Company was created as part of the settlement in 1997 of class action litigation against, among others, the sponsors of the Partnerships which were consolidated to form the Company. As part of that settlement, counsel ("Class Counsel") for the partners of the Partnerships had the right to petition the United States District Court for the Southern District of New York (the "Court") for additional attorneys' fees ("Counsel's Fee Shares") in an amount to be determined in the Court's sole discretion. The Counsel's Fee Shares would have been based upon a percentage of the increase in value of the Company, ("the Added Value") if any, as of October 10, 1998 based upon the difference between (i) the trading prices of the Company's shares of Common Stock during the six month period ended October 10, 1998 and (ii) the trading prices of the limited partnership units and the asset values of the Partnerships prior to 10/1/97. As of October 10, 1998, there was no Added Value and therefore, Class Counsel did not file a petition for Counsel's Fee Shares. -38- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - Selected Quarterly Financial Data (unaudited)
1999 Quarter Ended ---------------------------------------------------------------- March 31 June 30 September 30 December 31 -------------- ----------------- ------------ ----------- Revenues: Rental income $5,018,188 $4,916,201 $4,998,061 $4,747,666 Tenant reimbursements 1,178,675 1,178,670 1,091,893 1,232,837 Income from equity investments 85,501 85,937 68,014 51,630 Interest income 115,177 124,878 126,412 115,975 Other 32,882 25,519 35,970 124,415 ----------- ----------- ----------- ---------- Total revenues 6,430,423 6,331,205 6,320,350 6,272,523 ----------- ----------- ----------- ---------- Expenses: Repairs and maintenance 411,241 365,487 560,325 573,141 Operating 660,629 699,159 639,373 651,418 Real estate taxes 624,396 667,561 581,209 562,881 Interest 1,105,280 1,107,410 1,127,521 1,149,345 General and administrative 455,794 531,163 510,424 500,671 Depreciation and amortization 1,289,742 1,204,899 1,191,916 1,211,254 Other 369,319 198,187 160,981 23,111 ----------- ----------- ----------- ---------- Total expenses 4,916,401 4,773,866 4,771,749 4,671,821 ----------- ----------- ----------- ---------- Income before minority interest 1,514,022 1,557,339 1,548,601 1,600,702 Minority interest in income of the Operating Partnership (91,522) (95,915) (98,454) (111,692) ----------- ----------- ----------- ---------- Net income $1,422,500 $1,461,424 $1,450,147 $1,489,010 ========= ========= ========= ========= Net income per share: Basic $ .18 $ .18 $ .18 $ .19 ========= ========= ========= ========= Diluted $ .17 $ .18 $ .18 $ .19 ========= ========= ========= =========
-39- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1999 Quarter Ended ---------------------------------------------------------------- March 31 June 30 September 30 December 31 -------------- ----------------- ------------ ----------- Revenues: Rental income $2,723,985 $2,933,050 $3,520,886 $4,225,061 Tenant reimbursements 534,178 1,027,607 1,003,172 1,349,699 Income from equity investments 142,121 81,467 84,249 115,787 Interest income 704,121 663,096 189,795 92,059 Other 32,702 15,765 24,318 41,685 --------- --------- --------- --------- Total revenues 4,137,107 4,720,985 4,822,420 5,824,291 --------- --------- --------- --------- Expenses: Repairs and maintenance 273,858 236,934 499,963 492,991 Operating 323,735 439,746 414,070 609,068 Real estate taxes 371,607 414,866 449,469 488,482 Interest 365,560 470,691 366,521 729,102 General and administrative 345,498 487,780 483,247 503,031 Depreciation and amortization 759,772 892,386 997,784 1,199,248 Other 188,398 240,778 103,846 396,085 --------- --------- --------- --------- Total expenses 2,628,428 3,183,181 3,314,900 4,418,007 --------- --------- --------- --------- Income before gain on sale of investment 1,508,679 1,537,804 1,507,520 1,406,284 Gain on sale of investment in partnership 779,893 0 0 0 --------- --------- --------- --------- Income before minority interest 2,288,572 1,537,804 1,507,520 1,406,284 Minority interest in income of the Operating Partnership (13,130) (14,877) (26,049) (39,491) --------- --------- --------- --------- Net income $2,275,442 $1,522,927 $1,481,471 $1,366,793 ========= ========= ========= ========= Net income per share (basic and diluted) $ 0.28 $ 0.19 $ 0.18 $ 0.17 ========= ========= ========= =========
The results for the quarter ended March 31, 1998 reflect the gain of $779,893 recognized upon the sale of the Dominion investment (see Note 5). NOTE 13 - Commitments and Contingencies The Company is subject to routine litigation and administrative proceedings arising in the ordinary course of business. Management does not believe that such matters will have a material adverse impact on the Company's financial position, results of operations or cash flows. A current or previous owner or operator of real property may be legally liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such liability may exist whether or not the owner or operator knew of, or was responsible for, such hazardous or toxic substances. In addition, the presence of hazardous or toxic substances may adversely affect the owner's ability to borrow funds using such real property as collateral. Certain environmental laws impose liability for release of asbestos-containing materials ("ACMs") into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company may be liable for removal or remediation costs, as well as certain other potential costs which could relate to such hazardous or toxic substances or ACMs (including governmental fines and injuries to persons and property). To date, the Company has not incurred any costs of removal or remediations of such hazardous or toxic substances. However, the presence, with or without the Company's knowledge, of hazardous or toxic substances at any property held or operated by the Company could have an adverse effect on the Company's business, operating results and financial condition. Phase I Environmental Site Assessments have been undertaken on all of the Company's properties. In certain cases, additional Phase II site investigations have also been undertaken where deemed appropriate. Based on these reports, no on-site hazardous chemicals or petroleum products were detected or found to exist in the soil or in the groundwater at those properties which would result in action by state environmental agencies and which would require additional investigation and/or remediation, with the exception of the Mountain Park Plaza property. A Phase II investigation at this property, in February 1998, determined that there were detectable levels of certain hazardous materials above threshold levels which are ascertained by the Georgia State Department of Natural Resources Environmental Protection Division ("GAEPD"). Based on this report and notification to GAEPD, additional investigation, monitoring and/or remediation may be required by GAEPD. These hazardous materials were determined to derive from an on-site dry cleaner and an adjacent service station with a pre-existing, documented underground leaking storage tank. -40- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property management and the Company have taken preliminary steps in providing appropriate notification to GAEPD on these matters together with notification and possible remedies against both the on-site dry cleaner and adjacent service station. Dependent on a numerical score "ranking" for the site which is dependent on several factors (the most important being the potential for human exposure to occur) the GAEPD may require additional investigation and/or remediation. On May 28, 1999 management received notification form GAEPD that the site is now listed on the GAEPD Hazardous Site Inventory ("HSI") due, in part, to the presence of detectable levels of certain hazardous materials at slightly higher than maximum allowable levels. Management has recently undertaken a re-sampling to determine if such levels continue to exist in order to potentially qualify for a de-listing from the HSI. The re-sampling indicated that no hazardous materials remain detectable above the threshold levels which are ascertained by GAEPD to require remediation and a formal report has been submitted to GAEPD to indicate such and to qualify the property for de-listing. Management has installed wells on the site to monitor ongoing levels of hazardous materials in the ground water pursuant to GAEPD policy. Management, at this time, is unable to predict further requirements. NOTE 14 - Subsequent Events On February 15, 2000, 1,160 shares of Common Stock, having an aggregate value of $10,000 based on the closing price per share on February 14, 2000, were issued to each independent director as compensation for their services for the year ended December 31, 1999. -41- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Company. Incorporated by reference to the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Item 11. Executive Compensation. Incorporated by reference to the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. Item 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference to the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. Item 13. Certain Relationships and Related Transactions. Incorporated by reference to the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. -42- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Sequential Page ---------- (a) 1. FINANCIAL STATEMENTS Independent Auditors' Report 22 Consolidated Balance Sheets as of December 31, 1999 and 1998 23 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 24 Consolidated Statements of Changes in Shareholders' Equity/Partners' Capital (Deficit) for the years ended December 31, 1999, 1998 and 1997 25 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 26 Notes to Consolidated Financial Statements 28 (a) 2. FINANCIAL STATEMENT SCHEDULES Schedule II - Valuation and Qualifying Accounts for the three years ended December 31, 1999 48 Schedule III - Real Estate and Accumulated Depreciation and Notes to Schedule at December 31, 1999 49 Schedule IV - Mortgage Loans on Real Estate at December 31, 1999 51 All other schedules have been omitted because they are not required or because the required information is contained in the financial statements or notes hereto. (a) 3. EXHIBITS (3.1A) Articles of Incorporation dated as of August 13, 1996 (incorporated by reference to the Company's Registration Statement on Form 10, File No. 001-13239) (3.1B) Amended Articles of Incorporation dated as of September 26, 1996 (incorporated by reference to the Company's Registration Statement on Form 10, File No. 001-13239) (3.1C) Articles of Amendment and Restatement of Articles of Incorporation dated as of October 1, 1997 (incorporated by reference to the Company's Registration Statement on Form 10, File No. 001-13239) (3.1D) Certificate of Correction dated as of October 22, 1997 (incorporated by reference to the Company's Current Report on Form 8-K, filed with the Commission on March 19, 1998) (3.2) Bylaws (incorporated by reference to the Company's Current Report on Form 8-K, filed with the Commission on March 19, 1998) (4.1) Specimen Copy of Stock Certificate for shares of the Company's Common Stock (incorporated by reference to the Company's Amendment No. 1 on Form 10/A to the Company's Registration Statement on Form 10, File No. 001-13239) (10A) Continental Casualty Company Insurance Policy issued to the Company (incorporated by reference to Exhibit 10(C) to the Company's Registration Statement on Form S-11, File No. 33-8755, as amended) (10B) Indemnity Agreement among Continental Casualty Company, the Company and the General Partners (incorporated by reference to Ex- -43- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. Sequential Page ---------- hibit 10(D) to the Company's Registration Statement on Form S-11, File No. 33-8755, as amended) (10C) Secured Promissory Note between Principal Mutual Life Insurance Company and Insured II dated December 11, 1992 (incorporated by reference to Exhibit 10F to Insured II's Annual Report on Form 10-K for the year ended December 31, 1992) (10D) Form of Purchase and Sale Agreement pertaining to Summit Preferred's acquisition of Preferred Equity Investments (incorporated herein by reference to exhibit 10C to Summit Preferred's S-11 Registration Statement) (10E) Form of Amended and Restated Agreement of Limited Partnership of Operating Partnerships (incorporated herein by reference to Exhibit 10B to Summit Preferred's S-11 Registration Statement) (10F) Mortgage Note, dated June 10, 1988, with respect to Cross Creek Apartments in Charlotte, North Carolina, in the principal amount of $17,494,100 (incorporated by reference to Exhibit 10(b) in Eagle's Current Report on Form 8-K dated June 15, 1988) (10G) Equity Loan Note, dated June 10, 1988, with respect to Cross Creek Apartments in Charlotte, North Carolina, in the principal amount of $1,783,900 (incorporated by reference to Exhibit 10(c) in Eagle's Current Report on Form 8-K dated June 15, 1988) (10H) Subordinated Loan Note, dated June 10, 1988, with respect to Cross Creek Apartments in Charlotte, North Carolina (incorporated by reference to Exhibit 10(d) in Eagle's Current Report on Form 8-K dated June 15, 1988) (10I) Mortgage Note, dated August 18, 1988, with respect to Weatherly Walk Apartments in Fayetteville, Georgia, in the principal amount of $7,772,500 (incorporated by reference to Exhibit 10(e) in Eagle's Current Report on Form 8-K dated August 19, 1988) (10J) Equity Loan Note, dated August 18, 1988, with respect to Weatherly Walk Apartments in Fayetteville, Georgia, in the principal amount of $895,200 (incorporated by reference to Exhibit 10(f) in Eagle's Current Report on Form 8-K dated August 19, 1988) (10K) Subordinated Loan Note, dated August 18, 1988, with respect to Weatherly Walk Apartments in Fayetteville, Georgia (incorporated by reference to Exhibit 10(g) in Eagle's Current Report on Form 8-K dated August 19, 1988) (10L) Mortgage Note, dated December 12, 1988, with respect to Woodgate Manor in Gainesville, Florida, in the principal amount of $3,110,300 (incorporated by reference to Exhibit 10(h) in Eagle's Current Report on Form 8-K dated December 12, 1988) (10M) Equity Loan Note, dated December 12, 1988, with respect to Woodgate Manor in Gainesville, Florida, in the principal amount of $339,700 (incorporated by reference to Exhibit 10(i) in Eagle's Current Report on Form 8-K dated December 12, 1988) (10N) Subordinated Promissory Note, dated December 12, 1988, with respect to Woodgate Manor in Gainesville, Florida (incorporated by reference to Exhibit 10(j) in Eagle's Current Report on Form 8-K dated December 12, 1988) (10O) Advisory Agreement dated as of October 1, 1997, between the Company, Aegis Realty Operating Partnership, LP (the "OP") and Related Aegis LP (the "Advisor") (incorporated by reference to the Company's -44- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. Sequential Page ---------- Current Report on Form 8-K, filed with the Commission on March 19, 1998) (10P) Agreement and Plan of Consolidation dated as of October 1, 1997, by and among the Company, the OP, Aegis Realty Holding Partnership, LP ("Aegis Holding"), AOP Merger Sub I, Inc. ("AOP Sub I"), AOP Merger Sub II, Inc. ("AOP Sub II"), Summit Insured Equity L.P. ("Insured I"), Summit Insured Equity II L.P. ("Insured II"), Summit Preferred Equity L.P. ("Summit Preferred"), Eagle Insured L.P. ("Eagle"), the Advisor, Related Insured Equity Associates, Inc. ("Related GP I"), RIDC II, L.P. ("Related GP II"), Related Equity Funding, Inc. ("Related GP III"), Partnership Monitoring Corporation ("PMC"), Related Federal Insured, L.P. ("Related GP IV"), Related Insured BUC$ Associates, Inc., as assignor limited partner of Insured I and Insured II ("Assignor LP I/II"), Related BUC$ Associates, Inc. ("Assignor LP III") and Related FI BUC$, Inc. ("Assignor LP IV") (incorporated by reference to the Company's Current Report on Form 8-K, filed with the Commission on March 19, 1998) (10Q) Incentive Share Option Plan (incorporated by reference to the Company's Current Report on Form 8-K, filed with the Commission on March 19, 1998) (10R) Omnibus Assignment Agreement dated as of October 1, 1997, by and among the Company, the OP, Aegis Holding, AOP Sub I, AOP Sub II, Insured I, Insured II, Summit Preferred, Eagle, the Advisor, Related GP I, Related GP II, Related GP III, PMC, Assignor LP I/II, Assignor LP III and Assignor LP IV (incorporated by reference to the Company's Current Report on Form 8-K, filed with the Commission on March 19, 1998) (10S) Revolving Credit Agreement dated as of December 29, 1997 by and between the OP, as borrower and BankBoston, N.A. for itself and as Agent (incorporated by reference to the Company's Current Reports on Form 8-K, filed with the Commission on January 9, 1998) (10T) Management Agreement between the Company, Insured I, Insured II, the OP and the Property Manager dated October 1, 1997 (incorporated by reference to Exhibit 10Z in the Company's Annual Report on Form 10-K for the period ended December 31, 1997) 21 List of Subsidiaries (filed herewith) 52 27 Financial Data Schedule (filed herewith) 53 (b) REPORTS ON FORM 8-K Current report on Form 8-K relating to the resignation of J. Michael Fried as Chairman of the Board of Directors and Chief Executive Officer and Stuart J. Boesky as Chief Operating Officer and the unanimous appointment of Stuart J. Boesky as Chairman of the Board of Directors and Chief Executive Officer and Michael J. Brenner as a Director was dated December 16, 1999 and was filed on January 5, 2000.
-45- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AEGIS REALTY, INC. (Company) Date: March 29, 2000 By: /s/ Stuart J. Boesky -------------------- Stuart J. Boesky Director, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the Company and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ Stuart J. Boesky Director, Chairman of the Board, - -------------------- President and Chief Executive Officer March 29, 2000 Stuart J. Boesky /s/ Michael J. Brenner - ---------------------- Michael J. Brenner Director March 29, 2000 /s/ Alan P. Hirmes - ------------------ Alan P. Hirmes Director and Senior Vice President March 29, 2000 /s/Peter T. Allen - ----------------- Peter T. Allen Director March 29, 2000 /s/ Arthur P. Fisch - ------------------- Arthur P. Fisch Director March 29, 2000 /s/ John B. Roche Senior Vice President and - ----------------- Chief Financial Officer March 29, 2000 John B. Roche /s/ Richard A. Palermo Vice President, Treasurer, Controller - ---------------------- and Chief Accounting Officer March 29, 2000 Richard A. Palermo
AEGIS REALTY, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Year Ended Beginning During Deduction- Balance at December 31 Name of Period* Year* Write-offs* End of Period - ----------- -------------------------------- ------------- ----------- ------------ ------------- 1999 Allowance for Doubtful Accounts $383,000 $384,000 $(424,000) $343,000 1998 Allowance for Doubtful Accounts $304,000 $428,000 $(349,000) $383,000 1997 Allowance for Doubtful Accounts $303,000 $ 70,000 $ (69,000) $304,000
*Information prior to October 1, 1997 (the date of the Consolidation) is only with respect to Insured I. Information subsequent to September 30, 1997 is with respect to the Company and its consolidated subsidiaries which include Insured I and the other Partnerships pursuant to the Consolidation. AEGIS REALTY, INC. ITEM 14, SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1999
Cost Capitalized Subsequent to Initial Cost to Partnership (F) Acquisition Purchase Price Adjustments (E) ------------------------------- ------------- --------------------------------- Encum- Buildings and Buildings and brances Land Improvements Improvements Land Improvements --------- ---------------- ------------- ------------ --------------- -------------- Shopping Centers: Cactus Village $ 0 $ 2,093,532 $ 4,631,948 $ 33,517 $ (42,583) $ (94,681) Glendale, AZ Hickory Plaza 0 1,288,328 3,931,633 18,291 (3,750) 69,166 Nashville, TN Highland Fair (I) 1,288,328 5,059,079 138,661 (21,891) (76,137) Gresham, OR Pablo Plaza (H) 2,147,213 5,922,120 508,141 (7,866) 219,775 Jacksonville, FL Southhaven 0 1,288,328 4,793,938 31,050 0 7,965 Southhaven, MS Town West (H) 1,932,491 3,303,752 20,814 0 8,104 Indianapolis, IN Westbird (H) 1,566,070 5,475,510 660,577 2,474 176,774 Miami, FL Winery Square (H) 4,320,555 8,916,731 157,429 (227,319) (442,051) Fairfield, CA Mountain View 0 2,675,960 8,661,498 88,972 (143,357) (500,582) Village Shellville, GA Forest Park Square (I) 1,532,064 7,822,819 10,000 (19,024) (81,321) Cincinnati, OH Kokomo Plaza (H) 695,912 6,643,748 31,557 (8,784) (75,074) Kokomo, IN Rolling Hills Square (H) 2,624,639 2,516,365 (7) 331,033 46,877 Tucson, AZ Mountain Park Plaza 0 1,566,015 3,791,633 0 0 0 Atlanta, GA Applewood Centre (H) 1,795,469 4,574,757 0 0 0 Omaha, NE Birdneck Center 0 469,227 2,837,048 0 0 25,284 Virginia Beach, VA The Market Place 0 810,910 4,875,966 0 0 2,800 Newton, NC Barclay Place 2,547,557 573,079 3,452,804 28,402 0 125,206 Lakeland, FL The Village At 3,902,472 940,193 5,629,239 0 0 0 Waterford Midlothian, VA Governor's Square (H) 1,220,408 7,296,172 14,401 0 42,698 Montgomery, AL Marion City 0 765,950 4,619,926 0 0 7,000 Square Marion, NC Dunlop Village (H) 751,518 4,505,067 0 0 11,500 Colonial Heights, VA Life on which Gross Amount at which Depreciation Carried At Close of Period (D) in Latest ----------------------------------------- Income Buildings and Accumulated Year of Date Statement Land Improvements Total Depreciation Construction Acquired is Computed ----------- -------------- ----------- ------------ ------------ ---------- ------------ Shopping Centers: Cactus Village $ 2,050,949 $ 4,570,784 $ 6,621,733 $ 1,451,986 1986 July 1987 40 years Glendale, AZ Hickory Plaza 1,284,578 4,019,090 5,303,668 1,254,869 1974 (A) Apr. 1987 40 years Nashville, TN Highland Fair 1,266,437 5,121,603 6,388,040 1,566,173 1986 July 1987 40 years Gresham, OR Pablo Plaza 2,139,347 6,650,036 8,789,383 1,931,358 1972 (B) Feb. 1987 40 years Jacksonville, FL Southhaven 1,288,328 4,832,953 6,121,281 1,524,509 1984 (C) Feb. 1987 40 years Southhaven, MS Town West 1,932,491 3,332,670 5,265,161 1,070,615 1985 May 1987 40 years Indianapolis, IN Westbird 1,568,544 6,312,861 7,881,405 1,942,457 1977 Dec. 1986 40 years Miami, FL Winery Square 4,093,236 8,632,109 12,725,345 2,655,886 1987 Dec. 1987 40 years Fairfield, CA Mountain View 2,532,603 8,249,888 10,782,491 2,327,305 1987 July 1988 40 years Village Shellville, GA Forest Park Square 1,513,040 7,751,498 9,264,538 2,099,176 1988 May 1989 40 years Cincinnati, OH Kokomo Plaza 687,128 6,600,231 7,287,359 1,779,070 1988 May 1989 40 years Kokomo, IN Rolling Hills Square 2,955,672 2,563,235 5,518,907 260,524 1980 Oct. 1997 30.5 years Tucson, AZ Mountain Park Plaza 1,566,015 3,791,633 5,357,648 273,400 1988 Oct. 1997 31.2 years Atlanta, GA Applewood Centre 1,795,469 4,574,757 6,370,226 324,396 1989 Oct. 1997 33.1 years Omaha, NE Birdneck Center 469,227 2,862,332 3,331,559 191,568 1987 (G) Dec. 1997 40 years Virginia Beach, VA The Market Place 810,910 4,878,766 5,689,676 196,093 1989 Dec. 1997 40 years Newton, NC Barclay Place 573,079 3,606,412 4,179,491 164,328 1974 (J) Mar. 1998 40 years Lakeland, FL The Village At 940,193 5,629,239 6,569,432 245,872 1991 Apr. 1998 40 years Waterford Midlothian, VA Governor's Square 1,220,408 7,353,271 8,573,679 294,159 1960 (K) May 1998 40 years Montgomery, AL Marion City 765,950 4,626,926 5,392,876 182,666 1988 June 1998 40 years Square Marion, NC Dunlop Village 751,518 4,516,567 5,268,085 151,571 1986 Sep. 1998 40 years Colonial Heights, VA Cost Capitalized Subsequent to Initial Cost to Partnership (F) Acquisition Purchase Price Adjustments (E) ---------------------------------- ------------ --------------------------------- Encum- Buildings and Buildings and brances Land Improvements Improvements Land Improvements --------- ---------------- ---------------- ------------ --------------- -------------- Shopping Centers: Centre Stage (H) 1,052,698 6,305,930 0 0 336,999 Springfield, TN White Oaks Plaza 0 1,237,309 7,443,249 0 0 0 Spindale, NC Cape Henry (H) 587,486 3,548,028 0 0 26,223 Virginia Beach, VA Emporia West (H) 435,001 2,670,717 0 0 0 Emporia, KS Oxford Mall 6,350,323 1,289,377 7,740,512 0 0 3,448 Oxford, MS Southgate 10,776,168 2,269,668 13,384,681 0 0 29,638 Heath, OH Crossroads East (H) 721,798 4,273,252 0 0 0 Columbus, OH --------- --------- --------- -------- ------- --------- $59,120,698 $39,939,526 $154,628,122 $1,741,805 $(141,067) $(130,389) ========== ========== =========== ========= ======== ======== Life on which Gross Amount at which Depreciation Carried At Close of Period (D) in Latest ----------------------------------------- Income Buildings and Accumulated Year of Date Statement Land Improvements Total Depreciation Construction Acquired is Computed ----------- ------------ ------------ ------------ ------------ -------- ----------- Shopping Centers: Centre Stage 1,052,698 6,642,929 7,695,627 216,013 1989 Sep. 1998 40 years Springfield, TN White Oaks Plaza 1,237,309 7,443,249 8,680,558 247,881 1988 Sep. 1998 40 years Spindale, NC Cape Henry 587,486 3,574,251 4,161,737 117,853 1986 Sep. 1998 40 years Virginia Beach, VA Emporia West 435,001 2,670,717 3,105,718 77,936 1980 Nov. 1998 40 years Emporia, KS Oxford Mall 1,289,377 7,743,960 9,033,337 225,317 1982 Nov. 1998 40 years Oxford, MS Southgate 2,269,668 13,414,319 15,683,987 364,411 1962 (L) Dec. 1998 40 years Heath, OH Crossroads East 721,798 4,273,252 4,995,050 115,641 1984 (M) Dec. 1998 40 years Columbus, OH --------- ---------- ---------- --------- $39,798,459 $156,239,538 $196,037,997 $23,253,033 ========== =========== =========== ==========
(A) Renovated and expanded in 1985. (B) Expanded and remodeled from 1983 through 1985. (C) Expanded in 1986. (D) Aggregate cost for federal income tax purposes is $175,633,959. (E) Amounts received and accrued from sellers' rental guarantees from the sellers of the properties purchased by the Company. (F) Included in buildings and improvements are acquisition fees. (G) Expanded in 1997. (H) This shopping center is part of a pool of assets collateralizing the Credit Facility which has an outstanding balance of $30,818,000 at December 31, 1999. (I) Highland Fair and Forest Park Square collateralize a loan with an outstanding balance of $4,726,178 at December 31, 1999. (J) Renovated and expanded in 1988. (K) Developed and renovated in four phases from 1960 through 1990. (L) Renovated in 1984 and from 1996 through 1997. (M) Renovated from 1996 through 1997. Reconciliation of Real Estate Owned:
1999 1998 1997 ------------ ------------ ------------ Balance at beginning of period: $194,144,910 $111,042,804 $ 85,512,224 Acquisitions 714,293 82,423,329 25,769,503 Improvements 1,753,345 703,687 36,282 Write-off of improvements (574,551) (24,910) (275,205) ------------ ------------ ------------ Balance at close of period: $196,037,997 $194,144,910 $111,042,804 =========== =========== =========== Reconciliation of Accumulated Depreciation: 1999 1998 1997 ------------ ------------ ------------ Balance at beginning of period: $ 19,268,330 $ 16,404,617 $ 14,841,244 Depreciation Expense 4,114,002 2,880,114 1,835,782 Write-off of accumulated depreciation on improvements (129,299) (16,401) (272,409) ------------ ------------ ------------ Balance at close of period: $ 23,253,033 $ 19,268,330 $ 16,404,617 =========== =========== ===========
AEGIS REALTY, INC. AND SUBSIDIARIES Schedule IV - Mortgage Loans on Real Estate December 31, 1999
Original Carrying Final Periodic Face Amount Amount Interest Closing Maturity Payment Prior of Mortgage of Mortgage Description (1) Rate (2) Date Date (3)(5) Terms (4) Liens Loan Loan (6)(7)(8) - --------------- -------- -------- ----------- --------- ----- ------------- -------------- First Mortgage Loan: Woodgate Manor (9) 8.95% 12/12/88 1/1/24 Monthly None $3,110,300 $3,220,191
(1) The property is a multifamily residential apartment complex. (2) Includes a servicing fee of 0.07% paid by the mortgagor to Related Mortgage Corporation (an affiliate of the Advisor). (3) As of December 13, 1998, the Company may call for prepayment of the entire outstanding principal amount at any time, subject to the loss of the co-insurance feature. (4) Monthly payments include principal and interest and are made at a level amount over the life of the mortgage loan until maturity. See discussion regarding additional interest in Item 1, "Business-Mortgage Loans." (5) As of December 13, 1998, the Borrower may elect to prepay at any time without incurring prepayment penalties. (6) Carrying amount of mortgage loans:
1999 1998 ----------- ----------- Beginning balance $ 3,267,037 $30,980,995 Amortization of purchase accounting premiums (14,430) (66,805) Collections of principal (32,416) (105,124) Repayment of the Cross Creek Mortgage Loan (10) 0 (19,042,376) Carrying amount of the Cross Creek Mortgage Loan in excess of the repayment (10) 0 (72,967) Repayment of the Weatherly Walk Mortgage Loan (11) 0 (8,380,752) Carrying amount of the Weatherly Walk Mortgage Loan in excess of the repayment (11) 0 (45,934) ---------- ---------- Ending Balance $ 3,220,191 $ 3,267,037 ========== ==========
(7) The aggregate cost of the mortgage loan for Federal income tax purposes at December 31, 1999 is $2,873,868. The difference in aggregate cost is due to the purchase accounting premium recorded for financial statement purposes. (8) The mortgage loan is current with respect to principal and interest. (9) The general partnership interest of the mortgagor is held by an affiliate of the Advisor. (10) On June 24, 1998, Cross Creek Apartments was sold and the related Mortgage Loan was repaid in full (see Note 6 to the financial statements in "Item 8. Financial Statements and Supplementary Data") (11) On August 26, 1998, FAI, Ltd., the limited partnership which owns Weatherly Walk Apartments, completed a refinancing with an unaffiliated third party and the related Mortgage Loan was repaid (see Note 6 to the financial statements in "Item 8. Financial Statements and Supplementary Data") EX-21 2 EXHIBIT 21 Exhibit 21 LIST OF SUBSIDIARIES OF THE COMPANY 1. Aegis Realty Operating Partnership, L.P., a Delaware limited partnership 2. Barclay/Aegis Inc., a Delaware corporation LIST OF SUBSIDIARIES OF AEGIS REALTY OPERATING PARTNERSHIP, L.P. 1. Summit Insured Equity L.P., a Delaware limited partnership 2. Summit Insured Equity L.P. II, a Delaware limited partnership 3. Barclay/Aegis Limited Partnership, a Delaware limited partnership 4. Aegis Waterford, L.L.C. , a Delaware limited liability company 5. Aegis Oxford, L.L.C., a Mississippi limited liability company 6. Southgate Partners Limited Partnership, a Delaware limited partnership 7. Southgate/Aegis L.L.C., , a Delaware limited liability company 8. Crossroads East Shopping Center, Ltd., an Ohio limited liability company 9. Aegis Realty Holding Partnership, L.P. , a Delaware limited partnership EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AEGIS REALTY, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001043324 AEGIS REALTY, INC. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 2,226,295 0 8,599,110 343,000 0 1,401,319 196,037,997 23,253,033 193,392,424 5,590,506 59,239,944 0 0 0 121,301,604 193,392,424 0 25,354,501 0 0 15,041,864 0 4,489,556 5,832,081 0 0 0 0 0 5,832,081 .72 .72
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