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
<PAGE>
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.
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<PAGE>
PART I
Item 1. Business.
General
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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
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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:
<TABLE>
<CAPTION>
1998 1997* 1996*
---- ---- ----
<S> <C> <C> <C>
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%
</TABLE>
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*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
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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:
<TABLE>
<CAPTION>
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)
- ------------------- ------- ---- ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Woodgate Manor 12/12/ 12/13/ $3,110,300 $339,700 $3,450,000 8.95% 1/1/
Gainesville, FL (1) 1988 1988 2024
</TABLE>
(1) The general partner interest in the entity holding title to this Development
is held by an affiliate of the Advisor.
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(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
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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
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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
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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
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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
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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:
<TABLE>
<CAPTION>
% 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
- -------------------- --------- --------- ----------- --------- ------------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
% 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
- -------------------- --------- --------- ----------- --------- ------------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
% 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
- ----------------- --------- -------- ------ --- ------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Crossroads East 4,800,000 12/9/98 71,925 78% 470,000 *** 3 shopping
Columbus, OH centers
</TABLE>
*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-
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1998 1997 1997
Quarter Ended Low High Low High
- ------------- --- ---- --- ----
<S> <C> <C> <C> <C>
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
</TABLE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
Cash Distribution Total Amount
for Quarter Ended Date Paid Per Share Distributed
- ----------------- --------- --------- ------------
<S> <C> <C> <C>
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
======== ==========
</TABLE>
(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:
<TABLE>
<CAPTION>
Cash Distribution Approximate Total Quarterly Total Amount
for Quarter Ended Date Paid Distribution Per BUC of Distribution
- ----------------- --------- -------------------- ---------------
<S> <C> <C> <C>
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 $2,700,004
======== ==========
</TABLE>
Total Adjusted Cash from Operations remaining after payment of a special
distribution to the general partners of Insured I was distributed 99% to the
BUC$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-
<PAGE>
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:
<TABLE>
<CAPTION>
Date of Sale Title Number
- ------------ ----- ------
<S> <C> <C>
05/28/98 OP Units 94,726
12/9/98 OP Units 208,914
12/9/98 OP Units 167,149
</TABLE>
(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-
<PAGE>
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".
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------
OPERATIONS 1998* 1997* 1996* 1995* 1994*
- ---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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***
============ ============
</TABLE>
-13-
<PAGE>
OTHER DATA
- ----------
<TABLE>
<CAPTION>
Year Three Months
Ended Ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
*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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
Year Three Months
Ended Ended
December 31, December 31,
1998 1997
------------ -----------
<S> <C> <C>
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)
============ ===========
</TABLE>
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-
<PAGE>
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-
<PAGE>
<TABLE>
<CAPTION>
Item 8. Financial Statements and Supplementary Data.
Page
----
<S> <C>
(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
</TABLE>
-22-
<PAGE>
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-
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
-24-
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
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***
============ ============
</TABLE>
*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-
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY/PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Treasury Stock Additional Distributions
Limited General ------------------ -------------- Paid-in in Excess of
Partners Partners Shares Amount Shares Amount Capital Net Income Total
------------ --------- --------- ------- ------ ------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
============ ========= ========= ======= ====== ==== ============= =========== =============
</TABLE>
See accompanying notes to consolidated financial statements
-26-
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
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)
------------ ------------ -----------
</TABLE>
(continued)
-27-
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996
------------ ------------- -----------
<S> <C> <C> <C>
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)
============ ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements
-28-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
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
============= =============
</TABLE>
-31-
<PAGE>
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:
<TABLE>
<CAPTION>
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
- --------- -------- ----------- ----------- -------- ---------- -------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
(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-
<PAGE>
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.
<TABLE>
<CAPTION>
1998 1997* 1996*
---- ---- ----
<S> <C> <C> <C>
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%
</TABLE>
*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:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---------- -----------
<S> <C> <C>
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
========== ==========
</TABLE>
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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
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
- ---------- -------- -------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
=========== ===========
</TABLE>
(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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
Year Three Months
Ended Ended
December 31, December 31,
1998 1997
---------- --------
<S> <C> <C>
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
========== ========
</TABLE>
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:
<TABLE>
<CAPTION>
Nine Months Year
Ended Ended
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Expense reimbursement $ 79,935 $178,600
Property management fees 352,397 420,157
-------- --------
$432,332 $598,757
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
Nine Months Year
Ended Ended
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Special Distributions $326,454 $435,272
Regular Distributions of Adjusted Cash
from Operations 27,273 36,364
-------- --------
$353,727 $471,636
======== ========
</TABLE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - Selected Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
1998 Quarter Ended 1997
-------------------------------------------------- Quarter Ended
March 31 June 30 September 30 December 31 December 31
---------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
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
========== ========== ========== ========== ==========
</TABLE>
-40-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Signature Title Date
- -------------- ---------------------------------- --------------
<S> <C> <C>
/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
</TABLE>
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Additions
Year Ended Beginning During Deduction- Balance at
December 31 Name of Period* Year* Write-offs* End of Period
- ----------- ------------------------------- -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
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
---- ------------------------------- -------- -------- ---------- --------
</TABLE>
*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.
<PAGE>
AEGIS REALTY, INC.
ITEM 14, SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
<TABLE>
<CAPTION>
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:
<S> <C> <C> <C> <C> <C> <C>
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)
=========== =========== ============ ========== ========= ===========
<CAPTION>
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:
<S> <C> <C> <C> <C> <C> <C> <C>
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
=========== ============ ============ ===========
</TABLE>
(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:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
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
============ ============ ===========
</TABLE>
Reconciliation of Accumulated Depreciation:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
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
============ ============ ===========
</TABLE>
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Schedule IV - Mortgage Loans on Real Estate
December 31, 1998
<TABLE>
<CAPTION>
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)
- --------------- -------- ------- ---------- -------- ----- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
First Mortgage Loan:
Woodgate Manor(9) 8.95% 12/12/88 1/1/24 Monthly None $3,110,300 $3,267,037
========== ==========
</TABLE>
(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:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
(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")
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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
</LEGEND>
<CIK> 0001043324
<NAME> Aegis Realty, Inc.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,003,474
<SECURITIES> 0
<RECEIVABLES> 8,173,948
<ALLOWANCES> 383,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,235,742
<PP&E> 194,144,910
<DEPRECIATION> 19,268,330
<TOTAL-ASSETS> 195,389,970
<CURRENT-LIABILITIES> 6,538,468
<BONDS> 58,864,099
0
0
<COMMON> 0
<OTHER-SE> 123,183,508
<TOTAL-LIABILITY-AND-EQUITY> 195,389,970
<SALES> 0
<TOTAL-REVENUES> 19,504,803
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,706,189
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,931,874
<INCOME-PRETAX> 6,646,633
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,646,633
<EPS-PRIMARY> .83
<EPS-DILUTED> .82
</TABLE>
