-----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, OPkWi0a15rvFX0IFW/WD1KrFZ0VJTlk4WohAfSJyJCVEqtf3MoxkgcPubzflMHFg SYvbQri9fEYn8FS0OYiZNA== 0000950146-99-000681.txt : 19990403 0000950146-99-000681.hdr.sgml : 19990403 ACCESSION NUMBER: 0000950146-99-000681 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEGIS REALTY INC CENTRAL INDEX KEY: 0001043324 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 133916825 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13239 FILM NUMBER: 99583742 BUSINESS ADDRESS: STREET 1: 625 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2124215333 MAIL ADDRESS: STREET 1: 625 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 10-K 1 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, 1998 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-13239 AEGIS REALTY, INC. (Exact name of Registrant as specified in its charter) Maryland 13-3916825 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 625 Madison Avenue, New York, New York 10022 - -------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 421-5333 Securities registered pursuant to Section 12(b) of the Act: Title of each class ------------------------------------------ Common Stock, par value $.01 per share Name of each exchange on which registered: ------------------------------------------ American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The approximate aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of March 9, 1999 was $74,197,493, based on a price of $9 7/16 per share, the closing sales price for the Registrant's Common Stock on the American Stock Exchange on that date. As of March 9, 1999, there were 8,046,859 outstanding shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Part III: Those portions of the Registrant's Proxy Statement for Annual Meeting of Shareholders to be held on June 16, 1999, which are incorporated into Items 10, 11, 12 and 13. Index to exhibits may be found on page 43 Page 1 of 54 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 OCCURRING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE 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, renovate, own and operate 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, 1998, the Company owned a portfolio of 28 retail properties (the "Retail Properties") containing a total of approximately 3.0 million gross leaseable square feet ("GLA"), held partnership interests in two suburban garden apartment properties (the "Multifamily Properties") and held one FHA insured participating mortgage secured by a suburban garden apartment property (the "FHA Mortgage"). The locations of the assets in 14 states provide the Company with a geographically diverse portfolio. Moreover, the Company has a predictable and stable revenue stream that, for the year ended December 31, 1998, was derived approximately 54% from either base rent from anchor tenants or from interest payments on the FHA Mortgages. No single asset accounted for more than 7% of total revenues for the year ended December 31, 1998. The Retail Properties are well located neighborhood shopping centers anchored by nationally recognized credit tenants such as Kroger, Publix, Safeway, Food Lion, A&P, Flemming Foods, Bi-Lo, Hy-Vee, Walgreens and CVS Stores. The neighborhood centers are typically open air centers ranging in size from 55,000 GLA to approximately 214,000 GLA, with an average of approximately 107,000 GLA, and are anchored by supermarkets and/or drug stores. These centers are usually leased to tenants that provide consumers with convenient access to every day necessity items, such as food and pharmacy items. Therefore, the Company believes that the economic performance of these centers is less affected by downturns than other retail property types. As of December 31, 1998, the Retail Properties had an average physical occupancy of 92.4%. Through 2006 no more than 8.6% of leased GLA is subject to expiration in any one year. The Multifamily Properties total 290 units and had an average physical occupancy of 90.5% as of December 31, 1998. The FHA mortgage has a principal balance of approximately $2.9 million and carries an annual interest rate of 8.95%. The underlying FHA property had an average physical occupancy of 87.9% as of December 31, 1998. Organization - ------------ The Company was formed on October 1, 1997 as the result of the consolidation (the "Consolidation") of four publicly registered, non-listed limited partnerships, Summit Insured Equity L.P. ("Insured I"), Summit Insured Equity L.P. II ("Insured II"), Summit Preferred Equity L.P. ("Summit Preferred") and Eagle Insured, L.P. ("Eagle") (the "Partnerships", and each individually a "Partnership"). One of the general partners of the Partnerships was an affiliate of Related Capital Company ("Related"), a nationwide, fully integrated real estate financial services firm. Unless otherwise indicated, the "Company", as hereinafter used, refers to Aegis Realty, Inc. and subsidiaries and, for references prior to October 1, 1997, refers to Insured I. Pursuant to the Consolidation, the Company issued shares of its common stock, par value $.01 per share (the "Common Stock") to all partners in the Partnerships in exchange for their partnership interest in each Partnership. The Common Stock commenced trading on the American Stock Exchange on October 10, 1997 under the symbol "AER". As of December 31, 1998, there were 8,044,859 shares of Common Stock outstanding (an additional 517,625 shares were reserved for issuance upon conversion of OP Units, as defined below). For financial accounting and reporting purposes, the Consolidation was accounted for using the purchase method of accounting. Under this method, the Partnership with the investor group receiving the largest ownership in the Company, in this case Insured I, was deemed to be the acquirer. As the surviving entity for accounting purposes, Insured I's assets and liabilities were recorded by the Company at their historical cost, with the assets and liabilities of the other Partnerships recorded at their estimated fair values for each Partnership as set forth in the Solicitation Statement of the Company dated June 18, 1997 (the "Solicitation Statement"). Results of operations and other operating financial data for the Company for the years ended December 31, 1998, 1997 and 1996 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, 1998 with respect to the other Partnerships. Insured I is a Delaware limited partnership formed on December 12, 1985 which, subsequent to the Consolidation, became an indirectly wholly-owned subsidiary of the Company. Prior to the Consolidation, the general partners of Insured I were Related Insured Equity Associates, Inc., a Delaware corporation and Prudential-Bache Properties, Inc., a Delaware corporation ("PBP"). The general partners managed and controlled the affairs of Insured I prior to the Consolidation. The Company is governed by a board of directors comprised of two independent directors and three directors who are affiliated with Related. The Company has engaged Related Aegis LP (the "Advisor"), a Delaware limited partnership and an affiliate of Related, to manage its day to day affairs. Each independent director is entitled to receive annual compensation for serving as a director in the aggregate amount of $15,000, payable in cash (maximum of $5,000 per year) and/or shares of Common Stock valued based on the fair market value at the date of issuance. On June 4, 1998, 216 shares, having an aggregate value of $2,500 as of that date, were issued to each independent director as compensation for their services for the quarter ended December 31, 1997. Through the Advisor, Related offers the Company a core group of experienced staff and executive management, who provide the Company with services on both a full and part-time basis. These services include, among other things, acquisition, financial, accounting, capital markets, asset monitoring, portfolio management, investor relations and public relations services. The Company believes that it benefits significantly from its relationship with Related, since Related provides the Company with resources that are not generally available to small capitalized, self-managed REITs. In addition, RCC Property Advisors, 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 22 employees, employed in the areas of leasing, accounting, management and redevelopment. The -3- Company represents substantially all of the Property Manager's property management revenue and therefore substantially all of its staff is engaged, on a full-time basis, providing services to the Company. The Company owns all of its assets directly or indirectly through Aegis Realty Operating Partnership, LP, a Delaware limited partnership (the "Operating Partnership" or "OP"), of which the Company is the sole general partner and holder of 93.96% of the units of partnership interest (the "OP Units") at December 31, 1998. Also, at December 31, 1998, 3.05% and 2.99% of the OP Units are held by the sellers of three of the Retail Properties and by affiliates of Related, respectively. Business Plan - ------------- The Company has initiated a focused business/strategic plan designed to increase funds from operations ("FFO") and enhance the value of its stock. The plan concentrates principally on 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 continued acquisitions, on an individual or bulk basis, of shopping centers. The Company believes that there are significant opportunities available to acquire undervalued, undermanaged and/or underutilized neighborhood and community shopping centers. Unlike most small capitalized REITs, the Company has the ability to benefit from its affiliation with a much larger company, Related, with a national presence. The Company is using its affiliation with Related to execute a national acquisition program. The Company believes that by acquiring shopping centers on a national basis, rather than targeting a few markets or a region, it will be able to grow at a meaningful rate, without the need for it to compromise asset quality or current return. In addition, a national acquisition program allows the Company to maintain geographic diversity, which the Company believes reduces the risk otherwise associated with focusing on one region. The Company seeks to acquire primarily, but not exclusively, supermarket-anchored shopping centers, which are well located in primary and secondary markets. Acquisitions will be balanced between stabilized centers that the Company believes are undervalued and centers that may be enhanced through intensive management, leasing, redevelopment or expansion efforts. In all such cases, the Company generally seeks to acquire only those centers that are expected to immediately increase FFO. The Company's growth will be financed through proceeds of an expandable $60 million senior revolving credit facility shared equally among BankBoston, KeyBank National Association and Citizens Bank of Rhode Island (the "Credit Facility"), the issuance of shares of the Company's Common Stock or OP Units in exchange for real estate, funds generated from operations in excess of dividend payments and through placements of equity. Although the Credit Facility may be increased, the Company's Charter dictates leverage of no more than 50% of the Company's Total Market Value defined as the greater of (i) the sum of (a) the aggregate market value of the Company's outstanding shares of Common Stock and (b) the total debt of the Company or (ii) the aggregate value of the Company's assets as determined by the Advisor based upon third-party or management appraisals and other criteria as the Board of Directors shall determine in its sole discretion. During the period January 1, 1998 through December 31, 1998, the Company acquired 12 neighborhood shopping centers (see "Item 2. Properties"). Internal growth will occur from the continued re-deployment of proceeds from the sale or other disposition of non-core assets currently in the portfolio and through intensive management, leasing and redevelopment services provided to the Company by the Property Manager and the Advisor. The Company considers non-core assets to be those assets the Company has enhanced and no longer offer above market rates of return or those assets which due to location, configuration or tenant profile no longer offer the Company the prospects of better than market rates of growth. The Company regularly reviews its portfolio to identify non-core assets and to determine whether the time is appropriate to sell or otherwise dispose of such assets whose characteristics are no longer suited to the Company's overall growth strategy or operating goals. During 1998, the Company disposed of three non-core assets (see "Mortgage Loans" below and "Item 2. Properties"). Finally, the Company will encourage the Advisor and its affiliates to increase their ownership in the Company. The Company believes that this is necessary in order to more closely align the interest of management with that of the Company and to demonstrate that the Advisor has a long-term commitment to the success of the Company. During 1998, the ownership of the outstanding Common Stock of the Company by affiliates of the Advisor increased from .9% to 2.3%. In addition, during 1998, ownership of OP Units by affiliates of the Advisor increased from 46,836 OP Units to 252,277 OP Units. Assuming conversion of all outstanding OP Units, the ownership in the Company by affiliates of the Advisor increased from 1.5% to 5.0%. Retail Properties - ----------------- As of December 31, 1998, the Company owned 28 neighborhood shopping centers. See "Item 2. Properties" for a description of each property. The following table lists each of the Company's investment properties whose rental revenues accounted for 10% or more of the Company's total gross revenues for any of the three years in the period ended December 31, 1998:
1998 1997* 1996* ---- ---- ---- 1. Pablo Plaza/Jacksonville, FL 5% 7% 10% 2. Westbird/Miami, FL 6% 10% 11% 3. Winery Square/Fairfield, CA 7% 10% 14% 4. Mountain View Village/Snellville, GA 6% 10% 11% 5. Forest Park Square/Cincinnati, OH 6% 10% 12%
-4- *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, 1998, 1997 and 1996, the Kroger Company, which is a tenant at six shopping centers, accounted for approximately 17%, 28% and 28%, respectively, of the Company's total gross revenues. Based on the carrying value at December 31, 1998, approximately 15% of the Company's investment properties are located in Ohio, 11% are located in Florida, 11% are located in North Carolina and 11% are located in Virginia. No other states comprise more than 10% of the total carrying value. Investments in Partnerships - --------------------------- As of December 31, 1998, the Company owned equity interests in two partnerships, each of which owns a multi-family residential garden apartment property. See "Item 2. Properties" for a description of each property. Mortgage Loans - -------------- As of January 1, 1998, the Company held three FHA Mortgages and three equity loans (the FHA Mortgages and the equity loans together, the "Mortgage Loans"); two of the Mortgage Loans were repaid in 1998. All base interest and the principal amount of the FHA Mortgages were coinsured by the FHA (80%) and an affiliate of the Advisor (20%). The equity loans were made to the same developers and were uninsured, but were secured by the partnership interests which owned the underlying properties (the "Developments"). In addition to the stated interest rates, the Company was entitled to receive additional interest on the FHA Mortgages from a percentage of the annual net cash flow of the Developments and from a percentage of the residual proceeds upon a sale or refinancing. The Company accepted lower base interest rates than were otherwise available in the market at the time of the origination with respect to the FHA Mortgages in exchange for the potential to receive additional interest payments. The notes evidencing the FHA Mortgages relating to Cross Creek and Woodgate Manor, two of the Developments, bore interest at 8.95% with the potential to receive an additional 0.84% to 1.68% on the FHA Mortgages plus 30% of any remaining cash flow from the underlying Developments and 35% of capital proceeds. The FHA Mortgage for Weatherly Walk, a third Development, was structured in the same manner except that the Company was entitled to receive up to 50% of both any remaining cash flow and of capital proceeds. Additional interest was due no later than upon the prepayment or other satisfaction of the FHA Mortgages or the sale of the Developments. The receipt of additional interest was dependent upon the economic performance of the underlying Developments. Additional interest was not insured by the FHA or an affiliate of the Advisor. In addition to the Mortgage Loans, the Company held a loan of $3,060,000 (the "Cross Creek Loan") to Walsh/Cross Creek Limited Partnership (the "Cross Creek Obligor"), one of the FHA Mortgagors, which was used to pay for costs incurred to complete construction and to fund operating deficits. The Cross Creek Loan bore interest at the prime rate plus 1% and was due on January 1, 2030 or on the occurrence of certain events. The amount loaned to the Cross Creek Obligor was classified as a loan receivable from affiliate and was anticipated to be repaid from cash flows from the Cross Creek property. Stephen M. Ross holds a majority interest in the Advisor and had guaranteed the repayment of the principal and interest on the Cross Creek Loan (as amended, the "Guarantee Agreement") to the Company, subject to certain conditions. On June 24, 1998, the Cross Creek Obligor, the owner of Cross Creek Apartments ("Cross Creek") and an affiliate of the Advisor, sold Cross Creek to a third party for $23.4 million. The Cross Creek Obligor then fully repaid its outstanding debt due to the Company totaling $22,199,045 including a $16,971,528 FHA Mortgage, a $1,783,900 equity loan, the $3,060,000 Cross Creek Loan, a $286,948 prepayment penalty due the Company on the FHA Mortgage and accrued interest through the closing date of $96,669 resulting in a loss on the repayment (including the prepayment penalty) in the amount of $92,504 (due to purchase accounting premiums recorded pursuant to the Consolidation) which is included in other expenses. The interest income on the Cross Creek receivable recognized for the year ended December 31, 1998, through the date of sale, was $837,802. On August 26, 1998, FAI, Ltd. ("FAI"), the limited partnership which owns Weatherly Walk Apartments and one of the FHA Mortgagors, repaid in full (after completing a refinancing with an unaffiliated third party) the outstanding balance of its Mortgage Loan in the amount of $8,380,752 plus accrued interest through August 26, 1998 of $48,189 resulting in a loss on the repayment in the amount of $45,934 (due to purchase accounting premiums recorded pursuant to the Consolidation) which is included in other expenses. Simultaneously, the Company invested $895,200 for a 40% interest as a limited partner in FAI (see "Item 2. Properties"). The interest income on the Weatherly Walk receivable recognized for the year ended December 31, 1998 was $416,919. As of December 31, 1998, the Company held one Mortgage Loan. Further information regarding the Mortgage Loan is as follows:
Stated Funding Original Original Total Interest Mortgage Comple- FHA Equity Mortgage Rate on Loan Project Closing tion Mortgage Loan Loan Mortgage Maturity Date Date Amount Amount Amount Loan (2) Date (3) - ------------------- ------- ---- ------ ------ ------ -------- -------- Woodgate Manor 12/12/ 12/13/ $3,110,300 $339,700 $3,450,000 8.95% 1/1/ Gainesville, FL (1) 1988 1988 2024
(1) The general partner interest in the entity holding title to this Development is held by an affiliate of the Advisor. -5- (2) Includes a servicing fee of 0.07% paid by the developer to Related Mortgage Corporation, an affiliate of the Advisor, and excludes additional interest which may be payable under certain circumstances. (3) As of December 13, 1998, the Company may call for prepayment of the entire outstanding principal amount at any time. The Company, in order to call for prepayment, would be required to terminate the mortgage insurance contract with FHA and the other co-insurer not later than the accelerated payment date. Since the exercise of such option would be at the Company's discretion, it is intended to be exercised only where the Company determines that the value of the underlying Development has increased by an amount which would justify accelerating payment in full and assuming the risks of foreclosure if the mortgagor failed to make the accelerated payment. As of December 13, 1998, the Borrower may elect to prepay at any time. As of December 31, 1998, the aggregate balance of the Mortgage Loan recorded on the Company's financial statements was $3,267,037. Insurance Policies - ------------------ Insured I and Insured II, which are indirectly wholly-owned subsidiaries of the Company, are the record owners of 14 of the Retail Properties. Insured I and II are each the beneficiary of an insurance policy (the "Policies") from Continental Casualty Company ("CNA") which, in effect, will insure that the cumulative amount of cash available for distribution, from all sources, as determined in accordance with the Policies and related agreement together with the appraised values of the Retail Properties then owned by Insured I and Insured II (currently 14 of the 28 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 such Retail Property was acquired by Insured I and Insured II (the "Final Acquisition Date"). The maximum liability of CNA under the Policies will increase pursuant to a formula based upon the length of time such Retail Properties are held by Insured I and Insured II up to a maximum of 125% of Original Contributions on the tenth anniversary of the Final Acquisition Date (the "Guaranty Payment Date"). The Policies are intended to cover various economic risks of the ownership of such Retail Properties, but do not apply to certain losses, costs, penalties or expenses, including, among others, those arising out of any physical loss, damage, loss of use or other physical deterioration of such properties. Payment of any amounts due under the Policies will be made to Insured I and/or Insured II after the Guaranty Payment Date and the Policies are not a guaranty that shareholders of the Company will receive a return equal to 125% of the Original Contributions to either Insured I or Insured II, as applicable, or any lesser amount insured under the Policy. 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 Loan, the Company's business is affected by competition to the extent that the Development from which it derives interest and principal payments may be subject to competition from neighboring properties. In particular, additional interest payments which are not insured are dependent upon the economic performance of the Development and may be affected by competitive conditions. In addition, various other entities have been or may, in the future, be formed by affiliates of the Advisor to engage in businesses which may be competitive with the Company or compete for the time and services of management of the Advisor. Regulations - ----------- A current or previous owner or operator of real property may be legally liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such liability may exist whether or not the owner or operator knew of, or was responsible for, such hazardous or toxic substances. In addition, the presence of hazardous or toxic substances may adversely affect the owner's ability to borrow funds using such real property as collateral. Certain environmental laws impose liability for release of asbestos-containing materials ("ACMs") into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company may be liable for removal or remediation costs, as well as certain other potential costs which could relate to such hazardous or toxic substances or ACMs (including governmental fines and injuries to persons and property). To date, the Company has not incurred any costs of removal or remediations of such hazardous or toxic substances. However, the presence, with or without the Company's knowledge, of hazardous or toxic substances at any property held or operated by the Company could have an adverse effect on the Company's business, operating results and financial condition. Phase I Environmental Site Assessments have been undertaken on all of the Company's properties. In certain cases, additional Phase II site investigations have also been undertaken where deemed appropriate. Based on these reports, no on-site hazardous chemicals or petroleum products were detected or found to exist in the soil or in the groundwater at those properties which would result in action by state environmental agencies and which would require additional investigation and/or remediation, with the exception of the Mountain Park Plaza property. A Phase II investigation at this property, in February 1998, determined that there were detectable levels of certain hazardous materials above threshold levels 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 -6- 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. Notes Payable - ------------- For information regarding the Company's notes payable, see "Item 8. Financial Statements and Supplementary Data". Employees - --------- The Company does not directly employ anyone. All services are performed for the Company by the Advisor and its affiliates. The Advisor receives compensation in connection with such activities as set forth in Items 8, 11 and 13. In addition, the Company reimburses the Advisor and certain of its affiliates for expenses incurred in connection with the performance by their employees of services for the Company in accordance with the Advisory Agreement between the Company, the OP and the Advisor dated October 1, 1997. The 28 Retail Properties owned by the Company are managed by the Property Manager, an affiliate of the Advisor, for a fee equal to 4.5% of the gross rental receipts from the Retail Properties, which is competitive with such fees paid in the areas in which the properties are located. The Property Manager also receives standard leasing commissions for space leased to new tenants and for lease renewals and is reimbursed for certain expenses. Management fees earned by the Property Manager for the years ended December 31, 1998, 1997 and 1996 totaled approximately $863,000, $512,000 and $420,000, respectively. Item 2. Properties. Retail Properties - ----------------- As of December 31, 1998, the Company owned 28 neighborhood shopping centers, 12 of which were acquired during 1998. The following is a description of these shopping centers:
% Square Comparable Feet Annualized Competition Gross Leased at Base Rent at Main within a Purchase Date Leasable December December Anchor three-mile Name and Location Price Purchased Square Feet 31, 1998 31, 1998 Tenant radius - -------------------- --------- --------- ----------- --------- ------------ ------ ----------- Cactus Village $ 6,330,000 7/25/87 72,598 97% $474,000 Safeway** 11 shopping Glendale, AZ centers Hickory Plaza 4,902,000 4/23/87 67,336 100% 529,000 Kroger 8 shopping Nashville, TN centers Highland Fair 5,950,000 7/24/87 74,754 92% 591,000 Safeway 6 shopping Gresham, OR centers Pablo Plaza 7,500,000 2/18/87 140,921 83% 584,000 Publix* 12 shopping Jacksonville, FL centers Southhaven 5,666,000 2/28/87 83,750 100% 513,000 Kroger 6 shopping Southhaven, MS centers Town West 4,932,000 5/11/87 88,200 100% 439,000 Kroger 5 shopping Indianapolis, IN centers Westbird 7,000,000 12/31/86 100,237 87% 567,000 Publix 7 shopping Miami, FL centers Winery Square 12,801,700 12/22/87 121,047 76% 904,000 Food 4 5 shopping Fairfield, CA Less centers Mountain View Village 10,350,000 7/25/88 99,908 95% 790,000 Kroger 4 shopping Snellville, GA centers Forest Park Square 8,950,000 5/19/89 92,824 99% 727,000 Kroger 2 shopping Cincinnati, OH centers Kokomo Plaza 6,987,000 5/19/89 89,546 91% 485,000 Kroger 6 shopping Kokomo, IN centers Rolling Hills Square 6,100,000 08/18/88 98,887 93% 618,000 Fry's 6 shopping Tuscon, AZ Food centers & Drug
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% Square Comparable Feet Annualized Competition Gross Leased at Base Rent at Main within a Purchase Date Leasable December December Anchor three-mile Name and Location Price Purchased Square Feet 31, 1998 31, 1998 Tenant radius - -------------------- --------- --------- ----------- --------- ------------ ------ ----------- Mountain Park Plaza 6,650,000 12/14/89 77,686 89% 496,000 A&P ** 8 shopping Atlanta, GA Future centers store Applewood Centre 7,700,000 11/08/90 101,130 95% 715,000 Hy-Vee 5 shopping Omaha, NE Food centers Store & Walgreens Birdneck Center 3,115,000 12/31/97 67,060 96% 401,000 CVS 8 shopping Virginia Beach, VA Stores & centers Food Lion The Market Place 5,400,000 12/31/97 125,095 76% 517,000 Bi-Lo & 7 shopping Newton, NC Big Lots cemters Barclay Place 3,800,000 3/31/98 81,459 94% 499,000 Food Lion 13 shopping Lakeland, FL centers The Village At Waterford 6,250,000 4/22/98 79,162 97% 676,000 Winn-Dixie 5 shopping Midlothian, VA centers Governor's Square 8,200,000 5/28/98 183,340 80% 775,000 Odd Lots 14 shopping Montgomery, AL centers Marion City Square 5,100,000 6/25/98 163,970 83% 653,000 Roses, Bi-Lo 4 shopping Marion, NC & CVS centers Dunlop Village 5,000,000 9/1/98 77,315 98% 515,000 Food Lion 6 shopping Colonial Heights, VA & CVS centers Centre Stage 6,990,000 9/2/98 146,549 99% 808,000 K-Mart & 7 shopping Springfield, TN Food Lion centers White Oaks Plaza 8,125,000 9/9/98 186,758 100% 860,000 Winn-Dixie 2 shopping Spindale, NC & Wal-Mart centers Cape Henry 3,900,000 9/29/98 55,075 100% 459,000 Food Lion & 8 shopping Virginia Beach, VA Rite-Aid centers Emporia West 2,900,000 11/17/98 76,705 96% 316,000 Dillon Food 6 shopping Emporia, KS Store centers Oxford Mall 8,650,000 11/24/98 166,880 94% 1,010,000 Goody's, 4 shopping Oxford, MS JC Penney, centers Stage & Wal-Mart**** Southgate 15,100,000 12/9/98 213,923 98% 1,428,000 Big Bear 4 shopping Heath, OH Stores*****, centers Dunham's Sporting, Odd-Lots & Rite-Aid
-8-
% Square Comparable Feet Annualized Competition Gross Leased at Base Rent at Main within a Purchase Date Leasable December December Anchor three-mile Name and Location Price Purchased Square Feet 31, 1998 31, 1998 Tenant radius - ----------------- --------- -------- ------ --- ------- ----- ---------- Crossroads East 4,800,000 12/9/98 71,925 78% 470,000 *** 3 shopping Columbus, OH centers
*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, 1998. **Tenant has vacated but continues to be liable for all amounts due under its lease. Lease payments are current as of December 31, 1998. ***The current configuration of the shopping center does not include an anchor tenant. ****The portion of the property occupied by Wal-Mart is not owned by the Company. *****The tenant's parent corporation, Penn Traffic Co. filed for Chapter 11 bankruptcy on March 1, 1999. Lease payments are current as of December 31, 1998. On December 9, 1998, in connection with the acquisition of Southgate and Crossroads East, the Company made loans (the "OP Unit Loans") of $1,361,554 and $719,461 to Standard Investment Company ("SIC"), a partner in the partnerships which owned the properties. The loans are secured by the OP Units (106,462 and 57,055, respectively) which were issued to SIC in exchange for its partnership interest in the partnerships which owned Southgate and Crossroads East and also by guarantees from the principals of SIC for 25% of the total loan amounts. The OP Unit Loans bear interest at 7.613% and mature on December 9, 2015 or earlier if the underlying shopping centers are sold. Interest and principal on the OP Unit Loans is payable only to the extent of distributions with respect to the OP Units. Such distributions will be retained by the Company until all accrued interest and the outstanding balances of the loans are repaid. As of December 31, 1998, the balances of the OP Unit Loans relating to Southgate and Crossroads East were $1,361,554 and $719,461, respectively, and are shown as loans receivable from affiliates on the consolidated balance sheets. Certain other partners in the partnerships which owned these properties are affiliates of Related. For further information regarding the Company's Retail Properties, including information regarding the mortgage indebtedness encumbering certain properties, see "Item 8. Financial Statements and Supplementary Data" and "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - Financial Statement Schedules - Schedule III". Investments in Partnerships - --------------------------- As of December 31, 1998, the Company owns partnership interests in two partnerships, each of which holds a multi-family residential garden apartment property. The Company owns a limited partnership interest in the TCR-Pinehurst Limited Partnership ("Pinehurst"), which acquired and operates the Pinehurst apartment complex in Kansas City, Missouri. Under the original terms of this investment, the Company is entitled to a preferred equity return of 8.8% per annum on an initial investment of $3,799,620 which was made during 1987. During 1989, an additional $1,949,805 was invested 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 $1,610,549 and $1,457,326 at December 31, 1998 and 1997, respectively. These preferred equity returns are payable from excess cash flow from operations or proceeds from a sale or refinancing of Pinehurst's rental property. The Pinehurst apartment complex contains 96 apartment units and was approximately 94.5% occupied as of March 1, 1999. The Company's percentage of ownership in Pinehurst is 98.99%. The Company owned a limited partnership investment in the Dominion Totem Park Limited Partnership ("Dominion"), which acquired and operated the Chateau Creste apartment complex in Kirkland, Washington. Under the terms of this investment, the Company was entitled to receive a preferred equity return of 9.625% per annum on an initial cash contribution of $4,149,585 which was made during 1988. On March 20, 1998, Dominion Chateau Creste Limited Partnership, the general partner of Dominion, purchased the Company's limited partnership interest in Dominion pursuant to its rights under the partnership agreement. The purchase price was determined by independent appraisals and resulted in a cash payment to the Company of $4,727,500, which was $779,893 in excess of the carrying value of this investment at the date of sale. As of March 20, 1998, the Company had received all of the preferred equity returns due from Dominion. The Chateau Crest apartment complex contained 90 apartment units and was approximately 92% occupied as of March 1, 1998. The Company's percentage of ownership in Dominion was 99%. On August 26, 1998, the Company invested $895,200 for a 40% interest as a limited partner in FAI, Ltd. ("FAI"), the limited partnership which owns Weatherly Walk Apartments. This equity interest will earn an annual preferred return of 10.5% on $895,200, paid monthly, plus 40% of excess cash flow and sale or refinancing proceeds. As of December 31, 1998, the Company had received all of the preferred returns due from FAI. Weatherly Walk Apartments contains 194 apartment units and was approximately 90.1% occupied as of March 1, 1999. Item 3. Legal Proceedings. The Company is not a party to any material pending legal proceedings. -9- Item 4. Submission of Matters to a Vote of Shareholders. None. PART II Item 5. Market for the Company's Common Stock and Related Shareholder Matters As of March 24, 1999, there were 1,763 registered shareholders of record owning 8,046,859 shares of Common Stock. The Company's Common Stock has been listed on the American Stock Exchange since October 10, 1997 under the symbol "AER". Prior to October 10, 1997, there was no established public trading market for the Company's Common Stock. The high and low prices for each quarterly period of the last two years for which the shares of Common Stock were traded is as follows:
1998 1998 1997 1997 Quarter Ended Low High Low High - ------------- --- ---- --- ---- March 31 11 3/4 12 1/2 June 30 10 3/16 12 1/4 September 30 9 9/16 10 3/4 December 31 8 5/8 10 1/8 10 5/8 11 3/4
The last reported sale price of Common Stock on the American Stock Exchange on March 26, 1999 was $9 5/8. Incentive Stock Option Plan - --------------------------- The Company has adopted an incentive stock option plan (the "Incentive Stock Option Plan"), the purpose of which is to (i) attract and retain qualified persons as directors and officers and (ii) to incentivize and more closely align the financial interests of the Advisor and its 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 administers the Incentive Stock Option Plan. Pursuant to the Incentive Stock Option Plan, if the Company's distributions per share of common stock in the immediately preceding calendar year exceed $0.9869 per share, the Compensation Committee has the authority to issue options to purchase, in the aggregate, that number of shares of common stock which is equal to three percent of the shares outstanding as of December 31 of the immediately preceding calendar year (or in the initial year, as of October 1, 1997), provided that the Compensation Committee may only issue, in the aggregate, options to purchase a maximum number of shares of common stock over the life of the Incentive Stock Option Plan equal to 10% of the shares outstanding on October 1, 1997. Subject to the limitations described in the preceding paragraph, if the Compensation Committee does not grant the maximum number of options in any year, then the excess of the number of authorized options over the number of options granted in such year will be added to the number of authorized options in the next succeeding year and will be available for grant by the Compensation Committee in such succeeding year. All options granted will have an exercise price equal to or greater than the fair market value of the shares of common stock on the date of the grant. The maximum option term is ten years from the date of grant. All stock options granted pursuant to the Incentive Stock Option Plan may vest immediately upon issuance or in accordance with the determination of the Compensation Committee. No options were granted for the year ended December 31, 1997. In 1998, the Company distributed $1.035 per share of Common Stock ($0.96 from continuing operations and a $0.075 special capital gains distribution), thus enabling the Compensation Committee, at their discretion, to issue options. Three percent of the shares outstanding as of the effective date of the Consolidation are equal to 241,522 Shares. The Compensation Committee is considering granting options; however, as of March 30, 1999, no options have been granted. Stock Repurchase Plan - --------------------- On October 9, 1998, the Board of Directors authorized the implementation of a stock repurchase plan, enabling the Company to repurchase, from time to time, up to 500,000 shares of its common stock. The repurchases will be made in the open market and the timing will be dependent on the availability of shares and other market conditions. During the period October 9, 1998 through December 31, 1998, the Company acquired 6,300 shares of its common stock for an aggregate purchase price of $58,579 (including commissions and service charges). Repurchased shares are accounted for as treasury stock. Shareholder Rights Plan - ----------------------- On January 29, 1999, the Company adopted a shareholder rights plan (the "Shareholder Rights Plan"), the purpose of which is to better protect shareholders and assure that they receive the full value of their investment in the event of any proposed takeover of the Company. The Company noted that the adoption of the Shareholder Rights Plan was not in response to any specific attempt to acquire control of the Company and that the Company has no knowledge of any such interest on the part of any person or entity. The Shareholder Rights Plan, which is similar to plans adopted by many other U.S. companies, strengthens the ability of the Board of Directors to assure that the Company's shareholders receive fair and equal treatment and protects the interests of the Company's -10- shareholders in the event of an unsolicited offer to acquire control of the Company. Importantly, it is intended to encourage any potential acquirer to negotiate the manner and terms of any proposed acquisition with the Board of Directors. Terms of the Shareholder Rights Plan provide for a distribution to common shareholders of record at the close of business on February 16, 1999 of one Right for each outstanding share of common stock of the Company. Subject to limited exceptions, the Rights will be exercisable if a person or group acquires 15% or more of the Company's Common Stock or announces a tender offer for 15% or more of the Common Stock. Depending on the circumstances, the effect of the exercise of the Rights will be to permit each holder of a Right to either purchase stock in the Company or stock of the buyer, at a substantial discount, and, in so doing, materially dilute the level of ownership of the buyer in the Company. The Company will be entitled to redeem the Rights at $.01 per Right at any time before a person has acquired 15% or more of the outstanding common stock. The Shareholder Rights Plan will expire on February 16, 2009. Distribution Information - ------------------------ Aegis Realty, Inc. (After the Consolidation) - -------------------------------------------- Distributions Per Share - ----------------------- Quarterly cash distributions per share for the year ended December 31, 1998 and the quarter ended December 31, 1997 were as follows:
Cash Distribution Total Amount for Quarter Ended Date Paid Per Share Distributed - ----------------- --------- --------- ------------ March 31, 1998 5/15/98 $ .240 $1,932,174 June 30, 1998 8/14/98 .240 1,932,278 September 30, 1998 11/14/98 .240 1,932,278 December 31, 1998 1/29/99 .315(1) 2,534,135 -------- ---------- Total for 1998 $ 1.035 $8,330,865 ======== ========== December 31, 1997 1/22/98 $ .240 $1,932,174 ======== ==========
(1) Includes a capital gain distribution of $603,369 ($.075 per share) relating to the sale of three non-core assets (see "Item 1. Business.-Mortgage Loans" and "Item 2. Properties"). There are no material legal restrictions upon the Company's present or future ability to make distributions in accordance with the provisions of the Company's Articles of Amendment and Restatement. Future 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 Directors 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 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 $ .225 $ 900,002 June 30, 1997 8/14/97 .225 900,001 September 30, 1997 11/12/97 .225 900,001 -------- ---------- Total for 1997 $ .675 $2,700,004 ======== ==========
Total Adjusted Cash from Operations remaining after payment of a special distribution to the general partners of Insured I was distributed 99% to the BUC$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 for the nine months ended September 30, 1997. Cash distributions paid in 1997 were funded from current and previously undistributed cash flow from operations. Approximately $1,925,000 of the $3,600,000 paid to BUC$holders in 1997 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 was 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 was determined by the general partners of Insured I. -11- Recent Sales/Issuance of Unregistered Equity Securities - ------------------------------------------------------- (i) Securities Issued The following table sets forth the date of issuance, title and amount of unregistered securities issued by the Company since December 31, 1997:
Date of Sale Title Number - ------------ ----- ------ 05/28/98 OP Units 94,726 12/9/98 OP Units 208,914 12/9/98 OP Units 167,149
(ii) Underwriters and Other Purchasers May 28, 1998 and both December 9, 1998 sales. Underwriters were not retained in connection with the issuance of these securities. These OP Units were issued to the contributors of Governor's Square, Southgate and Crossroads East in exchange for part of the purchase price of the properties. (iii) Consideration May 28, 1998 and both December 9, 1998 sales. These OP Units were issued in exchange for properties having an aggregate purchase price of approximately $28.1 million, with consideration of $6.1 million represented by the issuance of OP Units. There were no underwriting discounts or commissions with respect to such securities. (iv) Exemption from Registration Claimed The OP Units were issued to "accredited investors" in transactions which were exempt from registration under Section 4 (2) of the Securities Act of 1933. -12- Item 6. Selected Financial Data. The information set forth below presents selected financial data of the Company. Additional financial information is set forth in the audited financial statements and notes thereto contained in "Item 8. Financial Statements and Supplementary Data".
Year ended December 31, ------------------------------------------------------------------------ OPERATIONS 1998* 1997* 1996* 1995* 1994* - ---------- ------------ ------------ ------------ ------------ ------------ Total revenues $ 19,504,803 $ 10,755,797 $ 9,224,030 $ 9,081,226 $ 9,272,415 Total expenses (13,638,063) (7,317,301) (6,797,394) (6,790,935) (6,563,660) ------------ ------------ ------------ ------------ ------------ Income before gain on sale of 5,866,740 3,438,496 2,426,636 2,290,291 2,708,755 investment Gain on sale of investment in partnership 779,893 0 0 0 0 ------------ ------------ ------------ ------------ ------------ Net income $ 6,646,633 $ 3,438,496 $ 2,426,636 $ 2,290,291 $ 2,708,755 ============ ============ ============ ============ ============ Net income applicable to common shareholders** $ 6,646,633 $ 1,420,370*** ============ ============ Net income per share (1) Basic** $ .83 $ .18*** ============ ============ Diluted** $ .82 $ .18*** ============ ============ Weighted average shares outstanding Basic** 8,049,987 8,050,727*** ============ ============ Diluted** 8,075,390 8,050,727*** ============ ============ December 31, ------------------------------------------------------------------------ FINANCIAL POSITION 1998* 1997* 1996* 1995* 1994* - ------------------ ------------ ------------ ------------ ------------ ------------ Total assets $195,389,970 $148,639,328 $ 75,842,337 $ 77,862,045 $ 79,552,661 ============ ============ ============ ============ ============ Notes payable $ 58,864,099 $ 18,544,242 $ 5,565,841 $ 5,792,615 $ 5,959,212 ============ ============ ============ ============ ============ Total liabilities $ 65,402,567 $ 22,866,886 $ 6,746,907 $ 7,121,610 $ 7,030,876 ============ ============ ============ ============ ============ Minority interest $ 6,803,895 $ 727,431 ============ ============ Total Shareholders' $123,183,508 $125,045,011 $ 69,095,430 $ 70,740,435 $ 72,521,785 ============ ============ ============ ============ ============ Equity/Partners' Capital DISTRIBUTIONS - ------------- Total BUC$holder distributions N/A $ 2,700,004 $ 3,600,005 $ 3,600,005 $ 3,600,003 ============ ============ ============ ============ Total shareholder distributions $ 8,330,865 $ 1,932,174*** ============ =========== Distributions per share $ 1.04 $ .24*** ============ ============
-13- OTHER DATA - ----------
Year Three Months Ended Ended December 31, December 31, 1998 1997 ------------ ------------ Funds From Operations ("FFO") (2) $ 9,974,863 $ 2,268,839 ============ ============ Funds Available for Distribution ("FAD") (2) $ 8,969,572 $ 2,171,071 ============ ============ FFO payout ratio 83.5% 85.2% ============ ============ Cash flows from: Operating activities $ 9,750,580 $ 2,417,220 ============ ============ Investing activities $(20,253,955) $ (8,938,616) ============ ============ Financing activities $ 6,778,799 $ 10,297,819 ============ ============
*Information prior to October 1, 1997 (the date of the Consolidation) is only with respect to Insured I. Information subsequent to September 30, 1997 is with respect to the Company and its 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. ***Represents amount for the three months ended December 31, 1997. (1) Net income per share equals net income divided by the weighted average shares outstanding for the period. (2) See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a definition of Funds From Operations and Funds Available for Distribution. -14- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources - ------------------------------- Aegis Realty, Inc. (the "Company") is a Maryland corporation that has qualified as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986 as amended (the "Code"). The Company was formed to acquire, own, operate and renovate primarily supermarket-anchored neighborhood and community shopping centers. As of December 31, 1998, the Company owned a portfolio of 28 retail properties (the "Retail Properties") containing a total of approximately 3.0 million gross leaseable square feet ("GLA"), held partnership interests in two suburban garden apartment properties (the "Multifamily Properties"), held one FHA insured participating mortgage secured by a suburban garden apartment property (the "FHA Mortgage") and had net assets of approximately $123,184,000. The Company was formed on October 1, 1997 as the result of the consolidation (the "Consolidation") of four publicly registered, non-listed limited partnerships, Summit Insured Equity L.P. ("Insured I"), Summit Insured Equity L.P. II ("Insured II"), Summit Preferred Equity L.P. ("Summit Preferred") and Eagle Insured, L.P. ("Eagle") (the "Partnerships"). One of the general partners of the Partnerships was an affiliate of Related Capital Company ("Related"). As of December 31, 1998, there were 8,044,859 shares of Common Stock outstanding (an additional 517,625 shares were reserved for issuance upon conversion of OP Units). For a discussion of the Company's Incentive Stock Option Plan, Stock Repurchase Plan and Shareholder Rights Plan, see "Item 5. Market for the Company's Common Stock and related Shareholder Matters". 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 continued acquisitions, on an individual or bulk basis, of shopping centers. The Company believes that there are significant opportunities available to acquire undervalued, undermanaged and/or underutilized neighborhood and community shopping centers. Unlike most small capitalized REITs, the Company has the ability to benefit from its affiliation with a much larger company, Related, with a national presence. The Company is using its affiliation with Related to establish a national acquisition program. The Company believes that by acquiring shopping centers on a national basis, rather than targeting a few markets or a region, it will be able to grow at a meaningful rate, without the need for it to compromise asset quality or current return. In addition, a national acquisition program allows the Company to maintain geographic diversity, which the Company believes reduces the risk otherwise associated with focusing on one region. The Company seeks to acquire primarily, but not exclusively, supermarket-anchored shopping centers, which are well located in primary and secondary markets. Acquisitions will be balanced between stabilized centers that the Company believes are undervalued and centers that may be enhanced through intensive management, leasing, redevelopment or expansion efforts. In all such cases, the Company generally seeks to acquire only those centers that are expected to immediately increase FFO. During the period January 1, 1998 through March 30, 1999, the Company acquired 12 neighborhood shopping centers for an aggregate purchase price of $78,815,000, not including acquisition fees and expenses of approximately $3,541,527. The acquisitions were financed through proceeds of an expandable $60 million senior revolving credit facility shared equally among BankBoston, KeyBank National Association and Citizens Bank of Rhode Island (the "Credit Facility"), the assumption of $23,952,320 of existing debt with respect to four of the acquisitions, the issuance of purchase money notes to sellers amounting to $705,000 with respect to two of the acquisitions and the issuance of 470,789 OP Units (subject to adjustment) valued at $6,120,257 with respect to three of the acquisitions. Internal growth will occur from the continued re-deployment of proceeds from the sale or other disposition of non-core assets currently in the portfolio and through intensive management, leasing and redevelopment services provided to the Company by the Property Manager and the Advisor. The Company considers non-core assets to be those assets the Company has enhanced and no longer offer above market rates of return or those assets which due to location, configuration or tenant profile no longer offer the Company the prospects of better than market rates of growth. The Company regularly reviews its portfolio to identify non-core assets and to determine whether the time is appropriate to sell or otherwise dispose of such assets whose characteristics are no longer suited to the Company's overall growth strategy or operating goals. During 1998, the Company disposed of three non-core assets. On March 20, 1998, Dominion Chateau Creste Limited Partnership, the general partner of Dominion, purchased the Company's limited partnership interest in Dominion pursuant to its rights under the partnership agreement. The purchase price was determined by independent appraisals and resulted in a cash payment to the Company of $4,727,500, which was $779,893 in excess of the carrying value of this investment at the date of sale. On June 24, 1998 Walsh/Cross Creek L.P. (the "Owner"), the owner of Cross Creek Apartments ("Cross Creek") and an affiliate of the Advisor, sold Cross Creek to a third party for $23.4 million. The Owner then fully repaid its outstanding debt due to the Company totaling $22,199,045 including a $16,971,528 FHA Mortgage, a $1,783,900 equity loan, a $3,060,000 additional loan made by the Company to the Owner, a $286,948 prepayment penalty due the Company on the FHA Mortgage and accrued interest through the closing date of $96,669 resulting in a loss on the repayment (including the prepayment penalty) in the amount of $92,504 (due to purchase accounting premiums recorded pursuant to the Consolidation) which is included in other expenses. The Company used the proceeds from the Dominion and Cross Creek asset dispositions to reduce its outstanding debt under the Credit Facility. On August 26, 1998, FAI, Ltd. ("FAI"), the limited partnership which owns Weatherly Walk Apartments and one of the FHA Mortgagors, repaid in full (after completing a refinancing with an unaffiliated third party) the outstanding balance of its Mortgage Loan in the amount of $8,380,752 plus accrued interest through August 26, 1998 of $48,189 resulting in a loss on the repayment in the amount of $45,934 (due to purchase accounting premiums recorded pursuant to the Consolidation) which is included in other expenses. Simultaneously, the Company invested $895,200 for a 40% interest as a limited partner in FAI. This equity interest will earn a monthly pre- -15- ferred return of 10.5% on $895,200 plus 40% of excess cash flow and sale or refinancing proceeds. In September 1998, the Company used the repayment proceeds from the Weatherly Walk asset disposition as well as proceeds from the Credit Facility to purchase two shopping centers. Finally, the Company will encourage the Advisor and its affiliates to increase their ownership in the Company. The Company believes that this is necessary in order to more closely align the interest of management with that of the Company and to demonstrate that the Advisor has a long-term commitment to the success of the Company. During 1998, the ownership of the outstanding Common Stock of the Company by affiliates of the Advisor increased from .9% to 2.3%. In addition, during 1998, ownership of OP Units by affiliates of the Advisor increased from 46,836 OP Units to 252,277 OP Units. Assuming conversion of all outstanding OP Units, the ownership in the Company by affiliates of the Advisor increased from 1.5% to 5.0%. The Company's growth will be financed through proceeds of the Credit Facility, the issuance of shares of the Company's common stock or OP Units in exchange for real estate, funds generated from operations in excess of distributions and from placements of equity. Although the Credit Facility may be increased, the Company's Charter dictates leverage of no more than 50% of the Company's Total Market Value. On December 1, 1998, the Company entered into an interest rate swap agreement with a notional amount of $10,000,000 to reduce the impact of changes in interest rates on the Credit Facility. This agreement effectively changes the Company's interest rate exposure on a portion of the Credit Facility debt to a fixed 5.44% and matures on December 1, 2000. The Company accounts for the net cash settlements under this swap agreement as adjustments to the interest expense on the Credit Facility. The Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement; however, the Company does not anticipate nonperformance by the counter party. The estimated fair value of this agreement was a liability of approximately $86,000 on December 31, 1998. As a REIT, the Company is required to distribute at least 95% of its taxable income to maintain REIT status. Funds generated from operations are expected to be more than sufficient to allow the Company to meet this requirement. The Advisor believes that the stability of the Company's operations and its ability to maintain liquidity are enhanced by: (i) Geographic diversity of its portfolio of real estate and its mortgage note. (ii) 54% of total revenues for the year ended December 31, 1998 (excluding gain on sale of investment in partnership) were earned from shopping center anchor tenants which are national credit tenants and from interest on FHA Mortgages. (iii) No single asset accounts for more than 7% of total revenues for the year ended December 31, 1998. (iv) Leases that provide for recovery of actual common area maintenance charges and real estate taxes, thereby minimizing any effects from inflation. (v) Leases that provide for increases in rents based on a percentage of tenants' sales. (vi) A mortgage note which is substantially guaranteed by FHA and a co-insurer and that provides for participation in increases in operating results and market value of the underlying collateral. During the year ended December 31, 1998, cash and cash equivalents of the Company and its consolidated subsidiaries decreased approximately $3,725,000. This decrease was primarily due to acquisitions of and improvements to real estate ($52,293,000), distributions paid ($7,729,000), an investment in an operating partnership ($895,000) and an increase in deferred loan costs ($897,000) which exceeded cash provided by operating activities ($9,751,000), proceeds from the sale of Dominion ($4,728,000), principal payments received on Mortgage Loans ($27,528,000), net repayment of loans receivable from affiliates ($979,000) and net proceeds from notes payable ($15,663,000). Included in the adjustments to reconcile the net income to cash provided by operating activities is a gain on sale of investment in partnerships ($780,000), a loss on repayments of Mortgage Loans receivable ($138,000) and depreciation and amortization ($3,966,000). The Company anticipates that cash generated from operations will provide for all major repairs, replacements and tenant improvements on its real estate and will provide sufficient liquidity to fund, in future years, the Company's operating expenditures, debt service and distributions. The Company has the following problem assets which may adversely affect future operations and liquidity: (i) Safeway, the anchor tenant of Cactus Village Shopping Center closed its facility in December 1991 due to poor sales. 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, 1999, this space has not been re-leased. (ii) In July 1994, A&P closed its store in the Mountain Park Plaza Shopping Center due to reduced sales and increased competition. The Company continues to receive rental payments from the vacated tenant pursuant to the terms of the lease which will expire in June 2007 and both the tenant and the Company are actively pursuing potential sub-tenants or replacement tenants. As of March 1, 1999, this space has not been re-leased. (iii) On March 1, 1999 Penn Traffic Co., parent of Big Bear Stores, an anchor tenant in the Southgate Shopping Center, filed for Chapter 11 bankruptcy. Penn Traffic has 60 days to affirm or reject the lease. The Company expects (a) this lease will be affirmed, -16- (b) the 60 days rent is post petition and will be paid in full and (c) in the unlikely event this lease were rejected, there are alternative grocery retailers which are ready to take over this location immediately at a rent equal to or exceeding the present lease. As part of the settlement of class action litigation relating to the Partnerships, counsel ("Class Counsel") for the partners of the Partnerships had the right to petition the United States District Court for the Southern District of New York (the "Court") for additional attorneys' fees ("Counsel's Fee Shares") in an amount to be determined in the Court's sole discretion. The Counsel's Fee Shares would have been based upon a percentage of the increase in value of the Company, ("the Added Value") if any, as of October 10, 1998 based upon the difference between (i) the trading prices of the Company's shares of common stock during the six month period ended October 10, 1998 and (ii) the trading prices of the limited partnership units and the asset values of the Partnerships prior to 10/1/97. As of October 10, 1998, there was no Added Value and therefore, Class Counsel did not file a petition for Counsel's Fee Shares. For a discussion of environmental issues affecting one of the Company's Retail Properties see "Item 1. Business-Regulations". In January 1999, a distribution of $2,534,135 ($.315 per share) which was declared in December 1998 was paid to the shareholders. Of the total amount distributed, $1,930,766 ($.24 per share) represented an ordinary distribution from cash flow from operations for the quarter ended December 31, 1998 and $603,369 ($.075 per share) represented a capital gain distribution relating to the sale of three non-core assets. Management is not aware of any trends or events, commitments or uncertainties, which have not otherwise been disclosed that will or are likely to impact liquidity in a material way. Results of Operations - --------------------- The following is a summary of the results of operations of the Company for the years ended December 31, 1998, 1997 and 1996. The net income for the years ended December 31, 1998, 1997 and 1996 was $6,646,633, $3,438,496 and $2,426,636, respectively. 1998 vs. 1997 - ------------- For the year ended December 31, 1998 as compared to 1997, total revenues, total expenses and net income increased and the results of operations are not comparable due to (i) the Consolidation of Insured I with three other Partnerships on October 1, 1997 which resulted in the formation of the Company and (ii) the purchase of 14 shopping centers after the Consolidation. The Company's results of operations for the year ended December 31, 1998 consisted primarily of the results of the Company's investment in 28 shopping centers, three garden apartment complexes, three participating FHA co-insured Mortgage Loans and a gain on the sale of an investment in one garden apartment complex. The Company's results of operations for the year ended December 31, 1997 consisted primarily of the results of the Company's investment in 11 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. In addition, the results of operations are not reflective of future operations due to the anticipated continued acquisition of shopping centers. Rental income increased approximately $5,641,000 for the year ended December 31, 1998 as compared to 1997. An increase of $1,437,000 was due to the three shopping centers acquired from Insured II in the Consolidation (the "Insured II Acquisitions") and an increase of $4,003,000 was due to the acquisition of 14 shopping centers after the Consolidation (the "New Acquisitions"). Excluding these acquisitions, rental income increased approximately $201,000 for the year ended December 31, 1998 as compared to 1997 primarily due to an increase in rental rates at Pablo Plaza and Winery Square and an increase in percentage rents received at Mountain Park Plaza. Tenant reimbursements increased approximately $1,961,000 for the year ended December 31, 1998 as compared to 1997. Increases of $451,000 and $697,000 were due to the Insured II Acquisitions and the New Acquisitions, respectively. Excluding these acquisitions, tenant reimbursements increased approximately $813,000 for the year ended December 31, 1998 as compared to 1997 primarily due to additional billings to tenants and increases in estimates for recoverable amounts in 1998. Income from equity investments increased approximately $230,000 for the year ended December 31, 1998 as compared to 1997 primarily due to the two equity interests in Multifamily Properties acquired from Summit Preferred in the Consolidation and the purchase of another equity interest in a Multifamily Property on August 26, 1998. Interest income increased approximately $898,000 for the year ended December 31, 1998 as compared to 1997. An increase of $843,000 was due to interest income relating to the three FHA Mortgages and the Cross Creek Loan acquired from Eagle. Excluding such income, interest income increased approximately $55,000 for the year ended December 31, 1998 as compared to 1997 primarily due to higher invested cash balances in 1998. Other income increased approximately $19,000 for the year ended December 31, 1998 as compared to 1997. Increases of $23,000 and $15,000 were due to the Insured II Acquisitions and the New Acquisitions, respectively. Excluding these acquisitions, other income decreased approximately $19,000 for the year ended December 31, 1998 as compared to 1997 primarily due to decreases in late charges at Westbird, Pablo Plaza and Highland Fair and a decrease in lease settlement income at Mountain Park Plaza in 1998. Repairs and maintenance increased approximately $572,000 for the year ended December 31, 1998 as compared to 1997. Increases of $214,000 and $304,000 were due to the Insured II Acquisitions and the New Acquisitions, respectively. Excluding these acquisitions, repairs and maintenance increased approximately 6% for the year ended December 31, 1998 as compared to 1997. -17- Real estate taxes increased approximately $534,000 for the year ended December 31, 1998 as compared to 1997. Increases of $207,000 and $325,000 were due to the Insured II Acquisitions and the New Acquisitions, respectively. Excluding these acquisitions, real estate taxes increased less than 1% for the year ended December 31, 1998 as compared to 1997. Interest expense increased approximately $1,373,000 for the year ended December 31, 1998 as compared to 1997 primarily due to interest expense relating to the Credit Facility and the assumption of existing debt with respect to four of the New Acquisitions. General and administrative expenses increased approximately $1,632,000 for the year ended December 31, 1998 as compared to 1997. Increases of $92,000 and $376,000 were due to the Insured II Acquisitions and the New Acquisitions, respectively. Excluding these acquisitions, general and administrative expenses increased approximately $1,164,000 for the year ended December 31, 1998 as compared to 1997. The increase was primarily due to fees relating to the unused portion of the Credit Facility, state income taxes resulting from qualification as a REIT, asset management fees incurred to the Advisor, an increase in printing and investor service expenses resulting from an increase in investors, an increase in audit/tax fees, and expense reimbursements to the Advisor and its affiliates due to the Insured II Acquisitions and the New Acquisitions and fees to the independent directors relating to their services for 1998. Depreciation and amortization increased approximately $1,194,000 for the year ended December 31, 1998 as compared to 1997. An increase of $295,000 was due to the Insured II Acquisitions, an increase of $777,000 was due to the New Acquisitions and an increase of $144,000 was due to an increase in amortization of deferred loan costs relating to the Credit Facility. Excluding these increases, depreciation and amortization decreased approximately 1% for the year ended December 31, 1998 as compared to 1997. Minority interest in the income of the Operating Partnership increased approximately $85,000 for the year ended December 31, 1998 as compared to 1997 primarily due to the issuance of OP Units with respect to three of the New Acquisitions. Other expenses increased approximately $930,000 for the year ended December 31, 1998 as compared to 1997. Increases of $147,000 and $248,000 were due to the Insured II Acquisitions and the New Acquisitions, respectively. Excluding these acquisitions, other expenses increased approximately $535,000 for the year ended December 31, 1998 as compared to 1997 primarily due to losses on the repayment of the Cross Creek and Weatherly Walk Mortgage Loans, an increase in utilities at Highland Fair, Winery Square, Mountain Park Plaza and Forest Park Square and an increase in bad debt expense resulting from an increase in reserves at Westbird, Pablo Plaza, Winery Square and Forest Park Square. A gain on sale of investment in partnership in the amount of approximately $780,000 was recorded for the year ended December 31, 1998 relating to the sale of the Company's limited partnership interest in Dominion. Westbird, Pablo Plaza, Highland Fair, Town West, Mountain Park Plaza, Winery Square, Cactus Village, Kokomo Plaza, Forest Park Square, Hickory Plaza, and Southhaven were the shopping centers which were owned by the Company during all of 1998 and 1997. 1997 vs. 1996 - ------------- For the year ended December 31, 1997 as compared to 1996, 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 11 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 Insured I's investment in eleven shopping centers. In addition, the results of operations are not reflective of future operations due to the anticipated continued acquisition of shopping centers. Rental income increased approximately $664,000 for the year ended December 31, 1997 as compared to 1996. An increase of $471,000 was due to the three shopping centers acquired from Insured II in the Consolidation (the "Insured II Acquisitions"). Excluding these acquisitions, rental income increased approximately $193,000 for the year ended December 31, 1997 as compared to 1996 primarily due to an increase in rental rates and occupancy at both Cactus Village and Mountain View Village. Tenant reimbursements decreased approximately $67,000 for the year ended December 31, 1997 as compared to 1996. An increase of $115,000 was due to the Insured II Acquisitions. Excluding these acquisitions, tenant reimbursements decreased approximately 9% for the year ended December 31, 1997 as compared to 1996. Income from equity investments in the amount of approximately $194,000 was recorded for the year ended December 31, 1997 relating to two partnership interests in Multifamily Properties which were acquired from Summit Preferred in the Consolidation. Interest income increased approximately $711,000 for the year ended December 31, 1997 as compared to 1996. An increase of $656,000 was due to interest income relating to the three FHA Mortgages and the Cross Creek Loan acquired from Eagle. Excluding such income, interest income increased approximately $55,000 for the year ended December 31, 1997 as compared to 1996 primarily due to higher invested cash balances in 1997. Other income increased approximately $30,000 for the year ended December 31, 1997 as compared to 1996. There was an increase of $4,000 due to the Insured II Acquisitions. Excluding these acquisitions, other income increased approximately $26,000 for the year ended December 31, 1997 as compared to 1996 primarily due to increases in late charges at Westbird, Highland Fair and Winery Square and increases in lease settlement income at Westbird and Mountain Park Plaza in 1998. -18- Repairs and maintenance increased approximately $39,000 for the year ended December 31, 1997 as compared to 1996. An increase of $31,000 was due to the Insured II Acquisitions. Excluding these acquisitions, repairs and maintenance increased approximately 1% for the year ended December 31, 1997 as compared to 1996. Real estate taxes increased approximately $115,000 for the year ended December 31, 1997 as compared to 1996. An increase of $72,000 was due to the Insured II Acquisitions. Excluding these acquisitions, real estate taxes increased approximately 4% for the year ended December 31, 1997 as compared to 1996. Interest expense increased approximately $27,000 for the year ended December 31, 1997 as compared to 1996 primarily due to interest expense relating to the Credit Facility. General and administrative expenses increased approximately $532,000 for the year ended December 31, 1997 as compared to 1996. An increase of $157,000 was due to the Insured II Acquisitions. Excluding these acquisitions, general and administrative expenses increased approximately $375,000 for the year ended December 31, 1997 as compared to 1996 primarily due to asset management fees incurred to the Advisor, an increase in property management fees and an increase in audit/tax fees due to the Insured II Acquisitions and the assets acquired from Summit Preferred and Eagle in the Consolidation. Depreciation and amortization decreased approximately $103,000 for the year ended December 31, 1997 as compared to 1996. There was an increase of $98,000 due to the Insured II Acquisitions and an increase of $71,000 due to amortization of deferred loan costs relating to the Credit Facility. Excluding these increases, depreciation and amortization decreased approximately $272,000 for the year ended December 31, 1997 as compared to 1996. Minority interest in the income of the Operating Partnership in the amount of approximately $8,000 was recorded for the year ended December 31, 1997. Other expenses decreased approximately $99,000 for the year ended December 31, 1997 as compared to 1996 primarily due to a decrease in bad debt expense resulting from a decrease in reserves at Winery Square. Westbird, Pablo Plaza, Highland Fair, Town West, Mountain Park Plaza, Winery Square, Cactus Village, Kokomo Plaza, Forest Park Square, Hickory Plaza and Southhaven were the shopping centers which were owned by the Company during all of 1997 and 1996. Funds from Operations and Funds Available for Distribution - ---------------------------------------------------------- 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 or repayments and sales of property, plus depreciation and amortization and including funds from operations for unconsolidated joint ventures calculated on the same basis. Net income computed in accordance with GAAP includes straight-lining of property rentals for rent escalations in the amounts of $191,057 and $66,331 for the year ended December 31, 1998 and the three months ended December 31, 1997, respectively. FFO is calculated in accordance with the National Association of Real Estate Investment Trusts ("NAREIT") definition 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 the financial statements, for the applicable periods. There are no material legal or functional restrictions on the use of FFO. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers FFO a supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. Funds available for distribution ("FAD") represents FFO plus recurring principal receipts from mortgage loans less reserves for lease commissions, recurring capital expenditures (excluding property acquisitions) and debt principal amortization. FAD should not be considered an alternative to net income as a measure of the Company's financial performance or to cash flow from operating activities (computed in accordance with GAAP) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. -19- FFO, as calculated in accordance with the NAREIT definition, and FAD for the year ended December 31, 1998 and the three months ended December 31, 1997 are summarized in the following table:
Year Three Months Ended Ended December 31, December 31, 1998 1997 ------------ ----------- Net income applicable to common shareholders $ 6,646,633 $ 1,420,370 Gain on sale of investment in partnership (779,893) 0 Loss on repayment of Cross Creek receivable 92,504 0 Loss on repayment of Weatherly Walk receivable 45,934 0 Depreciation and amortization of real property 3,143,873 617,567 Amortization of insurance contract 600,580 150,145 Proportionate share of adjustments to equity in income from equity investments to arrive at funds from operations 225,232 80,757 ------------ ----------- Funds From Operations ("FFO") 9,974,863 2,268,839 Amortization of deferred financing costs 222,538 72,036 Principal payments received on mortgage loans 105,124 39,994 Straight-lining of property rentals for rent escalations (191,057) (66,331) Improvements to real estate (695,177) (36,283) Principal repayments on notes payable (280,463) (64,717) Leasing commissions (166,256) (42,467) ------------ ----------- Funds Available for Distribution ("FAD") $ 8,969,572 $ 2,171,071 ============ =========== Distributions to shareholders $ 8,330,865 $ 1,932,174 ============ =========== FFO payout ratio 83.5% 85.2% ============ =========== Cash flows from: Operating activities $ 9,750,580 $ 6,533,038 ============ =========== Investing activities $(20,253,955) $(9,098,167) ============ =========== Financing activities $ 6,778,799 $(6,895,166) ============ ===========
Recently Issued Accounting Standards - ------------------------------------ The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It is effective for the Company beginning with the first quarter of 2000. Company management is currently evaluating the impact that this statement will have on its hedging strategies and is currently unable to predict the effect, if any, it will have on the Company's financial statements. 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. Year 2000 Compliance - -------------------- The Company utilizes the computer services of an affiliate of the Advisor. The affiliate of the Advisor has upgraded its computer information systems to be year 2000 compliant and beyond. The year 2000 compliance issue concerns the inability of a computerized system to accurately record dates after 1999. The affiliate of the Advisor recently underwent a conversion of its financial systems applications and upgraded all of its non-compliant, in-house software and hardware inventory. The work stations that experienced problems from the testing process were corrected with an upgrade patch. The costs incurred by the Advisor are not being charged to the Company. The most likely worst case scenario that the Company faces is that computer operations will be suspended for a few days to a week at January 1, 2000. The Company's contingency plan is to have a complete backup done on December 31, 1999 and to have both electronic and printed reports generated for all critical data up to and including December 31, 1999. -20- With regard to third parties, the Company's Advisor is in the process of evaluating the potential adverse impact that could result from the failure of material service providers to be year 2000 compliant. A detailed survey and assessment was sent to material third parties in the fourth quarter of 1998. The Company has received assurances from a majority of its third parties with which it interacts that they have addressed the year 2000 issues and is evaluating these assurances for their adequacy and accuracy. In cases where the Company has not received assurances from third parties, it is initiating further mail and/or phone correspondence. The Company relies heavily on third parties and is vulnerable to the failures of third parties to address their year 2000 issues. There can be no assurance given that the third parties will adequately address their issues. Inflation - --------- Inflation did not have a material effect on the Company's results for the periods presented. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The nature of the Company's investments and the Credit Facility used to raise capital for their acquisition expose the Company to fluctuations in market interest rates. Market interest rates are highly sensitive to many factors, including governmental policies, domestic and International political considerations and other factors beyond the control of the Company. Cash flows from the Company's investments do not fluctuate with changes in market interest rates. In contrast, payments required under the Credit Facility vary based on market interest rates, primarily the 30 day Euro-contract rate. Thus, an increase in market interest rates would result in increased payments under the Credit Facility, without a corresponding increase in cash flows from the Company's investments. For example, based on the $29,318,000 outstanding under the Credit Facility at December 31, 1998, the Company estimates that an increase of 1% in the 30 day Euro-contract rate would decrease the Company's annual net income by approximately $293,000; a 2% increase in the 30 day Euro-contract rate would decrease annual net income by approximately $586,000. For the same reasons, a decrease in market interest rates would generally benefit the Company, as a result of decreased payments under the Credit Facility without corresponding decreases in cash flows from the Company's investments. For example, based on the $29,318,000 outstanding under the Credit Facility at December 31, 1998, the Company estimates that a 1% decline in the 30 day Euro-contract rate would increase the Company's annual net income by approximately $293,000, and a 2% decline in the 30 day Euro-contract rate would increase net income by approximately $586,000. Various financial vehicles exist which would allow Company management to mitigate the impact of interest rate fluctuations on the Company's cash flows and earnings. On December 1, 1998, the Company entered into an interest rate swap agreement with a notional amount of $10,000,000 to reduce the impact of changes in interest rates on the Credit Facility floating rate debt. Management may engage in additional hedging strategies in the future, depending on management's analysis of the interest rate environment and the costs and risks of such strategies. -21-
Item 8. Financial Statements and Supplementary Data. Page ---- (a) 1. Financial Statements -------------------- Independent Auditors' Report 23 Consolidated Balance Sheets as of December 31, 1998 and 1997 24 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 25 Consolidated Statements of Changes in Shareholders' Equity/Partners' Capital (Deficit) for the years ended December 31, 1998, 1997 and 1996 26 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 27 Notes to Consolidated Financial Statements 29
-22- 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated 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 19, 1999 -23- AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, --------------------------- 1998 1997 ------------ ------------ ASSETS Real estate, net $174,876,580 $ 94,638,187 Investment in partnerships 6,095,543 9,296,088 Mortgage loans receivable 3,267,037 30,980,995 Loans receivable from affiliates 2,081,015 3,060,000 Cash and cash equivalents 3,003,474 6,728,050 Accounts receivable-tenants, net of allowance for doubtful accounts of $383,000 and $304,000, respectively 2,442,896 1,169,526 Deferred costs, net 2,387,683 2,226,832 Other assets 1,235,742 539,650 ------------ ------------ Total Assets $195,389,970 $148,639,328 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes payable $ 58,864,099 $ 18,544,242 Accounts payable and other liabilities 3,575,499 1,871,394 Due to Advisor and affiliates 355,915 507,835 Distributions payable 2,607,054 1,943,415 ------------ ------------ Total Liabilities 65,402,567 22,866,886 ------------ ------------ Minority interest of unitholders in the Operating Partnership 6,803,895 727,431 ------------ ------------ Commitments and Contingencies Shareholders' equity: Common stock; $.01 par value; 50,000,000 shares authorized; 8,051,159 issued and 8,044,859 outstanding and 8,050,727 shares issued and outstanding in 1998 and 1997, respectively 80,511 80,507 Treasury stock; $.01 par value; 6,300 and 0 shares, respectively (63) 0 Additional paid in capital 125,299,096 125,476,308 Distributions in excess of net income (2,196,036) (511,804) ------------ ------------ Total Shareholders' Equity 123,183,508 125,045,011 ------------ ------------ Total Liabilities and Shareholders' Equity $195,389,970 $148,639,328 ============ ============
See accompanying notes to consolidated financial statements -24- AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, -------------------------------------- 1998 1997 1996 ----------- ----------- ---------- Revenues: Rental income $13,402,982 $ 7,761,826 $7,097,398 Tenant reimbursements 3,914,656 1,953,948 2,021,201 Income from equity investments 423,624 193,511 0 Interest income 1,649,071 751,142 39,845 Other 114,470 95,370 65,586 ----------- ----------- ---------- Total revenues 19,504,803 10,755,797 9,224,030 ----------- ----------- ---------- Expenses: Repairs and maintenance 1,503,746 931,588 892,434 Real estate taxes 1,724,424 1,190,345 1,075,573 Interest 1,931,874 558,994 531,504 General and administrative 3,225,639 1,593,612 1,061,319 Depreciation and amortization 3,849,190 2,655,049 2,758,415 Minority interest in income of the Operating Partnership 93,547 8,263 0 Other 1,309,643 379,450 478,149 ----------- ----------- ---------- Total expenses 13,638,063 7,317,301 6,797,394 ----------- ----------- ---------- Income before gain on sale of investment 5,866,740 3,438,496 2,426,636 Gain on sale of investment in partnership 779,893 0 0 ----------- ----------- ---------- Net income $ 6,646,633 $ 3,438,496 $2,426,636 =========== =========== ========== Net income per share: Basic* $ .83 $ .18** =========== =========== Diluted* $ .82 $ .18** =========== ========== Weighted average shares outstanding Basic** 8,049,987 8,050,727*** ============ ============ Diluted** 8,075,390 8,050,727*** ============ ============
*Net income per unit information for periods before October 1, 1997 is not presented because it is not indicative to the Company's continuing capital structure. **Represents amount for the three months ended December 31, 1997. See accompanying notes to consolidated financial statements -25- AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY/PARTNERS' CAPITAL (DEFICIT)
Common Stock Treasury Stock Additional Distributions Limited General ------------------ -------------- Paid-in in Excess of Partners Partners Shares Amount Shares Amount Capital Net Income Total ------------ --------- --------- ------- ------ ------ ------------- ------------- ------------- Balance at January 1, 1996 $ 70,980,748 $(240,313) 0 0 0 0 0 0 $ 70,740,435 Net income 1,971,450 455,186 0 0 0 0 0 0 2,426,636 Distributions (3,600,005) (471,636) 0 0 0 0 0 0 (4,071,641) ------------ --------- --------- ------- ------ ---- ------------- ----------- ------------- Balance at December 31, 1996 69,352,193 (256,763) 0 0 0 0 0 0 69,095,430 Net income - January 1, 1997 to September 30, 1997 1,674,755 343,371 0 0 0 0 0 0 2,018,126 Distributions - January 1, 1997 to September 30, 1997 (3,600,005) (362,818) 0 0 0 0 0 0 (3,962,823) Consolidation and issuance of shares (67,426,943) 276,210 8,050,727 $80,507 0 0 $ 126,719,503 0 59,649,277 Consolidation costs 0 0 0 0 0 0 (1,243,195) 0 (1,243,195) Net income - October 1, 1997 to December 31, 1997 0 0 0 0 0 0 0 $ 1,420,370 1,420,370 Distributions - October 1, 1997 to December 31, 1997 0 0 0 0 0 0 0 (1,932,174) (1,932,174) ------------ --------- --------- ------- ------ ---- ------------- ----------- ------------- Balance at December 31, 1997 0 0 8,050,727 80,507 0 0 125,476,308 (511,804) 125,045,011 Net income 0 0 0 0 0 0 0 6,646,633 6,646,633 Issuance of shares of common stock 0 0 432 4 0 0 4,996 0 5,000 Purchase of treasury shares 0 0 0 0 (6,300) $(63) (58,516) 0 (58,579) Consolidation costs 0 0 0 0 0 0 (123,692) 0 (123,692) Distributions 0 0 0 0 0 0 0 (8,330,865) (8,330,865) ------------ --------- --------- ------- ------ ---- ------------- ----------- ------------- Balance at December 31, 1998 $ 0 $ 0 8,051,159 $80,511 (6,300) $(63) $ 125,299,096 $(2,196,036) $ 123,183,508 ============ ========= ========= ======= ====== ==== ============= =========== =============
See accompanying notes to consolidated financial statements -26- AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ----------------------------------------- 1998 1997 1996 ------------ ------------ ----------- Cash flows from operating activities: Net income $ 6,646,633 $ 3,438,496 $ 2,426,636 ------------ ------------ ----------- Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of investment in partnership (779,893) 0 0 Loss on repayments of mortgage loans receivable 138,438 0 0 Depreciation and amortization 3,966,178 2,702,274 2,758,415 Minority interest in income of the Operating Partnership 93,547 8,263 0 Distributions from equity investments in excess of (exceeded by) income 97,954 (19,448) 0 Changes in assets and liabilities: (Increase) decrease in accounts receivable-tenants (1,353,348) 15,090 281,873 Increase (decrease) in allowance for doubtful accounts 79,978 (907) (206,391) Increase in other assets (696,092) (213,902) (4,535) (Decrease) increase in due to Advisor, general partners and affiliates (146,920) 159,251 45,821 (Decrease) increase in accounts payable and other liabilities 1,704,105 491,380 (139,341) ------------ ------------ ----------- Total adjustments 3,103,947 3,142,001 2,735,842 ------------ ------------ ----------- Net cash provided by operating activities 9,750,580 6,580,497 5,162,478 ------------ ------------ ----------- Cash flows from investing activities: Proceeds from sale of investment in partnership 4,727,500 0 0 Improvements to real estate (695,177) (33,486) (119,325) Acquisitions of real estate (51,598,294) (8,912,945) 0 Increase in deferred acquisition expenses (114,229) (47,459) 0 Leasing commissions (166,256) (191,730) (349,450) Repayment of loan receivable from affiliate 3,060,000 0 0 Loans made to affiliate (2,081,015) 0 0 Principal payments received on mortgage loans 27,528,253 39,994 0 Closing costs relating to the repayment of mortgage loan receivable (19,537) 0 0 Investment in partnership (895,200) 0 0 ------------ ------------ ----------- Net cash used in investing activities (20,253,955) (9,145,626) (468,775) ------------ ------------ ----------- Cash flows from financing activities: Repayments of notes payable (28,905,463) (1,720,907) (226,774) Proceeds from notes payable 44,568,000 13,375,000 0 Distributions paid (7,728,904) (5,099,300) (4,126,050) Increase in deferred loan costs (896,901) (919,302) 0 Decrease in minority interest (137,340) (18,474) 0 Cash effect of Consolidation and issuance of shares 0 2,510,103 0 Purchase of treasury shares (58,579) 0 0 Consolidation costs (123,692) (1,243,195) 0 Increase in distributions payable to minority interest 61,678 11,241 0 ------------ ------------ ----------- Net cash provided by (used in) financing activities 6,778,799 6,895,166 (4,352,824) ------------ ------------ -----------
(continued) -27- AEGIS REALTY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------------ 1998 1997 1996 ------------ ------------- ----------- Net increase (decrease) in cash and cash equivalents (3,724,576) 4,330,037 340,879 Cash and cash equivalents at the beginning of the year 6,728,050 2,398,013 2,057,134 ------------ ------------- ----------- Cash and cash equivalents at the end of the year $ 3,003,474 $ 6,728,050 $ 2,398,013 ============ ============= =========== Supplemental information: Interest paid $ 1,626,784 $ 562,240 $ 532,799 ============ ============= =========== Supplemental disclosure of noncash investing and financing activities: Notes payable assumed in acquisition of real estate $ 23,952,320 $ 0 $ 0 ============ ============= =========== Real estate acquired for units in the Operating Partnership $ 6,120,257 $ 0 $ 0 ============ ============= =========== Issuance of shares of common stock for director fees $ 5,000 $ 0 $ 0 ============ ============= =========== Reclassification of deferred acquisition expenses to real estate upon purchase $ 47,459 $ 0 $ 0 ============ ============= =========== Real estate acquired through issuance of purchase money notes to sellers $ 705,000 $ 0 $ 0 ============ ============= =========== Consolidation and issuance of shares: Increase in real estate $ 0 $ (16,856,558) $ 0 Increase in investment in partnerships 0 (9,295,706) 0 Increase in mortgage loans receivable 0 (31,049,146) 0 Increase in loan receivable from affiliate 0 (3,060,000) 0 Increase in accounts receivable-tenants 0 (380,490) 0 Increase in other assets 0 (243,231) 0 Increase in notes payable 0 1,324,308 0 Increase in accounts payable and other liabilities 0 340,138 0 Increase in due to Advisor, general partners and affiliates 0 207,392 0 Increase in distributions payable 0 1,136,477 0 Decrease in limited partners' capital 0 (67,426,943) 0 Increase in general partners' capital 0 276,210 0 Increase in minority interest 0 737,642 0 Issuance of shares of common stock 0 124,289,907 0 ------------- ----------- $ 0 $ 0 $ 0 ============ ============= =========== Distributions declared $ (8,330,865) $ (5,894,997) $(4,071,641) Increase (decrease) in distributions payable to shareholders/partners 601,961 795,697 (54,409) ------------ ------------- ----------- Distributions paid $ (7,728,904) $ (5,099,300) $(4,126,050) ============ ============= ===========
See accompanying notes to consolidated financial statements -28- 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 is organized and managed as a single business segment. As of December 31, 1998, the Company owned a portfolio of 28 retail properties (the "Retail Properties") containing a total of approximately 3.0 million gross leaseable square feet ("GLA"), held partnership interests in two suburban garden apartment properties (the "Multifamily Properties") and held one FHA insured participating mortgage secured by a suburban garden apartment property (the "FHA Mortgage"). The Company was formed on October 1, 1997 as the result of the consolidation (the "Consolidation") of four publicly registered, non-listed limited partnerships, Summit Insured Equity L.P. ("Insured I"), Summit Insured Equity L.P. II ("Insured II"), Summit Preferred Equity L.P. ("Summit Preferred") and Eagle Insured, L.P. ("Eagle") (the "Partnerships", and each individually a "Partnership"). One of the general partners of the Partnerships was an affiliate of Related Capital Company ("Related"). Unless otherwise indicated, the "Company", as hereinafter used, refers to Aegis Realty, Inc. and subsidiaries and, for references prior to October 1, 1997 refers to, Insured I. Pursuant to the Consolidation, the Company issued shares of its common stock, par value $.01 per share (the "Common Stock") to all partners in the Partnerships in exchange for their partnership interest in each Partnership. The Common Stock commenced trading on the American Stock Exchange on October 10, 1997 under the symbol "AER". As of December 31, 1998, there were 8,044,859 shares of Common Stock outstanding (an additional 517,625 shares were reserved for issuance upon conversation of OP Units, as defined below). The Company is governed by a board of directors comprised of two independent directors and three directors who are affiliated with Related. The Company has engaged Related Aegis LP (the "Advisor"), a Delaware limited partnership and an affiliate of Related, to manage its day to day affairs. Each independent director is entitled to receive annual compensation for serving as a director in the aggregate amount of $15,000 payable in cash (maximum of $5,000 per year) and/or shares of Common Stock valued based on the fair market value at the date of issuance. On June 4, 1998, 216 shares, having an aggregate value of $2,500 as of that date, were issued to each independent director as compensation for their services for the quarter ended December 31, 1997. The Company owns all of its assets directly or indirectly through Aegis Realty Operating Partnership, LP, a Delaware limited partnership (the "Operating Partnership" or "OP"), of which the Company is the sole general partner and holder of 93.96% of the units of partnership interest (the "OP Units") at December 31, 1998. Also, at December 31, 1998, 3.05% and 2.99% of the OP Units are held by the sellers of three of the Retail Properties and by affiliates of Related, respectively. NOTE 2 - Summary of Significant Accounting Policies a) Basis of Accounting The books and records of the Company are maintained on the accrual basis of accounting in accordance with generally accepted accounting principles ("GAAP"). For financial accounting and reporting purposes, the Consolidation was accounted for using the purchase method of accounting. Under this method, the Partnership with the investor group receiving the largest ownership in the Company, in this case Insured I, was deemed to be the acquirer. As the surviving entity for accounting purposes, Insured I's assets and liabilities were recorded by the Company at their historical cost, with the assets and liabilities of the other Partnerships recorded at their estimated fair values for each Partnership (an aggregate of approximately $60,387,000) as set forth in the Solicitation Statement of the Company dated June 18, 1997 (the "Solicitation Statement"). No goodwill was recorded in the Consolidation. Results of operations and other operating financial data for the Company for the years ended December 31, 1998, 1997 and 1996 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, 1998 with respect to the other Partnerships. Insured I is a Delaware limited partnership formed on December 12, 1985 which, subsequent to the Consolidation, became an indirectly wholly-owned subsidiary of the Company. b) Basis of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiary partnerships. All intercompany accounts and transactions with the subsidiary partnerships have been eliminated in consolidation. c) Real Estate The carrying amount of 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 a straight line basis over their estimated useful lives, generally 40 years. Maintenance and repairs are charged to expense as incurred. Renewals and betterments that significantly extend the useful life of a property are capitalized. -29- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS d) Investment in Partnerships The Company accounts for its investment as a limited partner in partnerships, which own the Multifamily Properties, using the equity method of accounting. e) Mortgage Loans Receivable Amounts received or receivable for interest payments on loans are reflected as interest income. f) Impairment The Company reviews each of its property investments, including those held by the partnerships which own the Multifamily Properties, for possible impairment at least annually, and more frequently if circumstances warrant. Impairment of properties to be held and used is determined to exist when estimated amounts recoverable through future operations on an undiscounted basis are below the properties' carrying value. If a property is determined to be impaired, it is written down to its estimated fair value. At least annually, and more frequently if circumstances warrant, the Company evaluates the collectibility of both interest and principal of 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, 1998, 1997 and 1996. 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, for which cost approximates market value. h) Deferred Insurance Costs Costs related to insurance policies from Continental Casualty Company (see Note 3) are being amortized over a 10 year period. i) Deferred Loan Costs Costs incurred in connection with the Company's debt have been capitalized and are being amortized over the life of the respective debt using the effective yield method. j) Deferred Leasing Commissions Costs incurred in connection with the lease-up of vacant space and lease renewals have been capitalized and are being amortized over the term of the underlying leases. Amortization related to the deferred costs described in (h), (i) and (j) above is included in depreciation and amortization expense. k) Deferred Acquisition Expenses Costs incurred in connection with the proposed purchase of Retail Properties are deferred. Upon acquisition of Retail Properties, the associated costs are capitalized as real estate. Costs incurred in connection with Retail Properties which are not acquired are charged to operations. l) Consolidation Costs Costs incurred in the Consolidation including legal, accounting and registration fees, amounting to $1,366,887 and $7,953 were charged to shareholders' equity and minority interest of unit holders in the OP, respectively. -30- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS m) Rental Income Rental income includes amounts received and accrued from operating leases as well as amounts related to the reimbursement of common area maintenance charges, real estate taxes and insurance. The straight-line basis is used to recognize base rents under leases which provide for varying rents over the lease terms. n) Income Taxes The Company has qualified as a REIT under the Code. A REIT is generally not subject to federal income tax on that portion of its 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, 1998, the net tax basis of the Company's assets and liabilities exceeded the net book basis by approximately $9,974,000. During 1998, the Company declared distributions of $1.035 per share. For Federal income tax purposes, $.05 per share of ordinary income was carried over from 1997, $.755 and $.075 per share of ordinary income and capital gain income, respectively, was reported to shareholders for 1998 and $.26 per share of ordinary income was carried over to 1999. o) Comprehensive Income Because the Company has no items of other comprehensive income, the Company's net income and comprehensive income are the same for all periods presented. p) Use of Estimates The preparation of financial statements in conformity with GAAP requires the Advisor to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. q) New Pronouncements The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It is effective for the Company beginning with the first quarter of 2000. Company management is currently evaluating the impact that this statement will have on its hedging strategies and is currently unable to predict the effect, if any, it will have on the Company's financial statements. r) Reclassifications Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. NOTE 3 - Real Estate The components of real estate are as follows:
December 31, -------------------------------- 1998 1997 ------------- ------------- Land $ 39,467,426 $ 27,622,941 Buildings and improvements 154,677,484 83,419,863 ------------- ------------- 194,144,910 111,042,804 Less: Accumulated depreciation (19,268,330) (16,404,617) ------------- ------------- $ 174,876,580 $ 94,638,187 ============= =============
-31- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During the period January 1, 1998 through December 31, 1998, the Company acquired 12 neighborhood shopping centers for an aggregate purchase price of $78,815,000, not including acquisition fees and expenses of approximately $3,541,527. The acquisitions were financed through proceeds of an expandable $60 million senior revolving credit facility shared equally among BankBoston, KeyBank National Association and Citizens Bank of Rhode Island (the "Credit Facility"), the assumption of $23,952,320 of existing debt with respect to four of the acquisitions, the issuance of purchase money notes to sellers amounting to $705,000 with respect to two of the acquisitions and the issuance of 470,789 OP Units (subject to adjustment) valued at $6,120,257 with respect to three of the acquisitions. Further information regarding the 12 acquisitions is as follows:
Acquisition % Square Price/ Purchase Gross Feet Acquisition Assumption Money Leasable Leased at Name and Date Fees and of Existing Notes to OP Units/ Square Date of Location Acquired Expenses Debt Sellers Value Feet Acquisition Main Anchor Tenant - --------- -------- ----------- ----------- -------- ---------- -------- ----------- -------------------- Barclay Place 3/31/98 $ 3,800,000 $ 2,587,081 81,459 85% Food Lion Lakeland, FL $ 220,030 The Village At Waterford 4/22/98 $ 6,250,000 $ 4,063,567 79,162 100% Winn-Dixie Midlothian, VA $ 318,913 Governor's Square 5/28/98 $ 8,200,000 94,726(a) 183,340 83% Odd Lots Montgomery, AL $ 321,549 $1,231,438 Marion City Square 6/25/98 $ 5,100,000 163,970 83% Roses, Bi-Lo & CVS Marion, NC $ 275,062 Dunlop Village 9/1/98 $ 5,000,000 77,315 96% Food Lion & CVS Colonial Heights, VA $ 241,710 Centre Stage 9/2/98 $ 6,990,000 146,549 98% K-Mart & Food Lion Springfield, TN $ 352,210 White Oaks Plaza 9/9/98 $ 8,125,000 186,758 100% Winn-Dixie & Wal-Mart Spindale, NC $ 545,493 Cape Henry 9/29/98 $ 3,900,000 55,075 100% Food Lion & Rite-Aid Virginia Beach, VA $ 209,583 Emporia West 11/17/98 $ 2,900,000 76,705 98% Dillon Food Store Emporia, KS $ 154,707 Oxford Mall 11/24/98 $ 8,650,000 $ 6,413,288 166,880 94% Goody's, JC Penney, Oxford, MS $ 291,902 Stage & Wal-Mart (c) Southgate 12/9/98 $15,100,000 $10,888,384 $200,000 208,914(a) 213,923 99% Big Bear Stores, Heath, OH $ 460,468 $2,715,882 Dunham's Sporting, Odd Lots & Rite-Aid Crossroads East 12/9/98 $ 4,800,000 $505,000 167,149(a) 71,925 78% (b) Columbus, OH $ 149,900 $2,172,937
(a) The OP Units are convertible to shares of Common Stock on a one-to-one basis, subject to adjustment, on the one year anniversary of the closing date. The OP Units were issued at an agreed upon value of $13 per unit. If as of the last trading day prior to the first anniversary of the closing date (the "Post-Closing Adjustment Date"), the "Average Price Per Share" (as defined below) is less than $13, the Company is obligated to issue additional OP Units to the respective sellers in the amount of the difference between (i) the quotient obtained by dividing the OP Unit value at $13 per unit by the Average Price Per Share as of the Post-Closing Adjustment Date and (ii) the number of OP Units issued on the closing date. The Average Price Per Share means, with respect to any given date, the average final closing price per share of Common Stock during the twenty trading day period ending on such date. The additional OP Units which would have to be issued to the sellers of Governor's Square, Southgate and Crossroads East on the Post-Closing Adjustment Date, based on the Average Price Per Share of 9 7/8 on December 31, 1998, are 29,977, 66,112 and 52,895, respectively. (b) The current configuration of the shopping center does not include an anchor tenant. (c) The portion of the property occupied by Wal-Mart is not owned by the Company. Amounts estimated to be recoverable from future operations and ultimate sales are greater than the carrying value of each property owned at December 31, 1998 and 1997. However, the carrying value of certain properties may be in excess of their fair values as of such dates. -32- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1998.
1998 1997* 1996* ---- ---- ---- 1. Pablo Plaza/Jacksonville, FL 5% 7% 10% 2. Westbird/Miami, FL 6% 10% 11% 3. Winery Square/Fairfield, CA 7% 10% 14% 4. Mountain View Village/Snellville, GA 6% 10% 11% 5. Forest Park Square/Cincinnati, OH 6% 10% 12%
*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, 1998, 1997 and 1996, the Kroger Company, which is a tenant at six shopping centers, accounted for approximately 17%, 28% and 28%, respectively, of the Company's total gross revenues. Based on the carrying value at December 31, 1998, approximately 15% of the Company's investment properties are located in Ohio, 11% are located in Florida, 11% are located in North Carolina and 11% are located in Virginia. No other states comprise more than 10% of the total carrying value. Insured I and Insured II, which are indirectly wholly-owned subsidiaries of the Company, are the record owners of fourteen of the Retail Properties, Insured I and II are each the beneficiary of an insurance policy (the "Policies") from Continental Casualty Company ("CNA") which, in effect, will insure that the cumulative amount of cash available for distribution, from all sources, as determined in accordance with the Policies and related agreement together with the appraised values of the Retail Properties then owned by Insured I and Insured II (currently 14 of the 28 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 such Retail Property was acquired by Insured I and Insured II (the "Final Acquisition Date"). The maximum liability of CNA under the Policies will increase pursuant to a formula based upon the length of time such Retail Properties are held by Insured I and Insured II up to a maximum of 125% of Original Contributions on the tenth anniversary of the Final Acquisition Date (the "Guaranty Payment Date"). The Policies are intended to cover various economic risks of the ownership of such Retail Properties, but do not apply to certain losses, costs, penalties or expenses, including, among others, those arising out of any physical loss, damage, loss of use or other physical deterioration of such properties. Payment of any amounts due under the Policies will be made to Insured I and/or Insured II after the Guaranty Payment Date and the Policies are not a guaranty that shareholders of the Company will receive a return equal to 125% of the Original Contributions to either Insured I or Insured II, as applicable, or any lesser amount insured under the Policy. NOTE 4 - Deferred Costs The components of deferred costs are as follows:
December 31, ------------------------ 1998 1997 ---------- ----------- Deferred insurance costs $6,005,804 $6,005,804 Deferred loan costs 1,842,601 945,700 Deferred leasing commissions 928,148 809,941 Deferred acquisition expenses 114,229 47,459 ---------- ----------- 8,890,782 7,808,904 Less: Accumulated amortization (6,503,099) (5,582,072) ---------- ---------- $2,387,683 $2,226,832 ========== ==========
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 an initial investment of $3,799,620 which was made during 1987. During 1989 an additional $1,949,805 was invested 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 $1,610,549 and $1,457,326 at December 31, 1998 and 1997, respectively. These preferred equity returns are payable from excess cash flow from operations or proceeds from a sale or refinancing of Pinehurst's rental property. The Company's percentage of ownership in Pinehurst is 98.99%. -33- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company owned a limited partnership investment in the Dominion Totem Park Limited Partnership ("Dominion"), which acquired and operated the Chateau Creste apartment complex in Kirkland, Washington. Under the terms of this investment, the Company was entitled to receive a preferred equity return of 9.625% per annum on an initial cash contribution of $4,149,585 which was made during 1988. On March 20, 1998, Dominion Chateau Creste Limited Partnership, the general partner of Dominion, purchased the Company's limited partnership interest in Dominion pursuant to its rights under the partnership agreement. The purchase price was determined by independent appraisals and resulted in a cash payment to the Company of $4,727,500, which was $779,893 in excess of the carrying value of this investment at the date of sale. As of March 20, 1998, the Company had received all of the preferred equity returns due from Dominion. The Company's percentage of ownership in Dominion was 99%. On August 26, 1998, the Company invested $895,200 for a 40% interest as a limited partner in FAI Ltd. ("FAI"), the limited partnership which owns Weatherly Walk Apartments (see Note 6). This equity interest will earn an annual preferred return of 10.5% on $895,200, paid monthly, plus 40% of excess cash flow and sale or refinancing proceeds. As of December 31, 1998, the Company had received all of the preferred returns due from FAI. Amounts estimated to be recoverable from future operations and ultimate sales are greater than the carrying value of the Company's investments in partnerships at December 31, 1998. NOTE 6 - Mortgage Loans Receivable As of January 1, 1998, the Company held three FHA Mortgages and three equity loans (the FHA Mortgages and the equity loans together, the "Mortgage Loans"); two of the Mortgage Loans were repaid in 1998. All base interest and the principal amount of each of the FHA Mortgages were coinsured by the FHA (80%) and an affiliate of the Advisor (20%). The FHA Mortgages required monthly payments of principal and interest over the life of the loans. The FHA Mortgages, which closed during the period June 1988 to December 1988, bore interest at 8.95% and were scheduled to mature during the period January 2024 to January 2030. The interest rate of 8.95% included a servicing fee of 0.07% paid by the developer to Related Mortgage Corporation, an affiliate of the Advisor, and excluded additional interest which may have been payable under certain circumstances. The equity loans were made to the same developers as the FHA Mortgages. These equity loans, in the aggregate original amount of $3,018,800, represented noninterest-bearing advances made to the developers for such items as initial operating deficit escrow requirements and Housing and Urban Development ("HUD") related contingencies such as working capital escrow and cash requirements. Such amounts were due on demand upon six months notice at any time after the tenth anniversary of the initial endorsement of the loan by HUD. These loans were uninsured, but were secured by the partnership interests of the entities which own the underlying properties. In addition to the Mortgage Loans, the Company held a loan of $3,060,000 (the "Cross Creek Loan") to Walsh/Cross Creek Limited Partnership (the "Cross Creek Obligor"), one of the FHA Mortgagors, which was used to pay for costs incurred to complete construction and to fund operating deficits. The Cross Creek Loan bore interest at the prime rate plus 1% and was due on January 1, 2030 or on the occurrence of certain events. The amount loaned to the Cross Creek Obligor was classified as a loan receivable from affiliate and was anticipated to be repaid from cash flows from the Cross Creek property. Stephen M. Ross holds a majority interest in the Advisor and had guaranteed the repayment of the principal and interest on the Cross Creek Loan (as amended, the "Guarantee Agreement") to the Company, subject to certain conditions. On June 24, 1998, the Cross Creek Obligor, the owner of Cross Creek Apartments ("Cross Creek") and an affiliate of the Advisor, sold Cross Creek to a third party for $23.4 million. The Cross Creek Obligor then fully repaid its outstanding debt due to the Company totaling $22,199,045, including a $16,971,528 FHA Mortgage, a $1,783,900 equity loan, the $3,060,000 Cross Creek Loan, a $286,948 prepayment penalty due the Company on the FHA Mortgage and accrued interest through the closing date of $96,669 resulting in a loss on the repayment (including the prepayment penalty) in the amount of $92,504 (due to purchase accounting premiums recorded pursuant to the Consolidation) which is included in other expenses. The interest income on the Cross Creek receivable recognized for the year ended December 31, 1998, through the date of sale, was $837,802. On August 26, 1998, FAI, Ltd. ("FAI"), the limited partnership which owns Weatherly Walk Apartments and one of the FHA Mortgagors, repaid in full (after completing a refinancing with an unaffiliated third party) the outstanding balance of its Mortgage Loan in the amount of $8,380,752 plus accrued interest through August 26, 1998 of $48,189 resulting in a loss on the repayment in the amount of $45,934 (due to purchase accounting premiums recorded pursuant to the Consolidation) which is included in other expenses. Simultaneously, the Company invested $895,200 for a 40% interest as a limited partner in FAI (see "Note 5"). The interest income on the Weatherly Walk receivable recognized for the year ended December 31, 1998, through the date of sale, was $416,919. As of December 31, 1998, the Company held one Mortgage Loan (Woodgate Manor). As of December 13, 1998, the Company may call for prepayment of the entire outstanding principal amount at any time. The Company, in order to call for prepayment, would be required to terminate the mortgage insurance contract with FHA (and/or the co-insurer) not later than the accelerated payment date. Since the exercise of such option would be at the Company's discretion, it is intended to be exercised only where the Company determines that the value of the underlying property has increased by an amount which would justify accelerating payment in full and assuming the risks of foreclosure if the mortgagor failed to make the accelerated payment. As of December 13, 1998, the borrower may elect to prepay at any time without incurring prepayment penalties. The general partner interest in the obligor of the Company's remaining Mortgage Loan is held by an affiliate of the Advisor. -34- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The carrying values of the Mortgage Loans (the FHA Mortgages and equity loans) secured by Cross Creek Apartments, Weatherly Walk Apartments and Woodgate Manor were $0, $0 and $3,267,037 at December 31, 1998, respectively, and $19,195,048, $8,474,829 and $3,311,118 at December 31, 1997, respectively; the FHA Mortgage loan balances were $0, $0 and $2,906,284 at December 31, 1998, respectively, and $17,018,624, $7,513,929 and $2,935,935 at December 31, 1997, 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. At December 31, 1998 and 1997, the estimated fair value of the Company's Mortgage Loans receivable and the Cross Creek Loan approximated their carrying values. NOTE 7 - Notes Payable As of December 31, 1998 and 1997, the Company had notes payable with outstanding balances totaling $58,864,099 and $18,544,242, respectively. Further information regarding the notes is as follows:
Date of Monthly Note/ Payment Outstanding Outstanding Maturity Interest of Principal Balance Balance Noteholder Date Rate and Interest at 12/31/98 at 12/31/97 Collateral - ---------- -------- -------- ------------ ----------- ----------- ---------- New York Life 7/11/95 9.25% $55,984 $4,967,164 $ 5,169,242 Forest Park & Insurance 6/10/00 Highland Fair Company BankBoston, 10/1/97 (b) Interest 0 2,000,000 Westbird N.A. 4/1/98 only BankBoston, 12/30/97 (b) Interest 29,318,000 (c) 11,375,000 (i) N.A. (a) 12/30/00 (j) only KeyBank National Association (a) Heller 6/24/97(d) 8.50% $19,992 2,571,651 0 Barclay Place Financial, Inc. 7/1/17 Nomura 10/28/97(e) 7.54% $33,130 4,004,897 0 Village At Asset Capital 11/11/22 Waterford Corporation Chase Bank 12/16/96(f) 8.875% $51,717 6,409,003 0 Oxford Mall 1/1/07 Merrill Lynch 9/18/97(g) 7.73% $79,509 10,888,384 0 Southgate Credit 10/1/07 Corporation Sellers of 12/10/98 (h) $0 200,000 0 None Southgate 12/10/99 Sellers of 12/10/98 (h) $0 230,000 0 None Crossroads East 12/10/99 Sellers of 12/10/98 (h) $0 275,000 0 None ---------- ---------- Crossroads East 12/9/99 $58,864,099 $18,544,242 =========== ===========
(a) The Credit Facility is shared equally among BankBoston, N.A., KeyBank National Association and Citizens Bank of Rhode Island. (b) The interest rate under the Credit Facility can float 1/2% under BankBoston's base rate or can be fixed in 30, 60, 90 and 180 day periods at 1.625% over the indicated Euro-contract rate at the option of the Company. The 30 day rate at December 31, 1998 was 5.6563%. (c) Outstanding balance of a $60 million senior revolving credit facility. -35- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (d) Note was assumed upon purchase of the property by the Company on March 31, 1998. (e) Note was assumed upon purchase of the property by the Company on April 22, 1998. (f) Note was assumed upon purchase of the property by the Company on November 24, 1998. (g) Note was assumed upon purchase of the property by the Company on December 9, 1998. (h) Note is non-interest bearing. (i) Loan was collateralized at December 31, 1998 by nine Retail Properties, one investment in a partnership and one Mortgage Loan with carrying values of $57,431,120, $5,278,276 and $3,267,037, respectively, at December 31, 1998. Loan was collateralized at December 31, 1997 by two Retail Properties, one investment in a partnership and two Mortgage Loans with carrying values of $10,192,955, $5,301,572 and $22,506,166, respectively, at December 31, 1997. (j) The Company has an option to extend the maturity date to 12/30/03 upon payment of certain fees. On December 1, 1998, the Company entered into an interest rate swap agreement with a notional amount of $10,000,000 to reduce the impact of changes in interest rates on the Credit Facility. This agreement effectively changes the Company's interest rate exposure on a portion of the Credit Facility debt to a fixed 5.44% and matures on December 1, 2000. The Company accounts for the net cash settlements under this swap agreement as adjustments to the interest expense on the Credit Facility. The Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement; however, the Company does not anticipate nonperformance by the counter party. The estimated fair value of this agreement was a liability of approximately $86,000 on December 31, 1998. Annual principal payment requirements as of December 31, 1998 for each of the next five fiscal years and thereafter are as follows: Year Ending Amount - ----------- ------ 1999 $ 1,201,880 2000 34,358,496* 2001 322,817 2002 349,726 2003 378,907 Thereafter 22,252,273 ----------- $58,864,099 =========== *Includes maturity of the Credit Facility (see note (j) to the table above). The Company has determined that the carrying value of the notes payable approximates their fair value at December 31, 1998 and 1997. NOTE 8 - Related Party Transactions Aegis Realty, Inc. (After the Consolidation) - -------------------------------------------- Pursuant to the Advisory Agreement, the Advisor receives (i) acquisition fees equal to 3.75% of the acquisition prices of properties acquired; (ii) mortgage selection fees based on the principal amount of Mortgage Loans funded; (iii) asset management fees equal to .375% of the total invested assets of the Company; (iv) a liquidation fee based on the gross sales price of the assets sold by the Company in connection with a liquidation of the Company's assets; and (v) reimbursement of certain administrative costs incurred by the Advisor on behalf of the Company. The original term of the Advisory Agreement will terminate on October 1, 2001. Thereafter, the Advisory Agreement will be renewed annually by the Company and the OP, subject to the majority approval of the Company's Board of Directors and the OP. The Advisory Agreement cannot be terminated by the Company prior to October 1, 2001, other than for gross negligence or willful misconduct of the Advisor and by a majority vote of the Company's independent directors. The Advisory Agreement may be terminated without cause by a majority vote of the Company's independent directors following October 1, 2001 or by the Advisor at any time. The Company's 28 Retail Properties 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 Retail Properties, which is competitive with such fees paid in the areas in which the properties are located. The Property Manager also receives standard leasing commissions for space leased to new tenants and for lease renewals and is reimbursed for certain expenses. -36- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The costs incurred to related parties for the year ended December 31, 1998 and the three months ended December 31, 1997 (after the Consolidation) were as follows:
Year Three Months Ended Ended December 31, December 31, 1998 1997 ---------- -------- Acquisition fees $2,707,157 $322,606 Expense reimbursement 290,639 28,000 Property management fees 862,906 159,958 Asset management fee 630,661 142,105 ---------- -------- $4,491,363 $652,669 ========== ========
On December 9, 1998, in connection with the acquisition of Southgate and Crossroads East, the Company made loans (the "OP Unit Loans") of $1,361,554 and $719,461 to Standard Investment Company ("SIC"), a partner in the partnership which owned the properties. The loans are secured by the OP Units (106,462 and 57,055, respectively) which were issued to SIC in exchange for its partnership interest in the partnerships which owned Southgate and Crossroads East and also by guarantees from the principals of SIC for 25% of the total loan amounts. The OP Unit Loans bear interest at 7.613% and mature on December 9, 2015 or earlier if the underlying shopping centers are sold. Interest and principal on the OP Unit Loans is payable only to the extent of distributions with respect to the OP Units. Such distributions will be retained by the Company until all accrued interest and the outstanding balances of the loans are repaid. As of December 31, 1998, the balances of the OP Unit Loans relating to Southgate and Crossroads East were $1,361,554 and $719,461, respectively, and are shown as loans receivable from affiliates on the consolidated balance sheets. Certain other partners in the partnerships which owned these properties are affiliates of Related. Insured I (Prior to the Consolidation) - -------------------------------------- Prior to the Consolidation, the general partners of Insured I were Related Insured Equity Associates, Inc., a Delaware corporation and Prudential-Bache Properties, Inc., a Delaware corporation ("PBP"). The general partners managed and controlled the affairs of Insured I prior to the Consolidation. The general partners and their affiliates performed services for Insured I which included: accounting and financial management; registrar; transfer and assignment functions; asset management; investor communications; printing and other administrative services. The amount of reimbursement from Insured I was limited by the provisions of Insured I's Partnership Agreement. Insured I's eleven properties were being managed by the Property Manager. The expenses incurred by Insured I to related parties for the nine months ended September 30, 1997 and the year ended December 31, 1996 were as follows:
Nine Months Year Ended Ended September 30, December 31, 1997 1996 ------------ ------------ Expense reimbursement $ 79,935 $178,600 Property management fees 352,397 420,157 -------- -------- $432,332 $598,757 ======== ========
The distributions earned by the general partners of Insured I for the nine months ended September 30, 1997 and the year ended December 31, 1996 were as follows:
Nine Months Year Ended Ended September 30, December 31, 1997 1996 ------------ ------------ Special Distributions $326,454 $435,272 Regular Distributions of Adjusted Cash from Operations 27,273 36,364 -------- -------- $353,727 $471,636 ======== ========
NOTE 9 - Earnings Per Share, Profit and Loss Allocations and Distributions Aegis Realty, Inc. (After the Consolidation) - -------------------------------------------- Basic net income per share in the amount of $.83 and $.18 for the year ended December 31, 1998 and the three months ended December 31, 1997, respectively, equals net income for the periods ($6,646,633 and $1,420,370, respectively), divided by the weighted average number of shares outstanding for the periods (8,049,987 and 8,050,727, respectively). -37- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Diluted net income per share in the amount of $.82 and $.18 for the year ended December 31, 1998 and the three months ended December 31, 1997, respectively, equals net income for the periods, divided by the weighted average number of diluted shares outstanding for the periods (8,075,390 and 8,050,727, respectively). The weighted average number of diluted shares outstanding for the year ended December 31, 1998 reflects the weighted average impact of an additional 148,984 OP Units which would have to be issued to the sellers of Governor's Square, Southgate and Crossroads East on the Post-Closing Adjustment Date based on the Average Price Per Share on December 31, 1998 (see Note 3). There is no difference between basic and diluted net income per share with respect to the conversion of the minority interests' OP Units at December 31, 1998 and 1997 into an additional 517,625 and 46,836 shares, respectively, of Common Stock because the earnings of an OP Unit are equivalent to the earnings of a share of Common Stock. Net income per unit information for periods before the Consolidation is not presented because it is not indicative of the Company's continuing capital structure. Insured I (Prior to the Consolidation) - -------------------------------------- For financial reporting purposes, net profits or losses, after the Special Distributions to the general partners, were allocated 99% to the limited partners and 1% to the general partners. The general partners were paid a Special Distribution of adjusted cash from operations equal to 0.5% of invested assets per annum, as defined in the Partnership Agreement of Insured I, for managing the affairs of Insured I. Distributions of cash based on adjusted cash from operations, after payment of Special Distributions as defined in the Partnership Agreement of Insured I, were allocated 99% to the limited partners and 1% to the general partners. NOTE 10 - Leases Future minimum base rentals due from tenants under non-cancelable operating leases as of December 31, 1998 are as follows: Year Ending December 31 Amount - ----------------------- ------ 1999 $ 17,819,000 2000 15,865,000 2001 14,300,000 2002 12,275,000 2003 10,537,000 Thereafter 50,153,000 ----------- Total $120,949,000 ============ Certain leases require the lessees to reimburse the Company for real estate taxes, insurance costs and certain other reimbursable expenses. All 28 Retail Properties have tenants with leases that require payment of percentage rent. Percentage rent is an amount paid by the tenant which represents a portion of sales proceeds over a specified threshold amount as called for in the lease. Percentage rent received during the years ended December 31, 1998, 1997 and 1996 was approximately $132,000, $121,000 and $117,000, respectively. NOTE 11 - Common Stock and Stock Options The Company has adopted an incentive stock option plan (the "Incentive Stock Option Plan"), the purpose of which is to (i) attract and retain qualified persons as directors and officers and (ii) to incentivize and more closely align the financial interests of the Advisor and its 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 administers the Incentive Stock Option Plan. Pursuant to the Incentive Stock Option Plan, if the Company's distributions per share of common stock in the immediately preceding calendar year exceed $0.9869 per share, the Compensation Committee has the authority to issue options to purchase, in the aggregate, that number of shares of common stock which is equal to three percent of the shares outstanding as of December 31 of the immediately preceding calendar year (or in the initial year, as of October 1, 1997), provided that the Compensation Committee may only issue, in the aggregate, options to purchase a maximum number of shares of common stock over the life of the Incentive Stock Option Plan equal to 10% of the shares outstanding on October 1, 1997. Subject to the limitations described in the preceding paragraph, if the Compensation Committee does not grant the maximum number of options in any year, then the excess of the number of authorized options over the number of options granted in such year will be added to the number of authorized options in the next succeeding year and will be available for grant by the Compensation Committee in such succeeding year. All options granted will have an exercise price equal to or greater than the fair market value of the shares of common stock on the date of the grant. The maximum option term is ten years from the date of grant. All stock options granted pursuant to the Incen- -38- tive Stock Option Plan may vest immediately upon issuance or in accordance with the determination of the Compensation Committee. No options were granted for the year ended December 31, 1997. In 1998, the Company distributed $1.035 per share of Common Stock ($0.96 from continuing operations and a $0.075 special capital gains distribution), thus enabling the Compensation Committee, at their discretion, to issue options. Three percent of the shares outstanding as of the effective date of the Consolidation are equal to 241,522 Shares. The Compensation Committee is considering granting options; however, as of March 19, 1999, no options have been granted. On October 9, 1998, the Board of Directors authorized the implementation of a stock repurchase plan, enabling the Company to repurchase, from time to time, up to 500,000 shares of its Common Stock. The repurchases will be made in the open market and the timing will be dependent on the availability of shares and other market conditions. During the period October 9, 1998 through December 31, 1998, the Company acquired 6,300 shares of its Common Stock for an aggregate purchase price of $58,579 (including commissions and service charges). Repurchased shares are accounted for as treasury stock. As part of the settlement of class action litigation relating to the Partnerships, counsel ("Class Counsel") for the partners of the Partnerships had the right to petition the United States District Court for the Southern District of New York (the "Court") for additional attorneys' fees ("Counsel's Fee Shares") in an amount to be determined in the Court's sole discretion. The Counsel's Fee Shares would have been based upon a percentage of the increase in value of the Company, ("the Added Value") if any, as of October 10, 1998 based upon the difference between (i) the trading prices of the Company's shares of Common Stock during the six month period ended October 10, 1998 and (ii) the trading prices of the limited partnership units and the asset values of the Partnerships prior to 10/1/97. As of October 10, 1998, there was no Added Value and therefore, Class Counsel did not file a petition for Counsel's Fee Shares. -39- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - Selected Quarterly Financial Data (unaudited)
1998 Quarter Ended 1997 -------------------------------------------------- Quarter Ended March 31 June 30 September 30 December 31 December 31 ---------- ---------- ------------ ----------- ----------- Revenues: Rental income $2,723,985 $2,933,050 $3,520,886 $4,225,061 $2,335,242 Recovery of common area maintenance charges 226,623 390,142 461,961 577,358 267,480 Real estate tax reimbursements 291,444 620,619 503,364 694,450 285,506 Income from equity investments 142,121 81,467 84,249 115,787 193,511 Interest income 704,121 663,096 189,795 92,059 710,738 Other 48,813 32,611 62,165 119,576 28,553 ---------- ---------- ---------- ---------- ---------- Total revenues 4,137,107 4,720,985 4,822,420 5,824,291 3,821,030 ---------- ---------- ---------- ---------- ---------- Expenses: Repairs and maintenance 273,858 236,934 499,963 492,991 196,700 Real estate taxes 371,607 414,866 449,469 488,482 325,258 Interest 365,560 470,691 366,521 729,102 191,557 General and administrative 602,185 819,785 809,831 993,838 732,101 Depreciation and amortization 759,772 892,386 997,784 1,199,248 792,523 Minority interest in income of the Operating Partnership 13,130 14,877 26,049 39,491 8,263 Other 255,446 348,519 191,332 514,346 154,258 ---------- ---------- ---------- ---------- ---------- Total expenses 2,641,558 3,198,058 3,340,949 4,457,498 2,400,660 ---------- ---------- ---------- ---------- ---------- Income before gain on sale of investment 1,495,549 1,522,927 1,481,471 1,366,793 1,420,370 Gain on sale of investment in partnership 779,893 0 0 0 0 ---------- ---------- ---------- ---------- ---------- Net income $2,275,442 $1,522,927 $1,481,471 $1,366,793 $1,420,370 ========== ========== ========== ========== ========== Net income per common share (basic and diluted) $ 0.28 $ 0.19 $ 0.18 $ 0.17 $ 0.18 ========== ========== ========== ========== ==========
-40- AEGIS REALTY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - Commitments and Contingencies The Company is subject to routine litigation and administrative proceedings arising in the ordinary course of business. Management does not believe that such matters will have a material adverse impact on the Company's financial position, results of operations or cash flows. A current or previous owner or operator of real property may be legally liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such liability may exist whether or not the owner or operator knew of, or was responsible for, such hazardous or toxic substances. In addition, the presence of hazardous or toxic substances may adversely affect the owner's ability to borrow funds using such real property as collateral. Certain environmental laws impose liability for release of asbestos-containing materials ("ACMs") into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company may be liable for removal or remediation costs, as well as certain other potential costs which could relate to such hazardous or toxic substances or ACMs (including governmental fines and injuries to persons and property). To date, the Company has not incurred any costs of removal or remediations of such hazardous or toxic substances. However, the presence, with or without the Company's knowledge, of hazardous or toxic substances at any property held or operated by the Company could have an adverse effect on the Company's business, operating results and financial condition. Phase I Environmental Site Assessments have been undertaken on all of the Company's properties. In certain cases, additional Phase II site investigations have also been undertaken where deemed appropriate. Based on these reports, no on-site hazardous chemicals or petroleum products were detected or found to exist in the soil or in the groundwater at those properties which would result in action by state environmental agencies and which would require additional investigation and/or remediation, with the exception of the Mountain Park Plaza property. A Phase II investigation at this property, in February 1998, determined that there were detectable levels of certain hazardous materials above threshold levels 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 14 - Subsequent Events On January 29, 1999, the Company adopted a shareholder rights plan (the "Shareholder Rights Plan"). Terms of the Shareholder Rights Plan provide for a distribution to common shareholders of record at the close of business on February 16, 1999 of one Right for each outstanding share of common stock of the Company. Subject to limited exceptions, the Rights will be exercisable if a person or group acquires 15% or more of the Company's Common Stock or announces a tender offer for 15% or more of the Common Stock. Depending on the circumstances, the effect of the exercise of the Rights will be to permit each holder of a Right to either purchase stock in the Company or stock of the buyer, at a substantial discount, and, in so doing, materially dilute the level of ownership of the buyer in the Company. The Company will be entitled to redeem the Rights at $.01 per Right at any time before a person has acquired 15% or more of the outstanding common stock. The Shareholder Rights Plan will expire on February 16, 2009. On February 22, 1999, 1,000 shares of Common Stock, having an aggregate value of $10,000 as of that date, were issued to each independent director as compensation for their services for the year ended December 31, 1998. -41- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Company. Incorporated by reference to the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Item 11. Executive Compensation. Incorporated by reference to the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. Item 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference to the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. Item 13. Certain Relationships and Related Transactions. Incorporated by reference to the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act. -42- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. Sequential Page ---------- (a) 1. Financial Statements Independent Auditors' Report 23 Consolidated Balance Sheets as of December 31, 1998 and 1997 24 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 25 Consolidated Statements of Changes in Shareholders' Equity/Partners' Capital (Deficit) for the years ended December 31, 1998, 1997 and 1996 26 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 27 Notes to Consolidated Financial Statements 29 (a) 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts for the three years ended December 31, 1998 49 Schedule III - Real Estate and Accumulated Depreciation and Notes to Schedule at December 31, 1998 50 Schedule IV - Mortgage Loans on Real Estate at December 31, 1998 52 All other schedules have been omitted because they are not required or because the required information is contained in the financial statements or notes hereto. (a) 3. Exhibits (3.1A) Articles of Incorporation dated as of August 13, 1996 (incorporated by reference to the Company's Registration Statement on Form 10, File No. 001-13239) (3.1B) Amended Articles of Incorporation dated as of September 26, 1996 (incorporated by reference to the Company's Registration Statement on Form 10, File No. 001-13239) (3.1C) Articles of Amendment and Restatement of Articles of Incorporation dated as of October 1, 1997 (incorporated by reference to the Company's Registration Statement on Form 10, File No. 001-13239) (3.1D) Certificate of Correction dated as of October 22, 1997 (incorporated by reference to the Company's Current Report on Form 8-K, filed with the Commission on March 19, 1998) (3.2) Bylaws (incorporated by reference to the Company's Current Report on Form 8-K, filed with the Commission on March 19, 1998) (4.1) Specimen Copy of Stock Certificate for shares of the Company's Common Stock (incorporated by reference to the Company's Amendment No. 1 on Form 10/A to the Company's Registration Statement on Form 10, File No. 001-13239) (10A) Continental Casualty Company Insurance Policy issued to the Company (incorporated by reference to Exhibit 10(C) to the Company's Registration Statement on Form S-11, File No. 33-8755, as amended) (10B) Indemnity Agreement among Continental Casualty Company, the Company and the General Partners (incorporated by reference to Ex- -43- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) Sequential Page ---------- hibit 10(D) to the Company's Registration Statement on Form S-11, File No. 33-8755, as amended) (10C) Secured Promissory Note between Principal Mutual Life Insurance Company and Insured II dated December 11, 1992 (incorporated by reference to Exhibit 10F to Insured II's Annual Report on Form 10-K for the year ended December 31, 1992) (10D) Form of Purchase and Sale Agreement pertaining to Summit Preferred's acquisition of Preferred Equity Investments (incorporated herein by reference to exhibit 10C to Summit Preferred's S-11 Registration Statement) (10E) Form of Amended and Restated Agreement of Limited Partnership of Operating Partnerships (incorporated herein by reference to Exhibit 10B to Summit Preferred's S-11 Registration Statement) (10F) Mortgage Note, dated June 10, 1988, with respect to Cross Creek Apartments in Charlotte, North Carolina, in the principal amount of $17,494,100 (incorporated by reference to Exhibit 10(b) in Eagle's Current Report on Form 8-K dated June 15, 1988) (10G) Equity Loan Note, dated June 10, 1988, with respect to Cross Creek Apartments in Charlotte, North Carolina, in the principal amount of $1,783,900 (incorporated by reference to Exhibit 10(c) in Eagle's Current Report on Form 8-K dated June 15, 1988) (10H) Subordinated Loan Note, dated June 10, 1988, with respect to Cross Creek Apartments in Charlotte, North Carolina (incorporated by reference to Exhibit 10(d) in Eagle's Current Report on Form 8-K dated June 15, 1988) (10I) Mortgage Note, dated August 18, 1988, with respect to Weatherly Walk Apartments in Fayetteville, Georgia, in the principal amount of $7,772,500 (incorporated by reference to Exhibit 10(e) in Eagle's Current Report on Form 8-K dated August 19, 1988) (10J) Equity Loan Note, dated August 18, 1988, with respect to Weatherly Walk Apartments in Fayetteville, Georgia, in the principal amount of $895,200 (incorporated by reference to Exhibit 10(f) in Eagle's Current Report on Form 8-K dated August 19, 1988) (10K) Subordinated Loan Note, dated August 18, 1988, with respect to Weatherly Walk Apartments in Fayetteville, Georgia (incorporated by reference to Exhibit 10(g) in Eagle's Current Report on Form 8-K dated August 19, 1988) (10L) Mortgage Note, dated December 12, 1988, with respect to Woodgate Manor in Gainesville, Florida, in the principal amount of $3,110,300 (incorporated by reference to Exhibit 10(h) in Eagle's Current Report on Form 8-K dated December 12, 1988) (10M) Equity Loan Note, dated December 12, 1988, with respect to Woodgate Manor in Gainesville, Florida, in the principal amount of $339,700 (incorporated by reference to Exhibit 10(i) in Eagle's Current Report on Form 8-K dated December 12, 1988) (10N) Subordinated Promissory Note, dated December 12, 1988, with respect to Woodgate Manor in Gainesville, Florida (incorporated by reference to Exhibit 10(j) in Eagle's Current Report on Form 8-K dated December 12, 1988) (10O) Loan Agreement with Walsh/Cross Creek Limited Partnership and Cross Creek of Columbia, Inc. dated August 15, 1990 (incorporated by -44- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) Sequential Page ---------- reference to Exhibit 10(o) in Eagle's Annual Report on Form 10-K for the period ended December 31, 1990) (10P) 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) (10Q) 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) (10R) 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) (10S) 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) (10T) 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) (10U) 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) (10V) 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) (10W) 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) (10X) Management Agreement between the Company, Insured I, Insured II, the OP and the Property Manager dated October 1, 1997 (incorporated by reference to Exhibit 10Z in the Company's Annual Report on Form 10-K for the period ended December 31, 1997) 21 List of Subsidiaries (filed herewith) 53 27 Financial Data Schedule (filed herewith) 54 -45- 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 purchase of Southgate and Crossroads East was dated December 10, 1998 and was filed on December 18, 1998 Current report on Form 8-K/A-1 relating to the purchase of Southgate and Crossroads East was dated December 10, 1998 and was filed on February 25, 1999 -46- 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, 1999 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, 1999 J. Michael Fried /s/ Peter T. Allen - -------------------- Peter T. Allen Director March 30, 1999 /s/ Arthur P. Fisch - -------------------- Arthur P. Fisch Director March 30, 1999 /s/ Stuart J. Boesky Director, President and - -------------------- Chief Operating Officer March 30, 1999 Stuart J. Boesky /s/ Alan P. Hirmes - -------------------- Alan P. Hirmes Director and Senior Vice President March 30, 1999 /s/ John B. Roche Senior Vice President and Chief - -------------------- Financial and Accounting Officer March 30, 1999 John B. Roche
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 - ----------- ------------------------------- -------- -------- ---------- ------------- 1998 Allowance for Doubtful Accounts $304,000 $428,000 $(349,000) $383,000 1997 Allowance for Doubtful Accounts $303,000 $ 70,000 $ (69,000) $304,000 1996 Allowance for Doubtful Accounts $509,000 $ 58,000 $(264,000) $303,000 ---- ------------------------------- -------- -------- ---------- --------
*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, 1998
Cost Capitalized Initial Subsequent to Cost to Partnership (F) Acquisition Purchase Price Adjustments(E) --------------------------- ----------- ---------------------------- Encum- Buildings and Buildings and brances Land Improvements Improvements Land Improvements ------- ---------- ------------- ------------ ---------- ------------ Shopping Centers: Cactus Village $ 0 $ 2,093,532 $ 4,631,948 $ 33,517 $ (42,583) $ (93,903) Glendale, AZ Hickory Plaza 0 1,288,328 3,931,633 18,291 (3,750) (11,250) Nashville, TN Highland Fair (I) 1,288,328 5,059,079 138,661 (21,891) (60,437) Gresham, OR Pablo Plaza (H) 2,147,213 5,922,120 508,141 (7,866) (21,693) Jacksonville, FL Southhaven (H) 1,288,328 4,793,938 31,050 0 0 Southhaven, MS Town West (H) 1,932,491 3,303,752 20,814 0 0 Indianapolis, IN Westbird (H) 1,566,070 5,475,510 660,577 2,474 9,242 Miami, FL Winery Square (H) 4,320,555 8,916,731 157,429 (227,319) (477,165) Fairfield, CA Mountain View (H) 2,675,960 8,661,498 88,972 (143,357) (475,472) Village Shellville, GA Forest Park Squa (I) 1,532,064 7,822,819 10,000 (19,024) (99,866) Cincinnati, OH Kokomo Plaza (H) 695,912 6,643,748 31,557 (8,784) (78,640) Kokomo, IN Rolling Hills Square (H) 2,624,639 2,504,045 (7) 0 0 Tucson, AZ Mountain Park Plaza 0 1,566,015 3,791,633 0 0 0 Atlanta, GA Applewood Centre (H) 1,795,469 4,574,757 0 0 0 Omaha, NE Birdneck Center 0 469,227 2,828,615 0 0 0 Virginia Beach, VA The Market Place 0 810,910 4,875,966 0 0 0 Newton, NC Barclay Place 2,571,651 573,079 3,446,951 28,402 0 0 Lakeland, FL The Village At 4,004,897 940,193 5,628,720 0 0 0 Waterford Midlothian, VA Governor's Square 0 1,220,408 7,296,172 14,401 0 0 Montgomery, AL Marion City 0 765,950 4,609,112 0 0 0 Square Marion, NC Dunlop Village 0 751,518 4,490,192 0 0 0 Colonial Heights, VA Centre Stage 0 1,052,698 6,289,512 0 0 0 Springfield, TN White Oaks Plaza 0 1,237,309 7,433,184 0 0 0 Spindale, NC Cape Henry 0 587,486 3,522,096 0 0 0 Virginia Beach, VA Emporia West 0 435,001 2,619,706 0 0 0 Emporia, KS Oxford Mall 6,409,003 1,289,377 7,652,525 0 0 0 Oxford, MS Southgate 10,888,384 2,269,668 13,290,799 0 0 0 Heath, OH Crossroads East 0 721,798 4,228,102 0 0 0 Columbus, OH ----------- ----------- ------------ ---------- --------- ----------- $58,159,099 $39,939,526 $154,244,863 $1,741,805 $(472,100) $(1,309,184) =========== =========== ============ ========== ========= =========== Life on which Gross Amount at which Depreciation Carried At Close of Period(D) in Latest -------------------------------------- Income Buildings and Accumulated Year of Date Statement Land Improvements Total Depreciation Construction Acquired is Computed ---------- ------------ ---------- ------------ ------------ --------- ------------- Shopping Centers: Cactus Village $ 2,050,949 $ 4,571,562 $ 6,622,511 $ 1,339,629 1986 July 1987 40 years Glendale, AZ Hickory Plaza 1,284,578 3,938,674 5,223,252 1,149,968 1974(A) Apr. 1987 40 years Nashville, TN Highland Fair 1,266,437 5,137,303 6,403,740 1,441,000 1986 July 1987 40 years Gresham, OR Pablo Plaza 2,139,347 6,408,568 8,547,915 1,752,477 1972(B) Feb. 1987 40 years Jacksonville, FL Southhaven 1,288,328 4,824,988 6,113,316 1,426,631 1984(C) Feb. 1987 40 years Southhaven, MS Town West 1,932,491 3,324,566 5,257,057 999,043 1985 May 1987 40 years Indianapolis, IN Westbird 1,568,544 6,145,329 7,713,873 1,780,794 1977 Dec. 1986 40 years Miami, FL Winery Square 4,093,236 8,596,995 12,690,231 2,437,101 1987 Dec. 1987 40 years Fairfield, CA Mountain View 2,532,603 8,274,998 10,807,601 2,144,408 1987 July 1988 40 years Village Shellville, GA Forest Park Squa 1,513,040 7,732,953 9,245,993 1,900,831 1988 May 1989 40 years Cincinnati, OH Kokomo Plaza 687,128 6,596,665 7,283,793 1,608,135 1988 May 1989 40 years Kokomo, IN Rolling Hills Square 2,624,639 2,504,038 5,128,677 152,960 1980 Oct. 1997 30.5 years Tucson, AZ Mountain Park Plaza 1,566,015 3,791,633 5,357,648 151,950 1988 Oct. 1997 31.2 years Atlanta, GA Applewood Centre 1,795,469 4,574,757 6,370,226 180,020 1989 Oct. 1997 33.1 years Omaha, NE Birdneck Center 469,227 2,828,615 3,297,842 119,121 1987(G) Dec. 1997 40 years Virginia Beach, VA The Market Place 810,910 4,875,966 5,686,876 73,494 1989 Dec. 1997 40 years Newton, NC Barclay Place 573,079 3,475,353 4,048,432 71,900 1974(J) Mar. 1998 40 years Lakeland, FL The Village At 940,193 5,628,720 6,568,913 105,131 1991 Apr. 1998 40 years Waterford Midlothian, VA Governor's Square 1,220,408 7,310,573 8,530,981 107,735 1960(K) May 1998 40 years Montgomery, AL Marion City 765,950 4,609,112 5,375,062 66,794 1988 June 1998 40 years Square Marion, NC Dunlop Village 751,518 4,490,192 5,241,710 37,424 1986 Sep. 1998 40 years Colonial Heights, V Centre Stage 1,052,698 6,289,512 7,342,210 52,398 1989 Sep. 1998 40 years Springfield, TN White Oaks Plaza 1,237,309 7,433,184 8,670,493 61,721 1988 Sep. 1998 40 years Spindale, NC Cape Henry 587,486 3,522,096 4,109,582 28,985 1986 Sep. 1998 40 years Virginia Beach, VA Emporia West 435,001 2,619,706 3,054,707 11,011 1980 Nov. 1998 40 years Emporia, KS Oxford Mall 1,289,377 7,652,525 8,941,902 31,460 1982 Nov. 1998 40 years Oxford, MS Southgate 2,269,668 13,290,799 15,560,467 27,471 1962(L) Dec. 1998 40 years Heath, OH Crossroads East 721,798 4,228,102 4,949,900 8,738 1984(M) Dec. 1998 40 years Columbus, OH ----------- ------------ ------------ ----------- $39,467,426 $154,677,484 $194,144,910 $19,268,330 =========== ============ ============ ===========
(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. (H) This shopping center is part of a pool of assets collateralizing the Credit Facility which has an outstanding balance of $29,318,000 at December 31, 1998. (I) Highland Fair and Forest Park Square collateralize a loan with an outstanding balance of $4,967,164 at December 31, 1998. (J) Renovated and expanded in 1988. (K) Developed and renovated in four phases from 1960 through 1990. (L) Renovated in 1984 and from 1996 through 1997. (M) Renovated from 1996 through 1997. Reconciliation of Real Estate Owned:
1998 1997 1996 ------------ ------------ ----------- Balance at beginning of period: $111,042,804 $ 85,512,224 $85,800,450 Acquisitions 82,423,329 25,769,503 0 Improvements 703,687 36,282 119,325 Write-off of improvements (24,910) (275,205) (407,551) ------------ ------------ ----------- Balance at close of period: $194,144,910 $111,042,804 $85,512,224 ============ ============ ===========
Reconciliation of Accumulated Depreciation:
1998 1997 1996 ------------ ------------ ----------- Balance at beginning of period: $ 16,404,617 $ 14,841,244 $13,262,215 Depreciation Expense 2,880,114 1,835,782 1,986,580 Write-off of accumulated depreciation on improvements (16,401) (272,409) (407,551) ------------ ------------ ----------- Balance at close of period: $ 19,268,330 $ 16,404,617 $14,841,244 ============ ============ ===========
AEGIS REALTY, INC. AND SUBSIDIARIES Schedule IV - Mortgage Loans on Real Estate December 31, 1998
Carrying Final Periodic Face Amount Amount Interest Closing Maturity Payment Prior of Mortgage of Mortgage Description(1) Rate(2) Date Date(3)(5) Terms(4) Liens Loan Loan(6)(7)(8) - --------------- -------- ------- ---------- -------- ----- ----------- ------------- First Mortgage Loan: Woodgate Manor(9) 8.95% 12/12/88 1/1/24 Monthly None $3,110,300 $3,267,037 ========== ==========
(1) The property is a multifamily residential apartment complex. (2) Includes a servicing fee of 0.07% paid by the mortgagor to Related Mortgage Corporation (an affiliate of the Advisor). (3) As of December 13, 1998, the Company may call for prepayment of the entire outstanding principal amount at any time, subject to the loss of the co-insurance feature. (4) Monthly payments include principal and interest and are made at a level amount over the life of the mortgage loan until maturity. See discussion regarding additional interest in Item 1, "Business-Mortgage Loans." (5) As of December 13, 1998, the Borrower may elect to prepay at any time without incurring prepayment penalties. (6) Carrying amount of mortgage loans:
1998 1997 ------------ ------------ Beginning balance (10) $ 30,980,995 $ 31,049,146 Amortization of purchase accounting premiums (66,805) (28,157) Collections of principal (105,124) (39,994) Repayment of the Cross Creek Mortgage Loan (11) (19,042,376) 0 Carrying amount of the Cross Creek Mortgage Loan in excess of the repayment (11) (72,967) 0 Repayment of the Weatherly Walk Mortgage Loan (12) (8,380,752) 0 Carrying amount of the Weatherly Walk Mortgage Loan in excess of the repayment (12) (45,934) 0 ------------ ------------ Ending Balance $ 3,267,037 $ 30,980,995 ============ ============
(7) The aggregate cost of the mortgage loan for Federal income tax purposes at December 31, 1998 is $2,906,284. The difference in aggregate cost is due to the purchase accounting premium recorded for financial statement purposes. (8) The mortgage loan is current with respect to principal and interest. (9) The general partnership interest of the mortgagor is held by an affiliate of the Advisor. (10) The 1997 amount represents the balance at October 1, 1997 (date of the Consolidation) (11) On June 24, 1998, Cross Creek Apartments was sold and the related Mortgage Loan was repaid in full (see Note 6 to the financial statements in "Item 8. Financial Statements and Supplementary Data") (12) On August 26, 1998, FAI, Ltd., the limited partnership which owns Weatherly Walk Apartments, completed a refinancing with an unaffiliated third party and the related Mortgage Loan was repaid (see Note 6 to the financial statements in "Item 8. Financial Statements and Supplementary Data") EX-21 2 Exhibit 21 List of Subsidiaries of the Company ----------------------------------- 1. Aegis Realty Operating Partnership, L.P., a Delaware limited partnership 2. Barclay/Aegis Inc., a Delaware corporation List of Subsidiaries of Aegis Realty Operating Partnership, L.P. ---------------------------------------------------------------- 1. Summit Insured Equity L.P., a Delaware limited partnership 2. Summit Insured Equity L.P. II, a Delaware limited partnership 3. Barclay/Aegis Limited Partnership, a Delaware limited partnership 4. Aegis Waterford, L.L.C., a Delaware limited liability company 5. Aegis Oxford, L.L.C., a Mississippi limited liability company 6. Southgate Partners Limited Partnership, a Delaware limited partnership 7. Southgate/Aegis L.L.C., a Delaware limited liability company 8. Crossroads East Shopping Center, Ltd., an Ohio limited liability company 9. Aegis Realty Holding Partnership, L.P., a Delaware limited partnership EX-27 3 ART. 5 FDS FOR 1998 10-K
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, Inc. 1 12-MOS DEC-31-1998 JAN-1-1998 DEC-31-1998 3,003,474 0 8,173,948 383,000 0 1,235,742 194,144,910 19,268,330 195,389,970 6,538,468 58,864,099 0 0 0 123,183,508 195,389,970 0 19,504,803 0 0 11,706,189 0 1,931,874 6,646,633 0 0 0 0 0 6,646,633 .83 .82
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