SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-13239
AEGIS REALTY, INC.
------------------
(Exact name of Registrant as specified in its charter)
Maryland 13-3916825
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
- ---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
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 |_|
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
============ =============
June 30, December 31,
1999 1998
------------- -------------
ASSETS
Real estate, net $ 173,290,074 $ 174,876,580
Investment in partnerships 6,035,268 6,095,543
Mortgage loan receivable 3,244,035 3,267,037
Loans receivable from affiliates 2,077,929 2,081,015
Cash and cash equivalents 3,852,365 3,003,474
Accounts receivable-tenants, net of allowance for
doubtful accounts of $501,000 and $383,000,
respectively 2,266,707 2,442,896
Deferred costs, net 2,480,611 2,387,683
Other assets 756,144 1,235,742
------------- -------------
Total Assets $ 194,003,133 $ 195,389,970
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 59,099,001 $ 58,864,099
Accounts payable and other liabilities 3,455,162 3,575,499
Due to Advisor and affiliates 425,683 355,915
Distributions payable 2,058,004 2,607,054
------------- -------------
Total Liabilities 65,037,850 65,402,567
------------- -------------
Minority interest of unitholders in the
Operating Partnership 6,740,343 6,803,895
------------- -------------
Commitments and Contingencies
Shareholders' equity:
Common stock; $.01 par value;
50,000,000 shares authorized; 8,053,159
issued and 8,046,859 outstanding and
8,051,159 issued and 8,044,859 outstanding
in 1999 and 1998, respectively 80,531 80,511
Treasury stock; $.01 par value; 6,300 shares (63) (63)
Additional paid in capital 125,319,076 125,299,096
Distributions in excess of net income (3,174,604) (2,196,036)
------------- -------------
Total Shareholders' Equity 122,224,940 123,183,508
------------- -------------
Total Liabilities and Shareholders' Equity $ 194,003,133 $ 195,389,970
============= =============
See accompanying notes to consolidated financial statements
2
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
========================= ==========================
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
1999 1998 1999 1998
------------------------- --------------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 4,916,201 $ 2,933,050 $ 9,934,389 $ 5,657,035
Tenant reimbursements 1,178,670 1,027,607 2,357,345 1,561,785
Income from equity investments 85,937 81,467 171,438 223,588
Interest income 124,878 663,096 240,055 1,367,217
Other 25,519 15,765 58,401 48,467
----------- ----------- ------------ -----------
Total revenues 6,331,205 4,720,985 12,761,628 8,858,092
----------- ----------- ------------ -----------
Expenses:
Repairs and maintenance 365,487 236,934 776,728 510,792
Real estate taxes 667,561 414,866 1,291,957 786,473
Interest 1,107,410 470,691 2,212,690 836,251
General and administrative 1,093,984 819,785 2,085,282 1,421,970
Depreciation and amortization 1,204,899 892,386 2,494,641 1,652,158
Other 334,525 348,519 828,969 603,965
----------- ----------- ------------ -----------
Total expenses 4,773,866 3,183,181 9,690,267 5,811,609
----------- ----------- ------------ -----------
Income before gain on sale of
investment 1,557,339 1,537,804 3,071,361 3,046,483
Gain on sale of investment in
partnership 0 0 0 779,893
----------- ----------- ------------ -----------
Income before minority interest 1,557,339 1,537,804 3,071,361 3,826,376
Minority interest in income of
the Operating Partnership (95,915) (14,877) (187,437) (28,007)
----------- ----------- ------------ -----------
Net income $ 1,461,424 $ 1,522,927 $ 2,883,924 $ 3,798,369
=========== =========== ============ ===========
Net income per share:
Basic $ .18 $ .19 $ .36 $ .47
=========== =========== ============ ===========
Diluted $ .18 $ .19 $ .35 $ .47
=========== =========== ============ ===========
Weighted average shares
outstanding:
Basic 8,046,859 8,050,855 8,046,284 8,050,791
=========== =========== ============ ===========
Diluted 8,169,020 8,050,855 8,168,445 8,050,791
=========== =========== ============ ===========
</TABLE>
3
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Additional Distributions
Common Stock Treasury Stock Paid-in in Excess of
Shares Amount Shares Amount Capital Net Income Total
------ ------ ------ ------ ---------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 8,051,159 $80,511 (6,300) $ (63) $125,299,096 $(2,196,036) $ 123,183,508
Net income 0 0 0 0 0 2,883,924 2,883,924
Issuance of shares of
common stock 2,000 20 0 0 19,980 0 20,000
Distributions 0 0 0 0 0 (3,862,492) (3,862,492)
--------- ------- ------ ----- ------------ ----------- -------------
Balance at June 30, 1999 8,053,159 $80,531 (6,300) $ (63) $125,319,076 $(3,174,604) $ 122,224,940
========= ======= ====== ===== ============ =========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
==========================
Six Months Ended
June 30,
--------------------------
1999 1998
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,883,924 $ 3,798,369
----------- ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of investment in partnership 0 (779,893)
Loss on repayment of mortgage loan receivable 0 72,967
Depreciation and amortization 2,522,980 1,735,900
Minority interest in income of
the Operating Partnership 187,437 28,007
Distributions from equity investments
in excess of income 39,092 42,574
Changes in operating assets and liabilities:
Accounts receivable-tenants 58,654 103,661
Allowance for doubtful accounts 117,535 196,403
Other assets 479,598 (148,129)
Due to Advisor and affiliates 89,768 (229,282)
Accounts payable and other liabilities (120,337) 388,749
Leasing commissions (305,655) (54,067)
Deferred leasing costs (27,500) 0
----------- ------------
Total adjustments 3,041,572 1,356,890
----------- ------------
Net cash provided by operating activities 5,925,496 5,155,259
----------- ------------
Cash flows from investing activities:
Proceeds from sale of investment in partnership 0 4,727,500
Improvements to real estate (296,804) (109,334)
Acquisitions of real estate including acquisition
expenses (157,179) (16,414,814)
Increase in deferred acquisition expenses (44,224) (134,169)
Repayments of loans receivable from affiliates 3,086 3,060,000
Principal payments received on mortgage loans 15,846 19,125,091
----------- ------------
Net cash (used in) provided by investing activities (479,275) 10,254,274
----------- ------------
Cash flows from financing activities:
Proceeds from notes payable 500,000 15,250,000
Repayments of notes payable (265,098) (11,268,137)
Distributions paid (4,465,381) (3,864,348)
Increase in deferred loan costs (169,701) (341,034)
Distributions to minority interest (197,150) (22,482)
Consolidation costs 0 (41,547)
Consolidation costs allocated to
minority interest 0 (276)
----------- ------------
Net cash used in financing activities (4,597,330) (287,824)
----------- ------------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements
5
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
==========================
Six Months Ended
June 30,
--------------------------
1999 1998
--------------------------
Net increase in cash and cash equivalents 848,891 15,121,709
Cash and cash equivalents at the beginning of
the period 3,003,474 6,728,050
----------- ------------
Cash and cash equivalents at the end of the period $ 3,852,365 $ 21,849,759
=========== ============
Supplemental information:
Interest paid $ 2,259,284 $ 692,905
=========== ============
Supplemental disclosure of noncash
investing and financing activities:
Notes payable assumed in acquisition of real estate $ 0 $ 6,650,648
=========== ============
Real estate acquired for units in the Operating
Partnership $ 0 $ 1,231,438
=========== ============
Issuance of shares of common stock for
director fees $ 20,000 $ 5,000
=========== ============
Distributions declared $(3,862,492) $ (3,864,453)
(Decrease) increase in distributions payable
to shareholders (602,889) 105
----------- ------------
Distributions paid $(4,465,381) $ (3,864,348)
=========== ============
See accompanying notes to consolidated financial statements
6
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
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 June 30, 1999, the Company owned a portfolio of 28 retail properties (the
"Retail Properties"), held partnership interests in two suburban garden
apartment properties and held one FHA insured participating mortgage secured by
a suburban garden apartment property.
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. and Eagle Insured, L.P.
(the "Partnerships", and each individually a "Partnership"). One of the general
partners of the Partnerships was an affiliate of Related Capital Company
("Related"). 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.
As of June 30, 1999, there were 8,046,859 shares of Common Stock outstanding (an
additional 545,812 shares were reserved for issuance upon conversion of OP
Units, as defined below).
The Company is governed by a board of directors comprised of two independent
directors and three directors who are affiliated with Related. The Company has
engaged Related Aegis LP (the "Advisor"), a Delaware limited partnership and an
affiliate of Related, to manage its day to day affairs.
The Company owns all of its assets directly or indirectly through Aegis Realty
Operating Partnership, LP, a Delaware limited partnership (the "Operating
Partnership" or "OP"), of which the Company is the sole general partner and
holder of 93.65% of the units of partnership interest (the "OP Units") at June
30, 1999. Also, at June 30, 1999, 3.35% and 3.00% of the OP Units are held by
the sellers of three of the Retail Properties and by affiliates of Related,
respectively.
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.
The accompanying financial statements have been prepared without audit. In the
opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of the Company as of June 30, 1999, the results of its
operations for the three and six months ended June 30, 1999 and 1998 and its
cash flows for the six months ended June 30, 1999 and 1998. However, the
operating results for the interim periods may not be indicative of the results
for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles ("GAAP") have been condensed or omitted. It is suggested that these
financial statements should be read in con-
7
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
junction with the financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 1998.
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.
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 2001. 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.
Certain amounts in the 1998 financial statements have been reclassified to
conform to the 1999 presentation.
Note 2 - Real Estate
The components of real estate are as follows:
June 30, December 31,
1999 1998
------------- -------------
Land $ 39,467,426 $ 39,467,426
Buildings and improvements 155,045,833 154,677,484
------------- -------------
194,513,259 194,144,910
Less: Accumulated depreciation (21,223,185) (19,268,330)
------------- -------------
$ 173,290,074 $ 174,876,580
============= =============
The 470,789 OP Units which were issued to the sellers of Governor's Square,
Southgate and Crossroads East, three Retail Properties, are convertible to
shares of Common Stock on a one-to-one basis, subject to adjustment, on the one
year anniversary of their respective closing dates. The OP Units were issued at
an agreed upon value of $13 per 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. An additional 28,187 OP Units were issued to the seller of
Governor's Square on the Post-Closing Adjustment Date (May 28, 1999) based on
the Average Price Per Share of $10.01875. An additional 122,161 OP Units would
have to be issued to the sellers of Southgate and Crossroads East on the
Post-Closing Adjustment Date (December 9, 1999), based on the closing price per
share of 9 13/16 on June 30, 1999.
8
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
Amounts estimated to be recoverable from future operations and ultimate sales
are greater than the carrying value of each property owned at June 30, 1999.
However, the carrying value of certain properties may be in excess of their fair
value as of such date.
Note 3 - Deferred Costs
The components of deferred costs are as follows:
June 30, December 31,
1999 1998
----------- -----------
Deferred insurance costs $ 6,005,804 $ 6,005,804
Deferred loan costs 2,012,302 1,842,601
Deferred leasing commissions and costs 1,183,299 928,148
Deferred acquisition expenses 158,453 114,229
----------- -----------
9,359,858 8,890,782
Less: Accumulated amortization (6,879,247) (6,503,099)
----------- -----------
$ 2,480,611 $ 2,387,683
=========== ===========
9
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
NOTE 4 - Notes Payable
As of June 30, 1999 and December 31, 1998, the Company had notes payable with
outstanding balances totaling $59,099,001 and $58,864,099, respectively. Further
information regarding the notes is as follows:
<TABLE>
<CAPTION>
Collateral/
Date of Monthly Carrying
Note/ Payment Outstanding Outstanding Value at
Maturity Interest of Principal Balance Balance March 31,
Noteholder Date Rate and Interest at 6/30/99 at 12/31/98 1999
- ---------- ----------- --------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
New York Life 7/11/95 9.25% $55,984 $ 4,840,395 $ 4,967,164 Forest Park &
Insurance 6/10/00 Highland Fair/
Company $12,223,023
BankBoston, 12/30/97 (b) Interest 29,818,000 29,318,000(c) (i)
N.A. (a) 12/30/00 (j) only
KeyBank
National
Association (a)
Heller 6/24/97(d) 8.50% $19,992 2,558,952 2,571,651 Barclay Place/
Financial, Inc. 7/1/17 $3,954,036
Nomura 10/28/97(e) 7.54% $33,130 3,958,042 4,004,897 Village At
Asset Capital 11/11/22 Waterford/
Corporation $6,428,627
Chase Bank 12/16/96(f) 8.875% $51,717 6,382,617 6,409,003 Oxford Mall/
1/1/07 $8,891,523
Merrill Lynch 9/18/97(g) 7.73% $79,509 10,835,995 10,888,384 Southgate/
Credit 10/1/07 $15,449,965
Corporation
Sellers of 12/10/98 (h) $ 0 200,000 200,000 None
Southgate 12/10/99
Sellers of 12/10/98 (h) $ 0 230,000 230,000 None
Crossroads East 12/10/99
Sellers of 12/10/98 (h) $ 0 275,000 275,000 None
----------- -----------
Crossroads East 12/9/99
$59,099,001 $58,864,099
=========== ===========
</TABLE>
(a) The Credit Facility is shared among BankBoston, N.A. (28.57%), KeyBank
National Association (28.57%), Citizens Bank of Rhode Island (28.57%) and
Sovereign Bank (14.29%).
(b) The interest rate under the Credit Facility can float 1/2% under
BankBoston's base rate or can be fixed in 30, 60, 90 and 180 day periods at
1.625% over the indicated Euro-contract rate at the option of the Company. The
Company has currently elected the 30 day rate which was 5.25% at June 30, 1999.
(c) Outstanding balance of a $70 million senior revolving credit facility
("Credit Facility").
(d) Note was assumed upon purchase of the property by the Company on March 31,
1998.
10
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
(e) Note was assumed upon purchase of the property by the Company on April 22,
1998.
(f) Note was assumed upon purchase of the property by the Company on
November 24, 1998.
(g) Note was assumed upon purchase of the property by the Company on December 9,
1998.
(h) Note is non-interest bearing.
(i) The Credit Facility was collateralized at June 30, 1999 by nine Retail
Properties, one investment in a partnership and one Mortgage Loan with carrying
values of $56,906,221, $5,259,434 and $3,244,035, respectively. In addition, the
obligation under the Credit Facility is guaranteed by the Company, Insured I,
Insured II and TCR-Pinehurst Limited Partnership.
(j) The Company has an option to extend the maturity date to 12/30/03 upon
payment of certain fees.
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 on $10,000,000 of the Credit Facility debt to a fixed
rate of 5.44% and matures on December 1, 2000. The Company accounts for the net
cash settlements under this swap agreement as adjustments to the interest
expense on the Credit Facility. The Company is exposed to credit loss in the
event of nonperformance by the other party to the interest rate swap agreement;
however, the Company does not anticipate nonperformance by the counter party.
The Company estimates that if it decided to terminate this swap agreement at
June 30, 1999, the counter party would be required to pay the Company
approximately $25,000; however, the Company currently has no intention of
terminating this agreement.
Note 5 - Common Stock
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. As of June 30, 1999 and December 31, 1998, 1,216
and 216 shares, respectively, having an aggregate value of $12,500 and $2,500,
respectively, have been issued to each independent director as compensation for
their services.
Note 6 - Related Party Transactions
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.
11
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
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.
The costs incurred to related parties for the three and six months ended June
30, 1999 and 1998 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Acquisition fees $ 0 $ 733,559 $ 0 $ 877,388
Expense reimbursement 74,631 87,001 126,687 102,303
Property management fees 312,345 196,301 635,151 376,094
Asset management fee 194,039 154,092 385,965 301,394
---------- ---------- ---------- ----------
$ 581,015 $1,170,953 $1,147,803 $1,657,179
========== ========== ========== ==========
On December 9, 1998, in connection with the acquisition of two Retail
Properties, the Company made loans (the "OP Unit Loans") totaling $2,081,015 to
Standard Investment Company ("SIC"), a partner in the partnerships which owned
the properties; SIC is not affiliated with the Advisor or its affiliates but
affiliates of the Advisor were also partners in such partnerships. The loans are
secured by the 163,517 OP Units which were issued to SIC in exchange for its
partnership interests in the partnerships which owned the properties and also by
guarantees from the principals of SIC for 25% of the total loan amounts. The OP
Unit Loans bear interest at 7.613% and mature on December 9, 2015 or earlier if
the underlying shopping centers are sold. Interest and principal on the OP Unit
Loans are payable only to the extent of distributions with respect to the OP
Units. Such distributions will be retained by the Company until all accrued
interest and the outstanding balances of the loans are repaid. As of June 30,
1999, the balances of these OP Unit Loans totaled $2,077,929 and are shown as
loans receivable from affiliates on the consolidated balance sheets.
Note 7 - Earnings Per Share
Basic net income per share in the amount of $.18 and $.19 and $.36 and $.47 for
the three and six months ended June 30, 1999 and 1998, respectively, equals net
income for the periods ($1,461,424 and $1,522,927 and $2,883,924 and $3,798,369,
respectively), divided by the weighted average number of shares outstanding for
the periods (8,046,859 and 8,050,855 and 8,046,284 and 8,050,791, respectively).
Diluted net income per share in the amount of $.18 and $.19 and $.35 and $.47
for the three and six months ended June 30, 1999 and 1998, respectively, equals
net income for the periods, divided by the weighted average number of diluted
shares outstanding for the periods (8,169,020 and 8,050,855 and 8,168,445 and
8,050,791, respectively). The weighted average number of diluted shares
outstanding for the three and six months ended June 30, 1999 reflects an
additional 122,161 OP Units which would have to be issued to the sellers of two
Retail Properties on the Post-Closing Adjustment Date based on the closing price
per share on June 30,
12
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
1999 (see Note 2). For purposes of this calculation, the additional OP Units are
assumed to be immediately converted to shares of Common Stock.
There is no difference between basic and diluted net income per share with
respect to the conversion of the minority interests' OP Units outstanding at
June 30, 1999 and 1998 into an additional 545,812 and 141,562 shares,
respectively, of Common Stock because the earnings of an OP Unit are equivalent
to the earnings of a share of Common Stock.
Note 8 - Commitments and Contingencies
The Company is subject to routine litigation and administrative proceedings
arising in the ordinary course of business. Management does not believe that
such matters will have a material adverse impact on the Company's financial
position, results of operations or cash flows.
A current or previous owner or operator of real property may be legally liable
for the costs of removal or remediation of hazardous or toxic substances on,
under or in such property. Such liability may exist whether or not the owner or
operator knew of, or was responsible for, such hazardous or toxic substances. In
addition, the presence of hazardous or toxic substances may adversely affect the
owner's ability to borrow funds using such real property as collateral. Certain
environmental laws impose liability for release of asbestos-containing materials
("ACMs") into the air and third parties may seek recovery from owners or
operators of real properties for personal injury associated with ACMs. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, the Company may be liable for removal or
remediation costs, as well as certain other potential costs which could relate
to such hazardous or toxic substances or ACMs (including governmental fines and
injuries to persons and property). To date, the Company has not incurred any
costs of removal or remediations of such hazardous or toxic substances. However,
the presence, with or without the Company's knowledge, of hazardous or toxic
substances at any property held or operated by the Company could have an adverse
effect on the Company's business, operating results and financial condition.
Phase I Environmental Site Assessments have been undertaken on all of the
Company's properties. In certain cases, additional Phase II site investigations
have also been undertaken where deemed appropriate. Based on these reports, no
on-site hazardous chemicals or petroleum products were detected or found to
exist in the soil or in the groundwater at those properties which would result
in action by state environmental agencies and which would require additional
investigation and/or remediation, with the exception of the Mountain Park Plaza
property. A Phase II investigation at this property, in February 1998,
determined that there were detectable levels of certain hazardous materials
above threshold levels which are ascertained by the Georgia State Department of
Natural Resources Environmental Protection Division ("GAEPD"). Based on this
report and notification to GAEPD, additional investigation, monitoring and/or
remediation may be required by GAEPD. These hazardous materials were determined
to derive from an on-site dry cleaner and an adjacent service station with a
pre-existing, documented underground leaking storage tank. Property management
and the Company have taken preliminary steps in providing appropriate
notification to GAEPD on these matters together with notification and possible
remedies against both the on-site dry cleaner and adjacent service station.
Dependent on a numerical score "ranking" for the site which is dependent on
several factors (the most important being the potential for human exposure to
occur) the GAEPD may require additional investigation and/or remediation. On May
28, 1999
13
<PAGE>
AEGIS REALTY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
management received notification form GAEPD that the site is now listed on the
GAEPD Hazardous Site Inventory ("HSI") due, in part, to the presence of
detectable levels of certain hazardous materials at slightly higher than maximum
allowable levels. Management is considering, at this time, a re-sampling to
determine if such levels continue to exist in order to potentially qualify for a
de-listing from the HSI and/or begin the installation of monitoring wells to
further determine the extent of remediation. Management, at this time, is unable
to predict further requirements, if any, or the ultimate cost of remediation if
it is necessary.
14
<PAGE>
Item 2. 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 June 30, 1999, the Company owned a portfolio of 28 retail
properties (the "Retail Properties") containing a total of approximately 3.0
million gross leaseable square feet ("GLA"), held partnership interests in two
suburban garden apartment properties (the "Multifamily Properties"), held one
FHA insured participating mortgage secured by a suburban garden apartment
property (the "FHA Mortgage") and had net assets of approximately $122,225,000.
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 June 30, 1999, there were 8,046,859 shares of Common Stock outstanding (an
additional 545,812 shares were reserved for issuance upon conversion of OP
Units).
The Company has initiated a focused business/strategic plan designed to increase
funds from operations ("FFO") and to enhance the value of its stock. The plan
concentrates principally on 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.
Internal growth will occur from the re-deployment of proceeds from the sale or
other disposition of non-core assets currently in the portfolio and through
intensive management, leasing and redevelopment services provided to the Company
by the Property Manager and the Advisor. The Company considers non-core assets
to be those assets the Company has enhanced and no longer offer above market
rates of return or those assets which due to location, configuration or tenant
profile no longer offer the Company the prospects of better than market rates of
growth. The Company regularly reviews its portfolio to identify non-core assets
and to deter-
15
<PAGE>
mine whether the time is appropriate to sell or otherwise dispose of such assets
whose characteristics are no longer suited to the Company's overall growth
strategy or operating goals.
Finally, the Company will encourage the Advisor 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.
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 on $10,000,000 of the Credit Facility debt to a fixed
rate of 5.44% and matures on December 1, 2000. The Company accounts for the net
cash settlements under this swap agreement as adjustments to the interest
expense on the Credit Facility. The Company is exposed to credit loss in the
event of nonperformance by the other party to the interest rate swap agreement;
however, the Company does not anticipate nonperformance by the counter party.
The Company estimates that if it decided to terminate this swap agreement at
June 30, 1999, the counter party would be required to pay the Company
approximately $25,000; however, the Company currently has no intention of
terminating this agreement.
As a REIT, the Company is required to distribute at least 95% of its taxable
income to maintain REIT status. Funds generated from operations are expected to
be sufficient to allow the Company to meet this requirement.
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) 46% of total revenues for the six months ended June 30, 1999 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 8% of total revenues for the six
months ended June 30, 1999.
(iv) Leases that provide for recovery of actual common area maintenance charges
and real estate taxes, thereby minimizing any effects from inflation.
(v) Leases that provide for increases in rents based on a percentage of tenants'
sales.
(vi) A mortgage note which is substantially guaranteed by FHA and a co-insurer
and that provides for participation in increases in operating results and market
value of the underlying collateral.
During the six months ended June 30, 1999, cash and cash equivalents of the
Company and its consolidated subsidiaries increased approximately $849,000. This
increase was primarily due to cash provided by operating activities ($5,925,000)
and net proceeds from notes payable
16
<PAGE>
($235,000) which exceeded improvements to real estate ($297,000), acquisition
expenses ($157,000), an increase in deferred loan costs ($170,000),
distributions paid ($4,465,000) and distributions to minority interest
($197,000). Included in the adjustments to reconcile the net income to cash
provided by operating activities is depreciation and amortization in the amount
of $2,523,000.
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
August 13, 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 August 13,
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 had 60 days to affirm or reject the lease. The Company expects (a) this
lease will be affirmed, (b) the 60 days rent is post petition and will be paid
in full and (c) in the unlikely event this lease is 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 of August 13,
1999 (a) the lease has not been officially affirmed or rejected, (b) Penn
Traffic's reorganization plan was approved by the court on May 27, 1999 with
implementation awaiting completion of final creditor negotiations and (c) the
rent for the period March 2, 1999 through August 31, 1999 has been paid leading
the Company to believe the lease will be affirmed.
For a discussion of environmental issues affecting one of the Company's Retail
Properties see Note 8 to the consolidated financial statements.
In August 1999, a distribution of $1,931,246 ($.24 per share) which was declared
in June 1999 was paid to the shareholders from cash flow from operations for the
quarter ended June 30, 1999.
Management is not aware of any trends or events, commitments or uncertainties,
which have not otherwise been disclosed that will or are likely to impact
liquidity in a material way.
Results of Operations
For the three and six months ended June 30, 1999 as compared to 1998, total
revenues and total expenses increased due to the acquisition of 12 Retail
Properties during 1998. The Company's results of operations for the three and
six months ended June 30, 1999 consisted primarily of the results of the
Company's investment in 28 Retail Properties, two Multifamily Properties and one
FHA Mortgage. The Company's results of operations for the three months ended
June 30,
17
<PAGE>
1998 consisted primarily of the results of the Company's investment in 19 Retail
Properties, one Multifamily Property and three FHA Mortgages. The Company's
results of operations for the six months ended June 30, 1998 consisted primarily
of the results of the Company's investment in 19 Retail Properties, two
Multifamily Properties, three FHA Mortgages and a gain on the sale of an
investment in one Multifamily Property.
Rental income increased approximately $1,983,000 and $4,277,000 for the three
and six months ended June 30, 1999 as compared to 1998. Increases of $1,957,000
and $4,331,000 were due to the acquisition of 12 Retail Properties during 1998
(the "1998 Acquisitions"). Excluding these acquisitions, rental income increased
approximately 1% and decreased approximately 1% for the three and six months
ended June 30, 1999 as compared to 1998.
Tenant reimbursements increased approximately $151,000 and $796,000 for the
three and six months ended June 30, 1999 as compared to 1998. Increases of
$507,000 and $993,000 were due to the 1998 Acquisitions. Excluding these
acquisitions, tenant reimbursements decreased approximately $356,000 and
$197,000 for the three and six months ended June 30, 1999 as compared to 1998
primarily due to additional billings to tenants and increases in estimates for
recoverable amounts in 1998.
Income from equity investments increased approximately $4,000 and decreased
approximately $52,000 for the three and six months ended June 30, 1999 as
compared to 1998. The decrease for the six months was primarily due to the sale
of the Company's limited partnership interest in Dominion on March 20, 1998.
Interest income decreased approximately $538,000 and $1,127,000 for the three
and six months ended June 30, 1999 as compared to 1998 primarily due to the
repayment of the Cross Creek FHA Mortgage and the Cross Creek Loan on June 24,
1998 and the repayment of the Weatherly Walk FHA Mortgage on August 26, 1998.
Other income increased approximately $10,000 for both the three and six months
ended June 30, 1999 as compared to 1998. Increases of $17,000 and $33,000 were
due to the 1998 Acquisitions. Excluding these acquisitions, other income
decreased approximately $7,000 and $23,000 for the three and six months ended
June 30, 1999 as compared to 1998.
Repairs and maintenance increased approximately $129,000 and $266,000 for the
three and six months ended June 30, 1999 as compared to 1998. Increases of
$124,000 and $305,000 were due to the 1998 Acquisitions. Excluding these
acquisitions, repairs and maintenance increased approximately $5,000 and
decreased approximately $39,000 for the three and six months ended June 30, 1999
as compared to 1998.
Real estate taxes increased approximately $253,000 and $505,000 for the three
and six months ended June 30, 1999 as compared to 1998. Increases of $253,000
and $471,000 were due to the 1998 Acquisitions. Excluding these acquisitions,
real estate taxes increased less than $1,000 and approximately $34,000 for the
three and six months ended June 30, 1999 as compared to 1998.
Interest expense increased approximately $637,000 and $1,376,000 for the three
and six months ended June 30, 1999 as compared to 1998 primarily due to a higher
outstanding balance of the Credit Facility during the three and six months ended
June 30, 1999 and the assumption of existing debt with respect to four of the
1998 Acquisitions.
General and administrative expenses increased approximately $274,000 and
$663,000 for the three and six months ended June 30, 1999 as compared to 1998.
Increases of $222,000 and $458,000 were due to the 1998 Acquisitions. Excluding
these acquisitions, general and admin-
18
<PAGE>
istrative expenses increased approximately $52,000 and $205,000 for the three
and six months ended June 30, 1999 as compared to 1998. The increase for the six
months was primarily due to an increase in legal expenses at Westbird and Pablo
Plaza, an increase in security expenses at Birdneck, an increase in fees
relating to the unused portion of the Credit Facility, an increase in audit/tax
fees due to the 1998 Acquisitions and an increase in asset management fees
incurred to the Advisor and its affiliates due to the 1998 Acquisitions.
Depreciation and amortization increased approximately $313,000 and $842,000 for
the three and six months ended June 30, 1999 as compared to 1998. Increases of
$381,000 and $817,000 were due to the 1998 Acquisitions, and increases of $3,000
and $70,000 were due to an increase in amortization of deferred loan costs
relating to the Credit Facility. Excluding these increases, depreciation and
amortization decreased approximately 8% and increased approximately 2% for the
three and six months ended June 30, 1999 as compared to 1998.
Other expenses decreased approximately $14,000 and increased approximately
$225,000 for the three and six months ended June 30, 1999 as compared to 1998.
Increases of $121,000 and $300,000 were due to the 1998 Acquisitions. Excluding
these acquisitions, other expenses decreased approximately $135,000 and $75,000
for the three and six months ended June 30, 1999 as compared to 1998 primarily
due to small decreases in insurance expense at fifteen of the properties and the
loss on the repayment of the Cross Creek Mortgage Loan during the second quarter
of 1998.
A gain on sale of investment in partnership in the amount of approximately
$780,000 was recorded for the six months ended June 30, 1998 relating to the
sale of the Company's limited partnership interest in Dominion in the first
quarter of 1998.
Minority interest in the income of the Operating Partnership increased
approximately $81,000 and $159,000 for the three and six months ended June 30,
1999 as compared to 1998 primarily due to the issuance of OP Units with respect
to three of the 1998 Acquisitions.
Funds from Operations and Funds Available for Distribution
Funds from operations ("FFO"), represents net income (computed in accordance
with generally accepted accounting principles) ("GAAP"), excluding gains (or
losses) from debt restructuring or repayments and sales of property, plus
depreciation and amortization and including funds from operations for
unconsolidated joint ventures calculated on the same basis. Net income computed
in accordance with GAAP includes straight-lining of property rentals for rent
escalations in the amounts of $62,839 and $47,867 and $135,647 and $84,960 for
the three and six months ended June 30, 1999 and 1998, 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
19
<PAGE>
property acquisitions) and debt principal amortization. FAD should not be
considered an alternative to net income as a measure of the Company's financial
performance or to cash flow from operating activities (computed in accordance
with GAAP) as a measure of the Company's liquidity, nor is it necessarily
indicative of sufficient cash flow to fund all of the Company's needs.
FFO, as calculated in accordance with the NAREIT definition, and FAD for the
three and six months ended June 30, 1999 and 1998 are summarized in the
following table:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
1999 1998 1999 1998
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net income $ 1,461,424 $ 1,522,927 $ 2,883,924 $ 3,798,369
Gain on sale of investment in
partnership 0 0 0 (779,893)
Loss on repayment of Cross Creek
debt 0 72,967 0 72,967
Depreciation and amortization of
real property 1,082,916 698,236 2,157,215 1,343,973
Amortization of insurance contract 50,050 150,145 200,195 300,290
Proportionate share of adjustments
to equity in income
from equity investments to arrive
at funds from operations 61,011 41,083 120,735 115,236
----------- ----------- ----------- ------------
Funds From Operations ("FFO") 2,655,401 2,485,358 5,362,069 4,850,942
Amortization of deferred financing
costs 86,181 81,446 165,570 91,638
Principal payments received on
mortgage loans 8,011 41,818 15,846 82,715
Straight-lining of property rentals
for rent escalations (62,839) (47,867) (135,647) (84,960)
Improvements to real estate (201,433) (33,366) (296,804) (109,334)
Principal repayments on notes
payable (102,084) (69,351) (265,098) (118,138)
Leasing commissions (141,027) (42,434) (305,655) (54,067)
----------- ----------- ----------- ------------
Funds Available for Distribution
("FAD") $ 2,242,210 $ 2,415,604 $ 4,540,281 $ 4,658,796
=========== =========== =========== ============
Distributions to shareholders $ 1,931,246 $ 1,932,279 $ 3,862,492 $ 3,864,453
=========== =========== =========== ============
FFO payout ratio 72.7% 77.7% 72.0% 79.7%
=========== =========== =========== ============
Cash flows from:
Operating activities $ 3,050,026 $ 2,825,951 $ 5,925,496 $ 5,204,326
=========== =========== =========== ============
Investing activities $ (307,533) $ 6,985,292 $ (479,275) $ 10,200,207
=========== =========== =========== ============
Financing activities $(2,270,863) $ 1,818,743 $(4,597,330) $ (282,824)
=========== =========== =========== ============
</TABLE>
20
<PAGE>
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 2001. 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. 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.
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 which experienced problems during 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.
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 the third parties with which
it interacts that these third parties 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 inquiries. The Company relies heavily on third parties and is
vulnerable to the failures of third
21
<PAGE>
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.
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 addition, as of June 30, 1999, approximately 50% of
the Company's total notes payable outstanding are either fixed rate or
non-interest bearing, and so the payments on these instruments do not fluctuate
with changes in market interest rates. In contrast, payments required under the
Credit Facility vary based on market interest rates, primarily the 30 day
Euro-contract rate. Thus, an increase in market interest rates would result in
increased payments under the Credit Facility, without a corresponding increase
in cash flows from the Company's investments in the same amounts as described
above. For example, based on the $29,818,000 outstanding under the Credit
Facility at June 30, 1999, 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 $298,000; a 2% increase in the 30 day Euro-contract rate would
decrease annual net income by approximately $596,000. 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. 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.
22
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any material pending legal proceedings.
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
A proxy and proxy statement soliciting the vote of the Company's
shareholders for the Company's annual meeting of shareholders was sent to
shareholders on or about April 30, 1999. Such meeting was held on June 16,
1999. Alan P. Hirmes was reelected as trustee for a three-year term
expiring in 2002. The proxy statement incorrectly noted that Stuart J.
Boesky's term had expired and his name was, therefore, listed on the proxy
for reelection. Although Mr. Boseky received sufficient votes for
reelection, he will continue to be treated as a trustee whose term expires
in 2000, at which time he will again be eligible for reelection to a new
three-year term.
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AEGIS REALTY, INC.
(Registrant)
Date: August 13, 1999 By: /s/ Stuart J. Boesky
--------------------
Stuart J. Boesky
Director, President and
Chief Operating Officer
Date: August 13, 1999 By: /s/ John B. Roche
-----------------
John B. Roche
Senior Vice President and
Chief Financial Officer
Date: August 13, 1999 By: /s/ Richard A. Palermo
----------------------
Richard A. Palermo
Vice President, Treasurer,
Controller and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the financial
statements for Aegis Realty, Inc. and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,852,365
<SECURITIES> 0
<RECEIVABLES> 8,089,671
<ALLOWANCES> 501,000
<INVENTORY> 0
<CURRENT-ASSETS> 756,144
<PP&E> 194,513,259
<DEPRECIATION> 21,223,185
<TOTAL-ASSETS> 194,003,133
<CURRENT-LIABILITIES> 5,938,849
<BONDS> 59,099,001
0
0
<COMMON> 0
<OTHER-SE> 122,224,940
<TOTAL-LIABILITY-AND-EQUITY> 194,003,133
<SALES> 0
<TOTAL-REVENUES> 12,761,628
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,477,577
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,212,690
<INCOME-PRETAX> 2,883,924
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,883,924
<EPS-BASIC> .36
<EPS-DILUTED> .35
</TABLE>
