-----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, BL3vQYDqgFSErGI3ceGFSAUh5NLrP80iOS1PeRIkffyoo+ohqFxtWEvwI07tgFj+ S8OfiMj3BbdfCBbcBsxb5Q== 0000950146-98-000653.txt : 19980430 0000950146-98-000653.hdr.sgml : 19980430 ACCESSION NUMBER: 0000950146-98-000653 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980417 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEGIS REALTY INC CENTRAL INDEX KEY: 0001043324 STANDARD INDUSTRIAL CLASSIFICATION: 6500 IRS NUMBER: 133916825 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-13239 FILM NUMBER: 98596321 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/A 1 FORM 10-K/A-1 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, 1997 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 governing instrument) 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: Common Stock, par value $.01 per share 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 stock held by non-affiliates of the Registrant as of March 9, 1998 was $93,907,749, based on a price of $11 7/8 per share, the closing sales price for the Registrant's Common Stock on the American Stock Exchange on that date. As of March 9, 1998, there were 8,050,727 outstanding shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Part III: Proxy Statement for Annual Meeting of Shareholders to be held on June 18, 1998. Index to exhibits may be found on page 35 Page 1 of 63 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. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES OCCURING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURENCE OF UNANTICIPATED EVENTS. -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, own, operate and renovate primarily supermarket-anchored neighborhood and community shopping centers. The Company operates in a single business segment, investment in real estate related assets. As of December 31, 1997, the Company owned a portfolio of sixteen retail properties (the "Retail Properties") containing a total of approximately 1.5 million square feet of gross leaseable area ("GLA"), and holds partnership interests in two suburban garden apartment properties (the "Multifamily Properties") and three FHA insured participating mortgages secured by suburban garden apartment properties (the "FHA Mortgages"). The locations of the assets in fourteen states provide the Company with a geographically diverse portfolio. Moreover, the Company has a predictable and stable revenue stream that, as of December 31, 1997, is derived approximately 55% from either base rent from tenants or interest payments on the FHA Mortgages. No single asset accounts for more than 10% of total revenues. 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 C.V.S. Stores. Neighborhood centers are typically open air centers ranging in size from 50,000 GLA to approximately 150,000 GLA and 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. The Retail Properties range in size from approximately 67,000 GLA to 140,000 GLA, with an average of approximately 100,000 square feet of gross GLA. As of December 31, 1997, the Retail Properties had an average occupancy of 93.6%. Through 2005 no more than 7.6% of leased GLA is subject to expiration in any one year. The Multifamily Properties total 236 units and had an average physical occupancy of 90% as of December 31, 1997. The FHA mortgages have an aggregate principal balance of approximately $27.6 million, and carry an average annual interest rate of 8.95%. The underlying FHA properties had an average physical occupancy of 96.1% as of December 31, 1997. Organization - - ------------ The Company was formed on October 1, 1997 as the result of the consolidation (the "Consolidation") of four publicly registered, non-traded limited partnerships, Summit Insured Equity ("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"). The Partnerships were co-sponsored by 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 subsidiaries and, prior to October 1, 1997, 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 limited partnership interest in each Partnership. The shares commenced trading on the American Stock Exchange on October 10, 1997 under the symbol "AER". There are currently 8,050,727 shares of Common Stock outstanding (an additional 46,836 shares are reserved for issuance upon conversion of OP units, as defined below, held by affiliates of Related). The Company is governed by two independent directors and three directors who are affiliated with Related. The Company has engaged Related Aegis LP, a Delaware limited partnership (the "Advisor") and an affiliate of Related, to manage its day to day affairs. In addition, RCC Property Advisors, Inc. (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 fifteen 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, in providing management, leasing, acquisition, due diligence, construction management and redevelopment services to the Company. 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 advertising 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 a small capitalization self-managed REIT. The Company owns all of its assets directly or indirectly through Aegis Realty Operating Partnership, LP, a Delaware limited partnership (the "OP"), of which the Company is the sole general partner and the holder of 99.42% of the units of partnership interest (the "OP Units"). The balance of the OP Units are currently held by affiliates of Related. As part of the Consolidation, Insured I and Insured II remained as stand alone entities each owned by the OP, as the general partner, and a subsidiary of the Company, as the limited partner. Insured I and Insured II continue to be the record owners of their respective shopping centers. 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, is 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"). Results of operations and other operating financial data for the Company for the years ended December 31, 1997, 1996 and 1995 include amounts for Insured I for the entire period and amounts for the other Partnerships for the period October 1, 1997 to December 31, 1997. Insured I is a Delaware limited partnership formed on December 12, 1985. Prior to the Consolidation, the general -3- 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 of Insured I managed and controlled the affairs of Insured I prior to the Consolidation. 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 three areas: i) external growth, ii) internal growth and iii) the increase in the amount of stock owned in the Company by affiliates of the Advisor and the Property Manager. The Company's external growth will be accomplished through acquisitions, on an individual or bulk basis, of shopping centers. The Company believes that there are significant opportunities available to acquire under valued, under managed and/or under utilized neighborhood and community shopping centers. Unlike most small capitalization REITs, the Company has the ability to benefit from its affiliation with a much larger company with a national presence. Aegis will use its affiliation with Related to establish a national acquisition campaign. 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 plan will allow the Company to maintain geographic diversity, which the Company believes reduces the risk otherwise associated with focusing on one region. The Company will seek 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 will generally seek to acquire only those centers that are expected to immediately increase FFO. Internal growth will occur from the re-deployment of proceeds from the sale or other disposition of stabilized 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. Finally, the Company will encourage the Advisor, Property Manager, Related and their respective affiliates to increase their ownership in the Company. The Company believes that this is necessary in order to more closely align the interest of the management with that of the Company and to demonstrate that the Advisor and Property Manager have a long-term commitment to the success of the Company. Shopping Centers - - ---------------- As of December 31, 1997, the Company owned sixteen 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, 1997: 1997* 1996* 1995* ---- ---- ---- 1. Pablo Plaza/Jacksonville, FL 7% 10% 10% 2. Westbird/Miami, FL 10% 11% 12% 3. Winery Square/Fairfield, CA 10% 14% 15% 4. Mountain View Village/Snellville, GA 10% 11% 10% 5. Forest Park Square/Cincinnati, OH 10% 12% 11% *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 subsidiaries which include Insured I and the other Partnerships pursuant to the Consolidation. During the years ended December 31, 1997, 1996 and 1995, the Kroger Company, which is a tenant at several shopping centers, accounted for approximately 28% of the Company's total gross revenues in each year. Garden Apartment Complexes - - -------------------------- As of December 31, 1997, the Company owned, on an all-cash basis, 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 - - -------------- All base interest and, the principal amount of the FHA Mortgages (the "Mortgage Loans") are coinsured by the FHA (80%) and an affiliate of the Advisor (20%). Equity loans made to the same developers are uninsured, but are secured by the partnership interests which own the underlying properties (the "Developments"). -4- In addition to the stated interest rates, the Company is entitled to receive additional interest on the Mortgage Loans 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 their origination with respect to the Mortgage Loans in exchange for the potential to receive additional interest payments. The notes evidencing the Mortgage Loans for Cross Creek and Woodgate Manor, two of the Developments, bear interest at 8.95% with the potential to receive an additional 0.84% to 1.68% on the Mortgage Loans plus 30% of any remaining cash flow from the underlying Developments and 35% of capital proceeds. The Mortgage Loan for Weatherly Walk is structured in the same manner except that the Company is entitled to receive up to 50% of both any remaining cash flow and of capital proceeds. Additional interest is due no later than upon the prepayment or other satisfaction of the Mortgage Loans or the sale of the Developments. The receipt of additional interest is dependent upon the economic performance of the underlying Developments. Additional interest is not insured by the FHA or an affiliate of the Advisor. As of December 31, 1997, the Company held three Mortgage Loans. The following table lists the original principal amounts of the outstanding Mortgage Loans in which the Company has invested:
Stated Funding Original Original Interest Mortgage Comple- Mortgage Equity Total Rate on Loan Project Closing tion Loan Loan Loan Mortgage Maturity - - ------- Date Date Amount Amount Amount Loan (2) Date (3) -------- --------- ------ -------- ------- --------- --------- Cross Creek Apartments 06/10/ 2/01/ $17,494,100 $1,783,900 $19,278,000 8.95% 1/1/ Charlotte, NC (1) 1988 1991 2030 Weatherly Walk Apartments 08/18/ 12/05/ 7,772,500 895,200 8,667,700 8.95% 11/1/ Fayetteville, GA 1988 1989 2029 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) The Company may call for prepayment of the entire outstanding principal amount at any time after the tenth anniversary of the date the funding of the Mortgage Loans was completed. 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 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 31, 1997, the aggregate balance of the Mortgage Loans recorded on the Company's financial statements was $30,980,995. For individual year-end balances, see "Note 6 of Notes to Consolidated Financial Statements" included in Item 8. The Company made an additional loan of $3,060,000 (the "Cross Creek Loan") to the present owner of the Cross Creek property, Walsh/Cross Creek Limited Partnership ("Walsh/Cross Creek") which acquired title to the property upon the default of the original developer. Such funds were used to pay for costs incurred to complete construction and to fund operating deficits. Significant interests in Walsh/Cross Creek are held by affiliates of the Advisor. Walsh/Cross Creek continues to be liable to the Company for the outstanding principal balance and interest pursuant to the Cross Creek Loan. Stephen M. Ross, who holds a majority interest in the Advisor, has guaranteed repayment of the principal and interest on the Cross Creek Loan. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Note 7 of Notes to Consolidated Financial Statements" included in Item 8. Insurance Policy - - ---------------- Insured I and Insured II are beneficiaries of two insurance policies (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 real estate then owned by Insured I and Insured II (currently fourteen of the sixteen shopping centers), 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 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 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 the 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 the 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 their Original Contributions to either Insured I or Insured II, as applicable, or any lesser amount insured under the Policy. -5- 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 "Item 2. Properties." With respect to the Mortgage Loans, the Company's business is affected by competition to the extent that the Developments 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 Developments 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 - - ----------- Under various federal, state and local laws, 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 opreated by the Company could have an adverse effect on the Company's business, operating results and financial condition. Phase I Environmental Site Assessments were undertaken on all of the Company's properties in conformance with requirements for closing the BankBoston facility (see "Credit Facility"). In certain cases, additional Phase II site investigations were also 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 any of the Company's 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 determined that there were detectable levels of certain hazardous substances in the soil and groundwater which were above threshold levels 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. Management is unable, at this time, to predict further requirements, if any, or the associated costs of monitoring or remediation. Credit Facility - - --------------- Upon the consummation of the Consolidation, the Company entered into a $2 million loan (the "Interim Loan") with BankBoston, N.A. ("BankBoston"). Proceeds of the loan were used to pay costs incurred in the Consolidation. The $2 million loan was secured by a first mortgage on the Westbird Shopping Center. The interest rate was fixed at 1.625% above BankBoston's 30 day Euro-contract rate (7.5938% at December 31, 1997). On December 30, 1997, the Company closed on a $40 million senior revolving credit facility (the "Facility") from BankBoston. The Facility requires interest only payments until maturity on December 30, 2000 and is secured by certain of the Company's Retail Properties. Proceeds of the Facility will be used to acquire additional assets (primarily retail properties) to add to the Company's current portfolio. Upon closing of the Facility, $11,375,000 was drawn down to purchase two shopping centers. The interest rate under the 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 rate at December 31, 1997 was 7.3438%. Pursuant to the Trust Agreement, indebtedness under the Facility and other borrowings will not exceed 50% of the Company's total market value as of the date such debt is incurred. On March 4, 1998 the $2 million Interim Loan was repaid with an additional draw down from the Facility. The Company also has a loan from New York Life Insurance Company with an outstanding balance at December 31, 1997 of $5,169,242. It carries a 9.25% interest rate and requires equal monthly payments of principal and interest in the amount of $55,984 until June 10, 2000, at which time the balance of principal, together with any unpaid interest, is due. The loan is collateralized by first mortgages on Forest Park Shopping Center and Highland Fair Shopping Center. -6- 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 sixteen shopping centers owned by the Company are managed by RCC Property Advisors, Inc. (the "Property Manager"), an affiliate of the Advisor, for a fee equal to 4.5% of the gross rental receipts from the 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. The Property Manager also is reimbursed for certain expenses. Management fees earned by the Property Manager for the years ended December 31, 1997, 1996 and 1995 totaled approximately $512,000, $420,000 and $410,000, respectively. Other Events - Settlement of Class Action Litigation - - ---------------------------------------------------- On August 28, 1997, the United States District Court for the Southern District of New York (the "Court") issued its final approval order with respect to the settlement (the "Related Settlement") of a putative class action (the "Class Action") brought against, among others, the general partners of the Partnerships and certain of their affiliates under the original caption Kinnes et. Al. V. Prudential Securities Group, Inc., et. al. The Related Settlement was applicable only to the general partners of the Partnerships affiliated with Related and certain of their affiliates, since the other defendants in the Class Action had previously entered into their own settlement agreement. The Related Settlement was subject to objections by the holders of beneficial unit certificates ("BUCs") representing assignments of limited partnership interests and the limited partners of the Partnerships (collectively, the "BUC$holders"), and to final approval by the Court following a review of the settlement proposal at a fairness hearing. The Related Settlement included, among other matters, the Consolidation, the acquisition by the Advisor of the general partner interests held by PBP in each of the Partnerships (collectively, the "PBP Interest"), the transfer to the BUC$holders of one-half of the PBP Interest prior to the Consolidation and the reduction of fees which were then payable to the general partners of the Partnerships by 25%. As part of the Related Settlement and in the Court's sole discretion, counsel to the BUC$holders may receive additional attorney's fees payable in the Company's shares, based upon 25% of the increase in value of the Company's shares as of October 1, 1998 (the "Anniversary Date"). The number of Company shares so issued will be limited to a maximum of 3.95% of the total number of shares outstanding on the Anniversary Date. The amount of shares to be issued under this provision cannot presently be determined. 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. Item 2. Properties. As of December 31, 1997, the Company owned sixteen neighborhood shopping centers. The following is a description of these shopping centers and locations:
% Square Comparable Feet Annualized Competition Name, Type of Gross Leased at Base Rent at Main within a Property and Purchase Date Leasable December December Anchor three-mile Location Price Purchased Square Feet 31, 1997 31, 1997 Tenant radius - - ------------- --------- --------- ----------- ---------- ------------ ------ ----------- Cactus Village Shopping Center $ 6,330,000 7/25/87 72,598 97% $508,000 Safeway** 11 shopping Glendale, AZ centers Hickory Plaza Shopping Center $ 4,902,000 4/23/87 67,336 96% $484,000 Kroger 8 shopping Nashville, TN centers Highland Fair Shopping Center $ 5,950,000 7/24/87 74,754 100% $555,000 Safeway 6 shopping Gresham, OR centers
-7-
% Square Comparable Feet Annualized Competition Name, Type of Gross Leased at Base Rent at Main within a Property and Purchase Date Leasable December December Anchor three-mile Location Price Purchased Square Feet 31, 1997 31, 1997 Tenant radius - - ------------- --------- --------- ----------- ---------- ------------ ------ ----------- Pablo Plaza Shopping Center $ 7,500,000 2/18/87 140,921 83% $565,000 Publix* 12 shopping Jacksonville, FL centers Southhaven Shopping Center $ 5,666,000 2/28/87 83,750 100% $598,000 Kroger 6 shopping Southhaven, MS centers Town West Shopping Center $ 4,932,000 5/11/87 88,200 100% $490,000 Kroger 5 shopping Indianapolis, IN centers Westbird Shopping Center $ 7,000,000 12/31/86 100,237 98% $706,000 Publix 7 shopping Miami, FL centers Winery Square Shopping Center $12,801,700 12/22/87 121,047 77% $905,000 Food 4 5 shopping Fairfield, CA Less centers Mountain View Village $10,350,000 7/25/88 99,908 96% $819,000 Kroger 4 shopping Shopping Center centers Snellville, GA Forest Park Shopping Center $ 8,950,000 5/19/89 92,824 100% $841,000 Kroger 2 shopping Cincinnati, OH centers Kokomo Plaza Shopping Center $ 6,987,000 5/19/89 89,546 91% $512,000 Kroger 6 shopping Kokomo, IN centers Rolling Hills Square $6,100,000 08/18/88 98,887 93% $592,000 Fry's 6 shopping Shopping Center Food centers Tuscon, AZ & Drug Mountain Park Plaza $6,650,000 12/14/89 77,686 97% $532,000 A&P ** 8 shopping Shopping Center Future centers Atlanta, GA store Applewood Centre $7,700,000 11/08/90 101,130 95% $687,000 Hy-Vee 5 shopping Shopping Center Food centers Omaha, NE Store & Walgreens Birdneck Center $3,115,000 12/31/97 67,060 97% $407,000 C.V.S. 8 shopping Virginia Beach, VA Stores & centers Food Lion The Market Place $5,400,000 12/31/97 125,095 77% $579,000 Bi-Lo & 7 shopping Newton, NC Big Lots cemters
*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, 1997. **Tenant has vacated but continues to be liable for all amounts due under its lease. Lease payments are current as of December 31, 1997. For further information regarding the Company's shopping centers, including information regarding the mortgage indebtedness encumbering certain properties, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - Financial Statement Schedules - Schedule III". As of December 31, 1997, the Company owns, investments in two partnerships, each of which holds a multi-family residential garden apartment property. The following is a description of these partnerships. An investment was made by the Company in TCR-Pinehurst Limited Partnership ("Pinehurst") during 1987. This Operating Partnership operates the Pinehurst apartment complex (the "Pinehurst Property") located in Kansas City, Missouri, which contains 96 apartments. In 1989, the Company made an additional investment in Pinehurst relating to Phase II, which contains 50 apartments. The Pinehurst Property was approximately 95% occupied as of March 1, 1998. The Company's percentage of ownership is 99.99%. An investment was made by the Company in Dominion Totem Park Limited Partnership ("Dominion") during 1988. This Operating Partnership operates the Chateau Creste apartment complex (the "Chateau Creste Property") located in Kirkland, Washington. The Chateau Creste Property, which was completed during August 1988, contains 90 apartments and was 92% occupied as of March 1, 1998. The Company's percentage of ownership is 99%. -8- 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 approximately $4,727,000, which is approximately $732,000 in excess of the carrying value of this investment at December 31, 1997. Item 3. Legal Proceedings. See "Item 1. Business - Other Events - Settlement of Class Action Litigation" which information is incorporated herein by reference. Item 4. Submission of Matters to a Vote of Shareholders. See "Item 1. Business - Other Events - Settlement of Class Action Litigation" which information is incorporated herein by reference. PART II Item 5. Market for the Company's Common Stock and Related Shareholder Matters As of March 17, 1998, there were 2,119 registered shareholders of record owning 8,050,727 shares of Common Stock. The Company's shares have 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 shares. The high and low prices for the quarterly period in which the shares of Common Stock were traded is as follows: Quarter Ended Low High - - ------------- --- ---- December 31, 1997 10 5/8 11 3/4 Distribution Information - - ------------------------ Aegis Realty, Inc. (After the Consolidation) - - -------------------------------------------- Distributions Per Share - - ----------------------- The cash distribution per share for the quarter ended December 31, 1997 was as set forth in the following table: Cash Distribution Total Amount for Quarter Ended Date Paid Per Share Distributed - - ----------------- --------- --------- ----------- December 31, 1997 1/22/98 $ .24 $1,932,174 ===== ========== 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 dividends 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 Trustees deem relevant. Insured I (Prior to the Consolidation) - - -------------------------------------- Distributions per BUC Distributions per BUC of Insured I for the nine months ended September 30, 1997 and the year ended December 31, 1996 were as follows: Cash Distribution Approximate Total Quarterly Total Amount for Quarter Ended Date Paid Distribution Per BUC of Distribution - - ----------------- --------- -------------------- --------------- March 31, 1997 5/14/97 $ .2250 $ 900,002 June 30, 1997 8/14/97 $ .2250 900,001 September 30, 1997 11/12/97 $ .2250 900,001 ------- ---------- Total for 1997 $ .6750 $2,700,004 ======= ========== March 31, 1996 5/15/96 $ .2250 $ 900,001 June 30, 1996 8/14/96 $ .2250 900,001 September 30, 1996 11/14/96 $ .2250 900,002 December 31, 1996 2/13/97 $ .2250 900,001 ------- ---------- Total for 1996 $ .9000 $3,600,005 ======= ========== -9- Total Adjusted Cash from Operations remaining after payment of a special distribution to the general partners of Insured I was distributed 99% to the BUC$holders and 1% to the general partners of Insured I, see "Note 8 of Notes to Consolidated Financial Statements" included in Item 8. Accordingly, in connection with the distributions set forth in the table above, the general partners received, in payment of their 1% interest and special distributions, approximately $354,000 and $472,000 for the nine months ended September 30, 1997 and the year ended December 31, 1996, respectively. Cash distributions paid in 1997 and 1996 were funded from current and previously undistributed cash flow from operations. Approximately $1,925,000 of the $2,700,000 and $1,629,000 of the $3,600,000 paid to BUC$holders in 1997 and 1996, respectively, represented a return of capital on a generally accepted accounting principles ("GAAP") basis. The return of capital on a GAAP basis was calculated as BUC$holder distributions less net income allocated to BUC$holders. Total Adjusted Cash From Operations is defined as the excess of cash revenue from operations of Insured I's properties over cash disbursements, without deduction for depreciation and amortization but after a reasonable allowance for cash reserves for repairs, replacements, contingencies and other expenses, as determined by the general partners of Insured I. 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 footnotes thereto contained in Item 8 hereof.
Year ended December 31, --------------------------------------------------------------------------------- OPERATIONS 1997* 1996* 1995* 1994* 1993* - - ---------- ------------ ----------- ----------- ----------- ----------- Rental income $7,761,826 $7,097,398 $7,236,966 $7,145,175 $7,010,883 ========= ========= ========= ========= ========= Interest income from Mortgage Loans $ 581,941 ========= Total revenues $10,755,797 $9,224,030 $9,081,226 $9,272,415 $8,907,984 Total expenses (7,309,038) (6,797,394) (6,790,935) (6,563,660) (6,457,832) ---------- ---------- ----------- ---------- ---------- Net income $3,438,496 $2,426,636 $2,290,291 $2,708,755 $2,450,152 ========= ========= ========= ========= ========= For the three months ended December 31, 1997: Net income applicable to common shareholders** $1,420,370 ========= Net income per share** $ .18 ========= Year ended December 31, --------------------------------------------------------------------------------- FINANCIAL POSITION 1997* 1996* 1995* 1994* 1993* - - ------------------ ------------ ----------- ----------- ----------- ----------- Loan receivable from affiliate $ 3,060,000 =========== Total assets $148,639,328 $75,842,337 $77,862,045 $79,552,661 $81,104,315 =========== ========== ========== ========== ========== Notes payable $ 18,544,242 $ 5,565,841 $ 5,792,615 $ 5,959,212 $ 5,976,244 =========== ========== ========== ========== ========== Total liabilities $ 22,866,886 $ 6,746,907 $ 7,121,610 $ 7,030,876 $ 7,219,644 =========== ========== ========== ========== ========== Minority interest $ 727,431 ========== Total Shareholders' Equity/Partners' $125,045,011 $69,095,430 $70,740,435 $72,521,785 $73,884,671 Capital =========== ========== ========== ========== ========== DISTRIBUTIONS - - ------------- Total BUC$holder distributions $ 3,600,005 $ 3,600,005 $ 3,600,005 $ 3,600,003 $3,650,000 =========== ========== ========== ========== ========= Total shareholder dividend $ 1,932,174 =========== Dividend per share** (3) $ .24 ===========
-10-
For the Quarter ended --------------------- December 31, ------------ OTHER DATA 1997 - - ---------- ---- EBIDA (1) $2,412,713 ========= Funds from operations (2) Net income applicable to common shareholders $1,420,370 Depreciation and amortization of real property 617,567 Amortization of insurance contract (5) 150,145 Proportionate share of adjustments to equity 80,757 ---------- in income from equity investments to arrive at funds from operations Funds from operations 2,268,839 Amortization of deferred financing costs 72,036 Principal payments received on mortgage loans 39,994 Straight-lining of property rentals for rent (66,331) escalations Improvements to real estate (36,283) Principal repayments of notes payable (64,717) Leasing commissions paid (42,467) ---------- Funds available for distribution (4) $2,171,071 ========= FFO per share (2) (3) $ .28 ========= FAD per share (3) (4) $ .27 ========= Weighted average shares outstanding $8,050,272 =========
*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 subsidiaries which include Insured I and the other Partnerships pursuant to the Consolidation. **Net income and distribution per unit information for periods before October 1, 1997 is not presented because it is not indicative of the Company's continuing capital structure. (1) EBIDA is computed as income from operations before minority interests and extraordinary items plus interest expense, depreciation, amortization and unrealized loss provisions. The Company believes that in addition to cash flows and net income, EBIDA is a useful financial performance measurement for assessing the operating performance of a REIT because, together with net income and cash flows, EBIDA provides investors with an additional basis to evaluate the ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures. EBIDA does not represent net income or cash flows from operating, financing and investing activities as defined by generally accepted accounting principles and does not necessarily indicate that cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. (2) Funds from operations ("FFO"), represents net income (computed in accordance with generally accepted accounting principles) ("GAAP"), applicable to common shares excluding gains (or losses) from debt restructuring 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 amount of $66,331. FFO is calculated in accordance with the National Association of Real Estate Investment Trusts ("NAREIT") definition published in March 1995. 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 Item 8, for the applicable periods. There are no material legal or functional restrictions on the use of funds from operations. 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 funds from operations 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. (3) Dividends, funds from operations ("FFO") and funds available for distribution ("FAD") per share equals dividends, FFO and FAD divided by the Company's weighted average shares outstanding, assuming conversion of all outstanding OP Units into shares of Common Stock of the Company. The Company's interest in the OP entitles it to a cash distribution equal to that which it would received if a conversion had taken place. (4) FAD represents FFO plus recurring principal receipts from mortgage loans less reserves for lease commissions, 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. (5) See Item I. Business - Insurance Policy -11- 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. The Company operates in a single business segment, investment in real estate related assets. As of December 31, 1997, the Company owned a portfolio of sixteen retail properties (the "Retail Properties") containing a total of approximately 1.5 million square feet of gross leaseable area ("GLA"), and holds partnership interests in two suburban garden apartment properties (the "Multifamily Properties") and three FHA insured participating mortgages secured by suburban garden apartment properties (the "FHA Mortgages"). The locations of the assets in fourteen states provide the Company with a geographically diverse portfolio. Moreover, the Company has a predictable and stable revenue stream that, as of December 31, 1997, is derived approximately 55% from either base rent from tenants or interest payments on the FHA Mortgages. No single asset accounts for more than 10% of total revenues. 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 C.V.S. Stores. Neighborhood centers are typically open air centers ranging in size from 50,000 GLA to approximately 150,000 GLA and 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. The Retail Properties range in size from approximately 67,000 GLA to 140,000 GLA, with an average of approximately 100,000 square feet of gross GLA. As of December 31, 1997, the Retail Properties had an average occupancy of 93.6%. Through 2005 no more than 7.6% of leased GLA is subject to expiration in any one year. The Multifamily Properties total 236 units and had an average physical occupancy of 90% as of December 31, 1997. The FHA mortgages have an aggregate principal balance of approximately $27.6 million, and carry an average annual interest rate of 8.95%. The underlying FHA properties had an average physical occupancy of 96.1% as of December 31, 1997. 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 three areas: i) external growth, ii) internal growth and iii) the increase in the amount of stock owned in the Company by affiliates of the Advisor and the Property Manager. The Company's external growth will be accomplished through acquisitions, on an individual or bulk basis, of shopping centers. The Company believes that there are significant opportunities available to acquire under valued, under managed and/or under utilized neighborhood and community shopping centers. Unlike most small capitalization REITs, the Company has the ability to benefit from its affiliation with a much larger company with a national presence. Aegis will use its affiliation with Related to establish a national acquisition campaign. 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 plan will allow the Company to maintain geographic diversity, which the Company believes reduces the risk otherwise associated with focusing on one region. The Company will seek 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 will generally seek to acquire only those centers that are expected to immediately increase FFO. Internal growth will occur from the re-deployment of proceeds from the sale or other disposition of stabilized 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. Finally, the Company will encourage the Advisor, Property Manager, Related and their respective affiliates to increase their ownership in the Company. The Company believes that this is necessary in order to more closely align the interest of the management with that of the Company and to demonstrate that the Advisor and Property Manager have a long-term commitment to the success of the Company. On December 31, 1997, the company purchased two shopping centers, Birdneck Center and The Market Place, for an aggregate purchase price of $8,515,000, not including acquisition fees and expenses of approximately $398,000. On March 31, 1998 the Company purchased Barclay Place Shopping Center in Lakeland, Florida. The purchase price was $3,800,000 with $2,587,000 of debt assumed with Heller Financial, Inc. The center has 81,459 gross rentable square feet with Food Lion as anchor tenant. It is 85% occupied. During the year ended December 31, 1997, cash and cash equivalents of the Company and its consolidated subsidiaries increased approximately $4,330,000. This increase was primarily due to cash provided by operating activities ($6,533,000), net proceeds from notes payable ($11,654,000), and the cash effect of the Consolidation and issuance of shares ($2,510,000) which exceeded acquisitions of and improvements to real estate ($8,946,000), leasing commissions paid ($192,000), distributions paid ($5,099,000), Consolidation costs ($1,243,000) and an increase in deferred loan costs ($919,000). Included in the adjustments to reconcile the net income to cash provided by operating activities is depreciation and amortization in the amount of approximately $2,702,000. -12- The Company's investment in its shopping centers is subject to the risks arising from management and ownership of commercial properties. The Company invests in shopping centers with substantial anchor tenants. Anchor tenants usually provide stability to a shopping center and a steady source of rental payments. A shopping center's revenues from all of its tenants can be adversely affected by the loss of its anchor tenant. If the rental income from shopping centers decreases, it could adversely affect distributions to shareholders and could affect the price the Company is able to receive upon sale of the properties. All sixteen shopping centers have tenants with leases that require payment of percentage rent. Percentage rent is an amount paid by the tenant which represents a portion of sales proceeds over a specified threshold amount as called for in the lease. Safeway, the anchor tenant of Cactus Village Shopping Center closed its facility in December 1991 due to poor sales. However, the tenant continues to fully abide by all aspects of its lease which will expire in September 2006. There have been several proposals received for leasing this space, but as of March 1, 1998, this space has not been re-leased. In November 1995, Publix, the anchor tenant of Pablo Plaza Shopping Center in Jacksonville, Florida, moved out of its space to a newer, larger space approximately one mile away. Their lease expires in November 2003, and Publix continues to abide by the terms of its lease, including rental payments. Effective November 12, 1997, Office Depot signed a sublease agreement with Publix. The sublease will result in an increased common area maintenance payment commitment from the tenant and subtenant and will result in other property enhancements in the future. Office Depot opened for business on December 15, 1997. 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, 1998, this space has not been re-leased. Distributions from the Company's investment in the Pinehurst Partnership totaled $93,300 for the three months ended December 31, 1997. The cumulative, unrecorded and undistributed preferred equity returns to the Company totaled $1,457,326 at December 31, 1997. These preferred equity returns do not bear interest and are payable from excess cash flow or proceeds from a sale or refinancing of Pinehurst's rental property. Distributions from the Company's investment in Dominion totaled $99,860 for the three months ended December 31, 1997. As of December 31, 1997 the Company has received all of the preferred equity returns due from Dominion. 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 approximately $4,727,000, which is approximately $732,000 in excess of the carrying value of this investment at December 31, 1997. All base interest and the principal amount of the FHA Mortgages are coinsured by the FHA (80%) and an affiliate of the Advisor (20%). Equity loans made to the same developers are uninsured, but are secured by the partnership interests in the entities which own the underlying properties. The Company is entitled to receive additional interest on each FHA Mortgage from the annual net cash flow of the underlying property and from a percentage of the residual value upon the sale or refinancing of the property. The receipt of additional interest is dependent upon the economic performance of the underlying property. During the three months ended December 31, 1997, no additional interest payments were received by the Company. In prior years, the Company made the Cross Creek Loan to Walsh/Cross Creek to enable it to complete construction and to fund operating deficits. Stephen M. Ross, who holds a majority interest in the Advisor, has guaranteed repayment of the principal and interest on the Cross Creek Loan (as amended, the "Guarantee Agreement"). Mr. Ross remains in compliance with his obligations under the Guarantee Agreement. However, significant portions of his assets are in the form of partnership interests and corporate stock which are pledged or are otherwise illiquid. Furthermore, a significant portion of the cash flow which Mr. Ross would otherwise be expected to receive from his business operations is presently pledged to meet other obligations. Mr. Ross also has contingent liabilities that, if simultaneously called upon, could result in Mr. Ross having insufficient liquid assets to meet all of his current liabilities. There can be no assurance that Mr. Ross will have the liquidity necessary to continue to comply with his obligations under the Guarantee Agreement. FAI, Ltd. Weatherly Walk Apartments ("Weatherly Walk") and Walsh/Cross Creek have in the past experienced recurring operating losses, working capital deficiencies and negative cash flows which raised concerns of a potential default on the related Mortgage Loans and Equity Loans. With respect to Weatherly Walk, the Fayetteville, Georgia market has improved and the partnership which owns the property is no longer experiencing operating deficits, working capital deficiencies or negative cash flows and it is currently meeting its operating obligations including required Mortgage Loan payments. With respect to Cross Creek, which continues to experience recurring operating losses, as indicated above, Stephen M. Ross has guaranteed the performance of all obligations for the payment of interest (at 8.95%) and principal of the Mortgage Loan together with the Equity Loan and has contributed $356,012 during 1997 ($3,538,546 cumulatively) to cover operating losses and working capital deficiencies, allowing this property to meet all required Mortgage Loan payments. Future liquidity is expected to result from cash generated from the operations of the Retail Properties, interest and principal received on the FHA Mortgages distributions from the Company's investment in partnerships and interest earned on the funds invested in short-term money market instruments. The Company anticipates that cash generated from operations will provide sufficient liquidity to fund in future years the Company's operating expenditures, debt service, future tenant and capital improvements and distributions. -13- In January 1998, a distribution of $1,932,174 (.24 per share) which was declared in December 1997 was paid to the shareholders from cash flow from operations for the quarter ended December 31, 1997. In March 1998, a dividend in the amount of $.24 per share was declared for the quarter ended March 31, 1998. For a discussion of the settlement of the Class Action relating to the Partnerships which resulted in the formation of the Company, see "Item 1. - Other Events - Settlement of Class Action Litigation". In order to carry out its business plan of acquiring primarily retail properties, the Company intends to raise additional investment capital by incurring additional debt. Pursuant to the Trust Agreement, company indebtedness is not permitted to exceed 50% of the Company's total market value as of the date such debt is incurred. Upon the consummation of the Consolidation, the Company entered into a $2 million loan (the "Interim Loan") with BankBoston, N.A. ("BankBoston"). Proceeds of the loan were used to pay costs incurred in the Consolidation. The $2 million loan was secured by a first mortgage on the Westbird Shopping Center. The interest rate was fixed at 1.625% above BankBoston's 30 day Euro-contract rate (7.5938% at December 31, 1997). On December 30, 1997, the Company closed on a $40 million senior revolving credit facility (the "Facility") from BankBoston. The Facility requires interest only payments until maturity on December 30, 2000 and is secured by certain of the Company's Retail Properties. Proceeds of the Facility will be used to acquire primarily retail properties to add to the Company's current portfolio. Upon closing of the Facility, $11,375,000 was drawn down to purchase two shopping centers. The interest rate under the 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 rate at December 31, 1997 was 7.3438%. On March 4, 1998 the $2 million Interim Loan was repaid with an additional draw from the Facility. The Company had a loan in the amount of $1,400,000 from Principal Mutual Life Insurance Company ("Principal Mutual") at a fixed interest rate of 7.03% per annum payable in equal monthly installments of $13,405 based on a 13.5 year amortization schedule until January 1, 2010 at which time the unpaid principal balance was due. On December 31, 1997 the Principal Mutual loan was repaid with proceeds from the Facility. For a discussion of environmental issues affecting one of the Company's Retail Properties see Item 1. Business - Regulations. 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. The Company's investments in properties are geographically diversified so that if one area of the country is experiencing downturns in the economy, the remaining properties may be experiencing upswings. However, the geographic diversification of the portfolio may not protect against a general downturn in the national economy. Results of Operations - - --------------------- Results of the Company's operations for the year ended December 31, 1997 consist primarily of the results of the operations of the sixteen neighborhood shopping centers, two garden apartment complexes and three participating FHA co-insured Mortgage Loans in which the Company has invested. 1997 vs. 1996 - - ------------- During the year ended December 31, 1997, total revenues, total expenses and net income increased and the results of operations are not comparable due to the Consolidation of Insured I with three other Partnerships on October 1, 1997, which resulted in the formation of the Company. The Company's results of operations for the year ended December 31, 1997 consisted primarily of the results of the Company's investment in eleven shopping centers for the nine months ended September 30, 1997 and the results of the Company's investment in fourteen shopping centers, two garden apartment complexes and three participating FHA co-insured Mortgage Loans for the three months ended December 31, 1997. The Company's results of operations for the year ended December 31, 1996 consisted primarily of the results of the Company's investment in eleven shopping centers funded by a senior revolving credit facility. 1996 vs. 1995 - - ------------- Rental income decreased approximately $140,000 or 2% from 1995 to 1996 primarily due to decreases at Highland Fair Shopping Center ("Highland Fair") and Winery Square due to the loss of several tenants at both locations, partially offset by an increase in occupancy at Southhaven Shopping Center and Forest Park Shopping Center ("Forest Park"). Recovery of common area maintenance charges increased approximately $88,000 for the year ended December 31, 1996 as compared to the year ended December 31, 1995. This increase was primarily due to repairs in 1996 for relamping of parking lots at Hickory Plaza Shopping Center ("Hickory Plaza") and Winery Square, roof repairs at Hickory Plaza as well as an underaccrual of such charges at Cactus Village in 1995. Real estate tax reimbursements increased approximately $172,000 for the year ended December 31, 1996 as compared to the year ended December 31, 1995. This increase was primarily due to an increase in real estate taxes at Forest Park in 1995 due to an unsuccessful valuation protest which was billed in 1996 and an underaccrual of reimbursements at Mountain View Shopping Center ("Mountain View") in 1995. -14- Interest income decreased approximately $17,000 for the year ended December 31, 1996 as compared to the year ended December 31, 1995. This decrease was primarily due to interest income earned on an escrow account for several years at one of the Company's properties, which was recognized in the third quarter of 1995. Other income increased approximately $40,000 for the year ended December 31, 1996 as compared to the year ended December 31, 1995, primarily due to an increase in insurance reimbursements from tenants at Winery Square resulting from increases in premiums for earthquake insurance. General and administrative expense decreased approximately $104,000 for the year ended December 31, 1996 as compared to the year ended December 31, 1995. This decrease was primarily due to a settlement of a lawsuit with the seller of Winery Square in connection with monies placed in escrow at closing to ensure construction completion in 1995 as well as the cost of appraisals of the Company's eleven properties in 1995. Repairs and maintenance expense increased approximately $119,000 for the year ended December 31, 1996 as compared to the year ended December 31, 1995. This increase was primarily due to roof repairs at Westbird Shopping Center ("Westbird") and Hickory Plaza, relamping of parking lots at Hickory Plaza and Winery Square and structural repairs to the building at Westbird. Other expense decreased approximately $200,000 for the year ended December 31, 1996 as compared to the year ended December 31, 1995. This decrease was primarily due to a decrease in bad debt expense resulting from a decrease in reserves at Townwest, Cactus Village, Highland Fair and Winery Square. Depreciation and amortization increased approximately $266,000 for the year ended December 31, 1996 as compared to the year ended December 31, 1995, primarily due to the write off of leasehold improvements and leasing commissions relating to a tenant at Winery Square which ceased operations and rental payments in March 1996. Funds from Operations - - --------------------- Funds from operations ("FFO"), represents net income (computed in accordance with generally accepted accounting principles) ("GAAP"), applicable to common shares excluding gains (or losses) from debt restructuring 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 amount of $66,331. FFO is calculated in accordance with the National Association of Real Estate Investment Trusts ("NAREIT") definition published in March 1995. 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 Item 8, for the applicable periods. There are no material legal or functional restrictions on the use of funds from operations. 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 funds from operations 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. FFO for the quarter ended December 31, 1997, as calculated in accordance with the NAREIT definition is summarized in the following table. Net income applicable to common shareholders $1,420,370 Depreciation and amortization of real property 617,567 Amortization of insurance contract* 150,145 Proportionate share of adjustments to equity in income from equity investments to arrive at funds from operations 80,757 ---------- Funds from operations $2,268,839 ========== *See Item 1. Business - Insurance Policy Recently Issued Accounting Standards - - ------------------------------------ In June 1997, SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, were issued. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 131 establishes standards for reporting information about operating segments in annual and interim financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS No. 130 and No. 131 are effective for fiscal years beginning after December 15, 1997. Both SFAS No. 130 and 131 are disclosure related only and therefore will have no impact on the Company's financial position, results of operations or cash flows. Statement No. 132, "Employers' Disclosures about Pensions and other Post-retirement Benefits" will not affect the Company, because it has no employees. Year 2000 Compliance - - -------------------- As the year 2000 approaches, an issue has emerged regarding how existing application software programs and operating systems can accommodate this date value. The Advisor is in the process of working with the Company's service providers to prepare for -15- the year 2000. Based on information currently available, the Company does not expect that it will incur significant operating expenses or be required to incur material costs to be year 2000 compliant. Inflation - - --------- Inflation did not have a material effect on the Company's results for the periods presented. -16-
Item 8. Financial Statements and Supplementary Data. Page (a) 1. Financial Statements Independent Auditors' Report 18 Consolidated Balance Sheets as of December 31, 1997 and 1996 19 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 20 Consolidated Statements of Changes in Shareholders' Equity/Partners' Capital (Deficit) for the years ended December 31, 1997, 1996 and 1995 21 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 22 Notes to Consolidated Financial Statements 24
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 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 31, 1998 AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, --------------------------------- 1997 1996 ------------- ----------- ASSETS Real estate, net $ 94,638,187 $70,670,980 Investment in partnerships 9,296,088 0 Mortgage loans receivable 30,980,995 0 Loan receivable from affiliate 3,060,000 0 Cash and cash equivalents 6,728,050 2,398,013 Accounts receivable-tenants, net of allowance for doubtful accounts of $304,000 and $303,000, respectively 1,169,526 803,219 Deferred costs, net 2,179,373 1,887,608 Other assets 587,109 82,517 ------------ ------------ Total Assets $148,639,328 $75,842,337 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY/PARTNERS' CAPITAL (DEFICIT) Liabilities: Notes payable $ 18,544,242 $ 5,565,841 Accounts payable and other liabilities 1,871,394 1,039,874 Due to Advisor, general partners and affiliates 507,835 141,192 Distributions payable 1,943,415 0 ------------ ------------ Total Liabilities 22,866,886 6,746,907 ---------- ------------ Minority interest of unitholders in the OP 727,431 ------------ Commitment and Contingencies Shareholders' equity: Common stock; $.01 par value; 50,000,000 shares authorized; 8,050,727 shares issued and outstanding 80,507 Additional paid in capital 125,476,308 Distributions in excess of net income (511,804) ------------ Total Shareholders' Equity 125,045,011 ------------ Total Liabilities and Shareholders' Equity $148,639,328 =========== Partners' Capital (Deficit): Limited partners (4,000,000 BUC$ issued and outstanding) 69,352,193 General Partners (256,763) ------------ Total Partners' Capital 69,095,430 ------------ Total Liabilities and Partners' Capital $75,842,337 ============
See accompanying notes to financial statements -19- AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ------------------------------------------------ 1997 1996 1995 ---------- --------- --------- Revenues: Rental income $7,761,826 $7,097,398 $7,236,966 Recovery of common area maintenance charges 855,843 828,478 740,722 Real estate tax reimbursements 1,047,025 1,040,827 868,645 Income from equity investments 193,511 0 0 Interest income 751,142 39,845 57,219 Other 146,450 217,482 177,674 ---------- --------- --------- Total revenues 10,755,797 9,224,030 9,081,226 ---------- --------- --------- Expenses: Repairs and maintenance 931,588 892,434 773,174 Real estate taxes 1,190,345 1,075,573 1,184,399 Interest 558,994 531,504 552,456 General and administrative 1,593,612 1,061,319 1,110,343 Depreciation and amortization 2,655,049 2,758,415 2,491,954 Other 379,450 478,149 678,609 ---------- --------- --------- Total expenses 7,309,038 6,797,394 6,790,935 ---------- --------- --------- Income before minority interest 3,446,759 2,426,636 2,290,291 Minority interest in income of the OP (8,263) 0 0 ---------- --------- --------- Net income $3,438,496 $2,426,636 $2,290,291 ========== ========= =========
-20- AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY/PARTNERS' CAPITAL (DEFICIT)
Limited General Common Stock Partners Partners Shares Amount -------- -------- ------ ------ Balance at January 1, 1995 $ 72,744,284 $(222,499) 0 0 Net income 1,836,469 453,822 0 0 Distributions (3,600,005) (471,636) 0 0 ------------ --------- --------- ---------- Balance at December 31, 1995 70,980,748 (240,313) 0 0 Net income 1,971,450 455,186 0 0 Distributions (3,600,005) (471,636) 0 0 ------------ --------- --------- ---------- Balance at December 31, 1996 69,352,193 (256,763) 0 0 Net income - January 1, 1997 to September 30, 1997 1,674,755 343,371 0 0 Distributions - January 1, 1997 to September 30, 1997 (3,600,005) (362,818) 0 0 Consolidation and issuance of shares (67,426,943) 276,210 8,050,727 $ 80,507 Dividends - October 1, 1997 to December 31, 1997 0 0 0 0 Net income - October 1, 1997 to December 31, 1997 0 0 0 0 ------------ --------- --------- ---------- Balance at December 31, 1997 $ 0 $ 0 8,050,727 $ 80,507 ============ ========= ========= ========== Additional Distributions Paid-in in Excess of Capital Net Income Total -------------- ----------- ----- Balance at January 1, 1995 0 0 $ 72,521,785 Net income 0 0 2,290,291 Distributions 0 0 (4,071,641) ------------ ------------ ------------ Balance at December 31, 1995 0 0 70,740,435 Net income 0 0 2,426,636 Distributions 0 0 (4,071,641) ------------ ------------ ------------ Balance at December 31, 1996 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 $125,476,308 0 58,406,082 Dividends - October 1, 1997 to December 31, 1997 0 $ (1,932,174) (1,932,174) Net income - October 1, 1997 to December 31, 1997 0 1,420,370 1,420,370 ------------ ------------ ------------ Balance at December 31, 1997 $125,476,308 $ (511,804) $125,045,011 ============ ============ ============
See accompanying notes to financial statements -21- AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------------------ 1997 1996 1995 ---------- ---------- ---------- Cash flows from operating activities: Net income $3,438,496 $2,426,636 $2,290,291 ---------- ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,702,274 2,758,415 2,491,954 Minority interest in income of OP 8,263 0 0 Income from equity investments in excess of distributions (19,448) 0 0 Changes in assets and liabilities: Decrease (increase) in accounts receivable-tenants 15,090 281,873 (138,725) (Decrease) increase in allowance for doubtful accounts (907) (206,391) 197,000 Increase in other assets (261,361) (4,535) (40,851) Increase (decrease) in due to Advisor, general partners and affiliates 159,251 (8,588) 27,750 Increase (decrease) in accounts payable and other liabilities 491,380 (139,341) 229,581 ---------- ---------- ---------- Total adjustments 3,094,542 2,681,433 2,766,709 ---------- ---------- ---------- Net cash provided by operating activities 6,533,038 5,108,069 5,057,000 ---------- ---------- ---------- Cash flows used in investing activities: Improvements to real estate (33,486) (119,325) (110,637) Acquisitions of real estate (8,912,945) Leasing commissions paid (191,730) (349,450) (73,292) Increase in sellers' rental guarantees 0 0 15,000 Principal payments received on mortgage loans 39,994 0 0 ---------- ---------- ---------- Net cash used in investing activities (9,098,167) (468,775) (168,929) ---------- ---------- ---------- Cash flows provided by (used in) financing activities: Repayments of notes payable (1,720,907) (226,774) (166,597) Proceeds from notes payable 13,375,000 0 0 Distributions paid (5,099,300) (4,071,641) (4,071,641) Increase in deferred loan costs (919,302) 0 (26,398) Decrease in minority interest (18,474) 0 0 Cash effect of Consolidation and issuance of shares 2,510,103 0 0 Consolidation costs (1,243,195) 0 0 Increase in distributions payable to minority interest 11,241 0 0 ---------- ---------- ---------- Net cash provided by (used in) financing activities 6,895,166 (4,298,415) (4,264,636) ---------- ---------- ---------- Net increase in cash and cash equivalents 4,330,037 340,879 623,435 Cash and cash equivalents at beginning of year 2,398,013 2,057,134 1,433,699 ---------- ---------- ---------- Cash and cash equivalents at end of year $6,728,050 $2,398,013 $2,057,134 ========== ========== ==========
(continued) -22- AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Supplemental information: Interest paid $ 562,240 $ 532,799 $ 553,061 =========== =========== =========== Supplemental disclosure of noncash investing activities: Consolidation and issuance of shares: Increase in real estate (16,856,558) Increase in investment in partnerships (9,295,706) Increase in mortgage loans receivable (31,049,146) Increase in loan receivable from affiliate (3,060,000) Increase in accounts receivable-tenants (380,490) Increase in other assets (243,231) Increase in notes payable 1,324,308 Increase in accounts payable and other liabilities 340,138 Increase in due to Advisor, general partners and affiliates 207,392 Increase in distributions payable 1,136,477 Decrease in limited partners' capital (67,426,943) Increase in general partners' capital 276,210 Increase in minority interest 737,642 Issuance of shares of common stock 124,289,907 ----------- $ 0 =========== Supplemental disclosure of noncash financing activities: Distributions declared $(5,894,997) Increase in distributions payable to shareholders 795,697 ----------- Distributions paid $(5,099,300) ===========
-23- 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. The Company operates in a single business segment, investment in real estate related assets. As of December 31, 1997, the Company owned a portfolio of sixteen retail properties (the "Retail Properties") containing a total of approximately 1.5 million gross leaseable square feet ("GLA"), and holds partnership interests in two suburban garden apartment properties (the "Multifamily Properties") and three FHA insured participating mortgages secured by suburban garden apartment properties (the "FHA Mortgages"). The Company was formed on October 1, 1997 as the result of the consolidation (the "Consolidation") of four publicly registered, non-traded limited partnerships, Summit Insured Equity ("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"). The Partnerships were co-sponsored by an affiliate of Related Capital Company ("Related"). Unless otherwise indicated, the "Company", as hereinafter used, refers to Aegis Realty, Inc. and subsidiaries and, prior to October 1, 1997, 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 limited partnership interest in each Partnership. There are currently 8,050,727 shares of Common Stock outstanding (an additional 46,836 shares are reserved for issuance upon conversation of OP units, as defined below, held by affiliates of Related). The Company has engaged Related Aegis LP, a Delaware limited partnership an affiliate of Related (the "Advisor"), 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 "OP"), of which the Company is the sole general partner and holder of 99.42% of the units of partnership interest (the "OP Units"). The balance of the units are currently held by affiliates of Related. 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, is 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. As part of the Consolidation, Insured I and Insured II remained as stand alone entities each owned by the OP, as the general partner, and a subsidiary of the Company, as the limited partner. Insured I and Insured II continue to be the record owners of their respective shopping centers. Results of operations and other operating financial data for the Company for the years ended December 31, 1997, 1996 and 1995 include information for the entire periods presented with respect to Insured I, but only include information for the period October 1, 1997 to December 31, 1997 with respect to the other Partnerships. See pro forma information in Note 13. Prior to the Consolidation Insured I was a Delaware limited partnership formed on December 12, 1985. 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) Property and Equipment The carrying amount of property and equipment 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 the 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) Investments in Partnerships The Company accounts for its investment as a limited partner in two partnerships, which own the Multifamily Properties, using the equity method of accounting. The Company is allocated substantially all of the income of the Operating Partnerships until its preferred return is achieved. e) Mortgage Loans Receivable Amounts received or receivable for interest payments on loans are reflected as interest income. -24- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 each of its loans 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 loans. 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, 1997, 1996 and 1995. g) Cash and Cash Equivalents Cash and cash equivalents include cash in banks, money market funds and investments in short-term instruments with an original maturity of three months or less, whose cost approximates market value. h) Deferred Insurance Costs Costs related to the Policy are being amortized over a 10 year period (the life of the Policy) which commenced on May 19, 1989. 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 above is included in depreciation and amortization expense. k) Consolidation Costs Costs incurred in the Consolidation including legal, accounting and registration fees, amounting to $1,243,195 were charged directly to shareholders' equity. l) 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. m) 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 real estate investment trust 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. At December 31, 1997, the net book basis of the Company's assets and liabilities exceeded the net tax basis by approximately $1,005,893. During 1997, the Company declared a dividend of $.24 per share, payable to record owners of the shares on December 31, 1996. For Federal income tax purposes, $.19 per share was reported to shareholders as ordinary income for 1997. The remaining $.05 per share will be reported to shareholders in 1998. n) 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 -25- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. o) New Pronouncements The Financial Accounting Standards Board has recently issued several new accounting pronouncements. Statement No. 128, "Earnings per Share" establishes standards for computing and presenting earnings per share. Statement No. 129, "Disclosure of Information about Capital Structure" establishes standards for disclosing information about an entity's capital structure. The adoption of these standards in 1997 has not materially affected the Company's reported operating results, per share amounts, financial position or cash flow. p) Reclassifications Certain amounts in the 1995 and 1996 financial statements have been reclassified to conform to the 1997 presentation. NOTE 3 - Real Estate The components of real estate are as follows: December 31, -------------------------------- 1997* 1996* ------------ ----------- Land $ 27,622,941 $20,356,681 Buildings and improvements 83,419,863 65,155,543 ------------ ----------- 111,042,804 85,512,224 Less: Accumulated depreciation (16,404,617) (14,841,244) ------------ ----------- $ 94,638,187 $70,670,980 ============ =========== *Information for 1996 (Prior to the Consolidation) is only with respect to Insured I (the Acquirer). Information for 1997 is with respect to the Company and its subsidiaries which includes Insured I and the Partnerships pursuant to the Consolidation. On December 31, 1997, the company purchased two shopping centers, Birdneck Center and The Market Place, for an aggregate purchase price of $8,515,000, not including acquisition fees and expenses of approximately $398,000. Amounts estimated to be recoverable from future operations and ultimate sales were greater than the carrying value of each property owned at December 31, 1997 and 1996. 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, 1997. 1997* 1996* 1995* ---- ---- ---- 1. Pablo Plaza/Jacksonville, FL 7% 10% 10% 2. Westbird/Miami, FL 10% 11% 12% 3. Winery Square/Fairfield, CA 10% 14% 15% 4. Mountain View Village/Snellville, GA 10% 11% 10% 5. Forest Park Square/Cincinnati, OH 10% 12% 11% *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 subsidiaries which include Insured I and the other Partnerships pursuant to the Consolidation. During the years ended December 31, 1997, 1996 and 1995, the Kroger Company, which is a tenant at several shopping centers, accounted for approximately 28% of the Company's total gross revenues in each year. Insured I and Insured II are beneficiaries of an insurance policy (the "Policy") 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 Policy and related agreement, together with the appraised values of the real estate 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 property was acquired by Insured I and Insured II (the "Final Acquisition Date"). The maximum liability of CNA under the Policy will increase pursuant to a formula based upon the length of time 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 Policy is intended to cover various economic risks of the ownership of the 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 the properties. -26- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - Deferred Costs The components of deferred costs are as follows: December 31, ------------------------------ 1997* 1996* ---------- ---------- Deferred insurance costs $6,005,804 $6,005,804 Deferred loan costs 945,700 133,642 Deferred leasing commissions 809,941 731,957 ---------- ---------- 7,761,445 6,871,403 Less: Accumulated amortization (5,582,072) (4,983,795) ---------- ---------- $2,179,373 $1,887,608 ========== ========== *Information for 1996 (prior to the Consolidation) is only with respect to Insured I (the Acquirer). Information for 1997 is with respect to the Company and its subsidiaries which includes Insured I and the Partnerships pursuant to the Consolidation. 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. On May 8, 1989 the Company invested an additional $1,949,805 in Pinehurst. The Company is entitled to a preferred equity return of 9.85% per annum on this investment. These preferred equity returns are cumulative and non interest-bearing. The cumulative, unrecorded and undistributed preferred equity returns to the Company totaled $1,457,326 at December 31, 1997. 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 99.99%. The Company owns a limited partnership investment in the Dominion Totem Park Limited Partnership ("Dominion"), which acquired and operates the Chateau Creste apartment complex in Kirkland, Washington. Under the terms of this investment, the Company is entitled to receive a preferred equity return of 9.625% per annum on its initial cash contribution of $4,149,585. As of December 31, 1997, the Company has received all of the preferred equity returns due from Dominion. The Company's percentage of ownership in Dominion is 99%. 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 approximately $4,727,000, which is approximately $732,000 in excess of the carrying value of this investment at December 31, 1997. Amounts estimated to be recoverable from future operations and ultimate sales were greater than the carrying value of the Company's investments in partnerships at December 31, 1997. NOTE 6 - Mortgage Loans Receivable All base interest and the principal amount of each of the FHA Mortgages are coinsured by the FHA (80%) and an affiliate of the Advisor (20%). The FHA Mortgages require monthly payment of principal and interest over the life of the loan. The FHA Mortgages, which closed during the period June 1988 to December 1988, bear interest at 8.95% and mature during the period January 2024 to January 2030. The interest rate of 8.95% 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. The Company also has equity loans made to the same developers as were made to 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 are 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 are uninsured, but are secured by the partnership interests of the entities which own the underlying properties. The carrying values of the Mortgage Loans (the FHA Mortgages and equity loans) secured by Cross Creek Apartments, Weatherly Walk Apartments and Woodgate Manor at December 31, 1997 were $19,195,048, $8,474,829 and $3,311,118, respectively; the FHA Mortgage loan balances were $17,018,624, $7,513,929 and $2,935,935, respectively. The difference between the carrying values and the FHA Mortgage loan balances are due to the purchase accounting premiums recorded pursuant to the Consolidation. The Company may call for prepayment of the entire outstanding principal amount at any time after the tenth anniversary of the date the funding of the respective Mortgage Loans were completed. 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 -27- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The borrowers may elect to prepay at any time, but prepayment penalties are in effect for the first ten years. The general partner interests in the entities holding title to Cross Creek Apartments and Woodgate Manor are held by an affiliate of the Advisor. The present owner of the Cross Creek property, Walsh/Cross Creek Limited Partnership ("Walsh/Cross Creek"), acquired title to the property upon the default of the original developer. Significant interests in Walsh/Cross Creek are held by affiliates of the Advisor. In 1988, the Company made a loan of $3,060,000 to Walsh/Cross Creek (the "Cross Creek Loan") to pay for costs incurred to complete construction and to fund operating deficits. The Cross Creek Loan bears interest at the prime rate plus 1% (9.5% at December 31, 1997) and is due on January 1, 2030 or on the occurrence of certain events. The amount loaned to Walsh/Cross Creek is classified as a loan receivable from affiliate and is anticipated to be repaid from cash flows from the Cross Creek property. Stephen M. Ross holds a majority interest in the Advisor and has 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. In accordance with the Guarantee Agreement and except as otherwise required by HUD, available cash flow or capital proceeds from the Cross Creek property will be applied first to all expenses of operating and maintaining the property, debt service and/or satisfaction of the mortgage loan, equity loan and Cross Creek Loan, then to reimburse Stephen M. Ross for operating deficit payments which he has made (amounting to $356,012 for the year ended December 31, 1997 and $3,538,546, cumulatively), then to additional interest, default rate and guaranteed rate payments as set forth in the Subordinated Note and the Additional Interest Guarantee. At December 31, 1997, the estimated fair value of the Company's Mortgage Loans Receivable and the Cross Creek Loan approximated their carrying values. NOTE 7 - Related Party Transactions Aegis Realty, Inc. (After the Consolidation) - - -------------------------------------------- Pursuant to the Advisory Agreement, the Advisor will receive (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 Advisor is entitled to an acquisition fee equal to 3.75% of the acquisition price of each property acquired by the Company. During 1997, $322,606 of such fees were incurred and capitalized as real estate related to the Company's acquisition of Birdneck Center and The Market Place. The Company's sixteen properties are being managed by RCC Property Advisors, Inc. (the "Property Manager"), an affiliate of the Advisor. The costs incurred to related parties for the three months ended December 31, 1997 (after the Consolidation) were as follows: Acquisition fees $322,606 Expense reimbursement 28,000 Property management fees 159,958 Asset management fee 142,105 ------- $652,669 ======== 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 of Insured I 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. -28- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The expenses incurred to related parties for the nine months ended September 30, 1997 and the years ended December 31, 1996 and 1995 were as follows: 1997 1996 1995 -------- -------- -------- Expense reimbursement $ 79,935 $178,600 $128,586 Property management fees 352,397 420,157 410,177 -------- -------- -------- $432,332 $598,757 $538,763 ======== ======== ======== The distributions earned by the general partners of Insured I for the nine months ended September 30, 1997 and the years ended December 31, 1996 and 1995 are as follows:
General Partners ---------------------------------- 1997 1996 1995 --------- --------- --------- Special Distributions $ 326,454 $ 435,272 $ 435,272 Regular Distributions of Adjusted Cash from Operations 27,273 36,364 36,364 --------- --------- --------- $ 353,727 $ 471,636 $ 471,636 ========= ========= =========
NOTE 8 - Profit and Loss Allocation/Distribution Aegis Realty, Inc. (After the Consolidation) - - -------------------------------------------- Basic income per share is computed based on the net income for the three months ended December 31, 1997 ($1,420,370), divided by the weighted average number of shares outstanding for the period (8,050,727). Net income per unit information for prior periods is not presented because it is not indicative of the Company's continuing capital structure. Diluted net income per share, which would reflect conversion of the minority interests' OP units into an additional 46,836 shares of common stock, is the same as basic income per share because the earnings of an OP unit are equivalent to the earnings of a share of common stock. Insured I (Prior to the Consolidation) - - -------------------------------------- For financial reporting purposes, net profits or losses, after the Special Distributions to the general partners, were allocated 99% to the holders of beneficial unit certificates ("BUCs") representing assignments of limited partnership interests (the "BUC$holders") and 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 BUC$holders and 1% to the general partners. NOTE 9 - Leases Future minimum base rentals due from tenants under non-cancelable operating leases as of December 31, 1997 were as follows: Year Ending December 31 Amount - - ----------------------- ----------- 1998 $ 9,626,000 1999 8,787,000 2000 7,834,000 2001 7,128,000 2002 6,212,000 Thereafter 34,846,000 ----------- Total $74,433,000 =========== Certain leases require the lessees to reimburse the Company for real estate taxes, insurance costs and certain other reimbursable expenses. All sixteen shopping centers have tenants with leases that require payment of percentage rent. Percentage rent is an amount paid by the tenant which represents a portion of sales proceeds over a specified threshold amount as called for in the lease. NOTE 10 - Notes Payable Upon the consummation of the Consolidation, the Company entered into a $2 million loan (the "Interim Loan") with BankBoston, N.A. ("BankBoston"). Proceeds of the loan were used to pay costs incurred in the Consolidation. The $2 million loan was secured -29- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS by a first mortgage on the Westbird Shopping Center. The interest rate was fixed at 1.625% above BankBoston's 30 day Euro-contract rate (7.5938% at December 31, 1997). On December 30, 1997, the Company closed on a $40 million senior revolving credit facility (the "Facility") from BankBoston. The Facility requires interest only payments until maturity on December 30, 2000 and is secured by certain of the Company's Retail Properties. Proceeds of the Facility will be used to acquire primarily retail properties to add to the Company's current portfolio. Upon closing of the Facility, $11,375,000 was drawn down to purchase two shopping centers. The interest rate under the 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 rate at December 31, 1997 was 7.3438%. Pursuant to the Trust Agreement, indebtedness under the Facility and other borrowings will not exceed 50% of the Company's total market value as of the date such debt is incurred. On March 4, 1998 the $2 million Interim Loan was repaid with an additional draw down from the Facility. The Company has a loan from New York Life Insurance Company with an outstanding balance at December 31, 1997 of $5,169,242. It carries a 9.25% interest rate and requires equal monthly payments of principal and interest in the amount of $55,984 until June 10, 2000, at which time the balance of principal, together with any unpaid interest, is due. The loan is collateralized by first mortgages on Forest Park Shopping Center and Highland Fair Shopping Center. The Company had a loan in the amount of $1,400,000 from Principal Mutual Life Insurance Company ("Principal Mutual") at a fixed interest rate of 7.03% per annum payable in equal monthly installments of $13,405 based on a 13.5 year amortization schedule until January 1, 2010, at which time the unpaid principal balance was due. On December 31, 1997, the Principal Mutual loan was repaid with proceeds from the Facility. Annual principal payment requirements as of December 31, 1997 for each of the next five fiscal years and thereafter are as follows: Year Ending Amount - - ----------- ----------- 1998 $ 2,202,078 1999 221,583 2000 11,617,971 2001 266,424 2002 292,140 Thereafter 3,944,046 ----------- $18,544,242 =========== The Company has determined that the carrying value of the notes payable approximates their fair value at December 31, 1997 and 1996. NOTE 11 - Stock Option Plan The Board of Directors have 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 employees and officers with the interests of the stockholders by providing the Advisor with substantial financial interest in the Company's success. The Compensation Committee shall be authorized and directed to administer 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 will have 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). 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 to Potential Optionees by the Compensation Committee in such succeeding year. Pursuant to the Incentive Stock Option Plan, the Compensation Committee is not authorized to grant any options until six months after the common stock has been listed on the American Stock Exchange, so no options have been granted as of December 31, 1997. 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 will vest immediately upon issuance. -30- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - Selected Quarterly Financial Data (unaudited) Quarter ended December 31, 1997 ----------------- Revenues: Rental income $2,335,242 Recovery of common area maintenance charges 267,480 Real estate tax reimbursements 285,506 Income from equity investments 193,511 Interest income 710,738 Other 28,553 ---------- Total revenues 3,821,030 ---------- Expenses: Repairs and maintenance 196,700 Real estate taxes 325,258 Interest 191,557 General and administrative 732,101 Depreciation and amortization 792,523 Other 154,258 ---------- Total expenses 2,392,397 ---------- Income before minority interest 1,428,633 Minority interest in income of the OP (8,263) ---------- Net income $1,420,370 ========== Net income per common share (basic and diluted) $ 0.18 ========== NOTE 13 - Pro Forma Information (unaudited) The unaudited pro forma information set forth below presents the condensed consolidated statements of income for the Company for the years ended December 31, 1997 and 1996 as if the acquisition had occurred on January 1, 1996. This pro forma financial data does not purport to represent what the Company's results of operations would actually have been had the Consolidation in fact occurred on such date or is such data necessarily indicative of the Company's results of operations for any future date or period.
Pro Forma (Unaudited) Year Ended December 31, --------------------------------- 1997 1996 ------------- ------------- Revenues $ 15,183,000 $ 14,903,000 ============= ============= Net income $ 6,011,000 $ 5,704,000 ============= ============= Net income per common share (basic and diluted) $ 0.75 $ 0.71 ============= =============
NOTE 14 - Settlement of Class Action Litigation On August 28, 1997, the United States District Court for the Southern District of New York (the "Court") issued its final approval order with respect to the settlement (the "Related Settlement") of a putative class action (the "Class Action") brought against, among others, the general partners of the Partnerships and certain of their affiliates under the original caption Kinnes et. Al. V. Prudential Securities Group, Inc., et. al. The Related Settlement was applicable only to the general partners of the Partnerships affiliated with Related and certain of their affiliates, since the other defendants in the Class Action had previously entered into their own settlement agreement. The Related Settlement was subject to objections by the BUC$holders, and to final approval by the Court following a review of the settlement proposal at a fairness hearing. The Related Settlement included, among other matters, the Consolidation, the acquisition by the Advisor of the general partner interests held by PBP in each of the Partnerships (collectively, the "PBP Interest"), the transfer to the BUC$holders of one-half of the -31- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PBP Interest prior to the Consolidation and the reduction of fees which were then payable to the general partners of the Partnerships by 25%. As part of the Related Settlement and in the Court's sole discretion, counsel to the BUC$holders ("Class Counsel") may receive additional attorney's fees payable in the Company's shares, based upon 25% of the increase in value of the Company's shares as of October 10, 1998 (the "Anniversary Date"). The number of Company shares so issued shall be limited to a maximum of 3.95% of the total number of shares outstanding on the Anniversary Date. The amount of shares to be issued under this provision cannot presently be determined. NOTE 15 - 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 were undertaken on all of the Company's properties in conformance with requirements for closing the BankBoston facility (see Note 11). In certain cases, additional Phase II site investigations were also 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 any of the Company's 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 determined that there were detectable levels of certain hazardous materials above threshold levels 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. Management is unable, at this time, to predict further requirements, if any, or the associated costs of monitoring or remediation. NOTE 16 - Subsequent Events On March 31, 1998 the Company purchased Barclay Place Shopping Center in Lakeland, Florida. The purchase price was $3,800,000 with $2,587,000 of debt assumed with Heller Financial, Inc. The center has 81,459 gross rentable square feet with Food Lion as anchor tenant. It is currently 85% occupied. -32- 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. -33- PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. Sequential Page ---------- (a) 1. Financial Statements -------------------- Independent Auditors' Report 18 Consolidated Balance Sheets as of December 31, 1997 and 1996 19 Consolidated Statements of Income - Years ended December 31, 1997, 1996 and 1995 20 Consolidated Statements of Changes in Shareholders' Equity/Partners' Capital (Deficit) - Years ended December 31, 1997, 1996 and 1995 21 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 22 Notes to Consolidated Financial Statements 24 (a) 2. Financial Statement Schedules ----------------------------- Schedule II - Valuation and Qualifying Accounts three years ended December 31, 1997 44 Schedule III - Real Estate and Accumulated Depreciation and Notes to Schedule - December 31, 1997 45 Schedule IV - Mortgage Loans of Real Estate at December 31, 1997 47 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 (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 Exhibit 10(D) to the Company's Registration Statement on Form S-11, File No. 33-8755, as amended -34- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued). Sequential Page ---------- (10C) Management Agreement between RCC Property Advisors and the Company, dated May 1, 1991, incorporated by reference to Exhibit 10(C) to the Company's Annual Report on Form 10-K for the year ended December 31, 1991 (10D) Management Agreement between RCC Property Advisors and the Insured II, dated May 1992. Incorporated by reference to Exhibit 10E to the Insured II's Annual Report on Form 10-K for the year ended December 31, 1992 (10E) 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 (10F) 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 (10G) 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 (10H) 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) (10I) 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) (10J) 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) (10K) 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) (10L) 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) -35- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued). Sequential Page ---------- (10M) 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) (10N) 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) (10O) 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) (10P) 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) (10Q) Loan Agreement with Walsh/Cross Creek Limited Partnership and Cross Creek of Columbia, Inc. dated August 15, 1990 (incorporated by reference to Exhibit 10(o) in Eagle's Annual Report on Form 10-K for the period ended December 31, 1990) (10R) Guarantee of Cross Creek Apartments by Stephen M. Ross (incorporated by reference to Exhibit 10(p) in Eagle's Annual Report on Form 10-K for the period ended December 31, 1991) (10S) Guarantee Agreement, dated November 13, 1992, by and between the Company and Stephen M. Ross (incorporated by reference to Exhibit 10(q) in Eagle's Annual Report on Form 10-K for the period ended December 31, 1993) (10T) Amendment to the Guarantee Agreement, dated October 20, 1993, by and between the Company and Stephen M. Ross (incorporated by reference to Exhibit 10(r) in Eagle's Annual Report on Form 10-K for the period ended December 31, 1993) (10U) 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 Current Report on Form 8-K, filed with the Commission on March 19, 1998) -36- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued). Sequential Page ---------- (10V) 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) (10W) 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) (10X) 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) (10Y) 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. (10Z) Management Agreement between the Company, Insured I, Insured II, the OP and the Property Manager dated October 1, 1997 (filed herewith) 48 21 List of Subsidiaries (incorporated by reference to the Company's Current Report on Form 8-K, filed with the Commission on March 19, 1998) 27 Financial Data Schedule (filed herewith) 63 (99A) Settlement Agreement between Mountain Park Plaza Limited Partnership and Insured II dated October 16, 1992. Incorporated by reference to Insured II's Annual Report on Form 10-K for the year ended December 31, 1992 (99B) Settlement Agreement between Rolling Hills Devco and Insured II dated August 6, 1992. Incorporated by reference to Insured II's Annual Report on Form 10-K for the year ended December 31, 1992 -37- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued). Sequential Page ---------- (b) Reports on Form 8-K ------------------- Current report on Form 8-K relating to the settlement of class action litigation which resulted in the formation of the Company, dated October 1, 1997 and filed on October 14, 1997. Current report on Form 8-K relating to the approval of a $40 million senior revolving credit facility from BankBoston, N.A., dated and filed on November 14, 1997. Current report on Form 8-K relating to the closing of the $40 million senior revolving credit facility with BankBoston, N.A. and the purchase of The Market Place and Birdneck Center, dated December 30, 1997 and filed on January 9, 1998.
-38- 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: By: ______________________________ J. Michael Fried Director, Chairman of the Board 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 --------- ----- ---- - - ------------------- Director, Chairman of the J. Michael Fried Board and Chief Executive Officer - - ------------------- Peter T. Allen Director - - ------------------- Arthur P. Fisch Director - - ------------------- Director, President and Stuart J. Boesky Chief Operating Officer Director, Senior Vice President, - - ------------------- Chief Financial Officer and Alan P. Hirmes Assistant Secretary - - ------------------- Vice President, Treasurer, Controller Richard A. Palermo and Chief Accounting Officer 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 30, 1998 By: /s/ J. Michael Fried -------------------- J. Michael Fried Director, Chairman of the Board 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/ J. Michael Fried Director, Chairman of the - - ---------------------- Board and Chief Executive Officer March 30, 1998 J. Michael Fried /s/ Peter T. Allen - - ---------------------- Peter T. Allen Director March 30, 1998 /s/ Arthur P. Fisch - - ---------------------- Arthur P. Fisch Director March 30, 1998 /s/ Stuart J. Boesky Director, President and - - ---------------------- Chief Operating Officer March 30, 1998 Stuart J. Boesky /s/ Alan P. Hirmes Director, Senior Vice President, - - ---------------------- Chief Financial Officer and Alan P. Hirmes Assistant Secretary March 30, 1998 /s/ Richard A. Palermo Vice President, Treasurer, Controller - - ---------------------- and Chief Accounting Officer March 30, 1998 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 - - ----------- ------------------------------- ---------- ----- ----------- ------------- 1997 Allowance for Doubtful Accounts $303,000 $ 700,000 $ (69,000) $304,000 1996 Allowance for Doubtful Accounts $509,000 $ 58,000 $(264,000) $303,000 1995 Allowance for Doubtful Accounts $312,000 $ 248,000 $ (51,000) $509,000
*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 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, 1997
Cost Capitalized Subsequent to Initial Cost to Partnership (F) Acquisition Purchase Price Adjustments (E) -------------------------------- ------------ -------------------------------- Buildings and Buildings and Land Improvements Improvements Land Improvements ----------- ------------ ------------ --------- ------------- Shopping Centers: Cactus Village $ 2,093,532 $ 4,631,948 $ 33,642 $ (42,583) $ (93,903) Glendale, AZ Hickory Plaza 1,288,328 3,931,633 11,604 (3,750) (11,250) Nashville, TN Highland Fair 1,288,328 5,059,079 96,736 (21,891) (60,437) Gresham, OR Pablo Plaza 2,147,213 5,922,120 27,845 (7,866) (21,693) Jacksonville, FL Southhaven 1,288,328 4,793,938 31,050 0 0 Southhaven, MS Town West 1,932,491 3,303,752 20,814 0 0 Indianapolis, IN Westbird 1,566,070 5,475,510 606,879 2,474 9,242 Miami, FL Winery Square 4,320,555 8,916,731 109,429 (227,319) (477,165) Fairfield, CA Mountain View 2,675,960 8,661,498 85,972 (143,357) (475,472) Village Shellville, GA Forest Park Square 1,532,064 7,822,819 10,000 (19,024) (99,866) Cincinnati, OH Kokomo Plaza 695,912 6,643,748 29,057 (8,784) (78,640) Kokomo, IN Rolling Hills Square 2,624,639 2,504,045 0 0 0 Tucson, AZ Mountain Park Plaza 1,566,015 3,791,633 0 0 0 Atlanta, GA Applewood Centre 1,795,469 4,574,757 0 0 0 Omaha, NE Birdneck Center Virginia Beach, VA 469,227 2,807,457 0 0 0 The Market Place Newton, NC 810,910 4,825,351 0 0 0 ----------- ----------- ---------- --------- ----------- $28,095,041 $83,666,019 $1,063,028 $(472,100) $(1,309,184) =========== =========== ========== ========= =========== Gross Amount at which Carried At Close of Period (D) ------------------------------ Buildings and Accumulated Land Improvements Total Depreciation ----------- ------------ ------------ ------------ Shopping Centers: Cactus Village $ 2,050,949 $ 4,571,687 $ 6,622,636 $ 1,216,400 Glendale, AZ Hickory Plaza 1,284,578 3,931,987 5,216,565 1,048,306 Nashville, TN Highland Fair 1,266,437 5,095,378 6,361,815 1,324,427 Gresham, OR Pablo Plaza 2,139,347 5,928,272 8,067,619 1,599,373 Jacksonville, FL Southhaven 1,288,328 4,824,988 6,113,316 1,300,588 Southhaven, MS Town West 1,932,491 3,324,566 5,257,057 907,382 Indianapolis, IN Westbird 1,568,544 6,091,631 7,660,175 1,624,048 Miami, FL Winery Square 4,093,236 8,548,995 12,642,231 2,208,071 Fairfield, CA Mountain View 2,532,603 8,271,998 10,804,601 1,936,312 Village Shellville, GA Forest Park Square 1,513,040 7,732,953 9,245,993 1,703,823 Cincinnati, OH Kokomo Plaza 687,128 6,594,165 7,281,293 1,438,013 Kokomo, IN Rolling Hills Square 2,624,639 2,504,045 5,128,684 31,725 Tucson, AZ Mountain Park Plaza 1,566,015 3,791,633 5,357,648 30,505 Atlanta, GA Applewood Centre 1,795,469 4,574,757 6,370,226 35,644 Omaha, NE Birdneck Center Virginia Beach, VA 469,227 2,807,457 3,276,684 0 The Market Place Newton, NC 810,910 4,825,351 5,636,261 0 ----------- ----------- ------------ ----------- $27,622,941 $83,419,863 $111,042,804 $16,404,617 =========== =========== ============ =========== Life on which Depreciation in Latest Income Year of Date Statement is Construction Acquired Computed ------------ -------- ------------ Shopping Centers: Cactus Village 1986 July 1987 40 years Glendale, AZ Hickory Plaza 1974 (A) Apr. 1987 40 years Nashville, TN Highland Fair 1986 July 1987 40 years Gresham, OR Pablo Plaza 1972 (B) Feb. 1987 40 years Jacksonville, FL Southhaven 1984 (C) Feb. 1987 40 years Southhaven, MS Town West 1985 May 1987 40 years Indianapolis, IN Westbird 1977 Dec. 1986 40 years Miami, FL Winery Square 1987 Dec. 1987 40 years Fairfield, CA Mountain View 1987 July 1988 40 years Village Shellville, GA Forest Park Square 1988 May 1989 40 years Cincinnati, OH Kokomo Plaza 1988 May 1989 40 years Kokomo, IN Rolling Hills Square 1980 Oct. 1997 30.5 years Tucson, AZ Mountain Park Plaza 1988 Oct. 1997 31.2 years Atlanta, GA Applewood Centre 1989 Oct. 1997 33.1 years Omaha, NE Birdneck Center Virginia Beach, VA 1987 (G) Dec. 1997 40 years The Market Place Newton, NC 1989 Dec. 1997 40 years
AEGIS REALTY, INC. ITEM 14, SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (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 $117,621,110. (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.
Reconciliation of Real Estate Owned: 1997 1996 1995 ------------ ----------- ----------- Balance at beginning of period: $ 85,512,224 $85,800,450 $85,746,259 Acquisitions 25,769,503 0 0 Improvements 36,282 119,325 110,637 Write-off of improvements (275,205) (407,551) (41,446) Purchase price adjustments 0 0 (15,000) ------------ ----------- ----------- Balance at close of period: $111,042,804 $85,512,224 $85,800,450 ============ =========== =========== Reconciliation of Accumulated Depreciation: 1997 1996 1995 ----------- ----------- ----------- Balance at beginning of period: $14,841,244 $13,262,215 $11,514,796 Depreciation Expense 1,835,782 1,986,580 1,788,865 Write-off of accumulated depreciation of improvements (272,409) (407,551) (41,446) ----------- ------------- ------------ Balance at close of period: $16,404,617 $14,841,244 $13,262,215 =========== =========== ===========
AEGIS REALTY, INC. AND SUBSIDIARIES Schedule IV - Mortgage Loans on Real Estate December 31, 1997
Periodic Carrying Final Payment Face Amount Amount Interest Closing Maturity Terms Prior of Mortgage of Mortgage Description (1) Rate (2) Date Date (3) (4)(5) Liens Loans Loans(6)(7)(8) - - --------------- -------- ------- -------- ------ ----- ----------- -------------- First Mortgage Loans: Cross Creek Apartments (9) 8.95% 6/10/88 1/1/30 Monthly None $17,494,100 $19,195,048 Weatherly Walk Apartments 8.95% 8/18/88 11/1/29 Monthly None 7,772,500 8,474,829 Woodgate Manor (9) 8.95% 12/12/88 1/1/24 Monthly None 3,110,300 3,311,118 ----------- ----------- $28,376,900 $30,980,995 =========== ===========
(1) All properties are multifamily residential apartment complexes. (2) Includes a servicing fee of 0.07% paid by the mortgagor to Related Mortgage Corporation (an affiliate of the Advisor). (3) The Company may call for prepayment of the total loan at any time after the tenth anniversary of the date the mortgage loan was funded. (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) Beginning in the sixth year after each Mortgage Loan's closing date, any prepayment during one calendar year in an amount in excess of 15% of the original principal amount of the mortgage loan will be subject to a prepayment penalty. The prepayment penalty is 5% in the sixth year and decreases 1% per year thereafter. (6) Carrying amount of mortgage loans for the year ended December 31: 1997 ----------- Balance at October 1, 1997 $31,049,146 Amortization of purchase accounting premiums (28,157) Collections of principal (39,994) ----------- Ending Balance $30,980,995 =========== (7) The aggregate cost of the mortgage loans for Federal income tax purposes at December 31, 1997 is $27,468,488. The difference in aggregate cost is due to the purchase accounting premiums recorded for financial statement purposes. (8) All mortgage loans are current with respect to principal and interest. (9) The General Partnership interest of the mortgagor is held by an affiliate of the Advisor. EX-10.(D) 2 MANAGEMENT AGREEMENT MANAGEMENT AGREEMENT THIS AGREEMENT, dated the 1st day of October, 1997, is made by and between AEGIS REALTY, INC. SUMMIT INSURED EQUITY L.P., SUMMIT INSURED EQUITY II L.P. AND AEGIS REALTY OPERATING PARTNERSHIP, L.P. as ("OWNER") and RCC PROPERTY ADVISORS, ("RCC"), A Florida General Partnership, by its General Partner PRR Realty Associates, Inc. P R E A M B L E --------------- OWNER owns certain properties located as indicated in Exhibit "A". The properties, together with the improvements constructed thereon, are operated as shopping centers under the names indicated in Exhibit "A", and hereinafter known as the "PROJECTS". OWNER desires to retain the services of RCC as its exclusive managing agent and as its exclusive leasing and brokerage agent, in accordance with the terms and conditions set forth in this Agreement. NOW, THEREFORE, the parties agree as follows: 1. AGENCY. OWNER hereby appoints RCC as its exclusive managing agent, on an independent contractor basis and not as an employee of OWNER, and RCC hereby accepts the appointment, subject to the terms and conditions of this Agreement. 2. DUTIES OF MANAGER. RCC shall, on behalf of and as agent for and at the expense of OWNER, perform all services reasonably required in connection with the prudent day-to-day management and operation of the PROJECTS. RCC agrees to provide and perform the services and duties required of it in a prudent manner, and shall diligently and faithfully manage and operate the PROJECTS in accordance with standards reasonably applicable to projects of similar size and character and, subject to the terms hereof, in compliance with all mortgages, leases, budgets, cash and financial constraints and other Agreements it knows of and or is made or becomes aware of pertaining to or governing the operation of the PROJECTS, in compliance with the requirements of all controlling governmental authorities, and in compliance with reasonable directions made by OWNER from time to time. 2.01 After the execution of this Agreement, prior to the commencement date of each calendar year thereafter (if this Agreement is still in full force and effect), to submit to OWNER for OWNER's approval, proposed operating budgets for the PROJECTS, setting forth the estimated receipts and expenses relating to the PROJECTS for the ensuing calendar year. From time to time during the calendar year as and when revisions in the APPROVED BUDGET become necessary both the OWNER and RCC shall review and agree on same. If OWNER does not approve of any budget submitted by RCC, OWNER shall give RCC written notice of such disapproval within ten (10) days after the budget is submitted to OWNER, which notice shall specify the line items or amounts that are not approved by OWNER and shall set forth reasonable alternative line items and/or amounts satisfactory to OWNER. If such written notice of disapproval is not received by RCC within ten (10) days, then the budget shall be deemed approved by the OWNER, subject to above noted revisions. If RCC agrees to OWNER's changes in any budget, RCC shall so notify OWNER in writing within ten (10) days after receipt of OWNER's notice, and if not then the parties shall meet or discuss in good faith and resolve any differences within thirty (30) days after RCC's receipt of OWNER's revised budget. The operating budget, as approved by the OWNER is hereinafter referred to as the "APPROVED BUDGET". RCC shall in good faith use its best efforts as economically reasonable and typical to implement the APPROVED BUDGET and shall be authorized, without the need for further approval of OWNER, to make the expenditures and incur the obligations provided for in the APPROVED BUDGET. In the event that a submitted budget is rejected by OWNER, RCC shall operate under the last APPROVED BUDGET on an item-by-item basis until a revised budget is approved in writing by OWNER. 2.02 To use its best efforts to lease space now or hereafter becoming vacant, including but not limited to the subcontracting to local agents, a portion of same. 2.03 OWNER shall from time to time establish and notify RCC in writing of reasonable guidelines for the basic rents, terms and provisions to be contained in tenant leases, and RCC may execute leases as OWNER's agent and on behalf of OWNER on terms not less favorable to OWNER than those set forth in such guidelines, or on such other terms as are approved by OWNER in writing. OWNER has set out an approved lease form and shall have the right to direct RCC as to reasonable lease terms to be utilized in the leasing of space within the PROJECTS and, in that event, RCC shall be authorized to execute leases for the PROJECTS on such form(s); provided, however, no such lease shall contain any changes which are material and adverse to OWNER, without OWNER's prior consent. In addition to RCC'S authority granted herein to execute leases as OWNER's agent, at the request of RCC, and upon OWNER's approval, OWNER will execute a lease or give RCC specific authority to execute a lease otherwise found acceptable to OWNER. 2.04 To perform all OWNER's obligations to the tenants of the PROJECTS pursuant to the various tenant leases, and to respond to all tenant requests and complaints. 2.05 To collect all rents and other monies of any kind whatsoever due OWNER from tenants and to take any and all action which is reasonably necessary to enforce such collection of rents due OWNER from the various tenants of the PROJECTS or enforce their respective lease obligations, include filing of suit; to sign and serve in the name of OWNER such notices as are deemed necessary by RCC in enforcement of the tenant leases; to institute and prosecute legal actions or proceedings for the collection of rent and other monies due OWNER, the enforcement of the PROJECTS' leases and/or the dispossession of the various tenants of the PROJECTS, and in connection therewith to engage legal counsel, and where expedient, to settle, compromise and release such actions or proceedings or reinstate such tenancies. 2.06 To advise the OWNER promptly, with confirmation in writing, of the service upon or delivery to RCC of any summons, subpoena, or other legal document including, without limitation, notices, letters or other communications setting out or claiming an actual or alleged potential liability of OWNER or any violation of any statute, ordinance, law or other governmental rule or regulation. 2.07 To promptly notify OWNER of any actual or threatened condemnation which RCC has actual notice of and which may effect the PROJECTS or the area in the general vicinity thereof. 2.08 To obtain and renew such permits and licenses as shall be necessary in connection with the management and operation of the PROJECTS and comply where reasonably possible with all statutes, ordinances, laws or other governmental rules or regulations. 2.09 To contract for, purchase and pay for all utilities, repairs, maintenance, services, alterations, equipment, personal property, supplies and materials as may be deemed necessary or appropriate from time to time in connection with the prudent management and operation of the PROJECTS, and to do all things necessary to maintain the PROJECTS in a clean, safe and orderly condition, subject to the limitations set forth in Section 3. 2.10 To administer and supervise all contracts on Owner's behalf, and the obligations of the contracting parties, for all services, labor and materials to be supplied to or for the PROJECTS. 2.11 To promptly and timely pay all debts and other obligations of OWNER with respect to the PROJECTS, including amounts due pursuant to mortgage loans encumbering the PROJECTS, and all sales and use taxes, and real estate taxes, assessments, and like charges, unless otherwise directed by OWNER, providing cash is available to do so. 2.12 To establish and maintain, as are now provided, accurate and complete books of account with proper entries of all receipts, income and disbursements pertaining to the PROJECTS, which books of account shall be and remain the property of OWNER and shall be available to OWNER and its representative for inspection at any time during regular business hours, and to prepare and furnish reasonable financial reports and statements of the PROJECTS activities in accordance with provisions of Section 6 of this Agreement. 2.13 To review all bills and statements received for services, work, supplies and other expenditures incurred by or on behalf of OWNER in connection with the maintenance, operation and property level ownership of the PROJECTS and to pay or cause to be paid in a timely fashion all such expenses, unless otherwise directed by OWNER. 2.14 To review and make comment on, at the request of OWNER, all hazard, liability and other insurance carried for or by OWNER in connection with the PROJECTS. All insurance liability policies shall name RCC, its agents and employees as an additional insured, and shall provide that the policy may not be canceled or the coverage reduced without at least thirty (30) days written notice to RCC. RCC shall have the power and authority to settle and compromise claims against insurance companies, provided however that in the event any settlement would be insufficient to cover any loss incurred by, or claim against OWNER for which the insurance proceeds are payable (exclusive of any deductible) RCC shall not settle or compromise such claim without the written consent of OWNER. 2.15 To perform any and all other acts, and to take any and all other action, reasonably necessary or appropriate in the prudent management and operation of the PROJECTS. 3. LIMITATIONS ON AUTHORITY. Notwithstanding anything contained herein to the contrary, without the prior consent of OWNER, RCC shall not: 3.01 Execute any contract, purchase or pay for any item or thing; or incur any indebtedness on behalf of OWNER, exceeding in any instance the sum of $2,500 except where the expense incurred is specifically provided for in the APPROVED BUDGET. In addition, emergency repairs, including, but not limited to, those immediately necessary for the preservation and safety of the PROJECTS or the tenants or other persons, or required to avoid the suspension of any necessary service to the PROJECTS or to comply with any applicable, laws, order or regulation may be made by RCC, if RCC is unable to communicate promptly with OWNER, provided RCC notifies OWNER. 4. ACCOUNTS. All monies received by RCC for or on behalf of OWNER shall be deposited in an account(s) in the name of the OWNER, in a financial institution(s) to be approved by OWNER. All funds deposited in OWNER's account and not applied to the payment of OWNER's expenses as herein provided, shall be retained in OWNER's account(s) until such time as OWNER deems that there are excess funds to be distributed to the OWNER. 5. EXPENSES. Except as otherwise provided in this Agreement, all expenses of any kind or nature which are incurred or to be incurred in connection with the operation, leasing, ownership, maintenance, repair, or improvement of the PROJECTS, shall be the responsibility and obligation of OWNER, and OWNER agrees to indemnify and hold RCC and its agents and employees, harmless from claims action, liability, loss, damage, or a suit arising from such above referenced events or services or actions. Such expenses shall include RCC's cost for postage, long distance phones, overnight delivery service (Federal Express, UPS or other) and travel ( a minimum of two visits per calendar year) related to the PROJECTS. To the extent available, all such expenses shall be paid out of the income from the PROJECTS, and to the extent sufficient funds are not available OWNER shall pay or advance funds for the payment of such expenses which have been or are to be incurred out of its own funds upon written demand by RCC. In the event OWNER fails to pay an expense in connection with the PROJECTS, RCC shall have the right (but not the obligation) to (i) pay for such expense and in that event RCC shall have the option to deduct the amount paid by RCC from future income of the PROJECTS and retain same as reimbursement for such payment; and/or (ii) send written notice to OWNER demanding a reimbursement for such payment in which event OWNER shall reimburse RCC in full within ten (10) days of such demand. In any event, failure by OWNER to pay any expense incurred or to be incurred in connection with the PROJECTS shall constitute a default of this Agreement. 6. FINANCIAL AND INCOME TAX REPORTS. RCC shall prepare and distribute to OWNER, or parties specified by OWNER, the following financial and income tax reports and information: 6.01 Within fifteen (15) days after the end of each calendar month, except the months which end a calendar quarter, a statement of assets, liabilities and OWNER's equity/deficit, a statement of income and expenses and such other statements as may be reasonably requested by OWNER. 6.02 Within thirty (30) days after the end of OWNER's tax year, if requested in writing by the OWNER, the necessary supporting schedules from the books of account for submission to the accountants designated by OWNER for the preparation of Federal Income Tax, State Income Tax, Personal Property and Intangible Tax returns and any filings required by the SEC, or caused by the nature of the REIT structure of the OWNER. 7. EMPLOYEES. RCC shall have the right to utilize its own employees in connection with the performance of maintenance and other services for the PROJECTS, and in that event OWNER shall reimburse for the reasonable cost of such services while being performed for OWNER, including, but not limited to, salary, fringe benefits, payroll taxes and other employee costs. Notwithstanding the foregoing, OWNER shall not be required to reimburse RCC for costs associated with its executive or administrative personnel, unless special services are required and requested. Additional management charges to OWNER, requires OWNER'S written consent. 8. SECURITY DEPOSITS. Unless OWNER directs otherwise, all security deposits collected by RCC pursuant to the various tenant leases shall be remitted to OWNER unless required to be held in escrow. OWNER shall be responsible for the payment of all or any portion of any security deposit to be returned to any tenant, if sufficient funds are otherwise unavailable to RCC from the operations of the project. 9. TERM 9.01 This Agreement shall commence on the 1st day of October 1997 , and shall continue in full force and effect for an INITIAL TERM of one (1) year from such commencement date, and thereafter, shall be automatically extended for successive terms of one (1) year, unless either party elects not to extend the term by delivering written notice to the other party at least ninety (90) days prior to the expiration of the then existing term, or unless this Agreement is otherwise terminated as hereinafter provided. 9.02 After not less than thirty (30) days notice, or upon the transfer of title to the PROJECTS by OWNER to a person or entity that is independent of OWNER, either party may terminate this Agreement, provided, however, that in the event OWNER executes a contract for sale or option to sell the PROJECTS, OWNER shall forthwith notify RCC in writing that said contract has been executed and as to the approximate closing date. 9.03 In the event of default by either party which is not cured as soon as reasonably practical after a written notice specifying the default is delivered to the defaulting party and in any event within ten (10) days as to a monetary default, and thirty (30) days as to a non-monetary default, except that if such non-monetary default is not capable of being cured within such thirty (30) days then this period of time will be extended for a reasonable amount of time so long as to the defaulting party is diligently proceeding to cure such default, then the non-monetary defaulting party may terminate this Agreement immediately upon written notice to the defaulting party. 9.04 In the event either party is adjudicated as bankrupt, or institutes legal proceedings seeking relief for protection from its creditors, or in the event a receiver or trustee is appointed to take possession of all or a substantial portion of the assets of such party, then either party may immediately upon written notice by the other party, terminate this Agreement. 9.05 If RCC fraudulently misuses any funds held by it on behalf of OWNER or engages in any other fraudulent conduct, OWNER may terminate this Agreement immediately upon written notice to RCC, provided however that if such misconduct is engaged in by an employee other than a principal of RCC, OWNER shall not have the right to terminate this Agreement if RCC immediately compensates OWNER for any and all losses, costs and expenses incurred by OWNER as a result thereof, and RCC evidences to OWNER's reasonable satisfaction that it has terminated the employment of such employee and it has taken appropriate steps reasonably satisfactory to OWNER to provide safeguards to ensure that such misconduct will not occur in the future by any other employees. 9.06 Upon termination of this Agreement for any reason, and payment of any fees due RCC, RCC shall delivery to OWNER all leases, accounting records and files relating to the PROJECTS, and all funds of OWNER then remaining in RCC's possession, together with such authorizations and letters of direction addressed to tenants, occupants, suppliers, employees, bankers and other parties as OWNER may reasonably require; and RCC shall cooperate with OWNER in the transferring of management responsibilities to OWNER or its designee. 10. INDEMNIFICATION. OWNER agrees to indemnify and hold RCC harmless, from and against any and all claims, costs, damages, liabilities, and expenses of any kind or nature whatsoever, including attorney's fees and court costs, arising out of the management or operation of the PROJECTS, or from damages or injuries to persons or property resulting from any cause whatsoever in, on or about the PROJECTS and, at OWNER's cost and expense, to defend any action or proceeding against RCC arising therefrom. Notwithstanding the foregoing, OWNER shall not be required to indemnify RCC against claims or damages suffered as a result of the gross negligence or willful misconduct of RCC, or any willful violation by RCC of any applicable statute, ordinance, law or governmental rule or regulation, or any act outside of the authority granted RCC pursuant to this Agreement on the part of RCC, and RCC agrees to indemnify and hold OWNER harmless from and against all claims and damages arising out of the foregoing, including OWNER's reasonable attorney's fees and court costs. 11. NOTICES. All written notices to be given pursuant to this Agreement shall be given in writing at the following addresses unless either party notifies the other party in writing of a change of address: 11.01 OWNER: AEGIS REALTY, INC., SUMMIT INSURED EQUITY L.P., SUMMIT INSURED EQUITY II L.P. AND AEGIS REALTY OPERATING PARTNERSHIP, L.P. c/o Bruce Brown The Related Companies 625 Madison Avenue Suite 900 New York, NY 10022 11.02 RCC: RCC Property Advisors, A Florida General Partnership By: PRR Realty Associates, Inc. a Florida corporation, General Partner 15127 Jog Road, Suite 210 Delray Beach, Florida 33446 Notice by certified mail, return receipt requested, shall be effective the day after mailing, and notice any other means shall only be effective upon receipt by the party being notified. 12. DAMAGE, CONDEMNATION AND FORCE MAJEURE. 12.01 Damage and Repair. Intentionally Omitted 12.02 Condemnation. In the event all or substantially all of the PROJECTS are taken in any eminent domain, condemnation, or similar proceeding by any governmental or quasi-governmental authority, this Agreement shall terminate as of the date such taking is final, and OWNER and RCC shall each have the right to initiate such proceedings as they deem advisable to recover any damages to which they may be entitled due to such taking. 12.03 Force Majeure. If acts of war, civil disturbance, governmental action, including the revocation of any license or permit necessary for the operation of the PROJECTS where such revocation is not due to RCC's fault, or any other cause beyond the control of RCC, shall in RCC's reasonable opinion have a significant adverse effect upon the operations of the PROJECTS, then RCC shall be entitled to terminate this Agreement upon thirty (30) days written notice to OWNER. 13. EXTRAORDINARY SERVICES. The parties acknowledge that the services to be performed by RCC hereunder only include the normal and customary activities, associated with the day-to-day management and operation of the PROJECTS, and do not include extraordinary services such as activities associated with the repair or reconstruction of the PROJECTS or any portion thereof after damage or destruction by casualty; activities associated with substantial renovation and remodeling, or compliance with new governmental requirements that may impose extraordinary burdens upon RCC. However, RCC may agree to perform such services on behalf of OWNER by written agreement of the parties, for an additional fee to be agreed upon, as set forth in Exhibit B. 14. ADDITIONAL MANAGEMENT SERVICES. Notwithstanding anything contained herein to the contrary, the OWNER acknowledges that RCC, at OWNER's request, will perform certain additional management services for or on behalf of OWNER. These additional management services shall include the preparation and filing of governmental required reports; coordination of the preparation and filing of Federal and State Income tax returns; administration of partnership, loan, mortgage and similar agreements for compliance with specific terms and conditions contained therein; coordination of legal and other professional services; preparation of various reports beneficial to the OWNER; and certain other additional management services that may be reasonably requested by OWNER. RCC further agrees to perform these additional management services for the management fee set forth in Exhibit B. Further both OWNER and RCC agree that by the attached letter (Exhibit "C"), additional PROJECTS may be added to the Contract at the same rate, cost and expense ,under the same terms and conditions as provided for herein. 15. SALE OR FINANCING OF THE PROJECT. Intentionally Omitted 16. ASSIGNMENT. Neither party shall have the right to assign the Agreement, or any rights or obligations herein, without the prior written consent of the other party. 17. BINDING EFFECT. This Agreement is binding upon the successors and assigns of the parties hereto. 18. COMPLETE AGREEMENT. This Agreement constitutes the complete agreement of the parties, and no prior written or oral agreements or understandings shall be of any force or effect. 19. ATTORNEY'S FEES. In the event either party commences litigation in order to enforce its rights hereunder, the prevailing party in such litigation shall be entitled to recover its costs and reasonable attorney's fees from the other party. 20. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Florida. 21. AMENDMENTS. All amendments or modifications to this Agreement shall be in writing and signed by the parties, and no oral amendments or modifications shall be enforceable. 22. CAPTIONS. Captions utilized in this Agreement are for reference purposes only and shall be used to interpret, limit and define the terms and provisions of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement on the dates indicated below: OWNER: AEGIS REALTY, INC. /s/ Linda Garcia By: [ILLEGIBLE] ---------------------------- ---------------------------------- Name: ---------------------------- ---------------------------------- WITNESSES: Date: ---------------------------------- OWNER: SUMMIT INSURED EQUITY L.P. a Delaware Limited Partnership, By: AEGIS Realty Operating Partnership, L.P., Its General Partner By: AEGIS Realty, Inc., Its General Partner /s/ Linda Garcia By: [ILLEGIBLE] ---------------------------- ---------------------------------- Name: ---------------------------- ---------------------------------- WITNESSES: Date: ---------------------------------- OWNER: SUMMIT INSURED EQUITY II L.P. a Delaware Limited Partnership, By: AEGIS Realty Operating Partnership, L.P., Its General Partner By: AEGIS Realty, Inc., Its General Partner /s/ Linda Garcia By: [ILLEGIBLE] ---------------------------- ---------------------------------- Name: ---------------------------- ---------------------------------- WITNESSES: Date: ---------------------------------- OWNER: AEGIS REALTY OPERATING PARTNERSHIP, L.P. By: AEGIS Realty, Inc. Its General Partner /s/ Linda Garcia By: [ILLEGIBLE] ---------------------------- ---------------------------------- Name: ---------------------------- ---------------------------------- WITNESSES: Date: ---------------------------------- MANAGER: RCC PROPERTY ADVISORS a Florida Partnership By: PRR REALTY ASSOCIATES, INC. a Florida Corporation, General Partner /s/ Linda Garcia By: /s/ Paul R. Rutledge ---------------------------- ---------------------------------- Paul R. Rutledge ---------------------------- As President for the Corporation WITNESSES: Exhibit A Schedule of Projects Name Address City Size 1. Westbird 11423-11499 S.W. 40th Street Miami, FL 100,087 2. Pablo 1822-2280 South Third Street Jacksonville Bch, FL 140,922 3. Hickory 5753-5771 Nolensville Rd. Nashville, TN 67,336 4. Southaven 453-521 Stateline Rd. Southaven, MS 83,750 5. Townwest 5615-5633 W. 38th Street Indianapolis, IN 88,200 6. Cactus 4312-4414 West Cactus Rd. Phoenix, AZ 72,598 7. Highland 901 S.W. Highland Drive Gresham, OR 74,764 8. Winery 1955 W. Texas Street Fairfield, CA 121,950 9. Mt. View 4002 U.S. Highway 78 Snellville, GA 99,908 10. Rolling Hills 7012-7076 E. Golf Links Rd. and 513-631 S. Kolb Rd. Tucson, AZ 101,864 11. Kokomo S. Reed Rd. Kokomo, IN 89,546 12. Forest Park 1212-1250 W. Kemper Rd. Cincinnati, OH 92,824 13. Mt. Park 4750 Alabama Rd. Roswell, GA 77,686 14. Applewood 96th & "Q" Streets Omaha, NE 101,130 EXHIBIT "B" COMPENSATION. In consideration for the performance of its duties hereunder, RCC shall be entitled to receive and OWNER shall pay the RCC the following compensation: MANAGEMENT FEE. Each month OWNER shall pay to RCC a management fee equal to four and one half (4.5%) percent of the gross receipts, collections, or revenues as hereinafter defined, actually collected by RCC for OWNER's account after the date hereof until the termination of this Agreement, whichever is greater. Said fee shall be payable monthly no later than ten (10) days after the end of each calendar month, based upon the gross receipts, collections or revenues collected during said calendar month. Gross receipts, collections or revenues shall mean all amounts collected from tenants, subtenants and occupants of the PROJECTS, including but not limited to minimum rent, percentage rent, payments collected in excess of fixed rents on account of real estate taxes, common area maintenance, utility charges or similar costs. The management fee shall be prorated on a per diem basis for any portion of the first and last month for which this Agreement shall be in effect. RCC is hereby authorized and instructed to disburse compensation established in this section from any funds held on or for the account of OWNER. If such funds held on or for OWNER's account are insufficient to satisfy compensation due RCC hereunder, RCC shall invoice OWNER for such unsatisfied portion and OWNER shall pay to RCC all such amounts within ten (10) days. LEASING FEE. OWNER hereby engages the services of RCC, as its exclusive leasing agent. As to each tenant lease for the PROJECTS entered into by OWNER while this Agreement is in effect, OWNER shall pay RCC, a leasing fee equal to the sum of the amounts derived by multiplying the various percentages included in the following schedule by the minimum rental and all charges to be paid during the applicable lease year(s) of the INITIAL TERM of the lease, including fixed minimum rent increases specified or minimum percentage increases or increases otherwise determinable. Percentage Lease Year ----------------------- 5% 1 through 5 of INITIAL TERM 3% 6 through end of INITIAL TERM An additional leasing fee equal to one-half (1/2) of the amount computed to the above-mentioned shall be paid on the renewal, extension, or expansion of any tenant lease which is in occupancy or under lease, but by its terms does not provide a right or option to renew or extend at an agreed upon and specified rental rate, or if the rent for a renewal, extension, or expansion period is renegotiated, to add to the existing term. One-half of the leasing fee shall be paid to RCC upon the execution of the lease by OWNER and the tenant, and the balance of the leasing fee shall be paid to RCC on the commencement date of the lease. As the exclusive leasing agent for the PROJECTS, RCC, shall co-operate with its sub-contracted agents and/or any independent licensed real estate brokers or agents and, in the event that any such broker or agent procures a tenant lease then RCC's fee shall be increased by one half for each year of the INITIAL TERM as defined under LEASING FEE above and shall be shared between RCC and such independent broker or agent as they agree. The foregoing fees shall be net of any and all costs and expenses incurred by RCC in connection with and pursuant to this Agreement, provided; however, that RCC shall bear the cost of their own overhead for the home office of RCC and the salaries of their own officers and employees, except as elsewhere provided. IN WITNESS WHEREOF, the parties have executed this Exhibit on the dates indicated below: /s/ Linda Garcia By: [ILLEGIBLE] ---------------------------- ---------------------------------- Name: ---------------------------- ---------------------------------- WITNESSES: Date: ---------------------------------- OWNER: SUMMIT INSURED EQUITY L.P. a Delaware Limited Partnership, By: AEGIS Realty Operating Partnership, L.P., Its General Partner By: AEGIS Realty, Inc., Its General Partner /s/ Linda Garcia By: [ILLEGIBLE] ---------------------------- ---------------------------------- Name: ---------------------------- ---------------------------------- WITNESSES: Date: ---------------------------------- OWNER: SUMMIT INSURED EQUITY II L.P. a Delaware Limited Partnership, By: AEGIS Realty Operating Partnership, L.P., Its General Partner By: AEGIS Realty, Inc., Its General Partner /s/ Linda Garcia By: [ILLEGIBLE] ---------------------------- ---------------------------------- Name: ---------------------------- ---------------------------------- WITNESSES: Date: ---------------------------------- OWNER: AEGIS REALTY OPERATING PARTNERSHIP, L.P. By: AEGIS Realty, Inc. Its General Partner /s/ Linda Garcia By: [ILLEGIBLE] ---------------------------- ---------------------------------- Name: ---------------------------- ---------------------------------- WITNESSES: Date: ---------------------------------- MANAGER: RCC PROPERTY ADVISORS a Florida Partnership By: PRR REALTY ASSOCIATES, INC. a Florida Corporation, General Partner /s/ Linda Garcia By: /s/ Paul R. Rutledge ---------------------------- ---------------------------------- Paul R. Rutledge ---------------------------- As President for the Corporation WITNESSES: EXHIBIT "C" VIA FAX & REGULAR MAIL - - ----------------------------- - - ----------------------------- 625 Madison Avenue, Suite 900 New York, NY 10022 Attn:_________________________ Dear Owner: By this Agreement, Aegis Realty, Inc., Summit Insured Equity, L.P. and Summit Insured Equity II L.P. Aegis Realty Operating Partnership, L.P.,(collectively referred to as "Owner") acknowledge and agree that RCC Property Advisors ("RCC") shall be the managing agent of the following PROJECT: Center: _____________________________________ Address: _____________________________________ Closing Date:____________ Price:____________ Local Managing Company Name: _____________________________________ Address: _____________________________________ Phone #: _____________________________________ Contact: _____________________________________ Acquisition Contact: _________________________ Page 2 Owner and RCC acknowledge and agree that all terms and obligations provided in the Management Agreement effective October 1, 1997 between Owner and RCC shall be applicable to the Project. Kindly acknowledge receipt of this letter and your agreement with the foregoing by signing and returning the enclosed copy of this letter within seven (7) days of receipt. Should you have any questions, please do not hesitate to contact me. Very truly yours, RCC PROPERTY ADVISORS, a Florida General Partnership By: PRR Realty Associates, Inc., a Florida Corporation and General Partner ______________________________________________________ By: Paul R. Rutledge, as President for the corporation OWNER:________________________________________________ ______________________________________________________ By:___________________________________________________ ___________________________________________________ PRR/tlr EX-27 3 ART. 5 FDS FOR 1997 10-K/A-1
5 The 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 1 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 6,728,050 0 35,514,521 304,000 0 587,109 111,042,804 16,404,617 148,639,328 4,322,644 18,544,242 0 0 0 125,045,011 148,639,328 0 10,755,797 0 0 6,750,044 0 558,994 3,438,496 0 0 0 0 0 3,438,496 .18 .18
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