<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/ X / QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
/ / TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------- ------------------
Commission file number 1-12514
-------------
American Real Estate Investment Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 84-1246585
- ------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
620 West Germantown Pike, Suite 200, Plymouth Meeting, Pennsylvania 19462
-------------------------------------------------------------------------
(Address of principal executive offices)
(610) 834-7950
--------------
(Registrant's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
A total of 7,354,523 Common Shares of the Registrant's common equity were
outstanding as of November 12, 1998.
1
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of
September 30, 1998 (unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations (unaudited)
for the three months and nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II. OTHER INFORMATION
Items 1 through 6 18
SIGNATURES 20
</TABLE>
2
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS September 30, 1998 December 31, 1997
------ --------------------- ----------------------
(unaudited)
<S> <C> <C>
INVESTMENT IN REAL ESTATE:
Land and land improvements $ 73,602,000 $ 23,336,000
Buildings and improvements 327,669,000 98,102,000
Assets held for sale --- 31,705,000
--------------- ---------------
401,271,000 153,143,000
Less- accumulated depreciation (4,182,000) (2,955,000)
---------------- ---------------
397,089,000 150,188,000
Investment in direct financing lease 1,760,000 1,920,000
--------------- ---------------
Total investment in real estate, net 389,849,000 152,108,000
CASH AND CASH EQUIVALENTS 1,003,000 17,672,000
RESTRICTED CASH 593,000 1,243,000
CASH ESCROWS --- 3,764,000
ACCOUNTS AND OTHER RECEIVABLES 2,274,000 132,000
DEFERRED FINANCING COSTS ,net of accumulated
amortization of $416,000 and $6,000 2,863,000 688,000
DEFERRED LEASING COSTS, net of accumulated
amortization of $102,000 in 1998 1,341,000 782,000
INVESTMENT IN AMERICAN REAL ESTATE
MANAGEMENT INC., at equity 5,212,000 4,377,000
OTHER ASSETS, net of accumulated amortization
of $112,000 in 1997 4,270,000 189,000
--------------- ---------------
Total assets $ 416,405,000 $ 180,955,000
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgage notes payable $ 111,095,000 $ 86,501,000
Revolving credit facility 128,230,000 ---
Accounts payable 1,259,000 379,000
Accrued interest payable 786,000 540,000
Accrued expenses and other liabilities 899,000 692,000
Deferred rent revenue 977,000 119,000
Accrued leasing commissions 909,000 782,000
Security deposits 595,000 650,000
--------------- ---------------
Total liabilities 244,750,000 89,663,000
--------------- ---------------
MINORITY INTEREST OF UNITHOLDERS IN OPERATING
PARTNERSHIP 79,300,000 39,364,000
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value;
65,000,000 shares authorized;
7,354,523 shares issued and outstanding 7,000 5,000
Warrants 685,000 685,000
Additional paid-in capital 86,725,000 51,726,000
Cumulative net income 12,903,000 3,118,000
Cumulative dividends (7,965,000) (3,606,000)
---------------- ----------------
Total shareholders' equity 92,355,000 51,928,000
--------------- ---------------
Total liabilities and shareholders' equity $ 416,405,000 $ 180,955,000
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- -----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Rents $ 10,146,000 $ 1,643,000 $ 22,436,000 $ 5,561,000
Reimbursement revenue and other income
1,723,000 95,000 3,168,000 270,000
--------------- --------------- --------------- -------------
Total revenue 11,869,000 1,738,000 25,604,000 5,831,000
--------------- --------------- --------------- -------------
OPERATING EXPENSES:
Property operating expenses 2,617,000 712,000 5,048,000 2,349,000
General and administrative 275,000 99,000 440,000 510,000
Depreciation and amortization 1,892,000 234,000 4,157,000 769,000
Interest expense 4,164,000 746,000 8,997,000 2,404,000
--------------- --------------- --------------- -------------
Total operating expenses 8,948,000 1,791,000 18,642,000 6,032,000
--------------- --------------- --------------- -------------
Operating income (loss) 2,921,000 (53,000) 6,962,000 (201,000)
--------------- ---------------- --------------- --------------
EQUITY IN (LOSS) EARNINGS FROM INVESTMENTS
(562,000) 173,000 (1,023,000) 437,000
---------------- --------------- ---------------- -------------
INCOME BEFORE GAINS FROM SALES OF ASSETS
2,359,000 120,000 5,939,000 236,000
--------------- --------------- --------------- -------------
GAINS FROM SALES OF ASSETS --- 4,205,000 11,952,000 4,608,000
MINORITY INTEREST 1,086,000 1,988,000 8,106,000 1,988,000
--------------- --------------- --------------- -------------
Net income $ 1,273,000 $ 2,337,000 $ 9,785,000 $ 2,856,000
--------------- --------------- --------------- -------------
--------------- --------------- --------------- -------------
BASIC EARNINGS PER SHARE $ .19 $ 2.07 $ 1.65 $ 2.54
--------------- --------------- --------------- -------------
--------------- --------------- --------------- -------------
DILUTED EARNINGS PER SHARE $ .18 $ 2.07 $ 1.61 $ 2.54
--------------- --------------- --------------- -------------
--------------- --------------- --------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------
1998 1997
----------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 9,785,000 $ 2,856,000
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 4,567,000 808,000
Gains from sales of assets (11,952,000) (4,608,000)
Equity in (earnings) losses from equity 1,023,000 (30,000)
method investments
Common stock compensation --- 41,000
Minority interest allocation 8,106,000 1,988,000
Decrease in investment in direct financing lease 160,000 ---
Increase in straight-line rent receivable (664,000) ---
Cash provided by (used in) Operating Activities --
(Increase) Decrease In:
Restricted cash 650,000 197,000
Accounts receivable (1,478,000) (79,000)
Other assets (3,969,000) (1,598,000)
Increase (Decrease) In:
Accounts payable, accrued expenses, and
other liabilities 1,087,000 873,000
Accrued interest payable 246,000 (99,000)
Deferred rent revenue 858,000 ---
Accrued leasing commissions (101,000) ---
Security deposits (55,000) (85,000)
----------------- ---------------
Net cash provided by operating activities 8,263,000 264,000
----------------- --------------
INVESTING ACTIVITIES:
Properties acquired (210,942,000) ---
Advances to equity method investment (1,858,000) ---
Capital expenditures (675,000) (1,140,000)
Increase in deferred leasing costs (433,000) ---
Decrease in cash escrows 3,764,000 ---
Proceeds from sales of assets, net 24,956,000 13,477,000
------------------ ----------------
Net cash (used in) provided by investing activities (185,188,000) 12,337,000
------------------- --------------
</TABLE>
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------
1998 1997
----------------- ---------------
<S> <C> <C>
FINANCING ACTIVITIES:
Issuance of common stock for stock options exercised 385,000 ---
Net proceeds from issuance of common stock 17,440,000 ---
Dividends paid (4,359,000) (734,000)
Minority interest distributions (3,449,000) (516,000)
Proceeds from mortgage notes payable 65,849,000 5,700,000
Increase in deferred financing costs (2,585,000) ---
Net borrowings under Credit Facility 128,230,000 ---
Repayment of mortgage notes payable (41,255,000) (5,934,000)
Repayment of other notes payable --- (4,212,000)
-------------- ---------------
Net cash provided by financing activities 160,256,000 (5,696,000)
-------------- ---------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (16,669,000) 6,905,000
CASH AND CASH EQUIVALENTS, beginning of period 17,672,000 1,341,000
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 1,003,000 $ 8,246,000
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 8,338,000 $ 1,559,000
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
1. Organization and Operations:
American Real Estate Investment Corporation (the "Company") is a
self-administered and self-managed equity real estate investment trust
("REIT") which was organized in the state of Maryland in 1994. The Company
was previously engaged in the ownership and operation of multifamily
residential properties located in certain markets within the Southwestern
United States, including the Denver, Phoenix and San Diego metropolitan
areas. In connection with the transactions that were consummated on December
12, 1997 (the "Reorganization"), the Company modified its strategy to focus
on the acquisition of industrial and office properties located in the
mid-Atlantic and Northeastern United States. In June 1998, the Company
sold its last remaining multifamily residential property, American
Quadrangles Village Apartments (Note 3).
As of November 4, 1998, the Company owns 68 office and industrial
properties, a community shopping center, and an investment in a direct
financing lease which are located in Eastern Pennsylvania, New York State,
Northern New Jersey, and Ohio containing an aggregate of approximately 8.7
million square feet which have an overall occupancy of 98.0%. The Company
conducts all of its service operations, including leasing, property
management and other services through American Real Estate Management Inc.
(the "Management Company") an equity investee of American Real Estate
Investment, L.P. (the "Operating Partnership"), which was acquired in the
Reorganization.
2. General:
Basis of Presentation
The financial statements have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Accordingly, these financial statements should be read in
conjunction the Company's consolidated financial statements and footnotes
thereto included in the Annual Report on Form 10-KSB for the year ended December
31, 1997. In the opinion of management, all adjustments, consisting solely of
normal recurring adjustments, necessary to fairly present the financial position
of the Company as of September 30, 1998, and the results of its operations for
the three and nine months ended September 30, 1998 and 1997 and its cash flows
for the nine month periods ended September 30, 1998 and 1997 have been included.
The results of operations for such interim periods are not necessarily
indicative of the results for a full year.
7
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
Principles of Consolidation
The Company is the sole general partner of the Operating Partnership
with an ownership interest of approximately 53% at September 30, 1998. The
Company is also the sole stockholder of several other subsidiary entities. The
accompanying consolidated financial statements include the account balances of
the Company, the Operating Partnership and the Company's wholly owned
subsidiaries and their operations for the three month and nine month periods
ended September 30, 1998 and 1997 on a consolidated basis. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Equity Method Investments
The equity method of accounting is used to account for the Company's
non-controlling interest in 100% of the non-voting preferred stock of the
Management Company. The Company sold its non-controlling general partner
interest in Emerald Vista Associates, L.P. in September 1997.
Impact of Accounting Pronouncements Not Yet Adopted
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 131 ("SFAS No. 131") "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for public
business enterprises reporting of information about operating segments in
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. Adoption
of the new standard is required for the Company's December 31, 1998 financial
statements. As SFAS 131 addresses only disclosure-related issues, its
adoption will not have an impact on the Company's financial condition or its
results of operations.
Earnings per Share
In 1997, the Company adopted Statement of Financial Accounting Standard
No. 128, "Earnings per Share" ("SFAS No. 128"), which established simplified
standards for computing and presenting EPS and supercedes the standards in APB
Opinion No.15, making them more comparable to international EPS standards. It
requires the dual presentation of basic and diluted EPS on the income statement
and requires a reconciliation of the numerator and denominator of basic EPS to
diluted EPS.
8
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations.
<TABLE>
<CAPTION>
For the three month period ended September 30, 1998 1997
- ---------------------------------------------- ------------------------------- --------------------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
<S> <C> <C> <C> <C>
Net income $ 1,273,000 $ 1,273,000 $ 2,337,000 $ 2,337,000
Add: Minority interest allocation --- 1,086,000 --- 1,988,000
------------- ------------- ------------ -------------
1,273,000 2,359,000 2,337,000 4,325,000
Weighted average number of shares outstanding 6,854,150 6,854,150 1,129,145 1,129,145
Stock equivalents:
Options and Warrants (1) --- 204,614 --- ---
Convertible OP Units --- 5,865,916 --- 689,154
------------- ------------- ------------ -------------
6,854,150 12,924,680 1,129,145 1,818,299
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
Earnings per Share $ .19 $ .18 $ 2.07 $ 2.07
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------- --------------------------------
For the nine month period ended September 30, 1998 1997
- ---------------------------------------------- ------------------------------- --------------------------------
Basic Diluted Basic Diluted
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net income $ 9,785,000 $ 9,785,000 $ 2,856,000 $ 2,856,000
Add: Minority interest allocation --- 8,106,000 --- 1,988,000
------------- ------------- ------------ -------------
9,785,000 17,891,000 2,856,000 4,844,000
Weighted average number of shares outstanding 5,936,238 5,936,238 1,125,828 1,125,828
Stock equivalents:
Options and warrants (1) --- 252,765 --- ---
Convertible OP Units --- 4,906,375 --- 689,154
------------- ------------- ------------ -------------
5,936,238 11,095,378 1,125,828 1,814,982
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
Earnings Per Share $ 1.65 $ 1.61 $ 2.54 $ 2.54
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
</TABLE>
(1) Computed in accordance with the treasury stock method
Reclassifications
Certain amounts in the September 30, 1997 financial statements have been
reclassified in order to conform with the September 30, 1998 presentation.
3. Acquisitions and Dispositions of Investments in Real Estate
All acquisitions consummated during 1998 were accounted for by the
purchase method. During the nine month period ended September 30, 1998, the
Company acquired 21 industrial properties and 25 office properties totaling
approximately 5.2 million square feet.
9
<PAGE>
The following table summarizes certain information regarding
acquisition activity for the nine month period ended September 30, 1998:
<TABLE>
<CAPTION>
Number
Acquisition of Acquisition
Property Date Properties Location Price Square Feet
- ---------------------------- ----------- ---------- --------------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
101 Commerce Drive January 8 1 Mechanicsburg, PA $ 26,340,000 597,100
One Philips Drive January 9 1 Mountaintop, PA 11,127,000 400,000
4472/ 4580 Steelway Blvd. March 27 4 Liverpool, NY 12,983,000 655,500
1001 and 1011 AIP Drive March 27 2 Middletown, PA 7,608,000 284,262
2400, 2404 and 2410 3 Camp Hill, PA 6,710,000 182,813
Gettysburg Road March 27
Galesi Portfolio April 30 10 Albany, NY 58,876,000 790,000
4,5 and 8 Marway Circle June 23 3 Gates, NY 4,143,000 171,300
6 British American Blvd. June 23 1 Latham, NY 3,862,000 70,550
Fed One Industrial Portfolio June 26 3 Zanesville, Marysville 11,738,000 633,500
and Urbana, OH
Szeles Portfolio June 26 5 Allentown, 40,589,000 385,457
Mechanicsburg and
Wyomissing, PA
ASW Property August 7 1 Green, OH 7,878,000 255,000
Pioneer Portfolio August 19 12 Syracuse, NY 87,300,000 801,720
---------- -------------- ----------
46 $ 279,154,000 5,227,202
---------- -------------- ----------
</TABLE>
These acquisitions were funded with cash reserves and cash generated from the
sale of Americana Lakewood Apartments and Quadrangles Village Apartments,
$57,383,000 of fixed rate mortgage debt (including approximately $23,600,000
of debt assumed) with interest rates ranging from 7.03% to 9.68%, $8,430,000
of variable rate mortgage debt, (with an interest rate of LIBOR plus 2%),
borrowings under the Company's Credit Facility and the issuance of 2,533,832
units of partnership interest in the Company's Operating Partnership, which
were issued in the acquisition of the Galesi and Pioneer Portfolios.
Additionally, the Company issued 720,743 of its Common Stock in a Private
Placement resulting in net proceeds of approximately $11,019,000, which was
used to repay certain indebtedness encumbering certain properties in the
Pioneer Portfolio.
In January 1998, the Company sold Americana Lakewood Apartments, a 300 unit
multi-family residential property located in the metropolitan Denver, Colorado
area for a gross selling price of $15,066,000, which resulted in a gain of
$6,880,000. In June 1998, the Company sold the Quadrangles Village Apartments, a
510-unit apartment building located in Tempe, Arizona, the last remaining
multi-family residential property in the Company's portfolio, for a gross
selling price of $26,500,000, which resulted in a gain of $5,072,000 and net
proceeds to the Company of approximately $10,251,000.
10
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
Pro Forma Operating Results
Assuming the completion of acquisitions and dispositions which occurred in 1997,
the sales of Americana Lakewood and Quadrangles Village Apartments in 1998, the
1998 acquisitions discussed in Notes 4 and 8, and the private placements
completed in July and August 1998, (Note 5) as of January 1, 1998 and January 1,
1997, pro forma operating results are presented as follows:
<TABLE>
<CAPTION>
For Nine
Months Ended For Year Ended
September 30, December 31,
1998 1997
------------------ --------------------
<S> <C> <C>
Total revenue $ 45,455,000 $ 58,577,000
Operating income (1) 9,089,000 11,999,000
Minority interest 4,247,000 5,607,000
------------------ --------------------
Net income $ 4,842,000 $ 6,392,000
------------------ --------------------
------------------ --------------------
Earnings per share
Basic $ .66 $ .87
--------- --------
--------- --------
Diluted $ .66 $ .87
--------- --------
--------- --------
</TABLE>
- ----------
(1) Net of $7,832,000 and $10,162,000 in depreciation expense for the
nine-month period ended September 30, 1998 and the year ended December 31,
1997, respectively.
The pro forma operating results combine the Company's historical operating
results with the incremental rental income and operating expenses of the
properties acquired in 1998 and 1997, including adjustments for depreciation,
based upon the acquisition price associated with the property acquisitions,
interest costs assuming the borrowings to finance the property acquisitions
had occurred at the beginning of the respective year or the period and
interest savings utilizing the net proceeds from the July private placement
to repay the Credit Facility. The above pro forma amounts are also adjusted
to reflect the impact of the multi-family property dispositions in 1997 and
1998 as if they were disposed of as of January 1, 1997.
These pro forma amounts are not necessarily indicative of what the actual
results of the Company would have been assuming the above property acquisitions
and dispositions and other transactions had been consummated on January 1, 1997,
nor do they purport to represent the future results of the Company.
4. Indebtedness
As of September 30, 1998, the Company had mortgage notes payable of
$111,095,000 with variable and fixed interest rates which ranged from 7.03%
to 9.68% with maturities extending through 2013. In April 1998, the Company
obtained a three-year $150,000,000 senior secured revolving credit facility
(the "Credit Facility"). The amount outstanding under the Credit Facility is
$128,230,000 at September 30, 1998. The Credit Facility is recourse to the
Company and the Operating Partnership and is secured by cross-collateralized
and cross-defaulted first mortgage liens on the properties securing the
Credit Facility. Borrowings under the Credit
11
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
Facility enable the Company to fund acquisitions and development of real
estate, as well as provide working capital, and funds for capital
improvements at a variable rate equal to a Eurodollar rate plus 1.625% per
annum (7.00% at September 30, 1998). The weighted average rates for this
Credit Facility for the three and nine month periods ended September 30, 1998
were 7.42% and 7.38%, respectively. In addition, a fee of .25% per annum on
the unused amount of the Credit Facility is payable quarterly in arrears. The
Credit Facility requires the Company to meet certain financial covenants on a
quarterly, annually, and on an on-going basis.
5. Common Stock Offerings
On July 9, 1998, the Company sold 1,092,051 shares of Common Stock at
$16.50 per share in a private placement with several institutional investors
including Morgan Stanley Asset Management, Inc. and CRA Real Estate
Securities, L.P. The private placement generated net proceeds of
approximately $17,440,000, which was utilized to pay down the Credit
Facility. These investors have certain obligations to the Company in the
event the Company's Common Stock price exceeds $19.50 on the earlier of July
12, 1999 or on a Liquidating Event, as defined in the subscription
agreements. Conversely, in the event the Company's Common Stock price is less
than $15.50 at that time, the Company is obligated to make a cash payment to
the investors based upon a pre-determined formula.
On August 19, 1998, the Company consummated a private placement for
720,743 shares of Common Stock for an aggregate purchase price of
approximately $11,400,000 with the New York State Common Retirement Fund as
partial repayment for certain indebtedness encumbering certain properties in
the Pioneer Portfolio.
6. Dividends
On February 18, 1998, the Company declared a dividend of $.22 per share
for the fourth quarter of 1997 which was paid on March 16, 1998 to shareholders
of record as of March 2, 1998.
On May 13, 1998, the Company declared a dividend of $.22 per share for
the first quarter of 1998 which was paid on June 12, 1998 to shareholders of
record as of May 26, 1998.
On August 13, 1998, the Company declared a dividend of $.265 per share
for the second quarter of 1998 which was paid on September 10, 1998 to
shareholders of record on August 26, 1998.
On October 29, 1998, the Company declared a dividend of $.265 per share
for the third quarter of 1998 which is payable on November 23, 1998 to
shareholders of record on November 9, 1998.
7. Subsequent Events
On October 16, 1998, the Company closed a $94,900,000 ten-year term
loan with Column Financial, Inc. The loan is at a fixed rate for 10 year
term, and was funded in two tranches, the first tranche was $77,700,000 at
7.50% and a second tranche of $17,200,000 at 7.58%. Both loans provide for
monthly payments of principal and interest based on 30-year amortization. The
loans are non-recourse to the Company and are secured by 21 properties. The
proceeds of the loan were used to pay down the Company's $150 million
revolving line of credit and other mortgage debt
12
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
and to acquire three triple net leased distribution facilities comprising 1.4
million square feet in Chambersburg, PA.
On October 30, 1998, the Company acquired three industrial
properties aggregating approximately 1.4 million square feet for a purchase
price of approximately $48,951,000, including closing costs. The acquisitions
were funded by the Company's Credit Facility and the $17,200,000 borrowing
from Column Financial, Inc. discussed above.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This Form 10-Q contains forward looking statements within the meaning of Section
27A of the Securities Act of 1993 and Section 21E of the Securities Exchange Act
of 1934. The words "believe", "expect", "anticipate", "intend", "estimate" and
other expressions which are predictions of or indicate future events and trends
and which do not relate to historical matters identify forward-looking
statements. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such a
difference include but are not limited to the following: real estate investment
considerations, such as the effect of economic and other conditions in the
market area on cash flows and values; the need to renew leases or relet space
upon the expiration of current leases, and the ability of a property to generate
revenues sufficient to meet debt service payments and other operating expenses;
and risks associated with borrowings, such as the possibility that the Company
will not have sufficient funds available to make principal payments on
outstanding debt, outstanding debt may be refinanced at higher interest rates or
otherwise on terms less favorable to the Company and interest rates under the
Credit Facility may increase.
The following discussion compares the operations and activities of the Company
for the three and nine-month periods ended September 30, 1998 and 1997 and
should be read in conjunction with the accompanying financial statements and
notes thereto.
RESULTS OF OPERATIONS
Comparison of the Three and Nine Months Ended September 30, 1998 and 1997
Net income for the three and nine month periods ended September 30, 1998 was
$1.3 million and $9.8 million, respectively, compared with net income of $2.3
and $2.9 million for the same periods ended September 30, 1997. The changes in
net income during these periods were primarily the result of $11.9 million in
gains recorded as a result of the sale of the Americana Lakewood Apartments in
January 1998 and the sale of the Quadrangles Village Apartments in June 1998,
the increases in net operating income in 1998 as a result of property
acquisitions since the Reorganization, and gains generated in the third quarter
of 1997 from the sale of the Sedona Apartments and the Company's investment in
Emerald Vista Associates, L.P.
Revenues for the three and nine month periods ended September 30, 1998
increased to approximately $11.9 million and $25.6 million as compared with
$1.7 million and $5.8 million for the same periods ended September 30, 1997,
respectively, primarily as a result of property acquisitions since the
Reorganization. The impact of straight-line rent adjustments increased rent
revenues by $242,000 and $664,000 for the three and nine month periods ended
September 30, 1998, respectively. Reimbursement revenue and other income
increased in 1998 as compared to 1997 as a result of income from a direct
financing lease of $234,000 in 1998 and reimbursement revenue from office and
industrial properties.
14
<PAGE>
Operating expenses increased by approximately $7.2 million and $12.6 million for
the three and nine month periods ended September 30, 1998 over the same periods
in 1997. This overall increase is a result of property acquisitions since the
Reorganization and is primarily the result of increases in depreciation and
interest expense associated with the increase in the Company's investments in
real estate and mortgage debt from $28.8 million and $26.4 million at September
30, 1997 respectively, to $389.8 million and $239.3 million respectively, at
September 30, 1998.
Equity in earnings from investments decreased by $735,000 and $1.5 million as a
result of the operating losses incurred by the Management Company.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows for the Nine Months Ended September 30, 1998 and 1997
Cash and cash equivalents were approximately $1.0 million at September 30, 1998
and $17.7 million at December 31, 1997. The overall decrease in cash and cash
equivalents is primarily the result of the Company's reinvestment of cash from
asset sales into real estate assets during the nine month period ended September
30, 1998.
During the nine months ended September 30, 1998, the Company generated $8.3
million in cash flow from operating activities as compared to cash flow
generated of $264,000 during the same period in 1997. This increase in operating
cash flow is a result of the Reorganization and the cash flow generated from the
various acquisitions consummated by the Company on and since that date.
Cash used in investing activities in the nine months ended September 30, 1998
was $185.2 million as compared to $12.3 million of cash generated during the
same period in 1997. The increase in cash used was primarily a result of
approximately $210.9 million in acquisitions paid for in cash, net of $24.9
million of net cash proceeds from the sale of Americana Lakewood and Quadrangles
Village Apartments during 1998. Cash generated from financing activities was
$160.2 million in 1998 as compared to $5.7 million of cash used in financing
activities in the same period in 1997. The primary sources of this cash were
borrowings from mortgage notes, the issuance of common stock in the July 1998
private placement and borrowings from the Credit Facility.
Capitalization
As of September 30, 1998, the Company had $239.3 million of mortgage debt
outstanding. This mortgage debt matures between 2000 and 2008. The Company's
Credit Facility provides for borrowings up to $150,000,000 and bears interest
at a variable rate equal to 30, 60 or 90-day Eurodollar or LIBOR rate plus
1.625% per annum. As of September 30, 1998, the Company had borrowed
$128,230,000 under the Credit Facility. The Company's weighted average
interest rate was approximately 7.38% at September 30, 1998. As discussed in
Note 7 to the Company's financial statements, in October 1998 the Company
closed a $94,900,000 non-recourse, fixed-rate, ten-year term loan, the
proceeds of which were used to pay down the Company's Credit Facility and
other mortgage debt and to acquire certain properties. The Company's debt to
market capitalization and debt to market capitalization ratio were $496.1
million and 58.9% respectively, as of October 30, 1998 based upon the closing
price of the Company's common stock of $14.75 per share as of that date.
15
<PAGE>
Short and Long Term Liquidity
The Company expects to meet its short-term (1 year or less) liquidity needs
based on its cash flow from operations and, if necessary, borrowings from its
Credit Facility. The Company believes that its principal short-term liquidity
needs are to fund normal recurring operating expenses, recurring capital
improvements, debt service and distributions to its stockholders and holders of
OP Units.
The Company expects to meet long-term liquidity requirements including property
acquisitions, debt maturities, major renovations, expansions and other
non-recurring capital improvements through its Credit Facility, the assumption
of additional indebtedness, additional term debt and the issuance of additional
equity securities. In July 1998, the Company filed with the Securities and
Exchange Commission a shelf registration statement under which the Company from
time to time may issue Common Stock, or Preferred Stock and depository shares
representing Preferred Stock with an aggregate value of $500 million.
FUNDS FROM OPERATIONS
Funds From Operations ("FFO"), which is a commonly used measurement of
the performance of an equity REIT, as defined by the National Association of
Real Estate Investment Trusts, Inc. ("NAREIT"), is net income (computed in
accordance with generally accepted accounting principles), excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures will be
calculated to reflect FFO on the same basis. Management believes the
presentation of FFO is a useful disclosure as a general measurement of its
performance in the real estate industry, although the Company's FFO may not
necessarily be comparable to similarly titled measures of other REITs which do
not follow the NAREIT definition. The Company's FFO presentation is in
accordance with NAREIT's FFO definition. FFO does not represent cash generated
from operating activities in accordance with generally accepted accounting
principles and is not necessarily indicative of cash available to fund cash
needs and 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
flow as a measure of liquidity.
16
<PAGE>
FFO and cash flows for the three and nine month periods ended September
30, 1998 and 1997 are summarized in the following table (in thousands, except
per share data):
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
September 30, September 30,
------------------------------ --------------------------------
1998 1997 1998 1997
------- ------ ------ ------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income before minority interest $ 2,359 $ 4,325 $ 17,891 $ 4,844
(Less) Plus:
Gains on sales of assets --- (4,205) (11,952) (4,608)
Depreciation and amortization related to real
estate 1,892 233 4,157 769
Other cash adjustments 53 --- 159 ---
Equity in (earnings) losses from investments in
partnership and management company 562 (173) 1,023 (437)
FFO contribution (loss) from equity investments (519) 220 (895) 575
------------- ------------ ------------ -------------
Funds from Operations $ 4,347 $ 400 $ 10,383 $ 1,143
------------- ------------ ------------ -------------
Cash flow from operating activities $ 8,263 $ 264
Cash flow from investing activities (185,188) 12,337
Cash flow from financing activities 160,256 (5,696)
------------ -------------
Net (decrease) increase in cash $ (16,669) $ 6,905
------------ -------------
------------ -------------
Weighted average number of common shares/units
- - diluted 12,963,432 1,818,299 11,095,378 1,814,982
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
INFLATION
The Company's leases for commercial office and industrial properties
generally require tenants to pay either their share of operating expenses,
including common area maintenance, real estate taxes and insurance or pay 100%
of these costs directly (for triple net leases). As a result, the Company's
exposure to increases in costs and operating expenses is reduced. The Company
does not anticipate that inflation will have a significant impact on its
operating results in the near future.
17
<PAGE>
THE YEAR 2000 ISSUE
The Company is in the process of implementing a Year 2000
compliance program which consists of the following steps:
1. Compilation of an inventory of information and property systems
which are impacted by the Year 2000.
2. Prioritization of the critical systems identified in Step 1 and
inquiries of third parties with whom the Company does
significant business including but not limited to vendors,
service providers and tenants as to their Year 2000 compliance.
3. Analysis of critical systems and evaluation of the costs to
repair or replace those systems. Repair or replacement of those
systems and testing of the systems.
Status
The Company is in process of compiling a complete inventory of
systems which are impacted by Year 2000 concerns. The Company's accounting
and property management systems are either already Year 2000 compliant or
will be upgraded at an immaterial cost to the Company by the third party
vendor who developed the software. The Company anticipates that these
upgrades will be complete by March 1999. All of the Company's desktop and
network systems are believed to be Year 2000 compliant. Currently, the
Company is reviewing and will continue to review its buildings operating
systems to determine whether they are compliant. The Company anticipates that
this assessment will be complete by March 1999. Based upon the status of this
assessment, the Company does not believe a material number of these systems
will be non-compliant.
The Company is exposed to the risk that its vendors or service
providers could experience Year 2000 problems that, in turn, impact their
ability to deliver products or services to the Company. This is not
considered to be a significant risk for suppliers of goods, due to the
availability of alternative suppliers, however, the disruption of certain
services, such as utilities could have material impact on the Company's
operations. The Company is not currently aware of any vendor or service
provider Year 2000 issue which management believes would have a material
adverse impact on the Company's ability to operate its properties. The
inability of vendors or service providers to be Year 2000 compliant could
have an adverse impact on the Company, the effect of which is not
determinable at this time.
The Company is also exposed to the risk that its tenants could
experience Year 2000 problems that impact the tenants' ability to pay rent.
The Company does not believe that this risk is likely to effect enough
tenants to pose a material problem to the Company. The impact of
non-compliance by tenants is not determinable at this time.
Based on the current status of the Company's inventory of systems
regarding Year 2000 compliance, the Company has concluded it is not necessary
to develop a formal contingency plan. The Company will continue to evaluate
the need for such a formal plan as part of its on-going Year 2000 compliance
review.
Readers are cautioned that forward-looking statements contained in
the Year 2000 discussion should be read in conjunction with the Company's
disclosures regarding forward-looking statements on page 14.
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Properties are presently subject to any
litigation which the Company believes will result in any liability that will be
material to the Company, other than routine litigation arising in the ordinary
course of business, substantially all of which is expected to be covered by
liability insurance.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Promissory Note between American DE/SPE, LLC Virginia Street
Associates Limited Partnership and Column Financial, Inc.
for $65,500,000.
10.2 Amended and Restated Promissory Note between American DE/SPE2,
LLC, American DE/SPE4, L.P. and Column Financial, Inc.
for $29,400,000.
27 Financial Data Schedule
18
<PAGE>
(b) Reports on Form 8-K:
During the three month period ended September 30, 1998, and through
November 13, 1998, the Company filed the following:
(i) a Current Report on Form 8-K dated June 22, 1998 was filed on July
7, 1998 (reporting under Items 2 and 7) regarding the Company's
acquisition of five industrial properties and two office buildings
totaling 875,350 square feet for approximately $19.5 million.
(ii) a Current Report on Form 8-K/A No. 1 dated April 30, 1998 was
filed on July 14, 1998 (reporting under Item 5 and amending Item 7
as originally filed) regarding the Company's various acquisitions
and disposition of the Quadrangles Village Apartments which was
consummated on June 24, 1998. Such Form 8-K/A also included
information regarding the Company's Private Placement on July 9,
1998. The Company issued 1,092,051 shares of Common Stock at
$16.50 per share to various institutional investors. The net
proceeds from the Private Placement were contributed to American
Real Estate Investment, L.P. in exchange for 1,092,051 units of
limited partnership interest (OP Units).
(iii) a Current Report on Form 8-K, dated July 30, 1998 was filed on
August 13, 1998 (reporting under Item 2 and 7) regarding the
Company's acquisitions and pending acquisitions of two industrial
properties and 19 office buildings totaling 1,970,814 square feet
for approximately $181.2 million.
(iv) a Current Report on Form 8-K, dated August 19, 1998 was filed on
September 3, 1998 (reporting under Item 2 and 5) regarding the
consummation of twelve of the fifteen properties in the Pioneer
Portfolio on August 19, 1998. Additionally, the Company issued
720,743 of its Common Stock to the New York State Common
Retirement Fund as partial repayment for certain indebtedness
encumbering certain properties in the Pioneer Portfolio.
(v) a Current Report on Form 8-K, dated October 30, 1998 was filed on
November 13, 1998 (reporting under Item 2 and 7) regarding the
consummation of the acquisition of three properties in
Chambersburg, PA.
19
<PAGE>
SIGNATURES OF REGISTRANT
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.
AMERICAN REAL ESTATE
INVESTMENT CORPORATION
Date: November 16, 1998 By: /s/ Jeffrey E. Kelter
---------------------
Jeffrey E. Kelter
President
Date: November 16, 1998 By: /s/ Timothy A. Peterson
------------------------
Timothy A. Peterson
Chief Financial Officer
Date: November 16, 1998 By: /s/ Timothy E. McKenna
----------------------
Timothy E. McKenna
Treasurer
(Principal Accounting Officer)
20
<PAGE>
Exhibit 10.1
PROMISSORY NOTE
$65,500,000 October 16, 1998
New York, New York
FOR VALUE RECEIVED, the undersigned, AMERICAN DE/SPE LLC, a
Delaware limited liability company, and VIRGINIA STREET ASSOCIATES LIMITED
PARTNERSHIP, a Colorado limited partnership (collectively, "Borrower"), jointly
and severally, promise to pay to the order of COLUMN FINANCIAL, INC., a Delaware
corporation ("Lender"), at the office of Lender at 3414 Peachtree Road, N.E.,
Suite 1140, Atlanta, Georgia 30326-1113, or at such other place as Lender may
designate to Borrower in writing from time to time, the principal sum of
Sixty-Five Million Five Hundred Thousand and NO/100 DOLLARS ($65,500,000.00),
together with interest on so much thereof as is from time to time outstanding
and unpaid, from the date of the advance of the principal evidenced hereby, at
the rate of seven and one-half percent (7.50%) per annum (the "Note Rate"), in
lawful money of the United States of America, which shall at the time of payment
be legal tender in payment of all debts and dues, public and private.
ARTICLE I -- TERMS AND CONDITIONS
1.01 Payment of Principal and Interest. Said interest shall be
computed hereunder based on a 360-day year and paid for the actual number of
days elapsed for any whole or partial month for which interest is being
calculated. In computing the number of days during which interest accrues, the
day on which funds are initially advanced shall be included regardless of the
time of day such advance is made, and the day on which funds are repaid shall be
included unless repayment is credited prior to close of business. Payments in
federal funds immediately available in the place designated for payment received
by Lender prior to 2:00 p.m. local time at said place of payment shall be
credited prior to close of business, while other payments may, at the option of
Lender, not be credited until immediately available to Lender in federal funds
in the place designated for payment prior to 2:00 p.m. local time at said place
of payment on a day on which Lender is open for business. Such principal and
interest shall be payable in equal consecutive monthly installments of
$457,985.50 each, beginning on the first day of the second full calendar month
following the date of the advance of the principal amount evidenced by this Note
(or on the first day of the first full calendar month following the date of the
advance of the principal amount evidenced by this Note if such date is the first
day of a calendar month), and continuing on the first day of each and every
month thereafter (or if such day is not a Business Day (as defined in the Cash
Management Agreement) on the first Business Day thereafter) until November 1,
2008 (the "Maturity Date"), at which time the entire outstanding principal
balance hereof, together with all accrued but unpaid interest thereon, shall be
due and payable in full. Each such monthly installment shall be applied first to
the payment of accrued interest and then to reduction of principal. If the
advance of the principal amount evidenced by this Note is made on a date other
than the first day of a calendar month, then Borrower shall pay to Lender
contemporaneously with the execution hereof interest at the foregoing interest
rate for a period from the date hereof through
<PAGE>
and including the last day of the calendar month in which this note is funded.
All payments delivered to an account or reserve under the Cash Management
Agreement shall be deemed to be delivered to Lender.
1.02 Prepayment.
(a) Prior to the Lockout Expiration Date (defined below), this
Note may not be prepaid in whole or in part, except as provided in Section
1.02(c); provided, however, Borrower shall have the right and option to release
the Security Property (as hereinafter defined) from the lien of the Security
Instrument (as hereinafter defined) in accordance with the terms and provisions
of Section 1.35 and Section 1.36 of the Security Instrument. This Note may be
prepaid in whole but not in part (except as otherwise specifically provided
herein) at any time after the date of the 114th monthly installment of principal
and interest due hereunder (the "Lockout Expiration Date") provided (i) written
notice of such prepayment is received by Lender not more than sixty (60) days
and not less than thirty (30) days prior to the date of such prepayment and (ii)
such prepayment is received on the first day of a calendar month (or, if such
prepayment is not received on the first day of a calendar month, interest is
paid through the last day of such calendar month) and is accompanied by all
interest accrued hereunder and all other sums due hereunder or under the other
Loan Documents.
(b) If prior to the Lockout Expiration Date and following the
occurrence of any default beyond any applicable notice and/or grace period,
Borrower shall tender payment of an amount sufficient to satisfy all of the
indebtedness evidenced by the Note and the other Loan Documents (as hereinafter
defined) at any time prior to a sale of the Security Property, either through
foreclosure or the exercise of the other remedies available to Lender under the
Security Instrument, such tender by Borrower shall be deemed to be voluntary and
Borrower shall pay, in addition to the amounts payable hereunder and under the
Loan Documents, a prepayment fee in an amount equal to the greater of (A) two
percent (2.0%) of the principal amount being prepaid, and (B) one percent (1%)
of the principal amount being repaid plus the positive excess of (i) the present
value ("PV") of all future installments of principal and interest due under this
Note including the principal amount due at maturity (collectively, "All Future
Payments"), discounted at an interest rate per annum equal to the rate published
in the Treasury Constant Maturity Yield Index, during the second full week
preceding the date on which such premium is payable, for instruments having a
maturity coterminous with the remaining term of this Note, over (ii) the
principal amount of this Note outstanding immediately before such prepayment.
"Treasury Constant Maturity Yield Index" shall mean the average yield for "This
Week" as reported by the Federal Reserve Board in Federal Reserve Statistical
Release H.15 (519). If there is no Treasury Constant Maturity Yield Index for
instruments having a maturity coterminous with the remaining term of this Note,
then the index shall be equal to the weighted average yield to maturity of the
Treasury Constant Maturity Yield Indices with maturities next longer and shorter
than such remaining average life to maturity, calculated by averaging (and
rounding upward to the nearest whole multiple of 1/100 of 1% per annum, if the
average is not such a multiple) the yields of the relevant Treasury Constant
Maturity Yield indices (rounded, if necessary, to the nearest 1/100 of 1% with
any figure of 1/200 of 1% or above rounded upward). In the event that any
prepayment fee is due hereunder, Lender shall deliver to Borrower a statement
setting forth the amount and determination of the prepayment fee,
2
<PAGE>
and, provided that Lender shall have in good faith applied the formula described
above, Borrower shall not have the right to challenge the calculation or the
method of calculation set forth in any such statement in the absence of manifest
error, which calculation may be made by Lender on any day during the thirty (30)
day period preceding the date of such prepayment. Lender shall not be obligated
or required to have actually reinvested the prepaid principal balance at the
Treasury Constant Maturity Yield or otherwise as a condition to receiving the
prepayment fee.
(c) Partial prepayments of this Note shall not be permitted,
except partial prepayments resulting from Lender applying insurance or
condemnation proceeds to reduce the outstanding principal balance of this Note
as provided in the Security Instrument, in which event no prepayment fee or
premium shall be due. No notice of prepayment shall be required under the
circumstance specified in the preceding sentence. No principal amount repaid may
be reborrowed. Partial payments of principal shall be applied to the unpaid
principal balance evidenced hereby but such application shall not reduce the
amount of the fixed monthly installments required to be paid pursuant to Section
1.01 above.
1.03 Security. The indebtedness evidenced by this Note and the
obligations created hereby are secured by those certain mortgages (collectively,
the "Security Instrument") from Borrower to Lender, dated as of the date hereof,
concerning property located in Onondaga, Monroe, Warren and Albany Counties, New
York, Union and Muskingum Counties, Ohio and Dauphin County, Pennsylvania. The
Security Instrument together with this Note and all other documents to or of
which Lender is a party or beneficiary now or hereafter evidencing, securing,
guarantying, modifying or otherwise relating to the indebtedness evidenced
hereby, are herein referred to collectively as the "Loan Documents". All of the
terms and provisions of the Loan Documents are incorporated herein by reference.
Some of the Loan Documents are to be filed for record on or about the date
hereof in the appropriate public records.
1.04 Default. It is hereby expressly agreed that should any
default occur in the payment of principal or interest as stipulated above and
such payment is not made within five (5) days of the date such payment is due
(provided that no grace period is provided for the payment of principal and
interest due on the Maturity Date), or should any other default occur under any
of the Loan Documents which is not cured within any applicable grace or cure
period, then a default shall exist hereunder, and in such event the indebtedness
evidenced hereby, including all sums advanced or accrued hereunder or under any
other Loan Document, and all unpaid interest accrued thereon, shall, at the
option of Lender and without notice to Borrower, at once become due and payable
and may be collected forthwith, whether or not there has been a prior demand for
payment and regardless of the stipulated date of maturity. In the event that any
payment (other than any payment due on maturity, by acceleration or otherwise)
is not received by Lender on the date when due, then in addition to any default
interest payments due hereunder, Borrower shall also pay to Lender a late charge
in an amount equal to five percent (5.0%) of the amount of such overdue payment.
So long as any default exists and continues hereunder, regardless of whether or
not there has been an acceleration of the indebtedness evidenced hereby, and at
all times after maturity of the indebtedness evidenced hereby (whether by
acceleration or otherwise), interest shall accrue on the outstanding principal
balance of this Note at a rate per annum equal to four percent (4.0%) plus the
interest rate which would be in effect hereunder absent such default or
maturity, or if such increased
3
<PAGE>
rate of interest may not be collected under applicable law, then at the maximum
rate of interest, if any, which may be collected from Borrower under applicable
law (the "Default Interest Rate"), and such default interest shall be
immediately due and payable. Borrower acknowledges that it would be extremely
difficult or impracticable to determine Lender's actual damages resulting from
any late payment or default, and such late charges and default interest are
reasonable estimates of those damages and do not constitute a penalty. The
remedies of Lender in this Note or in the Loan Documents, or at law or in
equity, shall be cumulative and concurrent, and may be pursued singly,
successively or together in Lender's discretion. Time is of the essence of this
Note. In the event this Note, or any part hereof, is collected by or through an
attorney-at-law, Borrower agrees to pay all costs of collection including, but
not limited to, reasonable attorney's fees.
1.05 Exculpation. Notwithstanding anything in the Loan
Documents to the contrary, but subject to the qualifications hereinbelow set
forth, Lender agrees that (i) Borrower shall be liable upon the indebtedness
evidenced hereby and for the other obligations arising under the Loan Documents
to the full extent (but only to the extent) of the security therefor, the same
being all properties (whether real or personal), rights, estates and interests
now or at any time hereafter securing the payment of this Note and/or the other
obligations of Borrower under the Loan Documents (collectively, the "Security
Property"), (ii) if default occurs in the timely and proper payment of all or
any part of such indebtedness evidenced hereby or in the timely and proper
performance of the other obligations of Borrower under the Loan Documents, any
judicial proceedings brought by Lender against Borrower shall be limited to the
preservation, enforcement and foreclosure, or any thereof, of the liens,
security titles, estates, assignments, rights and security interests now or at
any time hereafter securing the payment of this Note and/or the other
obligations of Borrower under the Loan Documents, and confirmation of any sale
under power of sale, and no attachment, execution or other writ of process shall
be sought, issued or levied upon any assets, properties or funds of Borrower
other than the Security Property except with respect to the liability described
below in this section, and (iii) in the event of a
foreclosure of such liens, security titles, estates, assignments, rights or
security interests securing the payment of this Note and/or the other
obligations of Borrower under the Loan Documents, whether by judicial
proceedings or exercise of power of sale, no judgment for any deficiency upon
the indebtedness evidenced hereby shall be sought or obtained by Lender against
Borrower, except with respect to the liability described below in this section;
provided, however, that, notwithstanding the foregoing provisions of this
section, Borrower shall be fully and personally liable and subject to legal
action for loss, cost or damage due to (a) proceeds paid to
Borrower under any insurance policies (or paid as a result of any other claim or
cause of action against any person or entity) by reason of damage, loss or
destruction to all or any portion of the Security Property, to the full extent
of such proceeds not previously delivered to Lender, but which, under the terms
of the Loan Documents, should have been delivered to Lender,
(b) proceeds paid to Borrower or awards resulting from the condemnation or other
taking in lieu of condemnation of all or any portion of the Security Property,
or any of them, to the full extent of such proceeds or awards not previously
delivered to Lender, but which, under the terms of the Loan Documents, should
have been delivered to Lender, (c) all tenant security
deposits or other refundable deposits paid to or held by Borrower or any other
person or entity in connection with leases of all or any portion of the Security
Property which are not applied in accordance with the terms of the applicable
lease or other agreement, (d) rent and other payments
received from tenants under leases of all or any portion of the Security
Property paid more than one month in advance,
4
<PAGE>
(e) rents, issues, profits and revenues of all or any portion of the Security
Property distributed to partners in Borrower that (i) are received or applicable
to a period after any notice of default from Lender hereunder or under the Loan
Documents in the event of any default by Borrower hereunder or thereunder, which
is not then or thereafter, whether or not within an applicable grace period,
cured prior to the acceleration of the principal sum of this Note, and (ii) are
not either applied to the payment of real estate taxes or other ordinary and
necessary expenses of owning and operating the Security Property or paid to
Lender, (f) damage to the Security Property as a result of the intentional
misconduct or gross negligence of Borrower or any of its principals, officers or
general partners, or any agent or employee of any such persons acting within the
scope of their agency or employment, to the extent of Net Operating Income (as
defined in that certain Cash Management Agreement dated the date hereof between
Maker and Payee (the "Cash Management Agreement") or any removal of the Security
Property in violation of the terms of the Loan Documents, to the full extent of
the losses or damages incurred by Lender on account of such failure, (g) failure
to pay any valid taxes, assessments, mechanic's liens, materialmen's liens or
other liens which could create liens on any portion of the Security Property
which would be superior to the lien or security title of the Security Instrument
or the other Loan Documents, to the full extent of the amount claimed by any
such lien claimant, to the extent of Operating Income (as defined in the Cash
Management Agreement), (h) all obligations and indemnities of Borrower under the
Loan Documents relating to hazardous or toxic substances or compliance with
environmental laws and regulations to the full extent of any losses or damages
(including those resulting from diminution in value of any Security Property)
incurred by Lender as a result of the existence of such hazardous or toxic
substances or failure to comply with environmental laws or regulations, (i)
fraud or material misrepresentation as to facts existing at the time such
representation is made by Borrower or any of its principals, officers, or
general partners, any guarantor, any indemnitor or any agent, employee or other
person authorized or apparently authorized to make statements or representations
on behalf of Borrower, any principal, officer or partner of Borrower, any
guarantor or any indemnitor, to the full extent of any losses, damages and
expenses of Lender on account thereof and (j) any action, claim or counterclaim
or similar cause of action asserted or interposed by or on behalf of Maker
against Payee in any action or proceeding for foreclosure of the Mortgage
regardless of the forum, court or venue, or if Maker raises any defense to its
obligations under any of the Loan Documents, in either event of which such
action, claim, counterclaim, similar cause of action or defense is found by the
applicable court or trier of facts to be wholly or materially without basis in
law or fact. References herein to particular sections of the Loan Documents
shall be deemed references to such sections as affected by other provisions of
the Loan Documents relating thereto. Nothing herein shall be deemed (w) to be a
waiver of any right which Payee may have under any bankruptcy law of the United
States or of any State in which any part of the Mortgaged Property is located to
file a claim for the full amount of the Loan or to require that all of the
Mortgaged Property and any other collateral given to secure the Loan shall
continue to secure all of the Loan; (x) to impair the validity of the Loan; (y)
to impair the right of Payee as mortgagee or secured party to foreclose any lien
or security interest or (z) impair the right of Payee to obtain the Recourse
Distributions received by Maker, including, without limitation, the right, if
any, to proceed against any constituent partner or shareholder of Maker to the
extent any such Recourse Distribution has actually theretofore been distributed
to such constituent partner or shareholder. The provisions of this Section 1.05
shall be inapplicable to Maker if any petition for bankruptcy, reorganization or
arrangement pursuant to federal or state law shall be filed by, consented to or
5
<PAGE>
acquiesced in by or with respect to Maker or if Maker shall institute any
proceeding for the dissolution or liquidation of Maker or if Maker shall make an
assignment for the benefit of creditors, in which event Payee shall have
recourse against all of the assets of Maker and the Recourse Distributions
received by the constituent partners and shareholders of Maker. For purposes of
this Section 1.05, the term "Recourse Distributions" shall mean the
distributions referred to in the foregoing clause (e).
ARTICLE II - GENERAL CONDITIONS
2.01 No Waiver; Amendment. No failure to accelerate the debt
evidenced hereby by reason of default hereunder, acceptance of a partial or past
due payment, or indulgences granted from time to time shall be construed (i) as
a novation of this Note or as a reinstatement of the indebtedness evidenced
hereby or as a waiver of such right of acceleration or of the right of Lender
thereafter to insist upon strict compliance with the terms of this Note, or (ii)
to prevent the exercise of such right of acceleration or any other right granted
hereunder or by any applicable laws; and Borrower hereby expressly waives the
benefit of any statute or rule of law or equity now provided, or which may
hereafter be provided, which would produce a result contrary to or in conflict
with the foregoing. No extension of the time for the payment of this Note or any
installment due hereunder, made by agreement with any person now or hereafter
liable for the payment of this Note shall operate to release, discharge, modify,
change or affect the original liability of Borrower under this Note, either in
whole or in part unless Lender agrees otherwise in writing. This Note may not be
changed orally, but only by an agreement in writing signed by the party against
whom enforcement of any waiver, change, modification or discharge is sought.
2.02 Waivers. Presentment for payment, demand, protest and
notice of demand, protest and nonpayment and all other notices are hereby waived
by Borrower. Borrower hereby further waives and renounces, to the fullest extent
permitted by law, all rights to the benefits of any statute of limitations and
any moratorium, reinstatement, marshalling, forbearance, valuation, stay,
extension, redemption, appraisement, exemption and homestead now or hereafter
provided by the Constitution and laws of the United States of America and of
each state thereof, both as to itself and in and to all of its property, real
and personal, against the enforcement and collection of the obligations
evidenced by this Note or the other Loan Documents.
2.03 Limit of Validity. The provisions of this Note and of all
agreements between Borrower and Lender, whether now or existing or hereafter
arising and whether written or oral, are hereby expressly limited so that in no
contingency or event whatsoever, whether by reason of demand or acceleration of
the maturity of this Note or otherwise, shall the amount paid, or agreed to be
paid ("Interest"), to Lender for the use, forbearance or retention of the money
loaned under this Note exceed the maximum amount permissible under applicable
law. If, from any circumstance whatsoever, performance or fulfillment of any
provision hereof or of any agreement between Borrower and Lender shall, at the
time performance or fulfillment of such provision shall be due, exceed the limit
for Interest prescribed by law or otherwise transcend the limit of validity
prescribed by applicable law, then ipso facto the obligation to be performed or
fulfilled shall be reduced to such limit and if, from any circumstance
whatsoever, Lender shall ever receive anything of value deemed Interest by
applicable law in excess of the maximum lawful amount, an amount
6
<PAGE>
equal to any excessive Interest shall be applied to the reduction of the
principal balance owing under this Note in the inverse order of its maturity
(whether or not then due) or at the option of Lender be paid over to Borrower,
and not to the payment of Interest. All Interest (including any amounts or
payments deemed to be Interest) paid or agreed to be paid to Lender shall, to
the extent permitted by applicable law, be amortized, prorated, allocated and
spread throughout the full period until payment in full of the principal balance
of this Note so that the Interest thereof for such full period will not exceed
the maximum amount permitted by applicable law. This Section 2.03 will control
all agreements between Borrower and Lender.
2.04 Use of Funds. Borrower hereby warrants, represents and
covenants that no funds disbursed hereunder shall be used for personal, family
or household purposes.
2.05 Unconditional Payment. Borrower is and shall be obligated
to pay principal, interest and any and all other amounts which become payable
hereunder or under the other Loan Documents absolutely and unconditionally and
without any abatement, postponement, diminution or deduction and without any
reduction for counterclaim (other than compulsory counterclaims) or setoff. In
the event that at any time any payment received by Lender hereunder shall be
deemed by a court of competent jurisdiction to have been a voidable preference
or fraudulent conveyance under any bankruptcy, insolvency or other debtor relief
law, then the obligation to make such payment shall survive any cancellation or
satisfaction of this Note or return thereof to Borrower and shall not be
discharged or satisfied with any prior payment thereof or cancellation of this
Note, but shall remain a valid and binding obligation enforceable in accordance
with the terms and provisions hereof, and such payment shall be immediately due
and payable upon demand.
2.06 Governing Law; Consent to Jurisdiction.
(a) This Note shall be interpreted, construed and enforced
according to the laws of the State of New York, except that the provisions of
Section 2.08 shall be governed by Pennsylvania law.
(b) Any suit, action or proceeding against Maker or Payee
arising out of or relating to this Note shall be instituted in any federal or
state court in New York, New York, pursuant to ss.5-1402 of the New York General
Obligations Law, or, at Payee's discretion, in any state where the Trust
Property is located and Maker waives any objection which it may now or hereafter
have to the laying of venue of any such suit, action or proceeding, and Maker
hereby irrevocably submits to the jurisdiction of any such court in any suit,
action or proceeding. Maker does hereby designate and appoint C.T. Corporation
System, 1633 Broadway, New York, New York 10019, as their authorized agent to
accept and acknowledge on their behalf service of any and all process which may
be served in any such suit, action or proceeding in any federal or state court
in New York, New York, or in the state in which the Trust Property is located
and agrees that service of process upon said agent at said address and written
notice of said service of Maker mailed or delivered to Maker in the manner
provided in the Mortgage, shall be deemed in every respect effective service of
process upon Maker, in any such suit, action or proceeding. Maker (i) shall give
prompt notice to the Payee of any changed address of their authorized agent
hereunder, (ii) may at any time and from time to time designate a substitute
authorized agent
7
<PAGE>
with an office in New York, New York (which office shall be designated as the
address for service of process), and (iii) shall promptly designate such a
substitute if its authorized agent ceases to have an office in New York, New
York or is dissolved without leaving a successor.
2.07 Miscellaneous. The terms and provisions hereof shall be
binding upon and inure to the benefit of Borrower and Lender and their
respective heirs, executors, legal representatives, successors,
successors-in-title and assigns, whether by voluntary action of the parties or
by operation of law. As used herein, the terms "Borrower" and "Lender" shall be
deemed to include their respective heirs, executors, legal representatives,
successors, successors-in-title and assigns, whether by voluntary action of the
parties or by operation of law. If Borrower consists of more than one person or
entity, each shall be jointly and severally liable to perform the obligations of
Borrower under this Note. All personal pronouns used herein, whether used in the
masculine, feminine or neuter gender, shall include all other genders; the
singular shall include the plural and vice versa. Titles of articles and
sections are for convenience only and in no way define, limit, amplify or
describe the scope or intent of any provisions hereof. Time is of the essence
with respect to all provisions of this Note. This Note and the other Loan
Documents contain the entire agreements between the parties hereto relating to
the subject matter hereof and thereof and all prior agreements relative hereto
and thereto which are not contained herein or therein are terminated.
2.08 Pennsylvania Provisions. The following provisions shall
apply in connection with any enforcement of Lender's remedies under the Loan
Documents with respect to portions of the Security Property located in
Pennsylvania:
(a) Sealed Instrument. This Note is a sealed instrument.
(b) Confession of Judgment.
(1) THE FOLLOWING PARAGRAPH SETS FORTH A WARRANT OF AUTHORITY
FOR AN ATTORNEY TO CONFESS JUDGMENT AGAINST BORROWER IN GRANTING THIS WARRANT OF
ATTORNEY TO CONFESS JUDGMENT AGAINST THE BORROWER, THE BORROWER HEREBY
KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, AND, ON THE ADVICE OF THE SEPARATE
COUNSEL OF BORROWER, UNCONDITIONALLY WAIVES ANY AND ALL RIGHTS BORROWER HAS OR
MAY HAVE TO PRIOR NOTICE AND AN OPPORTUNITY FOR HEARING UNDER THE RESPECTIVE
CONSTITUTIONS AND LAWS OF THE UNITED STATES AND THE COMMONWEALTH OF
PENNSYLVANIA.
(2) BORROWER IRREVOCABLY AUTHORIZES AND EMPOWERS ANY ATTORNEY
OR THE PROTHONOTARY OR CLERK OF ANY COURT IN THE COMMONWEALTH OF PENNSYLVANIA,
OR ELSEWHERE, TO APPEAR FOR BORROWER AT ANY TIME AFTER DEFAULT BEYOND ANY
APPLICABLE NOTICE AND GRACE PERIOD UNDER THIS NOTE OR UNDER THE LOAN DOCUMENTS
IN ANY ACTION BROUGHT AGAINST BORROWER ON THIS NOTE AT THE SUIT OF LENDER, AS OF
ANY TERM, AND IN THAT ACTION TO CONFESS OR ENTER JUDGMENT AGAINST BORROWER FOR
THE ENTIRE UNPAID PRINCIPAL OF THIS NOTE AND ALL OTHER SUMS DUE UNDER THIS NOTE
OR THE LOAN DOCUMENTS, AND ALL
8
<PAGE>
INTEREST ACCRUED ON THOSE AMOUNTS, TOGETHER WITH COSTS OF SUIT, ATTORNEY'S
COMMISSION FOR COLLECTION OF FIVE PERCENT (5%) OF THE TOTAL AMOUNT THEN DUE BY
BORROWER TO LENDER (BUT IN ANY EVENT NOT LESS THAN TEN THOUSAND DOLLARS
($10,000.00)), TOGETHER WITH INTEREST ON ANY JUDGMENT OBTAINED BY LENDER AT THE
DEFAULT INTEREST RATE, SPECIFIED IN THE NOTE AFTER DEFAULT, INCLUDING INTEREST
AT THAT RATE FROM AND AFTER THE DATE OF ANY SHERIFF'S OR JUDICIAL SALE UNTIL
ACTUAL PAYMENT IS MADE TO LENDER OF THE FULL AMOUNT DUE LENDER; AND FOR SO DOING
THIS NOTE OR A COPY OF IT VERIFIED BY AFFIDAVIT SHALL BE A SUFFICIENT WARRANT.
THE AUTHORITY GRANTED IN THIS NOTE TO CONFESS JUDGMENT SHALL NOT BE EXHAUSTED BY
ANY EXERCISE OF IT BUT SHALL CONTINUE FROM TIME TO TIME AND AT ALL TIMES UNTIL
PAYMENT IN FULL OF ALL THE AMOUNTS DUE UNDER THIS NOTE.
2.09 Consolidation and Restatement. Lender is the lawful owner
and holder of the notes described on Exhibit A attached hereto (the "Existing
Notes"), by assignment or otherwise, which Existing Notes evidence indebtedness
of one of Borrower. Lender and Borrower have agreed that the Existing Notes will
be amended, modified and restated in their entirety pursuant hereto, and
consolidated with certain new indebtedness of Borrower to Lender pursuant
hereto. Accordingly, by Borrower's execution and delivery, and Lender's
acceptance of delivery, of this Note, this Note does hereby amend, modify and
restate the Existing Notes in their entirety, and consolidate the Existing Notes
with one another and with the new indebtedness evidenced hereby, so as to cause
this Note to evidence one joint and several debt of Borrower in the principal
amount of $65,500,000. All of the terms, covenants, agreements, rights,
obligations and conditions of the Existing Notes are hereby amended, restated
and superseded in their entirety by this Note, it being understood, acknowledged
and agreed that the consolidation and restatement of the Existing Notes pursuant
to this Note shall not (and does not) impair the debt evidenced by the Existing
Notes. Each Borrower expressly acknowledges and consents to its joint and
several liability for the entire debt evidenced by this Note and, if and to the
extent such Borrower was not the obligor with respect to the indebtedness
evidenced by any of the Existing Notes, such Borrower, by its execution and
delivery of this Note, does hereby expressly assume joint and several liability
for such indebtedness on the restated terms set forth herein.
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<PAGE>
IN WITNESS WHEREOF, Borrower has executed this Note under seal
as of the date first above written.
AMERICAN DE/SPE, LLC,
a Delaware limited liability company
By: AMERICAN DE/SPE 1, INC., a Delaware
corporation, its managing member
By: /s/ Stephen J. Butte
-------------------------------
Name: Stephen J. Butte
Title:Vice-President
CORPORATE SEAL
VIRGINIA STREET ASSOCIATES
LIMITED PARTNERSHIP,
a Colorado limited partnership
By: American DE/SPE 3 Inc., a Delaware
-------------------------------
corporation, its general partner
By: /s/ Stephen J. Butte
-------------------------------
Name: Stephen J. Butte
Title:Vice-President
CORPORATE SEAL
<PAGE>
Exhibit 10.2
AMENDED AND RESTATED PROMISSORY NOTE
$29,400,000 October 30, 1998
New York, New York
FOR VALUE RECEIVED, the undersigned, AMERICAN DE/SPE 2, LLC, a
Delaware limited liability company ("American 2"), and AMERICAN DE/SPE 4, L.P.,
a Delaware limited partnership ("American 4"; American 2 and American 4 are
hereinafter collectively referred to as "Borrower"), jointly and severally,
promise to pay to the order of COLUMN FINANCIAL, INC., a Delaware corporation
("Lender"), at the office of Lender at 3414 Peachtree Road, N.E., Suite 1140,
Atlanta, Georgia 30326-1113, or at such other place as Lender may designate to
Borrower in writing from time to time, the principal sum of Twenty Nine Million
Four Hundred Thousand and NO/100 DOLLARS ($29,400,000.00), together with
interest on so much thereof as is from time to time outstanding and unpaid, from
the date of the advance of the principal evidenced hereby, at the rate of Seven
and Fifty-Five One Hundredths percent (7.55%) per annum (the "Note Rate"), in
lawful money of the United States of America, which shall at the time of payment
be legal tender in payment of all debts and dues, public and private.
ARTICLE I -- TERMS AND CONDITIONS
1.01 Payment of Principal and Interest. Said interest shall be
computed hereunder based on a 360-day year and paid for the actual number of
days elapsed for any whole or partial month for which interest is being
calculated. In computing the number of days during which interest accrues, the
day on which funds are initially advanced shall be included regardless of the
time of day such advance is made, and the day on which funds are repaid shall be
included unless repayment is credited prior to close of business. Payments in
federal funds immediately available in the place designated for payment received
by Lender prior to 2:00 p.m. local time at said place of payment shall be
credited prior to close of business, while other payments may, at the option of
Lender, not be credited until immediately available to Lender in federal funds
in the place designated for payment prior to 2:00 p.m. local time at said place
of payment on a day on which Lender is open for business. Such principal and
interest shall be payable in equal consecutive monthly installments of
$206,576.59 each, beginning on the first day of the second full calendar month
following the date of the advance of the principal amount evidenced by this Note
(or on the first day of the first full calendar month following the date of the
advance of the principal amount evidenced by this Note if such date is the first
day of a calendar month), and continuing on the first day of each and every
month thereafter (or if such day is not a Business Day (as defined in the Cash
Management Agreement) on the first Business Day thereafter) until November 1,
2008 (the "Maturity Date"), at which time the entire outstanding principal
balance hereof, together with all accrued but unpaid interest thereon, shall be
due and payable in full. Each such monthly installment shall be applied first to
the payment of accrued interest and then to reduction of principal. If the
advance of the principal amount evidenced by this Note is made on a date other
than the first day of a calendar month, then Borrower shall pay to Lender
contemporaneously with
<PAGE>
the execution hereof interest at the foregoing interest rate for a period
from the date hereof through and including the last day of the calendar month
in which this note is funded. All payments delivered to an account or reserve
under the Cash Management Agreement shall be deemed to be delivered to Lender.
1.02 Prepayment.
(a) Prior to the Lockout Expiration Date (defined below), this Note may not
be prepaid in whole or in part, except as provided in Section 1.02(c); provided,
however, Borrower shall have the right and option to release the Security
Property (as hereinafter defined) from the lien of the Security Instrument (as
hereinafter defined) in accordance with the terms and provisions of Section 1.35
and Section 1.36 of the Security Instrument. This Note may be prepaid in whole
but not in part (except as otherwise specifically provided herein) at any time
after the date of the 114th monthly installment of principal and interest due
hereunder (the "Lockout Expiration Date") provided (i) written notice of such
prepayment is received by Lender not more than sixty (60) days and not less than
thirty (30) days prior to the date of such prepayment and (ii) such prepayment
is received on the first day of a calendar month (or, if such prepayment is not
received on the first day of a calendar month, interest is paid through the last
day of such calendar month) and is accompanied by all interest accrued hereunder
and all other sums due hereunder or under the other Loan Documents.
(b) If prior to the Lockout Expiration Date and following the occurrence of
any default beyond any applicable notice and/or grace period, Borrower shall
tender payment of an amount sufficient to satisfy all of the indebtedness
evidenced by the Note and the other Loan Documents (as hereinafter defined) at
any time prior to a sale of the Security Property, either through foreclosure or
the exercise of the other remedies available to Lender under the Security
Instrument, such tender by Borrower shall be deemed to be voluntary and Borrower
shall pay, in addition to the amounts payable hereunder and under the Loan
Documents, a prepayment fee in an amount equal to the greater of (A) two percent
(2.0%) of the principal amount being prepaid, and (B) one percent (1%) of the
principal amount being repaid plus the positive excess of (i) the present value
("PV") of all future installments of principal and interest due under this Note
including the principal amount due at maturity (collectively, "All Future
Payments"), discounted at an interest rate per annum equal to the rate published
in the Treasury Constant Maturity Yield Index, during the second full week
preceding the date on which such premium is payable, for instruments having a
maturity coterminous with the remaining term of this Note, over (ii) the
principal amount of this Note outstanding immediately before such prepayment.
"Treasury Constant Maturity Yield Index" shall mean the average yield for "This
Week" as reported by the Federal Reserve Board in Federal Reserve Statistical
Release H.15 (519). If there is no Treasury Constant Maturity Yield Index for
instruments having a maturity coterminous with the remaining term of this Note,
then the index shall be equal to the weighted average yield to maturity of the
Treasury Constant Maturity Yield Indices with maturities next longer and shorter
than such remaining average life to maturity, calculated by averaging (and
rounding upward to the nearest whole multiple of 1/100 of 1% per annum, if the
average is not such a multiple) the yields of the relevant Treasury Constant
Maturity Yield indices (rounded, if necessary, to the nearest 1/100 of 1% with
any figure of 1/200 of 1% or above rounded upward). In the event that any
prepayment fee is due hereunder, Lender shall
<PAGE>
deliver to Borrower a statement setting forth the amount and determination of
the prepayment fee, and, provided that Lender shall have in good faith
applied the formula described above, Borrower shall not have the right to
challenge the calculation or the method of calculation set forth in any such
statement in the absence of manifest error, which calculation may be made by
Lender on any day during the thirty (30) day period preceding the date of
such prepayment. Lender shall not be obligated or required to have actually
reinvested the prepaid principal balance at the Treasury Constant Maturity
Yield or otherwise as a condition to receiving the prepayment fee.
(c) Partial prepayments of this Note shall not be permitted, except partial
prepayments resulting from Lender applying insurance or condemnation proceeds to
reduce the outstanding principal balance of this Note as provided in the
Security Instrument, in which event no prepayment fee or premium shall be due.
No notice of prepayment shall be required under the circumstance specified in
the preceding sentence. No principal amount repaid may be reborrowed. Partial
payments of principal shall be applied to the unpaid principal balance evidenced
hereby but such application shall not reduce the amount of the fixed monthly
installments required to be paid pursuant to Section 1.01 above.
1.03 Security. The indebtedness evidenced by this Note and the obligations
created hereby are secured by those certain mortgages from American 2 to Lender,
dated as of October 16, 1998, concerning property located in Onondaga, County,
New York and that certain mortgage from American 4 to Lender, dated as of the
date hereof, concerning property located in Franklin County, Pennsylvania
(collectively, the "Security Instrument") . The Security Instrument together
with this Note and all other documents to or of which Lender is a party or
beneficiary now or hereafter evidencing, securing, guarantying, modifying or
otherwise relating to the indebtedness evidenced hereby, are herein referred to
collectively as the "Loan Documents". All of the terms and provisions of the
Loan Documents are incorporated herein by reference. Some of the Loan Documents
are to be filed for record on or about the date hereof in the appropriate public
records.
1.04 Default. It is hereby expressly agreed that should any default occur
in the payment of principal or interest as stipulated above and such payment is
not made within five (5) days of the date such payment is due (provided that no
grace period is provided for the payment of principal and interest due on the
Maturity Date), or should any other default occur under any of the Loan
Documents which is not cured within any applicable grace or cure period, then a
default shall exist hereunder, and in such event the indebtedness evidenced
hereby, including all sums advanced or accrued hereunder or under any other Loan
Document, and all unpaid interest accrued thereon, shall, at the option of
Lender and without notice to Borrower, at once become due and payable and may be
collected forthwith, whether or not there has been a prior demand for payment
and regardless of the stipulated date of maturity. In the event that any payment
(other than any payment due on maturity, by acceleration or otherwise) is not
received by Lender on the date when due, then in addition to any default
interest payments due hereunder, Borrower shall also pay to Lender a late charge
in an amount equal to five percent (5.0%) of the amount of such overdue payment.
So long as any default exists and continues hereunder, regardless of whether or
not there has been an acceleration of the indebtedness evidenced hereby, and at
all times after maturity of the indebtedness evidenced hereby (whether by
acceleration or otherwise), interest shall accrue on the outstanding principal
balance of this Note at a rate per annum equal to four percent (4.0%) plus the
<PAGE>
interest rate which would be in effect hereunder absent such default or
maturity, or if such increased rate of interest may not be collected under
applicable law, then at the maximum rate of interest, if any, which may be
collected from Borrower under applicable law (the "Default Interest Rate"), and
such default interest shall be immediately due and payable. Borrower
acknowledges that it would be extremely difficult or impracticable to determine
Lender's actual damages resulting from any late payment or default, and such
late charges and default interest are reasonable estimates of those damages and
do not constitute a penalty. The remedies of Lender in this Note or in the Loan
Documents, or at law or in equity, shall be cumulative and concurrent, and may
be pursued singly, successively or together in Lender's discretion. Time is of
the essence of this Note. In the event this Note, or any part hereof, is
collected by or through an attorney-at-law, Borrower agrees to pay all costs of
collection including, but not limited to, reasonable attorney's fees.
1.05 Exculpation. Notwithstanding anything in the Loan Documents to the
contrary, but subject to the qualifications hereinbelow set forth, Lender
agrees that (i) Borrower shall be liable upon the indebtedness evidenced
hereby and for the other obligations arising under the Loan Documents to the
full extent (but only to the extent) of the security therefor, the same being
all properties (whether real or personal), rights, estates and interests now
or at any time hereafter securing the payment of this Note and/or the other
obligations of Borrower under the Loan Documents (collectively, the "Security
Property"), (ii) if default occurs in the timely and proper payment of all or
any part of such indebtedness evidenced hereby or in the timely and proper
performance of the other obligations of Borrower under the Loan Documents,
any judicial proceedings brought by Lender against Borrower shall be limited
to the preservation, enforcement and foreclosure, or any thereof, of the
liens, security titles, estates, assignments, rights and security interests
now or at any time hereafter securing the payment of this Note and/or the
other obligations of Borrower under the Loan Documents, and confirmation of
any sale under power of sale, and no attachment, execution or other writ of
process shall be sought, issued or levied upon any assets, properties or
funds of Borrower other than the Security Property except with respect to the
liability described below in this section, and (iii) in the event of a
foreclosure of such liens, security titles, estates, assignments, rights or
security interests securing the payment of this Note and/or the other
obligations of Borrower under the Loan Documents, whether by judicial
proceedings or exercise of power of sale, no judgment for any deficiency upon
the indebtedness evidenced hereby shall be sought or obtained by Lender
against Borrower, except with respect to the liability described below in
this section; provided, however, that, notwithstanding the foregoing
provisions of this section, Borrower shall be fully and personally liable and
subject to legal action for loss, cost or damage due to(a) proceeds paid to
Borrower under any insurance policies (or paid as a result of any other claim
or cause of action against any person or entity) by reason of damage, loss or
destruction to all or any portion of the Security Property, to the full
extent of such proceeds not previously delivered to Lender, but which, under
the terms of the Loan Documents, should have been delivered to Lender, (b)
proceeds paid to Borrower or awards resulting from the condemnation or other
taking in lieu of condemnation of all or any portion of the Security
Property, or any of them, to the full extent of such proceeds or awards not
previously delivered to Lender, but which, under the terms of the Loan
Documents, should have been delivered to Lender, (c) all tenant security
deposits or other refundable deposits paid to or held by Borrower or any
other person or entity in connection with leases of all or any portion of the
Security Property which are not applied in accordance with the terms of the
applicable lease or other agreement, (d) rent and other payments received
from tenants
<PAGE>
under leases of all or any portion of the Security Property paid more than
one month in advance, (e) rents, issues, profits and revenues of all or any
portion of the Security Property distributed to partners in Borrower that (i)
are received or applicable to a period after any notice of default from
Lender hereunder or under the Loan Documents in the event of any default by
Borrower hereunder or thereunder, which is not then or thereafter, whether or
not within an applicable grace period, cured prior to the acceleration of the
principal sum of this Note, and (ii) are not either applied to the payment of
real estate taxes or other ordinary and necessary expenses of owning and
operating the Security Property or paid to Lender, (f) damage to the Security
Property as a result of the intentional misconduct or gross negligence of
Borrower or any of its principals, officers or general partners, or any agent
or employee of any such persons acting within the scope of their agency or
employment, to the extent of Net Operating Income (as defined in that certain
Cash Management Agreement dated October 16, 1998 between American 2 and
Lender (the "Cash Management Agreement") or any removal of the Security
Property in violation of the terms of the Loan Documents, to the full extent
of the losses or damages incurred by Lender on account of such failure, (g)
failure to pay any valid taxes, assessments, mechanic's liens, materialmen's
liens or other liens which could create liens on any portion of the Security
Property which would be superior to the lien or security title of the
Security Instrument or the other Loan Documents, to the full extent of the
amount claimed by any such lien claimant, to the extent of Operating Income
(as defined in the Cash Management Agreement), (h) all obligations and
indemnities of Borrower under the Loan Documents relating to hazardous or
toxic substances or compliance with environmental laws and regulations to the
full extent of any losses or damages (including those resulting from
diminution in value of any Security Property) incurred by Lender as a result
of the existence of such hazardous or toxic substances or failure to comply
with environmental laws or regulations, (i) fraud or material
misrepresentation as to facts existing at the time such representation is
made by Borrower or any of its principals, officers, or general partners, any
guarantor, any indemnitor or any agent, employee or other person authorized
or apparently authorized to make statements or representations on behalf of
Borrower, any principal, officer or partner of Borrower, any guarantor or any
indemnitor, to the full extent of any losses, damages and expenses of Lender
on account thereof and (j) any action, claim or counterclaim or similar cause
of action asserted or interposed by or on behalf of Borrower against Lender
in any action or proceeding for foreclosure of the Mortgage regardless of the
forum, court or venue, or if Borrower raises any defense to its obligations
under any of the Loan Documents, in either event of which such action, claim,
counterclaim, similar cause of action or defense is found by the applicable
court or trier of facts to be wholly or materially without basis in law or
fact. References herein to particular sections of the Loan Documents shall be
deemed references to such sections as affected by other provisions of the
Loan Documents relating thereto. Nothing herein shall be deemed (w) to be a
waiver of any right which Lender may have under any bankruptcy law of the
United States or of any State in which any part of the Mortgaged Property is
located to file a claim for the full amount of the Loan or to require that
all of the Mortgaged Property and any other collateral given to secure the
Loan shall continue to secure all of the Loan; (x) to impair the validity of
the Loan; (y) to impair the right of Lender as mortgagee or secured party to
foreclose any lien or security interest or (z) impair the right of Lender to
obtain the Recourse Distributions received by Borrower, including, without
limitation, the right, if any, to proceed against any constituent partner or
shareholder of Borrower to the extent any such Recourse Distribution has
actually theretofore been distributed to such constituent partner or
shareholder.
<PAGE>
The provisions of this Section 1.05 shall be inapplicable to Borrower if any
petition for bankruptcy, reorganization or arrangement pursuant to federal or
state law shall be filed by, consented to or acquiesced in by or with respect
to Borrower or if Borrower shall institute any proceeding for the dissolution
or liquidation of Borrower or if Borrower shall make an assignment for the
benefit of creditors, in which event Lender shall have recourse against all
of the assets of Borrower and the Recourse Distributions received by the
constituent partners and shareholders of Borrower. For purposes of this
Section 1.05, the term "Recourse Distributions" shall mean the distributions
referred to in the foregoing clause (e).
ARTICLE II - GENERAL CONDITIONS
2.01 No Waiver; Amendment. No failure to accelerate the debt evidenced
hereby by reason of default hereunder, acceptance of a partial or past due
payment, or indulgences granted from time to time shall be construed (i) as a
novation of this Note or as a reinstatement of the indebtedness evidenced hereby
or as a waiver of such right of acceleration or of the right of Lender
thereafter to insist upon strict compliance with the terms of this Note, or (ii)
to prevent the exercise of such right of acceleration or any other right granted
hereunder or by any applicable laws; and Borrower hereby expressly waives the
benefit of any statute or rule of law or equity now provided, or which may
hereafter be provided, which would produce a result contrary to or in conflict
with the foregoing. No extension of the time for the payment of this Note or any
installment due hereunder, made by agreement with any person now or hereafter
liable for the payment of this Note shall operate to release, discharge, modify,
change or affect the original liability of Borrower under this Note, either in
whole or in part unless Lender agrees otherwise in writing. This Note may not be
changed orally, but only by an agreement in writing signed by the party against
whom enforcement of any waiver, change, modification or discharge is sought.
2.02 Waivers. Presentment for payment, demand, protest and notice of
demand, protest and nonpayment and all other notices are hereby waived by
Borrower. Borrower hereby further waives and renounces, to the fullest extent
permitted by law, all rights to the benefits of any statute of limitations and
any moratorium, reinstatement, marshalling, forbearance, valuation, stay,
extension, redemption, appraisement, exemption and homestead now or hereafter
provided by the Constitution and laws of the United States of America and of
each state thereof, both as to itself and in and to all of its property, real
and personal, against the enforcement and collection of the obligations
evidenced by this Note or the other Loan Documents.
2.03 Limit of Validity. The provisions of this Note and of all agreements
between Borrower and Lender, whether now or existing or hereafter arising and
whether written or oral, are hereby expressly limited so that in no contingency
or event whatsoever, whether by reason of demand or acceleration of the maturity
of this Note or otherwise, shall the amount paid, or agreed to be paid
("Interest"), to Lender for the use, forbearance or retention of the money
loaned under this Note exceed the maximum amount permissible under applicable
law. If, from any circumstance whatsoever, performance or fulfillment of any
provision hereof or of any agreement between Borrower and Lender shall, at the
time performance or fulfillment of such provision shall be due, exceed the limit
for Interest prescribed by law or otherwise transcend the limit of validity
prescribed by applicable law, then ipso facto the obligation to be performed or
fulfilled shall be
<PAGE>
reduced to such limit and if, from any circumstance whatsoever, Lender shall
ever receive anything of value deemed Interest by applicable law in excess of
the maximum lawful amount, an amount equal to any excessive Interest shall be
applied to the reduction of the principal balance owing under this Note in
the inverse order of its maturity (whether or not then due) or at the option
of Lender be paid over to Borrower, and not to the payment of Interest. All
Interest (including any amounts or payments deemed to be Interest) paid or
agreed to be paid to Lender shall, to the extent permitted by applicable law,
be amortized, prorated, allocated and spread throughout the full period until
payment in full of the principal balance of this Note so that the Interest
thereof for such full period will not exceed the maximum amount permitted by
applicable law. This Section 2.03 will control all agreements between
Borrower and Lender.
2.04 Use of Funds. Borrower hereby warrants, represents and covenants that
no funds disbursed hereunder shall be used for personal, family or household
purposes.
2.05 Unconditional Payment. Borrower is and shall be obligated to pay
principal, interest and any and all other amounts which become payable hereunder
or under the other Loan Documents absolutely and unconditionally and without any
abatement, postponement, diminution or deduction and without any reduction for
counterclaim (other than compulsory counterclaims) or setoff. In the event that
at any time any payment received by Lender hereunder shall be deemed by a court
of competent jurisdiction to have been a voidable preference or fraudulent
conveyance under any bankruptcy, insolvency or other debtor relief law, then the
obligation to make such payment shall survive any cancellation or satisfaction
of this Note or return thereof to Borrower and shall not be discharged or
satisfied with any prior payment thereof or cancellation of this Note, but shall
remain a valid and binding obligation enforceable in accordance with the terms
and provisions hereof, and such payment shall be immediately due and payable
upon demand.
2.06 Governing Law; Consent to Jurisdiction.
(a) This Note shall be interpreted, construed and enforced according to the
laws of the State of New York.
(b) Any suit, action or proceeding against Borrower or Lender arising
out of or relating to this Note shall be instituted in any federal or state
court in New York, New York, pursuant to Section.5-1402 of the New York General
Obligations Law, or, at Lender's discretion, in any state where the Trust
Property is located and Borrower waives any objection which it may now or
hereafter have to the laying of venue of any such suit, action or proceeding,
and Borrower hereby irrevocably submits to the jurisdiction of any such court
in any suit, action or proceeding. Borrower does hereby designate and appoint
C.T. Corporation System, 1633 Broadway, New York, New York 10019, as their
authorized agent to accept and acknowledge on their behalf service of any and
all process which may be served in any such suit, action or proceeding in any
federal or state court in New York, New York, or in the state in which the
Trust Property is located and agrees that service of process upon said agent
at said address and written notice of said service of Borrower mailed or
delivered to Borrower in the manner provided in the Mortgage, shall be deemed
in every respect effective service of process upon Borrower, in any such
suit, action or proceeding. Borrower (i) shall give prompt notice to the
Lender of any
<PAGE>
changed address of their authorized agent hereunder, (ii) may at any time and
from time to time designate a substitute authorized agent with an office in
New York, New York (which office shall be designated as the address for
service of process), and (iii) shall promptly designate such a substitute if
its authorized agent ceases to have an office in New York, New York or is
dissolved without leaving a successor.
2.07 Miscellaneous. The terms and provisions hereof shall be binding upon
and inure to the benefit of Borrower and Lender and their respective heirs,
executors, legal representatives, successors, successors-in-title and assigns,
whether by voluntary action of the parties or by operation of law. As used
herein, the terms "Borrower" and "Lender" shall be deemed to include their
respective heirs, executors, legal representatives, successors,
successors-in-title and assigns, whether by voluntary action of the parties or
by operation of law. If Borrower consists of more than one person or entity,
each shall be jointly and severally liable to perform the obligations of
Borrower under this Note. All personal pronouns used herein, whether used in the
masculine, feminine or neuter gender, shall include all other genders; the
singular shall include the plural and vice versa. Titles of articles and
sections are for convenience only and in no way define, limit, amplify or
describe the scope or intent of any provisions hereof. Time is of the essence
with respect to all provisions of this Note. This Note and the other Loan
Documents contain the entire agreements between the parties hereto relating to
the subject matter hereof and thereof and all prior agreements relative hereto
and thereto which are not contained herein or therein are terminated.
2.08 Consolidation and Restatement. Lender is the lawful owner and holder
of that certain Promissory Note dated October 16, 1998 made by American 2 to
Lender in the original principal amount of $12,200,000 (the "Existing Note").
Lender and Borrower have agreed that the indebtedness evidenced by the Existing
Note shall be increased, and that in connection the Existing Note will be
amended, modified and restated in its entirety pursuant hereto. Accordingly, by
Borrower's execution and delivery, and Lender's acceptance of delivery, of this
Note, this Note does hereby amend, modify and restate the Existing Note in its
entirety, and consolidate the Existing Note with the new indebtedness evidenced
hereby, so as to cause this Note to evidence one joint and several debt of
Borrower in the principal amount of $29,400,000. All of the terms, covenants,
agreements, rights, obligations and conditions of the Existing Note are hereby
amended, restated and superseded in their entirety by this Note, it being
understood, acknowledged and agreed that the amendment and restatement of the
Existing Note pursuant to this Note shall not (and does not) impair the debt
evidenced by the Existing Note. Borrower expressly acknowledges and consents to
its liability for the entire debt evidenced by this Note and, if and to the
extent American 4 was not the obligor with respect to the indebtedness evidenced
by the Existing Note, American 4, by its execution and delivery of this Note,
does hereby expressly assume liability for such indebtedness on the restated
terms set forth herein.
<PAGE>
IN WITNESS WHEREOF, Borrower has executed this Note as of the
date first above written.
AMERICAN DE/SPE 2, LLC,
a Delaware limited liability company
By: AMERICAN DE/SPE 2, INC., a Delaware
corporation, its managing member
By: /s/ Stephen J. Butte
--------------------------------------
Name: Stephen J. Butte
Title:Vice-President
AMERICAN DE/SPE 4, L.P.,
a Delaware limited partnership
By: AMERICAN DE/SPE 4, INC.
a Delaware corporation, its general partner
By: /s/ Stephen J. Butte
--------------------------------------
Name: Stephen J. Butte
Title:Vice-President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998, FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,003
<SECURITIES> 0
<RECEIVABLES> 13,686
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,627
<PP&E> 401,271
<DEPRECIATION> 4,192
<TOTAL-ASSETS> 416,405
<CURRENT-LIABILITIES> 5,425
<BONDS> 239,325
0
79,300<F1>
<COMMON> 7
<OTHER-SE> 92,348
<TOTAL-LIABILITY-AND-EQUITY> 416,405
<SALES> 25,604
<TOTAL-REVENUES> 25,604
<CGS> 9,645
<TOTAL-COSTS> 9,645
<OTHER-EXPENSES> 1,023<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,997
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 11,952<F3>
<EXTRAORDINARY> 8,106<F4>
<CHANGES> 0
<NET-INCOME> 9,785
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.61
<FN>
<F1>REPRESENTS MINORITY INTEREST
<F2>EQUITY IN LOSS FROM INVESTMENT
<F3>REPRESENTS GAINS FROM PROPERTY SALES
<F4>REPRESENTS MINORITY INTEREST IN INCOME
</FN>
</TABLE>
