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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
(FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
(NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 1-12514
AMERICAN REAL ESTATE INVESTMENT CORPORATION
(Name of registrant as specified in its charter)
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MARYLAND 84-1246586
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
620 WEST GERMANTOWN PIKE, SUITE 200
PLYMOUTH MEETING, PENNSYLVANIA 19462
(Address of principal executive offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER (INCLUDED AREA CODE): (610) 834-7950
Name of each Exchange on which Registered: American Stock Exchange
Securities registered under Section 12(b) of the Exchange Act:
Title of each Class:
Common Stock, $.001 Par Value
Securities registered under Section 12(g) of the Exchange Act: NONE
Indicate by check mark whether the Registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) and been subject to such filing requirements for the past
90 days.Yes /X/ No / /
Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and will not be contained, to the
best of the Registrants's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates (based
upon the closing price on the American Stock Exchange) on March 29, 1999 was
approximately $68.0 million. As of March 29, 1999, there were 7,392,974 shares
of Common Stock, $.001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of the shareholders
of American Real Estate Investment Corporation to be held in 1999 are
incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
FORM 10-K
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PART I
Item 1. Business...................................................................................... 3
Item 2. Properties.................................................................................... 12
Item 3. Legal Proceedings............................................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders........................................... 15
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters......................... 16
Item 6. Selected Financial Data....................................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 18
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..................................... 24
Item 8. Financial Statements and Supplementary Data................................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 24
PART III.
Item 10. Directors and Executive Officers of the Registrant............................................ 25
Item 11. Executive Compensation........................................................................ 25
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 25
Item 13. Certain Relationships and Related Transactions................................................ 25
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K................................ 26
Signatures.................................................................................................
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PART I.
ITEM 1. BUSINESS.
American Real Estate Investment Corporation (together with its subsidiaries,
the "Company") is a self-administered, self-managed real estate investment trust
("REIT") engaged in the ownership, acquisition and development of industrial and
office properties. At December 31, 1998, the Company owned a portfolio of 99
properties (the "Properties") comprised of 64 industrial properties, 33 office
properties, a community shopping center and an investment in a direct financing
lease which aggregated approximately 12 million square feet. The Properties are
located principally in the eastern United States and were 98% leased to 290
tenants at December 31, 1998.
The Company's strategic focus continues to be the acquisition of
institutional quality, "high bay" distribution facilities located in close
proximity to major ports, airports and interstate and regional road systems in
the eastern United States. Additionally, the Company owns a variety of single
tenant and multi-tenant service, assembly, light manufacturing and research and
development facilities in suburban, mixed-use developments or business parks.
The Company's office properties consist principally of modern mid-rise and
single-story suburban buildings, located in suburban office parks. Substantially
all of the office buildings are located within established and growing business
communities with convenient access to regional and interstate road systems and
highways.
The Company conducts substantially all of its activities through, and
substantially all of the Properties are held directly or indirectly by, American
Real Estate Investment, L.P. (the "Operating Partnership"). The Company is the
sole general partner of the Operating Partnership and owns, at December 31,
1998, approximately 53% of the limited partnership interests (the "OP Units") in
the Operating Partnership. The remaining OP Units are owned by limited partners
of the Operating Partnership. The officers and the directors of the Company own
approximately 27% of the outstanding Common Stock and OP Units as of December
31, 1998. Each OP Unit may be redeemed by the holder for one share of Common
Stock (subject to certain anti-dilution provisions), or, at the Company's
option, the cash value of one share of Common Stock. With each such exchange,
the Company's percentage interest in the Operating Partnership will increase.
During the year ended December 31, 1998, the Company increased the portfolio
of owned real estate from approximately two million square feet to 12 million
square feet and the book value of its real estate assets from $152 million to
$536 million, respectively. The Company accomplished this by acquiring 78
industrial and office buildings for an aggregate purchase price of approximately
$418 million and by disposing of its two remaining multi-family assets for
proceeds of $41.0 million and reinvesting these proceeds in office and
industrial assets. Industrial acquisitions totaled $255 million, comprising 54
buildings and 8.4 million square feet, and office acquisitions totaled $163
million, comprising 24 buildings and 1.5 million square feet. At December 31,
1998, the Company's industrial and office real estate portfolio composition, on
a square footage basis, was 82% industrial (64 properties totaling 9.7 million
square feet) and 17% office (33 buildings, totaling two million square feet).
Additionally, in December 1998, the Company formed a strategic alliance with
Browning Investments, Inc., a developer located in Indianapolis, Indiana, to
develop Airtech Park, a 457 acre site located adjacent to the Indianapolis
International Airport, with direct access to Interstate 70. This site can
accommodate 7.5 million square feet of industrial development. The terms of this
alliance give the Company an option and right of first refusal to develop
distinct land parcels through joint ventures in which the Company will have a
50% noncontrolling ownership interest. In 1998, the venture commenced the
construction of the first facility in Airtech Park, a 495,740 build-to-suit
industrial building on 34 acres for lease to Brightpoint, Inc. This building is
expected to be completed in the first quarter of 2000 for a cost of
approximately $28.5 million.
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The Company was originally incorporated in Delaware in 1993 and was
re-incorporated in Maryland in 1994. The Company's executive offices are located
at 620 West Germantown Pike, Suite 200, Plymouth Meeting, Pennsylvania and its
telephone number is 610-834-7950. The Company also maintains regional offices in
Allentown, Pennsylvania; Franklin Lakes, New Jersey; Albany and Syracuse, New
York; and Greenville, South Carolina.
MANAGEMENT AND EMPLOYEES
The Company conducts its real estate management activities through American
Real Estate Management, Inc. (the "Management Company"). At December 31, 1998,
the Company managed all but one of the Properties through the Management
Company. Urban Farms Shopping Center, a community shopping center which was sold
on March 26, 1999, was managed for the Company by unaffiliated third parties.
The Company also manages, through the Management Company, additional properties
on behalf of third parties. As of March 25, 1999, the Management Company was
managing industrial and office properties containing an aggregate of
approximately 15 million square feet, of which approximately 12 million square
feet was owned by the Company, approximately two million square feet related to
properties owned by unaffiliated third parties and approximately one million
square feet related to two properties owned by limited partnerships in which
certain executive officers and a director of the Company have general and
limited partnership interests. Through its ownership of 100% of the nonvoting
preferred stock of the Management Company, the Operating Partnership is entitled
to receive 95% of amounts paid as dividends by the Management Company. The
Management Company's voting stock is owned by three directors of the Company.
The Company accounts for its investment in the Management Company in
accordance with the equity method of accounting as it does not control its
operations. The Management Company currently has 76 full-time employees,
including the Company's executive officers. Such persons provide services to
both the Company and the Operating Partnership.
BUSINESS OBJECTIVES AND STRATEGIES FOR GROWTH
The Company's primary business objectives are to maximize total return to
shareholders through growth in the Company's cash flow per share and to increase
the value of its portfolio. The Company intends to pursue these objectives
through aggressive asset and property management, acquiring and selectively
developing new properties with a view towards maximizing cash flow and the
selective disposition of non-core assets. Though the Company currently is
focusing its activities in the eastern United States, no specific geographic
limits have been established.
The Company intends to accomplish its business objectives (i) through
contractual increases in rental rates from existing leases, (ii) by maintaining
and increasing occupancy levels in its properties, (iii) by increasing rental
rates through aggressive management and re-leasing of space, (iv) by acquiring
primarily new properties which have potential for additional growth through
adaptive re-use and/or expansion and (vi) by generating build-to-suit
development opportunities, particularly by maintaining strong relationships with
its tenants and establishing local market prominence.
The Company's strategy is to generate growth opportunities (i) in markets
where it has a significant local market presence through cash acquisitions of
single properties and portfolios and (ii) by entering targeted markets through
strategic transactions with dominant local partners, often through the issuance
of OP Units in tax deferred transactions. Management targets markets which
exhibit strong, stable supply and demand fundamentals yet offer the opportunity
to acquire high quality assets at discounts to replacement cost with attractive
total returns. Management believes that these opportunities exist in primary
markets which have lagged the national real estate recovery, primary markets in
which there is a misperception that the market is dominated by a one or two
significant players, and secondary markets which offer vital alternatives to
cost sensitive tenants. In implementing its growth strategy, management
generally does not
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pursue transactions which involve competitive bid situations. Rather the Company
endeavors to seek out owners before they are actively marketing their properties
and establish relationships with entrenched local developers who can supply the
Company with a pipeline of attractively priced real estate.
The Company believes that the combination of long-term leased
warehouse/distribution facilities and suburban office properties presents a
balanced and complementary strategy for maximizing total shareholder return. The
warehouse facilities are intended to provide stable long-term cash flow to the
Company, as they generally represent established fixed income, require low
recurring capital expenditures and have modest tenant exposure. The office
portfolio provides greater internal cash flow growth opportunities through
increases in contractual rent, lease-up of existing vacancy and operating
efficiencies derived from economies of scale and management expertise.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's current investment and
financing policies. The Company's policies with respect to these activities have
been determined by the Directors of the Company and may be amended or revised
from time to time at the discretion of the Directors without a vote of the
shareholders of the Company.
INVESTMENT POLICIES
The Company has not adopted any policy as to the amount or percentage of its
assets that can be invested in a single property. The key criterion for new
investments will be that they offer total returns likely to enhance shareholder
value and the opportunity for growth in cash flows from operating activities and
asset value.
The Company may purchase or develop properties for long-term investment,
expand, renovate and improve its properties or sell any of its existing or
acquired properties, in whole or in part, when circumstances warrant. The
Company may also participate with other entities in property ownership through
joint venture or other types of shared ownership. Equity investments may be
subject to existing mortgage financing and other indebtedness which have
priority over the equity interest of the Company.
Future investments are not limited (as to percentage of assets or otherwise)
to any geographic area or any specified type of property. The Company may
decide, under favorable economic circumstances, to develop properties.
While the Company intends to emphasize equity real estate investments, it
may, in its discretion, invest in mortgages and other real estate interests.
Mortgage investments may include participating or convertible mortgages. The
Company's investment in mortgages may include investments as a strategy for
ultimately acquiring a property, and might also include the purchase of
non-performing loans at a discounted price. Subject to the percentage of
ownership limitations and gross income and asset tests necessary for REIT
qualification, the Company may also invest in securities of entities engaged in
real estate activities or securities of other issuers. In the future, the
Company may acquire all or substantially all of the securities or assets of
other REITs or similar entities where such investments are consistent with the
Company's investment policies. In any event, the Company does not intend that
its investments in securities will require the Company to register as an
"investment company" under the Investment Company Act of 1940, and the Company
intends to divest securities before any such registration would be required.
FINANCING POLICIES
The Company has not adopted any policy to limit the amount or percentage of
debt the Company may incur or to maintain any maximum debt-to-Total Market
Capitalization ratio. As of December 31, 1998, the Company had a debt-to-Total
Market Capitalization ratio of approximately 57.5% (based on the closing
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price of $15.88 per share of Common Stock on December 31, 1998). "Total Market
Capitalization" means the sum of the aggregate market value of the Company's
outstanding Common Stock and OP Units, the total debt of the Company and the
liquidation value of Convertible Preferred Stock and Convertible Preferred OP
Units on the date thereof. The debt-to-Total Market Capitalization ratio, which
is based upon the market value of the Company's equity and, accordingly,
fluctuates with changes in the price of the Common Stock, differs from a
debt-to-book capitalization ratio. To the extent the Company incurs or assumes
indebtedness with respect to properties in connection with pending or future
acquisitions, the Company's debt-to-Total market Capitalization may change. The
Company believes that debt-to-Total Market Capitalization provides a more
appropriate indication of leverage for a company whose assets are primarily
operating real estate. The Company also considers its interest coverage and
fixed charge coverage ratios to be indicative of its level of leverage and
ability to service its debt and fixed charges. For the twelve months ended
December 31, 1998 the Company's interest coverage ratio and fixed charge
coverage ratio was 2.08.
The Company may in the future adopt a debt policy in light of then current
economic conditions, relative costs of debt and equity capital, market values of
properties, growth and acquisition opportunities and other factors, and may
modify any debt financing policy from time to time. If the Board of Directors
determines that additional funding is required, the Company may raise such funds
through additional equity offerings (including offers of senior securities),
debt financing or retention of cash flow (subject to provisions in the Internal
Revenue Code of 1986, as amended (the "Code") concerning taxability of
undistributed REIT income), or a combination of these methods. The Company has
agreed to use all commercially reasonable efforts to maintain a level of
indebtedness at least equal to the level of indebtedness immediately following
the closing of the Reorganization and to cause its lenders to permit certain
holders of OP Units ("Unitholders") to guarantee such level of indebtedness. At
December 31, 1998, approximately $83,200,000, in the aggregate, of the Company's
outstanding indebtedness is guaranteed by these respective Unitholders in the
Operating Partnership.
In the event the Board of Directors determines to raise additional equity
capital, the Board of Directors has the authority, without shareholder approval,
to issue additional shares of Common Stock up to the maximum number authorized,
or other capital stock, on such terms and for such consideration it deems
appropriate, including in exchange for property. Any such offerings might cause
a dilution of a shareholder's investment in the Company.
To the extent that the Board of Directors determines to obtain additional
debt financing, the Company intends to do so generally through loans secured by
mortgages on its properties and lines of credit. These mortgage loans may be
recourse, non-recourse or cross-collateralized and may contain cross-default
provisions. The Company does not have a policy limiting the number of mortgages
that may be placed on any particular property or the amount of the loans secured
by such mortgages, but mortgage financing instruments usually limit additional
indebtedness on such properties. Indebtedness incurred by the Company may be in
the form of bank borrowings, secured and unsecured, and publicly and privately
placed debt instruments. Such indebtedness may be with recourse to all or any
part of the property of the Company, or may be limited to the particular
property to which the indebtedness relates. The proceeds from any borrowings by
the Company may be used for the payment of distributions, for working capital,
to refinance existing indebtedness or to finance acquisitions of new properties
or expansions of existing or new properties.
The Company intends to seek to acquire additional real estate assets using
shares of Common Stock to pay all or a portion of the purchase price. The
Company may also issue senior equity securities or shares of preferred stock for
this purpose. There can be no assurance that such issuances may not be dilutive
to the Company's existing shareholders. In addition, shares of Common Stock may
be issued on terms which grant the recipient the right to require the Company to
register the shares under the Securities Act of 1933, as amended ("the
"Securities Act"). Sales of those shares may adversely affect the market price
of the Company's outstanding shares of Common Stock.
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The Company may also acquire additional real estate assets in exchange for
OP Units. This creates the opportunity for tax deferred transactions for the
seller.
SUMMARY OF INDEBTEDNESS
The following table sets forth the Company's mortgage indebtedness
outstanding, including debt premiums, at December 31, 1998.
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DECEMBER 31, MATURITY
1998 INTEREST DATE ANNUAL
LENDER BALANCE RATE (MONTH/YEAR) AMORTIZATION PAYMENTS COLLATERAL
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USG Annuity and Life.... $ 2,837,000 8.25% 9/00 20 $ 309,000 One Tabas Lane
USG Annuity and Life.... 4,578,000 8.50% 9/05 20 479,000 Two Tabas Lane
USG Annuity and Life.... 3,514,000 8.50% 9/05 20 367,000 1305 Goshen Parkway
M&T Real Estate, Inc.... 1,628,000 8.68% 11/01 N/A 140,000 13 Columbia Circle
M&T Real Estate, Inc.... 5,378,000 8.33% 11/05 N/A 432,000 3 Columbia Circle
M&T Real Estate, Inc.... 7,434,000 8.53% 11/06 N/A 600,000 15 Columbia Circle
Independent Order of
Foresters............. 4,793,000 8.50% 3/03 10 489,000 1 Columbia Circle
Guardian Life Insurance
Company............... 3,797,000 9.68% 2/07 20 453,000 1045 James Street
Nationwide Life
Insurance Company..... 1,790,000 8.25% 9/02 14 143,000 8677 Logo Court
Nationwide Life
Insurance Company..... 1,391,000 9.75% 9/02 20 125,000 8677 Logo Court
Nationwide Life
Insurance Company..... 6,412,000 9.75% 9/02 20 576,000 8677 Logo Court
Column Financial, Inc... 7,437,000 7.03% 1/08 30 601,000 One Philips Drive
Column Financial, Inc... 16,856,000 7.03% 1/08 30 1,361,000 101 Commerce Drive
Column Financial, Inc... 65,416,000 7.50% 10/08 30 5,496,000 (1)
Column Financial, Inc... 29,363,000 7.55% 10/08 30 2,479,000 (2)
Berkshire Life Insurance
Company............... 2,327,000 8.75% 7/13 25 259,000 5000 Campuswood Drive
AEGON USA Realty
Advisors.............. 6,619,000 6.92% 7/13 15 458,000 4400 West 96th Street
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DECEMBER 31, MATURITY
1998 INTEREST DATE ANNUAL
LENDER BALANCE RATE (MONTH/YEAR) AMORTIZATION PAYMENTS COLLATERAL
- ------------------------ ------------- ----------- ------------- --------------- ------------ ---------------------------
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Nationwide Life
Insurance Company..... 715,000 7.91% 4/06 17 54,000 6402 Corporate Drive
Nationwide Life
Insurance Company..... 2,620,000 7.91% 4/06 17 199,000 6402 Corporate Drive
Nationwide Life
Insurance Company..... 3,079,000 8.41% 4/06 20 242,000 6402 Corporate Drive
Nomura Asset Capital
Corporation........... 44,291,000 7.71% 10/22 25 4,463,000 (3)
Bank Boston and
various............... 123,830,000 7.39%(5) 4/2001 N/A 9,151,000(5) (4)
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$ 346,105,000 $ 28,876,000
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(1) Secured by a first lien on 17 properties (see Schedule III--Real Estate and
Accumulated Depreciation) subject to certain permitted release provisions.
The loan facility contains covenants and agreements customary in such
borrowings.
(2) Secured by a first lien on 4 properties (see Schedule III--Real Estate and
Accumulated Depreciation) subject to certain permitted release provisions.
The loan facility contains covenants and agreements customary in such
borrowings.
(3) Secured by a first lien on 10 properties (see Schedule III--Real Estate and
Accumulated Depreciation) subject to certain permitted release provisions.
The loan facility contains covenants and agreements customary in such
borrowings.
(4) Secured by a first lien on 53 properties (see Schedule III--Real Estate and
Accumulated Depreciation) subject to certain permitted release provisions.
The loan facility contains covenents and agreements customary in such
borrowings.
(5) Debt service is payable monthly at a Eurodollar rate plus 1.625%, interest
only. Rate as of December 31, 1998 was 7.39%. Annual amount is based on
interest payments at 7.39%.
RECENT ACQUISITIONS
On March 26, 1999, the Company consummated the following transactions:
- the sale of Urban Farms Shopping Center, a community shopping center
located in northern New Jersey for proceeds of approximately $10.0
million. This sale resulted in a gain of approximately $1.5 million for
financial reporting purposes.
- the acquisition of a 303,091 square foot industrial facility located in
Duncan, South Carolina for a purchase price of approximately $9.7 million
including closing costs. This facility is leased to BMG Music until July
2003.
The Company is currently evaluating several property acquisitions and
transactions which include strategic transactions designed to increase
shareholder value over the long-term. There can be no assurance that the Company
will pursue any of these potential acquisitions or transactions, or that, if
pursued, the Company will successfully acquire any such properties or complete
such transactions or that such properties or transactions once completed will
perform as expected.
COMPETITION
The Properties are primarily located in the Eastern United States. There are
numerous other office and industrial properties and real estate companies within
the market area of each of such properties which competes with the Company for
tenants and development and acquisition opportunities. The
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number of competitive properties and real estate companies in such areas could
have a material adverse effect on the Company's (i) future operations, (ii)
ability to rent its properties and the rents charged, and (iii) development and
acquisition opportunities. The Company will compete for tenants and acquisitions
with others who may have greater resources. The Company's competitive position
for tenants is strongly influenced by economic conditions in its market areas.
However, the Company believes that its responsiveness to tenant needs will
enable it to attract and maintain high quality tenants in the markets in which
the properties are located. With respect to development and acquisition
opportunities, the Company competes with other REITs and investors in office and
industrial properties seeking to develop or acquire properties in the areas
where the Company will concentrate its activities. The Company will experience
strong competition in pursuing development and acquisition opportunities.
The Company's financial performance and its ability to make distributions to
shareholders continues to be particularly sensitive to the economic conditions
in New York State, northern New Jersey, central Pennsylvania and the Greenville
and Spartanburg region of South Carolina. Like other real estate markets, these
markets have experienced economic downturns in the past, and future declines in
any of these economies or real estate markets could adversely affect the
Company's operations or cash available for distribution. The Company's revenues
and the value of the Properties may be affected by a number of factors,
including the local economic climate (which may be adversely impacted by
business layoffs or downsizing, industry slowdowns, changing demographics and
other factors) and local real estate conditions (such as oversupply of or
reduced demand for office, industrial and other competing commercial
properties). These factors, when and if they occur in an area in which the
Properties are located, would adversely affect the Company's ability to make
distributions to its shareholders.
ENVIRONMENTAL AND OTHER REGULATORY MATTERS
Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous or toxic substances on such property. Such laws often impose such
liability without regard to whether the owner knew of, or was responsible for,
the presence of such hazardous or toxic substances. The costs of remediation or
removal of such substances may be substantial, and the presence of such
substances, or the failure to promptly remediate such substances, may adversely
affect the owner's ability to sell such real estate or to borrow using such real
estate as collateral. In connection with its ownership and operation of the
Properties, the Company or the Operating Partnership, as the case may be, may be
potentially liable for such costs.
All of the Properties have been subject to Phase I or similar environmental
assessments, which are intended to discover information regarding, and to
evaluate the environmental condition of, the surveyed properties and surrounding
properties. The Phase I assessments included a historical review, a public
records review, a preliminary investigation of the site and surrounding
properties, screening for the presence of asbestos, polychlorinated biphenyls
("PCBs") and underground storage tanks and the preparation and issuance of a
written report, but do not include soil sampling or subsurface investigations.
Where Phase I assessments resulted in specific recommendations for remedial
actions, the recommended action has been taken.
The Phase I assessments have not revealed any environmental liability that
the Company believes would have a material adverse effect on the Company's
business, assets or results of operations, nor is the Company aware of any such
liability. Nevertheless, it is possible that these assessments do not reveal all
environmental liabilities of which the Company is unaware. Moreover, no
assurance can be given that (i) future laws, ordinances or regulations will not
impose any material environmental liability or (ii) the current environmental
condition of its properties will not be affected by tenants and occupants of its
properties, by the condition of properties in the vicinity of the Properties
(such as the presence of underground storage tanks) or by third parties
unrelated to the Operating Partnership or the Company.
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Environmental inspections indicate that there are minor amounts of asbestos
containing materials ("ACMs") in certain of the Properties, primarily in the
form of floor tiles and ceiling materials, which are generally in good
condition. The presence of such amounts of ACMs is in compliance with current
law.
The Company believes that the Properties are in compliance in all material
respects with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances. Neither the Company nor the Operating Partnership
has been notified by any governmental authority, or is otherwise aware, of any
material noncompliance, liability or claim related to hazardous or toxic
substances in connection with any of its present Properties.
From time to time legislation is proposed which, if enacted, would require
installation of various items of safety equipment, such as smoke alarms and
sprinkler equipment. If such legislation should be enacted and be applicable to
the Properties, the Company could be required to expend material sums in
fulfilling these requirements.
DEPRECIATION
See "Schedule III--Real Estate and Accumulated Depreciation" herein.
GENERAL
In the opinion of management, the Properties are adequately covered by
insurance. The Company has no plans to make any material renovations or
improvements to any of the Properties.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding named executive
officers and other executives of the Company.
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NAME AGE POSITION
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David F. McBride(1).................... 51 Chairman
Jeffrey E. Kelter(1)................... 44 President and Chief Executive Officer
Timothy A. Peterson(1)................. 33 Executive Vice President, Chief Financial Officer and Secretary
Stephen J. Butte(1).................... 39 Senior Vice President, Chief Investment Officer
John B. Begier......................... 33 Senior Vice President--Acquisitions
Charles C. Lee......................... 35 Senior Vice President--Marketing and Leasing
Francis X. Ryan........................ 38 Senior Vice President--Property Operations
Timothy E. McKenna(1).................. 35 Vice President--Finance, Treasurer
Jennifer A. Pancoast................... 35 Vice President--Leasing
Jeffrey D. Anderson.................... 46 Vice President--Operations
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(1) This executive is a named executive officer of the Company.
Mr. McBride has been Chairman of the Board of the Company since December
1997. He served as Secretary of the Company from January 1998 until December
1998. He has served as Chief Executive Officer of McBride Enterprises, Inc. and
affiliated family real estate, construction and brokerage companies since 1987
and has been a director of McBride Enterprises, Inc. and such enterprises since
1975. Mr. McBride has served as a Director of Midlantic Corporation, Midlantic
National Bank and various subsidiaries for thirteen years prior to its merger
with PNC Bank in 1996. Prior to 1987, he was a partner in the law firm of
Harwood Lloyd from 1981 to 1987, a partner in the law firm of Murphy, Ellis &
McBride from 1997 to 1981, and an associate in the firm of Robinson, Wayne &
Greenberg from 1973 to 1977, all located in New Jersey. He received B.A. and
J.D. degrees from Georgetown University in 1969 and 1973, respectively. He
remains Of Counsel to Harwood Lloyd and is a member of the bars of New Jersey
and New York.
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Mr. Kelter has been President of the Company since December 1997 and was
appointed Chief Executive Officer in December 1998. He has over 18 years of
experience in all phases of commercial real estate including development,
third-party management and employed by The Bankers Trust Corporation where he
was an assistant treasurer in the Corporate Finance division. In 1982, Mr.
Kelter was employed by Vector Properties in Tulsa, Oklahoma, where he was in
charge of the development and finance of several downtown Tulsa office building
renovations. In 1982, Mr. Kelter founded Penn Square Properties, Inc. in
Philadelphia and has served as chief executive officer and president. Prior to
the Reorganization, Mr. Kelter also served on the Board of Directors of the
Central Philadelphia Development Corporation (CPDC), a non-profit urban planning
commission. He has developed, owned, managed and leased more than 4.5 million
square feet of office and warehouse projects throughout the Pennsylvania and New
Jersey markets.
Mr. Peterson has served as Chief Financial Officer of the Company since
August 1998 and as Secretary since December 1998. He was appointed Executive
Vice President of the Company in March 1999. Prior to joining the Company, Mr.
Peterson held a variety of positions with Post Properties, Inc. since 1989,
including his most recent responsibility as Executive Vice President, Finance.
While at Post Properties, Mr. Peterson managed all capital markets activities,
maintained all rating agency relationships and oversaw accounting, budgeting and
financial reporting functions. Mr. Peterson is a Certified Public Accountant, is
a member of the National Association of Real Estate Investment Trusts and
currently serves as Co-Chairman of its Accounting Committee and Adjunct member
of the Best Financial Practices Task Force. He is a member of the Tax Policy
Advisory Board of the National Realty Committee and the University of Florida
Real Estate Advisory Board.
Mr. Butte is a Certified Public Accountant and has served as Senior Vice
President of the Company with primary responsibility for acquisition due
diligence and financing since December 1997. He was appointed Chief Investment
Officer in March 1999. Prior to joining Penn Square Properties, Inc. in 1988, he
spent five years in public accounting as a manager in the audit department of
Asher & Company, specializing in providing financial and accounting services to
companies in the real estate industry.
Mr. Begier has served as Senior Vice President of the Company since December
1997 with primary responsibility for the Company's acquisition activities. Mr.
Begier joined Penn Square Properties, Inc. in 1995; prior to working for Penn
Square Properties he worked for eight years as a real estate broker with the
Pennsylvania office of Cushman & Wakefield where he was responsible for leasing,
sales and acquisition of commercial and industrial properties.
Mr. Lee has served as Senior Vice President of the Company since December
1997 with primary responsibility for the Company's leasing and marketing
activities. Mr. Lee joined Penn Square Properties, Inc. in 1987 where he was
responsible for leasing and marketing activities for various commercial
properties. From September, 1997 until March, 1998, when he re-joined the
Company, Mr. Lee was the regional leasing director for the Philadelphia region
of Equity Office Properties. Prior to working for Penn Square Properties, he was
an Assistant Portfolio Manager in the Private Banking Division of the Boston
Safe Deposit and Trust Company.
Mr. Ryan has served as Senior Vice President of the Company since December
1997 with primary responsibility for the Company's property operations and
management activities. Mr. Ryan joined Penn Square Properties, Inc. in 1991
where he was responsible for the management of various commercial offices and
industrial properties. Prior to working for Penn Square Properties, Mr. Ryan
worked for four years as a senior property manager for Cushman & Wakefield's
Pennsylvania office and as a project manager for American Building Maintenance
from 1984 through 1986. Mr. Ryan is certified as a Real Property Administrator
by the Building Owners and Managers Association.
Mr. McKenna is a Certified Public Accountant and has served as Vice
President and Treasurer of the Company since January 1998. Mr. McKenna was
previously employed as a senior manager in the Real Estate Services Group of
Arthur Andersen LLP's Philadelphia office. He has over 12 years of experience
11
<PAGE>
in providing consulting and accounting services to publicly and privately-owned
real estate companies and over 11 years of his experience was obtained as an
employee of Arthur Andersen LLP.
Ms. Pancoast has served as Vice President of the Company since December 1997
with responsibility for the Company's leasing activities related to office
properties. Prior to rejoining Penn Square Properties, Inc. in October 1995, she
spent two years with Bell Atlantic Properties, the real estate subsidiary of
Bell Atlantic, where she was director of property management for over 600,000
square feet of properties located in the Philadelphia region. From September
1990 until September 1993 she was responsible for leasing over 600,000 square
feet of office properties located in Philadelphia for Penn Square Properties,
Inc. From September 1996 until September 1990, she worked as a real estate
broker for The Flynn Company, a manager and developer of office and industrial
properties in the Philadelphia region.
Mr. Anderson has served as Vice President of the Company since August 1998
with primary responsibility for the operations and management of the properties
located in New York State. Mr. Anderson was previously employed by Pioneer
Management Services Company, an affiliate of Pioneer Development, LLC since
March 1996 as director of property management where he managed over five million
square feet of office and retail properties located in the northeastern region
of the United States. From March 1993 until March 1996, he was vice president of
property management for United Properties, Inc., a developer and manager of
commercial properties located in Minneapolis, Minnesota. Prior to March 1993, he
was director of property management for the Trammell Crow Company's Milwaukee,
Wisconsin office for three years and managed over six million square feet of
office and industrial properties. He has over twenty years of property
management experience.
ITEM 2. DESCRIPTION OF PROPERTY
SUMMARY PROPERTY TABLE
The following table sets forth certain information with respect to each of
the Properties at December 31, 1998.
<TABLE>
<CAPTION>
% OF
PORTFOLIO
YEAR RENTABLE
# OF BUILT/ SQUARE SQUARE ANNUALIZED
BUILDINGS BUILDINGS LOCATION RENOVATED FEET FEET % LEASED RENT (1)
- ----------------------- ------------- ----------------- ---------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INDUSTRIAL:
100 Oakhill Road....... 1 Mountaintop, PA 1996 105,000 0.88% 100.0% $ 375,996
1701 Pollitt Drive..... 1 Fair Lawn, NJ 1968 108,877 0.91% 70.8% 660,323
1905 Nevins Road....... 1 Fair lawn, NJ 1955 151,700 1.27% 100.0% 620,930
2 Volvo Drive.......... 1 Rockleigh, NJ 1966/1995 67,460 0.57% 100.0% 502,572
5 Thornton Road........ 1 Oakland, NJ 1973/81 151,874 1.27% 100.0% 1,050,512
1305 Goshen Parkway.... 1 West Chester, PA 1991 90,000 0.75% 100.0% 387,000
One Tabas Lane......... 1 Exton, PA 1970 150,027 1.26% 100.0% 450,084
Two Tabas Lane......... 1 Exton, PA 1970/91 150,000 1.26% 100.0% 762,520
1091 Arnold Road....... 1 Reading, PA 1996 133,055 1.12% 100.0% 465,696
1157 Arnold Road....... 1 Reading, PA 1995 219,120 1.84% 100.0% 654,768
101 Commerce Drive..... 1 Mechancisburg, PA 1997 597,100 5.01% 100.0% 2,376,444
1 Phillips Drive....... 1 Mountaintop, PA 1991-1993 400,000 3.35% 100.0% 1,188,000
1001, 1011 AIP Drive... 2 Middletown, PA 1991 284,262 2.38% 100.0% 1,044,282
2400, 2404, 2410
Gettysburg Road...... 3 Camp Hill, PA 1952/1993 182,770 1.53% 86.7% 650,016
4472 & 4480 Steelway
Blvd................. 4 Liverpool, NY 1977 655,500 5.50% 100.0% 1,770,745
Northeastern Industrial
Park, Bldg. 21....... 1 Albany, NY 1989 100,000 0.84% 100.0% 762,600
Northeastern Industrial
Park, Bldg. 22....... 1 Albany, NY 1988 104,000 0.87% 100.0% 530,400
Northeastern Industrial
Park, Bldg. 8........ 1 Albany, NY 1950/1997 192,645 1.61% 100.0% 659,097
<CAPTION>
ANNUALIZED
% OF RENT PER
PORTFOLIO LEASED
ANNUALIZED # OF SQUARE
BUILDINGS RENT LEASES FOOT (2) MAJOR TENANT
- ----------------------- ------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
INDUSTRIAL:
100 Oakhill Road....... 0.59% 1 $ 3.58 Dana Perfumes
Corp.
1701 Pollitt Drive..... 1.03% 3 4.29 MDA Services
1905 Nevins Road....... 0.97% 1 4.09 Road-Con
Systems
2 Volvo Drive.......... 0.78% 1 7.45 National
Medical
5 Thornton Road........ 1.64% 1 6.92 Aramis, Inc.
1305 Goshen Parkway.... 0.60% 1 4.30 Communication
Test Design
One Tabas Lane......... 0.70% 1 3.00 Alstrip
Two Tabas Lane......... 1.19% 1 5.08 International
Paper
1091 Arnold Road....... 0.73% 1 3.50 The Glidden
Company
1157 Arnold Road....... 1.02% 3 2.99 Premium
Beverage
101 Commerce Drive..... 3.71% 1 3.98 Hershey Foods,
Inc.
1 Phillips Drive....... 1.85% 1 2.97 Philips
Lighting Co.
1001, 1011 AIP Drive... 1.63% 6 3.67 Bayard Sales
2400, 2404, 2410
Gettysburg Road...... 1.01% 4 3.08 Ezon, Inc.
4472 & 4480 Steelway
Blvd................. 2.76% 1 2.70 GATX Logistics,
Inc.
Northeastern Industrial
Park, Bldg. 21....... 1.19% 2 7.63 Distribution
Unlimited
Northeastern Industrial
Park, Bldg. 22....... 0.83% 1 5.10 Ameriserve Food
Northeastern Industrial
Park, Bldg. 8........ 1.03% 1 3.42 Moran Foods,
Inc.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
% OF
PORTFOLIO
YEAR RENTABLE
# OF BUILT/ SQUARE SQUARE ANNUALIZED
BUILDINGS BUILDINGS LOCATION RENOVATED FEET FEET % LEASED RENT (1)
- ----------------------- ------------- ----------------- ---------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
4, 5 & 8 Marway
Circle............... 3 Gates, NY 1976/77 179,550 1.51% 95.1% 648,146
1030 South Edgewood
Drive................ 1 Urbana, OH 1988 200,000 1.68% 0.0% --
16725 Square Drive..... 1 Marysville, OH 1987 133,500 1.12% 100.0% 481,572
3530 East Pike......... 1 Zanesville, OH 1991 300,000 2.51% 100.0% 840,000
5555 Massillon Road.... 1 Green, OH 1996 255,000 2.14% 100.0% 907,500
One Apollo Drive....... 1 Glens Falls, NY 1992 158,000 1.32% 100.0% 1,323,104
1440 Sheffler Drive.... 1 Chambersburg, PA 1996 355,200 2.98% 100.0% 1,384,752
1465 Nitterhouse
Drive................ 1 Chambersburg, PA 1995 420,000 3.52% 100.0% 1,617,000
2294 Molly Pitcher
Highway.............. 1 Chambersburg, PA 1986 621,400 5.21% 100.0% 2,366,892
4400 W. 96th Street.... 1 Indianapolis, IN 1998 100,000 0.84% 100.0% 930,000
6402 Corporate Drive... 1 Indianapolis, IN 1996 162,608 1.36% 100.0% 894,456
8677 Logo Court........ 1 Indianapolis, IN 1993 599,152 5.02% 100.0% 1,527,838
1221 South Batesville
Road................. 1 Greer, SC 1970/1985 434,798 3.64% 100.0% 1,125,487
Augusta Road Industrial
Park................. 2 Greenville, SC 1996 360,000 3.02% 100.0% 842,400
Buncombe Road
Industrial Park...... 5 Greer, SC 1988/1995 350,000 2.93% 100.0% 778,092
Outlaw Industrial
Park................. 3 Greenville, SC 1994/1997 302,000 2.53% 100.0% 556,504
Piedmont Highway
Industrial Park...... 3 Piedmont, SC 1995/1997 400,000 3.35% 100.0% 895,000
Rocky Creek Business
Park................. 5 Greenville, SC 1997 159,400 1.35% 100.0% 488,100
White Horse Industrial
Park................. 7 Greenville, SC 1989/1997 390,000 3.27% 100.0% 947,700
- ----------------------- --- --------- ----------- ----------- ----------
Sub-Total Industrial
Properties........... 64 9,723,998 81.51% 97.3% $33,466,527
OFFICE:
128 Bauer Drive........ 1 Oakland, NJ 1981 41,450 0.35% 100.0% 226,248
1500 Pollit Drive...... 1 Fair Lawn, NJ 1970/1992 18,614 0.16% 100.0% 162,873
1600 Route 208......... 1 Fair Lawn, NJ 1983 52,748 0.44% 86.0% 635,551
1655 Valley Road....... 1 Wayne, NJ 1989 155,700 1.31% 100.0% 2,307,474
1900 Pollitt Drive..... 1 Fair Lawn, NJ 1970/84/95 77,262 0.65% 100.0% 687,632
22-08 Route 208........ 1 Fair Lawn, NJ 1968/1998 75,599 0.63% 84.0% 986,175
40 Potash Road......... 1 Oakland, NJ 1992 60,994 0.51% 100.0% 1,216,377
95 Bauer Drive......... 1 Oakland, NJ 1974/1991 6,792 0.06% 100.0% 88,296
99 Bauer Drive......... 1 Oakland, NJ 1971 20,449 0.17% 100.0% 141,303
8 Airline Drive........ 1 Albany, NY 1997 61,127 0.51% 100.0% 882,053
Fifteen Columbia
Circle............... 1 Albany, NY 1995 82,608 0.69% 100.0% 1,229,207
Nine Columbia Circle... 1 Albany, NY 1992 10,908 0.09% 77.0% 130,480
One Columbia Circle.... 1 Albany, NY 1991 68,895 0.58% 96.5% 1,016,840
Seventeen Columbia
Circle............... 1 Albany, NY 1995 66,000 0.55% 100.0% 733,920
Thirteen Columbia
Circle............... 1 Albany, NY 1996 21,468 0.18% 100.0% 267,534
Three Columbia Circle.. 1 Albany, NY 1992 78,971 0.66% 98.6% 1,092,967
6 British American
Boulevard............ 1 Latham, NY 1980 70,550 0.59% 94.6% 404,841
Corporate Center 15.... 1 Mechanicsburg, PA 1979 55,574 0.47% 100.0% 904,116
Executive Park......... 1 Wyomissing, PA 1979 52,841 0.44% 100.0% 872,179
Hillside Corporate
Center............... 1 Mechanicsburg, PA 1991 67,473 0.57% 97.1% 1,079,180
Treeview Corporate
Center............... 1 Wyomissing, PA 1991 63,084 0.53% 91.5% 912,828
<CAPTION>
ANNUALIZED
% OF RENT PER
PORTFOLIO LEASED
ANNUALIZED # OF SQUARE
BUILDINGS RENT LEASES FOOT (2) MAJOR TENANT
- ----------------------- ------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
4, 5 & 8 Marway
Circle............... 1.01% 13 3.43 Anixter, Inc.
1030 South Edgewood
Drive................ 0.00% -- 0.00 --
16725 Square Drive..... 0.75% 1 3.61 Midwest
Express, Inc.
3530 East Pike......... 1.31% 1 2.80 Owens Brockway
Glass
5555 Massillon Road.... 1.42% 2 3.56 General
Electric
One Apollo Drive....... 2.07% 1 8.37 Niagra Mohawk
1440 Sheffler Drive.... 2.16% 3 3.90 Ingram Book
Company
1465 Nitterhouse
Drive................ 2.52% 1 3.85 Franklin
Storage, Inc.
2294 Molly Pitcher
Highway.............. 3.69% 2 3.81 National
Medical
4400 W. 96th Street.... 1.45% 1 9.30 Support Net
6402 Corporate Drive... 1.40% 2 5.50 Brightpoint,
Inc.
8677 Logo Court........ 2.38% 1 2.55 Logo 7
1221 South Batesville
Road................. 1.76% 3 2.59 BMW
Augusta Road Industrial
Park................. 1.31% 2 2.34 Benore
Logistics
Systems
Buncombe Road
Industrial Park...... 1.21% 5 2.22 Spring
Industries
Outlaw Industrial
Park................. 0.87% 3 1.84 Graco
Piedmont Highway
Industrial Park...... 1.40% 3 2.24 Fabri-Kal Corp.
Rocky Creek Business
Park................. 0.76% 5 3.06 Export
Packaging
White Horse Industrial
Park................. 1.48% 8 2.43 Sunland
Distribution
- ----------------------- ------ --- ------
Sub-Total Industrial
Properties........... 52.24% 88 $ 3.35
OFFICE:
128 Bauer Drive........ 0.35% 4 5.46 N-D Industries
1500 Pollit Drive...... 0.25% 1 8.75 Bell Atlantic-
NJ, Inc.
1600 Route 208......... 0.99% 19 10.36 Fogarty & Hara
1655 Valley Road....... 3.60% 1 14.82 Reckitt &
Coleman, Inc.
1900 Pollitt Drive..... 1.07% 1 8.90 Paid
Prescriptions
22-08 Route 208........ 1.54% 10 10.96 Maxell
Corporation
40 Potash Road......... 1.90% 1 19.94 TCI-UA-Columbia
95 Bauer Drive......... 0.14% 1 13.00 Greentree
Learning
99 Bauer Drive......... 0.22% 1 6.91 Stratton
Travel, Inc.
8 Airline Drive........ 1.38% 4 14.43 Homestead
Funding
Fifteen Columbia
Circle............... 1.92% 1 14.88 Prudential
Insurance
Nine Columbia Circle... 0.20% 3 9.21 Banc One
Financial
One Columbia Circle.... 1.59% 9 14.24 Novalis
Seventeen Columbia
Circle............... 1.15% 2 11.12 CDPHP
Thirteen Columbia
Circle............... 0.42% 4 12.46 Roemer, Wallens
& Mineaux
Three Columbia Circle.. 1.71% 16 13.65 Thompson
Corp.--Delmar
6 British American
Boulevard............ 0.63% 6 5.43 BOCES
Corporate Center 15.... 1.41% 8 16.27 EUR Data
Center, Inc.
Executive Park......... 1.36% 8 16.51 GE Capital
Hillside Corporate
Center............... 1.68% 9 15.53 Travelers
Treeview Corporate
Center............... 1.42% 11 13.23 Carpenter
Technology
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
% OF
PORTFOLIO
YEAR RENTABLE
# OF BUILT/ SQUARE SQUARE ANNUALIZED
BUILDINGS BUILDINGS LOCATION RENOVATED FEET FEET % LEASED RENT (1)
- ----------------------- ------------- ----------------- ---------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Winchester Plaza
Corporate Center..... 1 Allentown, PA 1998/1992 146,000 1.22% 100.0% 2,557,567
1045 James Street...... 1 Syracuse, NY 1992 50,000 0.42% 100.0% 825,996
125 Indigo Creek
Drive................ 1 Greece, NY 1992 26,700 0.22% 100.0% 346,500
250 South Clinton
Street............... 1 Syracuse, NY 1991 183,206 1.54% 100.0% 3,273,077
308 Maltbie Street..... 1 Syracuse, NY 1992 26,221 0.22% 85.0% 250,589
400 West Division
Street............... 1 Syracuse, NY 1992 38,051 0.32% 85.6% 539,015
5000 Campuswood Drive.. 1 East Syracuse, NY 1988 32,636 0.27% 100.0% 527,046
5009 Campuswood Drive.. 1 East Syracuse, NY 1989 6,584 0.06% 100.0% 92,640
5010 Campuswood Drive.. 1 East Syracuse, NY 1989 70,163 0.59% 98.0% 1,136,768
5015 Campuswood Drive.. 1 East Syracuse, NY 1991 99,888 0.84% 100.0% 1,661,813
507 Franklin Square.... 1 Syracuse, NY 1991 71,449 0.60% 100.0% 1,177,815
One Clinton Square..... 1 Syracuse, NY 1991 39,609 0.33% 100.0% 528,740
--- --------- ----------- ----------- ----------
Sub-Total Office....... 33 1,999,614 16.77% 97.6% $28,895,639
Other:
88 Mary Street......... 1 Paterson, NJ 1976 114,000 0.96% 100.0% $ 525,000
Urban Farms Shopping
Center (3)........... 1 Franklin Lakes, 1965-1982 91,008 0.76% 93.9% $1,176,393
NJ
--- --------- ----------- ----------- ----------
Sub-Total Other........ 2 205,008 1.72% 97.3% 1,701,393
--- --------- ----------- ----------- ----------
GRAND TOTAL............ 99 11,928,620 100.00% 97.5% $64,063,559
--- --------- ----------- ----------- ----------
--- --------- ----------- ----------- ----------
<CAPTION>
ANNUALIZED
% OF RENT PER
PORTFOLIO LEASED
ANNUALIZED # OF SQUARE
BUILDINGS RENT LEASES FOOT (2) MAJOR TENANT
- ----------------------- ------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Winchester Plaza
Corporate Center..... 3.99% 3 17.52 Aetna Life &
Casualty
1045 James Street...... 1.29% 1 16.52 Royal Indemnity
Co.
125 Indigo Creek
Drive................ 0.54% 1 12.98 Park Ridge
Health
250 South Clinton
Street............... 5.11% 12 17.87 AT&T
Communications
308 Maltbie Street..... 0.39% 3 8.12 Niagra Mohawk
400 West Division
Street............... 0.84% 2 12.13 Royal Indemnity
Co.
5000 Campuswood Drive.. 0.82% 6 16.15 Cruise's Inc.
5009 Campuswood Drive.. 0.14% 1 14.07 Magic Years
Child Care and
Learning
Center, Inc.
5010 Campuswood Drive.. 1.77% 8 15.88 National Grange
5015 Campuswood Drive.. 2.59% 6 16.64 Time Warner
507 Franklin Square.... 1.84% 2 16.48 Unity Mutual
Life
One Clinton Square..... 0.83% 2 13.35 Fleet Bank
------ --- ------
Sub-Total Office....... 45.10% 167 $ 14.11
Other:
88 Mary Street......... 0.82% 1 $ 4.61 St. Joseph's
Hospital
Urban Farms Shopping
Center (3)........... 1.84% 34 $ 12.14 Market Basket
------ --- ------
Sub-Total Other........ 2.66% 35 8.07
------ --- ------
GRAND TOTAL............ 100.00% 290 $ 5.23
------ --- ------
------ --- ------
</TABLE>
- ------------------------
(1) Annualized Rent, as used throughout this report, represents the total
contractual rent under existing leases for the month ended December 31,
1998, before any abatement and excluding any expense reimbursements,
multiplied by 12.
(2) Annualized Rent Per Leased Square Foot, as used throughout this report,
represents Annualized Rent, as described in Footnote (1) above, divided by
the square footage of property.
(3) This property was sold for proceeds of approximately $10,000,000 on March
26, 1998. This sale resulted in a gain of approximately $1,500,000 for
financial reporting purposes.
PRINCIPAL TENANTS
The following table sets forth information regarding the leases with respect
to the current 10 largest tenants at the Properties, based on the Annualized
Rent received from such tenants as of December 31, 1998.
<TABLE>
<CAPTION>
% OF TOTAL
TERM REMAINING PORTFOLIO
TENANT (1) PROPERTY IN MONTHS SQUARE FEET SQUARE FEET
- ---------------------------- ----------------------------------------------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
Franklin Storage 1440 Sheffler Drive 20-44 852,000 7.14%
1465 Nitterhouse Drive
2294 Molly Pitcher Highway
Reckitt & Colman, Inc. 1655 Valley Road 1-58 207,700 1.74%
2404 Gettysburg Road (3)
Hershey Foods Corp. 101 Commerce Drive 178 597,100 5.01%
Aetna Life & Casualty Winchester Plaza Corporate Center 14 133,082 1.12%
Niagara Mohawk 308 Maltbie Street 31-178 200,041 1.68%
507 Franklin Square
One Apollo Drive
GATX Logistics, Inc. 4472 & 4480 Steelway Blvd. 27 655,500 5.50%
Logo Athletics 8677 Logo Court 98 599,152 5.02%
AT&T Communications 250 South Clinton Street 20 86,602 0.73%
Benore Logistic Systems Augusta Road Industrial Park 9-19 540,000 4.53%
Piedmont Highway Industrial Park
White Horse Industrial Park
Royal Indemnity Co. 1045 James Street 59-89 80,000 0.67%
400 West Division Street
------ ------------ -----------
Total/Weighted Average (2) 66 3,951,177 33.14%
------ ------------ -----------
------ ------------ -----------
<CAPTION>
% OF TOTAL
PORTFOLIO
ANNUALIZED
TENANT (1) ANNUALIZED RENT RENT
- ---------------------------- ---------------- -----------
<S> <C> <C>
Franklin Storage $ 3,243,560 5.06%
Reckitt & Colman, Inc. 2,497,278 3.90%
Hershey Foods Corp. 2,376,444 3.71%
Aetna Life & Casualty 2,358,568 3.68%
Niagara Mohawk 2,041,163 3.19%
GATX Logistics, Inc. 1,770,745 2.76%
Logo Athletics 1,527,838 2.38%
AT&T Communications 1,515,516 2.37%
Benore Logistic Systems 1,449,000 2.26%
Royal Indemnity Co. 1,328,496 2.07%
---------------- -----------
Total/Weighted Average (2) $ 20,108,608 31.38%
---------------- -----------
---------------- -----------
</TABLE>
- ----------------------------------
(1) This list is not intended to be representative of the Company's tenants as a
whole.
(2) Weighted average calculations based on the total rentable square footage
leased by each tenant.
(3) Lease expired December 31, 1998. Tenant is under a lease extention which
expired on January 15, 1999.
14
<PAGE>
LEASE EXPIRATIONS
The following table sets forth the annual lease expirations and certain
other information for leases existing at the Properties (assuming that no
tenants exercise renewal or cancellation options and that there are no tenant
bankruptcies or other tenant defaults):
<TABLE>
<CAPTION>
ANNUALIZED RENT
YEAR OF SQUARE FOOTAGE PERCENTAGE OF ANNUALIZED RENT PER LEASED
LEASE NUMBER OF LEASES OF TOTAL LEASED OF EXPIRING SQUARE FOOT OF
EXPIRATION EXPIRING EXPIRING LEASES SQUARE FEET LEASES EXPIRING LEASES
- --------------- --------------------- ---------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
1999 51 1,871,536 16.1% $ 6,187,104 $ 3.31
2000 62 2,319,335 19.9% 13,040,711 5.62
2001 50 1,673,404 14.4% 9,366,315 5.60
2002 33 1,188,545 10.2% 5,503,960 4.63
2003 32 736,796 6.3% 7,216,973 9.80
2004 15 516,089 4.4% 3,742,380 7.25
2005 9 256,585 2.2% 3,616,405 14.09
2006 15 500,524 4.3% 2,990,121 5.97
2007 8 1,346,573 11.6% 4,480,888 3.33
2008 7 200,037 1.7% 1,796,524 8.98
2009 1 19,503 0.2% 279,978 14.36
2011 1 150,027 1.3% 450,084 3.00
2012 1 60,994 0.5% 1,216,377 19.94
2013 3 756,178 6.5% 3,717,605 4.92
2014 1 26,700 0.2% 346,500 12.98
2015 1 8,594 0.2% 111,634 12.99
--- ---------------- ----- ----------------- -----
Grand Total 290 11,631,420 100.0% $ 64,063,559 $ 5.51
--- ---------------- ----- ----------------- -----
--- ---------------- ----- ----------------- -----
</TABLE>
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 11, 1998, the 1998 Annual Meeting of Shareholders was held in
which the following matters were submitted to a vote of the shareholders of the
Company.
1. To approve the issuance of shares of Common Stock upon conversion of
up to 1,362,940 OP Units by the holders of such OP Units who obtained such
OP Units pursuant to two contribution agreements, each dated as of February
4, 1998 between the Operating Partnership and the parties listed on the
signature pages thereto.
2. To approve the issuance of shares of our Common Stock upon conversion
of up to approximately 1,992,514 OP Units by the shareholders of such OP
Units who obtained, or may obtain, such OP Units pursuant to the
contribution agreement, dated as of April 30, 1998 between the Company, the
Operating Partnership and the parties listed on the signature pages thereto.
3. To elect three Class I directors to serve until the Annual Meeting of
Shareholders to be held in 2001 and until their successors are duly elected
and qualified and two Class II directors to serve until the Annual Meeting
of Shareholders to be held in 1999 and until their successors are duly
elected and qualified.
4. To approve a proposal to amend and restate our 1993 Omnibus Incentive
Plan.
15
<PAGE>
The Shareholders of the Company approved all four matters by the following
votes in person or by proxy:
<TABLE>
<CAPTION>
VOTES CAST
------------------------------------ BROKER
MATTER FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES
- ------------- ---------- --------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
1 3,105,602 3,706 -- 4,300 --
2 3,105,502 3,706 -- 4,400 --
3 4,065,633 -- -- 1,000 --
4 3,908,733 153,300 -- 4,600 --
</TABLE>
Messrs. Galesi, Falcone, and Kelter were elected as Class I directors and
Messrs. Timothy McBride and Zucker were elected as Class II directors. Messrs.
Branson, Mulvihill, Lesser and David McBride continued as directors after the
meeting.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the American Stock Exchange ("AMEX")
under the symbol REA. The high and low last sale prices as reported by the AMEX
for each calendar quarter from January 1, 1997 to December 31, 1998 and the
dividends with respect to the Company's operations for each such calendar
quarter were as follows:
<TABLE>
<CAPTION>
SALES PRICE
--------------------------------
YEAR/QUARTER HIGH LOW DIVIDENDS
- ----------------------------------- ----- ----- --------
<S> <C> <C> <C>
1998:
1st Quarter...................... $20 $15 3/8 $0.22000
2nd Quarter...................... $20 $16 5/8 $0.22000
3rd Quarter...................... $18 3/8 $12 3/8 $0.26500
4th Quarter...................... $15 7/8 $11 7/8 $0.26500
1997:
1st Quarter...................... $10 1/4 $ 8 1/2 $0.21625
2nd Quarter...................... $ 9 15/16 $ 8 5/8 $0.21750
3rd Quarter...................... $16 3/4 $ 9 5/8 $0.21875
4th Quarter...................... $19 1/4 $13 7/8 $0.22000
</TABLE>
As of December 31, 1998, the Company had 94 shareholders of record and
believes that it had in excess of 1,200 beneficial holders.
On July 7, 1998, the Company completed a private placement of 1,092,051
shares of its Common Stock for an aggregate purchase price of $18,018,841 to
several institutional purchasers including certain accounts managed by CRA Real
Estate Securities, L.P. and Morgan Stanley Asset Management, Inc. The shares
were issued without registration pursuant to an exemption provided by Section
4(2) of the Securities and Exchange Act of 1933, as amended (the "Securities
Act"), and the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
On August 19, 1998, the Company completed a private placement of 720,743
shares of its Common Stock for an aggregate purchase price of approximately
$11,400,000 to the New York State Common Retirement Fund a partial repayment of
certain indebtedness encumbering certain properties which the Company acquired
as part of an acquisition of a portfolio of properties. The shares were issued
without registration pursuant to an exemption provided by Section 4(2) of the
Securities Act and the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
On December 23, 1998, the Company completed a private placement of 800,000
shares of its Series A Convertible Preferred Stock for an aggregate purchase
price of $20 million to AEW Targeted Securities Fund, L.P. ("AEW"), an
investment partnership managed by AEW Capital Management, L.P. The shares were
issued without registration pursuant to an exemption provided by Section 4(2) of
the Securities Act
16
<PAGE>
and the rules and regulations of the Securities and Exchange Commission
promulgated thereunder. The Convertible Preferred Shares have a conversion price
of $16.50 and are convertible at any time, at AEW's option into shares of Common
Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth Selected Financial Data for the Company as of
and for the years ended December 31, 1998, 1997, 1996, 1995 and 1994. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto appearing elsewhere in this report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Total revenue............................. $ 41,028,000 $ 8,197,000 $ 10,240,000 $ 9,966,000 $ 5,505,000
Property operating expenses............... 8,814,000 3,112,000 4,350,000 4,107,000 2,392,000
General and administrative expenses....... 759,000 732,000 515,000 653,000 296,000
Depreciation and amortization............. 6,911,000 909,000 1,366,000 1,304,000 707,000
Buy out of employment agreements, options
and warrants............................ -- 3,203,000 -- -- --
Interest expense.......................... 14,539,000 3,134,000 3,897,000 4,300,000 1,692,000
-------------- -------------- ------------- ------------- -------------
Operating income (loss)................... 10,005,000 (2,893,000) 112,000 (398,000) 418,000
Equity in (losses) income from equity
method investments...................... (1,167,000) 404,000 570,000 597,000 277,000
Gains on sales of assets.................. 11,952,000 4,608,000 1,786,000 -- --
-------------- -------------- ------------- ------------- -------------
Income before minority interest and
extraordinary item...................... 20,790,000 2,119,000 2,468,000 199,000 695,000
Minority interest......................... (9,452,000) (876,000) (1,364,000) 16,000 --
Extraordinary item-loss from debt
refinancing net of amounts allocated to
minority interest....................... (110,000) -- -- (243,000) --
Distributions to preferred unitholders and
dividends to preferred shareholders..... (55,000) -- -- -- --
-------------- -------------- ------------- ------------- -------------
Income (loss) allocated to common
shareholders............................ $ 11,173,000 $ 1,243,000 $ 1,104,000 $ (28,000) $ 695,000
-------------- -------------- ------------- ------------- -------------
-------------- -------------- ------------- ------------- -------------
Distributions paid on common shares....... $ 6,308,000 $ 985,000 $ 943,000 $ 902,000 $ 775,000
-------------- -------------- ------------- ------------- -------------
-------------- -------------- ------------- ------------- -------------
PER SHARE DATA
Income (loss) per common share before
extraordinary item--basic............... $ 1.79 $ 0.92 $ 1.00 $ .18 $ 0.65
Income (loss) per common share-- basic.... $ 1.77 $ 0.92 $ 1.00 $ (0.03) $ 0.65
Income (loss) per common share before
extraordinary item--diluted............. $ 1.75 $ 0.88 $ 1.00 $ .11 $ 0.39
Income (loss) per common share--
diluted................................. $ 1.73 $ 0.88 $ 1.00 $ (0.03) $ 0.39
Distributions paid per common share....... $ 0.97 $ 0.87 $ 0.85 $ 0.83 $ 0.72
Weighted average number of shares
outstanding--basic (1).................. 6,299,281 1,347,297 1,106,379 1,083,233 1,075,000
Weighted average number of shares
outstanding--diluted.................... 11,908,761 2,404,004 1,831,443 1,756,988 1,786,324
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OTHER DATA
Funds from Operations (2)................. $ 16,132,000 $ 1,849,000 $ 2,166,000 $ 2,009,000 $ 1,679,000
Cash flow provided from (used in):
Operating activities.................... 16,387,000 2,087,000 2,254,000 1,493,000 1,377,000
Investing activities.................... (261,100,000) (3,134,000) (2,571,000) (576,000) (9,300,000)
Financing activities.................... $ 230,288,000 $ 17,377,000 $ (4,119,000) $ (1,342,000) $ 8,537,000
BALANCE SHEET DATA
Undepreciated book value of real estate... $ 542,869,000 $ 155,063,000 $ 47,383,000 $ 48,639,000 $ 48,096,000
Net investment in real estate............. 536,002,000 152,108,000 43,555,000 45,634,000 46,464,000
Total assets.............................. 559,366,000 180,955,000 46,224,000 47,741,000 49,437,000
Total liabilities......................... 356,225,000 89,662,000 38,470,000 41,051,000 41,303,000
Total minority interest................... 95,705,000 39,364,000 3,125,000 2,436,000 3,112,000
Total shareholders' equity................ $ 107,436,000 $ 51,929,000 $ 4,629,000 $ 4,254,000 $ 5,022,000
OTHER DATA
Total leaseable square footage of
properties at end of year............... 11,928,620 2,418,590 1,444,770 1,533,770 1,533,770
Number of properties at the end of year... 99 21 5 6 6
Percentage leased at end of year.......... 98% 95% 92% 94% 94%
</TABLE>
- ------------------------
(1) Basic weighted average number of shares includes only Common Stock
outstanding during the year.
(2) 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., 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 were calculated to reflect funds from operations 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. 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion and analysis should be read in conjunction with the
1998, 1997 and 1996 consolidated financial statements appearing elsewhere
herein. This Annual Report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934. The words "believe", "expect", "anticipate", "intend",
"estimate" and other expressions which are predictions of or indicate future
events and trends which do not relate to historical matters identify
forward-looking statements. The Company's actual results could materially differ
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 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
Company's $150,000,000 senior secured revolving credit facility (the "Credit
Facility") may increase.
18
<PAGE>
The Company has achieved significant growth since the transactions that
occurred in December 1997 which resulted in the reorganization (the
"Reorganization") of the Company as a Real Estate Investment Trust ("REIT")
focused on the office and industrial segments. During 1998, the Company acquired
approximately $418 million in properties which aggregated approximately 9.9
million square feet, which was comprised of 8.4 million square feet of
industrial properties and 1.5 million square feet of office properties (the
"1998 Acquisitions"). This represents a 500% increase over the December 31, 1997
total owned square feet of approximately 2.0 million. This growth has resulted
in the broadening of the Company's focus on the Mid-Atlantic and Northeastern
United States to include Northern New York State, Indianapolis, Indiana, Ohio
and Greenville and Spartanburg, South Carolina. Additionally, in 1998 the
Company completed its strategy to dispose of all its remaining multi-family
properties. The last two remaining multifamily properties were sold in 1998.
These sales generated gains totaling $11.9 million and more importantly, net
proceeds of $14.8 million after repayment of debt outstanding on these
properties, which were used to acquire industrial and office properties during
1998.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net income for the year ended December 31, 1998 was $11.2 million compared
with a net income of $1.2 million for the same period in 1997. The increase in
net income was primarily attributed to the operating results from the 99
properties acquired by the Company since December 1997 and the gains recorded
from sales of the last two multifamily assets owned by the Company.
Revenues increased by $32.8 million for the year ended December 31, 1998 as
compared to the corresponding prior year period primarily as a result of
property acquisitions in 1998.
Property operating expenses, general and administrative expenses,
depreciation and amortization increased in the aggregate by $11.7 million as
compared with the prior year primarily as a result of property acquisitions.
Interest expense increased by $11.4 million as a result of additional
indebtedness incurred to finance the Company's acquisitions.
Equity in losses or earnings from equity method investments was a loss of
$1.2 million as compared to equity in earnings of $404,000 for the same period
in 1997. The loss in 1998 was attributed to the operations of American Real
Estate Management, Inc. (the "Management Company"). The earnings from equity
method investments in 1997 primarily related to the Company's 50% interest in
Emerald Vista Associates, L.P. ("Emerald Vista"), which was sold in September
1997.
Gains on sales of assets increased by $7.3 million in 1998 over the previous
year as a result of the sale of Quadrangles Village Apartments ("Quadrangles")
and Americana Lakewood Apartments ("Americana") as the Company consummated its
plan to dispose of its remaining multifamily properties.
In October 1998, the Company incurred an extraordinary loss of $220,000 as a
result of the refinancing of $66 million of debt under the Credit Facility and
$8.4 million of other debt with certain fixed rate debt.
SEGMENTS
Revenues and property net operating income increased significantly in both
the industrial and office segments during 1998 in comparison to the previous
year as a result of the Reorganization. Revenue and property net operating
income decreased in the multifamily segment by $5.4 million (74.5%) and $2.2
million (64.4%), respectively, as a result of the sale of the remaining
multifamily assets in 1997 and 1998.
19
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net income of the Company was $1.2 million in 1997 as compared to $1.1
million in 1996.
Rents and fees revenues decreased from $9.9 million in 1996 to $7.7 million
in 1997 primarily as a result of the sale of International Apartments
("International") on December 20, 1996, the sale of Timberleaf Apartments
("Timberleaf") on February 28, 1997 and the sale of Sedona Apartments ("Sedona")
on August 29, 1997. Americana and Quadrangles, the Company's two remaining
properties as of December 31, 1997, both experienced higher rents and fees
revenues in 1997 as a result of higher rental rates. Lower vacancies occurred at
Americana in 1997, contributing to higher rents and fees revenues. In addition,
rent revenue increased by $675,000 in 1997 as a result of the acquisitions in
the Reorganization.
Other income increased to $465,000 in 1997 from $297,000 in 1996 primarily
as a result of interest earned on the net cash proceeds generated from sales of
various multifamily properties in 1997 and of International in December 1996.
This increase was partially offset by reductions in other income from the sale
of International, Timberleaf and Sedona.
Operating expenses increased to $11 million in 1997 from $10 million in
1996. This increase was primarily the result of $3.2 million of non-recurring
expenses in 1997 associated with the buyout of employment contracts with three
former Company officers and the cancellation of outstanding options held by
these officers and warrants held by certain other individuals in conjunction
with the transactions which were consummated on December 12, 1997. This increase
was offset by various decreases in property operating expenses as a result of
the various multifamily property sales in 1997 and the fourth quarter of 1996.
Operating expenses increased approximately $200,000 as a result of the
acquisitions which occurred on December 12, 1997.
The $2.9 million operating loss for 1997 is primarily the result of the $3.2
million expense associated with the buyout of the employment agreements and
options of the former executives of the Company.
The minority interest allocation was $876,000 in 1997 as compared to $1.4
million in 1996. Income before the allocation to minority interest for 1997 and
1996 was $2.1 million and $2.5 million, respectively. The proportionate decrease
in the minority interest's share of income in 1997 is primarily a result of the
$605,000 carryover preference allocated to the minority interest in 1996, which
reduced the cumulative carryover amount due to the limited partners in the
Operating Partnership to zero at December 31, 1996.
The $4.6 million aggregate gain from property sales in 1997 was the result
of the Company's successful execution of its decision to sell the various
multi-family assets. In 1997, the Company realized gains from the sales of
Timberleaf ($403,000) on February 28, 1997, the sale of Sedona ($3.4 million) on
August 29, 1997 and the September 26, 1997 sale of the Company's 50% general
partner interest in Emerald Vista which generated a gain of approximately
$752,000. This compares to the $1.8 million gain realized in December 1996
related to the sale of International for a gross sales price of $3 million.
SEGMENTS
Revenues and property net operating income in the multifamily segment
decreased by $2.9 million (28.6%) and $1.0 million (23.2%), respectively, in
1997 as compared to 1996, as a result of the sale of various multifamily assets
in 1997 and 1996. These decreases were offset slightly by increases in both
revenues and property net operating income in the industrial and office segments
as a result of the Reorganization.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $16.4 million, $2.1 million,
and $2.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively. This represents the Company's primary source of liquidity to fund
distributions to shareholders and unitholders in the Operating Partnership and
to a
20
<PAGE>
certain extent, recurring costs associated with the re-leasing and renovation of
the Company's properties. The increase in net cash provided by operating
activities in 1998 was a result of the significant increase in net income
resulting from the acquisitions of properties in 1997 and 1998.
Net cash used in investing activities was $261.1 million and $3.1 million
for the years ended December 31, 1998 and 1997 as compared to net cash provided
of $2.6 million for 1996. The increase in net cash used in investing activities
in 1998 was primarily a result of the $300.7 million spent by the Company in
1998 to fund the 1998 Acquisitions. Included within the net cash used in 1998
and 1997 are proceeds from the sales of multifamily assets of $41.0 million and
$19.8 million, respectively, which the Company re-invested in office and
industrial properties in 1998. The net cash provided in 1996 was the result of
$2.9 million in proceeds from the sale of a multi-family property in December
1996.
Net cash provided by financing activities was $230.3 million and $17.4
million for the years ended December 31, 1998 and 1997, respectively as compared
to net cash used in financing activities of $4.1 million in 1996. The
significant increase in net cash provided in 1998 is a result of the Company's
debt and equity issuances, net of other debt repayments and distributions to
shareholders and minority interests, which were used to fund the Company's
acquisitions in 1998.
In 1998, the Company received $36.7 million of net cash proceeds from common
stock and convertible preferred stock offerings which were used to pay down
amounts outstanding on the Company's Revolving Credit Facility and to fund
acquisitions of real estate properties. These proceeds were generated from the
following offerings:
- In July 1998, the Company issued 1,092,051 shares of Common Stock at
$16.50 per share in a private placement to several institutional investors
including certain accounts managed by Morgan Stanley Asset Management,
Inc. and CRA Real Estate Securities, L.P. which resulted in net proceeds
of $17.4 million.
- In December 1998, the Company issued 800,000 shares of Series A
Convertible Preferred Stock that has a liquidation preference of $25 per
share, is convertible into Common Stock at $16.50 per share and requires
an annual dividend of $2.25 per Convertible Preferred share. This offering
generated net proceeds of $19.3 million.
Additionally, in August 1998, the Company issued 720,743 shares of Common
Stock at $15.81 per share in a $11 million private placement with the New York
State Common Retirement Fund as a repayment for certain indebtedness encumbering
certain properties acquired by the Company in August 1998.
In addition to the offerings discussed above, the Operating Partnership
issued 3,070,220 OP Units as total consideration for several acquisitions that
were consummated in 1998 at prices which ranged from $16.50 to $17.50 per OP
Unit. In addition, the Company issued 300,000 Convertible Preferred OP Units, in
connection with an acquisition of properties, for $7.5 million that are
convertible into Common Stock at $16.50.
In 1997, the Company received $20.8 million of net proceeds from a private
placement of 1,963,635 shares of Common Stock at $11.00 per share with Hudson
Bay Partners II, L.P., CRA Real Estate Securities, L.P. and Robert Branson, a
director of the Company.
In addition to the offering in 1997 discussed above, the Company issued
2,001,132 shares of Common Stock in consideration for the merger of Fair Lawn
Industrial Park, Inc., Co. ("FLIP") with and into the Company as part of the
Reorganization. In connection with this transaction, the Operating Partnership
also issued 3,362,503 OP Units as consideration for the acquisition of interests
in several entities owning 15 office and industrial properties located in north
New Jersey and all of the outstanding preferred stock of the Management Company.
21
<PAGE>
On April 30, 1998, the Company entered into a three year $150,000,000 Credit
Facility that can be used to fund acquisitions, capital improvements,
development activities and working capital needs. The Credit Facility bears
interest at a variable rate at the Company's option of either a Eurodollar rate
plus 1.625% per annum or the prime rate. The Company's outstanding borrowings
under this Credit Facility are $123.8 million at December 31, 1998 at an
interest rate of 7.39%.
As of December 31, 1998, the Company had approximately $218.7 million of
mortgage notes outstanding, excluding the Credit Facility, that had a weighted
average interest rate of 7.75% and at a weighted average maturity of 11.84
years. No mortgage debt matures in 1999. At December 31, 1998, the Company's
market capitalization was approximately $601.9 million and the Company's
consolidated debt represented approximately 57.5% of total market
capitalization.
During 1998 and 1997, the Company paid distributions totaling $.97 and $.87
per share of Common Stock, respectively, which aggregated $6.3 million and
$985,000. In addition, in December 1998 the Company declared a distribution of
$.265 per share of Common Stock that was paid on January 29, 1999 to
shareholders of record on December 31, 1998.
The Company expects to meet its short-term (one 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 shareholders and
holders of OP Units.
The Company expects to meet long-term liquidity requirements including
property acquisition, debt maturity, major renovations, expansions and other non
recurring capital improvements through long -term indebtedness, the sale of
certain owned assets and the issuance of additional equity securities. In July
1998, the Company filed with the Securities and Exchange Commission a Form S-3
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 up to $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., 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 are calculated to
reflect funds from operations 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. 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.
22
<PAGE>
FFO and cash flow for each of the three years in the period ended December
31, 1998 are summarized in the following table (in thousands, except share
data):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Income before distributions to preferred unitholders and preferred
shareholders, minority interest and extraordinary item.............. $ 20,790 $ 2,119 $ 2,468
(Less) Plus:
Gains on sales of real estate....................................... (11,952) (4,608) (1,786)
Depreciation and amortization related to real estate................ 6,911 909 1,306
Termination of employment agreements and options and warrants
buyout............................................................ -- 3,203 --
Other adjustments................................................... 213 -- --
Equity in (earnings) losses from equity method investments.......... 1,167 (404) (570)
FFO contribution (loss) from equity investments..................... (997) 630 748
------------- ------------ ------------
Funds from Operations................................................. $ 16,132 $ 1,849 $ 2,166
------------- ------------ ------------
------------- ------------ ------------
Cash flow from operating activities................................... $ 16,387 $ 2,087 $ 2,254
Cash flow from investing activities................................... (261,100) (3,134) 2,571
Cash flow from financing activities................................... 230,288 17,377 (4,119)
------------- ------------ ------------
Net (decrease) increase in cash....................................... $ (14,425) $ 16,330 $ 706
------------- ------------ ------------
------------- ------------ ------------
Weighted average number of common shares--basic....................... 6,299,281 1,347,297 1,106,379
------------- ------------ ------------
------------- ------------ ------------
Weighted average number of common and preferred shares and
units--diluted...................................................... 11,908,761 2,404,004 --
------------- ------------ ------------
------------- ------------ ------------
</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.
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 issue.
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.
23
<PAGE>
STATUS
The Company is in the 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 completed in April
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 completed in June 1999. Based
upon the status of this assessment, the Company does not believe a material
number of these systems will be noncompliant.
The Company is exposed to the risk that its vendors or service providers
could experience Year 2000 problems that, in turn, affect 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 ability to operate is 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 affect the tenants' ability to pay rent. The Company
does not believe that this risk is likely to affect enough tenants to pose a
material problem to the Company. The impact of noncompliance by tenant 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 ongoing Year 2000 compliance program.
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 18.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary exposure to market risk is to changes in interest
rates. The Company is exposed to market risk related to its Credit Facility as
interest on the Credit Facility is subject to fluctuations in the market. The
amount outstanding under the Credit Facility represents approximately 35.8% of
debt outstanding as of December 31, 1998. The Company also utilizes mortgage
debt with fixed rates as a source of capital. The weighted average maturity for
fixed rate debt was 11.8 years at December 31, 1998. As these debt instruments
mature, the Company typically refinances such debt at then existing market
interest rates which may be more or less than the interest rates on the maturing
debt.
If the interest rate for the Credit Facility was 100 basis points higher or
lower during 1998, the Company's interest expense would have been increased or
decreased by approximately $518,000. None of the Company's fixed rate debt
matures in 1999. The Company currently does not intend to refinance any of its
fixed rate debt in 1999. This sensitivity analysis assumes no changes in the
Company's financial structure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item 8 is included as a separate section of this Annual
Report on Form 10-K. See pages F-1 through F-26.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
24
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This item is incorporated by reference from the proxy statement for the 1999
Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
This item is incorporated by reference from the proxy statement for the 1999
Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This item is incorporated by reference from the proxy statement for the 1999
Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This item is incorporated by reference from the proxy statement for the 1999
Annual Meeting of Shareholders.
25
<PAGE>
PART IV.
ITEM 14. EXHIBITS, REPORTS ON FORM 8-K, AND FINANCIAL STATEMENT SCHEDULE.
The following consolidated Financial Statements of American Real Estate
Investment Corporation are included in Item 8.
(A) 1. REPORTS OF ARTHUR ANDERSEN, LLP, INDEPENDENT PUBLIC ACCOUNTANTS AND
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December
31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financials Statements
2. FINANCIAL STATEMENT SCHEDULE:
Schedule III--Real Estate and Accumulated Depreciation as of
December 31, 1998 for American Real Estate Investment Corporation.
3. EXHIBITS
<TABLE>
<C> <S>
3(a) Certificate of Incorporation
(b) Certificate of Amendment filed October 6, 1993
(c) Amended and Restated Certificate of Incorporation filed November 9, 1993
(d) Amended and Restated Certificate of Incorporation filed December 12, 1997
(e) By-laws of Registrant
(f) Articles Supplementary classifying and designating a series of Preferred Stock as
Series A Convertible Preferred Stock and fixing distribution and other preferences and
rights of such series
4(a) Specimen Certificate for Common Stock
10(a) Amended and Restated Agreement of Limited Partnership of American
Real Estate Investment, L. P.
(b) 1993 Omnibus Incentive Plan
(c) Registration Rights Agreement
(d) Employment Agreement between American Real Estate Investment, L.P. and Evan Zucker
(e) Warrant Agreement between Dickinson & Co. and Registrant
(f) Employment Agreement between American Real Estate Investment, L.R and Rick A. Burger
(g) Sub-Tenant Agreement dated December 1, 1993 between First Meridian Group, Inc. and
Registrant
(h) Loan Agreement dated as of May 1, 1993 between The Industrial Development Authority of
the City of Tempe, Arizona and Quadrangles I Limited Partnership
(i) Modification of Deed of Trust, Note and Deed of Trust dated May 14, 1993
(ii) Modification Agreement dated December 1, 1994
(iii) Assignment of the Loan Agreement, the Arbitrage Regulation Agreement and the
Amended and Restated Regulatory Agreement as to Tax Exemption dated December 2,
1994
</TABLE>
26
<PAGE>
<TABLE>
<C> <S>
(i) Loan Agreement dated December 2, 1994 between American Quadrangles Partners, L.P.,
Virginia Street Associates Limited Partnership, American Timberleaf Partners, L.R,
American Real Estate Investment Corporation and D.H. Blair Holdings, Inc.
(j) Promissory Note dated December 2, 1994 in the principal amount of $3,500,000 issued to
D.H. Blair Holdings, Inc.
(k) Stock Purchase Warrant dated December 27, 1994 issued, on transfer, to Rosalind
Davidowitz
(1) Loan Agreement dated May 31, 1994 between the Operating Partnership and First
Interstate Bank of Denver, N.A.
(i) Promissory Note dated June 1, 1994
(ii) First Amendment dated August 31, 1995 to Loan dated May 31, 1994 between the
Operating Partnership and First Interstate Bank of Denver, N.A.
(iii) Amended and Restated Promissory Note dated August 31, 1995 in the principal
amount of $5,904,143
(iv) Promissory Note dated August 31, 1995 in the principal amount of $500,000
(m) Contract for Purchase and Sale of International Apartment Project
(n) Adjustable Rate Note in the principal amount of $5,700,000 dated January 31, 1997
payable to GMAC Commercial Mortgage Corporation
(o) Promissory Note dated January 8, 1998 between American Sedona Partners, L.R, American
Real Estate Investment Corporation and Column Financial, Inc. in the principal amount
of $17,000,000
(p) Dana Perfumes Mortgage Note dated September 11, 1997 by Fair Lawn Industrial Park,
Inc. and First Union National Bank in the principal amount of $1,155,000
(q) L&W Promissory Note dated August 4, 1995 between L&W Associates and USG
Annuity & Life Company in the principal sum of $3,525,000
(r) Northfield Business Center Promissory Note dated December 24, 1997 between McBride
Properties, Inc. and Column Financial, Inc. in the principal amount of $3,500,000
(s) One Tabas Promissory Note dated August 9, 1995 between Hough-Loew Associates, Inc. and
USG Annuity & Life Company in the principal amount of $3,025,000
(t) Phillips Promissory Note dated January 5, 1998 between McBride Properties, Inc. and
Column Financial, Inc. in the principal amount of $7,500,000
(u) Two Tabas Promissory Note dated August 9, 1995 between Hough-Loew Associates, Inc. and
USG Annuity & Life Company in the principal amount of $4,600,000
(v) Loan Agreement dated September 23, 1997 by and between FLIP/BRE, Inc., OIP/BRE,
L.L.C., MBP/BRE, L.L.C., and NJA/BRE, L.L.C., and Nomura Asset Capital Corporation
(w) Master Investment Agreement dated as of August 20, 1997 by and between American Real
Estate Investment Corporation and The Parties Listed on the Signature Pages Thereto
(x) Stock Purchase Agreement dated as of August 20, 1997 by and between American Real
Estate Investment Corporation and Hudson Bay Partners, L.R
(y) Management Contribution Agreement dated as of August 20, 1997 among American Real
Estate Investment, L.P., American Real Estate Investment Corporation, Jeffrey Kelter,
and Penn Square Properties, Inc.
(z) McBride Contribution Agreement between American Real Estate Investment Corporation,
American Real Estate Investment, L.R, and The Other Parties Listed on the Signature
Pages of the Agreement
(aa) Agreement and Plan of Merger among American Real Estate Investment Corporation and
Fair Lawn Industrial Park, Inc., and The Other Parties Listed on the Signature Pages
Thereto
(ab) Agreement of Sale and Purchase and Assignment of Agreement of Sale and Purchase-101
Commerce Drive
</TABLE>
27
<PAGE>
<TABLE>
<C> <S>
(ac) Agreement of Sale and Purchase-One and Two Tabas Lane with First, Second, Third and
Fourth Amendments
(ad) Agreement of Sale and Purchase-Northfield Business Center (1057 and 1091 Arnold Road)
with First, Second, Third, Fourth and Fifth Amendments
(ae) Agreement of Sale and Purchase-1305 Goshen Parkway with First, Second, Third
and Fourth Amendments
(af) Agreement of Sale Americana Lakewood I & II and addendum
(ag) Employment Agreement, dated December 12, 1997, by and between American Real Estate
Investment Corporation and Jeffrey Kelter
(ah) Employment Agreement, dated December 12, 1997, by and between American Real Estate
Investment Corporation and David McBride
(ai) Agreement of Sale and Purchase dated July 17, 1997, with John D. Moran Sr. with
Amendment One and Assignment
(aj) Warrant Agreement between American Real Estate Investment, L.R and Jeffrey Kelter
(ak) Warrant Agreement between American Real Estate Investment, L.P. and David McBride
(al) Agreements of Sale and Purchase--Double M Development Properties and First Amendment
dated March 1998
(am) Agreement of Sale and Purchase--GATX Properties and Assignment dated March 16, 1998
(an) Promissory Note for $8,430,000 dated March 27 1998 between Virginia Street Associates
and Column Financial, Inc.
(ao) Promissory Note for $5,725,000 dated March 27, 1998 between Virginia Street Associates
and Column Financial, Inc.
(ap) Promissory Note for $3,630,000 dated March 27, 1998 between McBride Properties and
Column Financial, Inc.
(aq) Contribution Agreement between American Real Estate Investment, L.P., and Northeastern
Industrial Park, Inc. and Guilderland Ventures, Inc.
(ar) Contribution Agreement between American Real Estate Investment, L.P. and Columbia
Executive I Assoc., Columbia Executive II Assoc., Columbia Executive III Assoc.,
Columbia Executive V Assoc., Columbia Executive VI Assoc., Columbia Executive VII
Assoc., and Columbia Executive VIII Assoc.
(as) Agreement of Sale and Purchase--Fed One Industrial Portfolio
(at) Revolving Credit Facility between American Real Estate Investment L.P., American Real
Estate Investment Corporation and BankBoston, N.A., and DLJ Capital Funding, Inc.
(au) Registration Rights Agreement between American Real Estate Investment Corporation and
CRA Real Estate Securities, L.P. (as attorney-in-fact for the purchasers named
therein)
(av) Registration Rights Agreement between American Real Estate Investment Corporation and
Morgan Stanley Asset Management, Inc. (as attorney-in-fact for the purchasers named
therein)
(aw) Subscription Agreement between American Real Estate Investment Corporation and CRA
Real Estate Securities, L.P. (as attorney-in-fact for the purchasers named therein)
(ax) Subscription Agreement between American Real Estate Investment Corporation and Morgan
Stanley Asset Management, Inc. (as attorney-in-fact for the purchasers named therein)
(ay) Agreement of Sale and Purchase between American Real Estate Investment, L.P. and ASW
Properties, Ltd. Along with First, Second and Third Amendments to Agreement of Sale
and Purchase
(az) Purchase and Sale Agreement between American Real Estate Investment, L.P. and Szeles
Real Estate Development Company and Szeles Investment Company
</TABLE>
28
<PAGE>
<TABLE>
<C> <S>
(ba) Contribution Agreement between American Real Estate Investment, L.P., American Real
Estate Investment Corporation and Pioneer Properties Company of Clinton Square,
Waterfront Associates, Pioneer Indigo One Company, Pioneer Franklin Square Company,
1045 James Street Company, Pioneer Apollo Drive Company, Pioneer Park One Company,
Pioneer Clinton Street Company, Pioneer Maltbie Company, 5010 Campuswood Company, 5015
Campuswood Company, 400 West Division Company, Pioneer Day Care Company, and Pioneer
Management Services Company, LLC
(bb) Employment Agreement, dated as of August 15, 1998, between American Real Estate
Investment Corporation and Timothy A. Peterson
(bc) Subscription Agreement between American Real Estate Investment Corporation and the New
York State Common Retirement Fund
(bd) Registration Rights Agreement between American Real Estate Investment Corporation and
the New York State Common Retirement Fund.
(be) Agreement of Sale and Purchase between WCN Properties, L.P. and Franklin Storage, Inc.
and American Real Estate, L.P. along with Amendment to Agreement of Sale and Purchase.
(bf) Contribution Agreement between American Real Estate Investment, L.P., acquiror and
MPSN, L.L.C., Corporate Drive Associates, LLC, Post 70 Building 7 Partners, and
COB Associates, LLC.
(bg) Agreement of Sale and Purchase between T. Walter Brashier, Martin Timothy Brashier,
Hopewell Properties, Inc. TTT Partnership, Stoneledge, Inc., Kidco and American Real
Estate Investment, L.P.
(bh) Twelfth Amendment to Agreement of Sale and Purchase between T. Walter Brashier, Martin
Timothy Brasher, Hopewell Properties, Inc., TTT Partnership, Stoneledge, Inc., and
Kidco and American Real Estate Investment, L.P.
(bi) Preferred Unit Recipient Agreement between Hopewell Properties, Inc., and American
Real Estate Investment, L.P.
(bj) Securities Purchase Agreement between American Real Estate Investment Corporation and
AEW Targeted Securities Fund, L.P.
(bk) Registration Rights Agreement between American Real Estate Investment Corporation and
AEW Targeted Securities Fund, L.P.
(bl) Amended and restated 1993 Omnibus Incentive Plan
</TABLE>
29
<PAGE>
21. SUBSIDIARIES OF THE REGISTRANT: The Registrant has subsidiaries carrying on
the same line of business as the Registrant as follows:
<TABLE>
<CAPTION>
INCORPORATION/
STATE OF
NAME ORGANIZATION
- ------------------------------------------------------------------------------ --------------
<S> <C>
American Real Estate Investment, L.P. Delaware
Virginia Street Associates Limited Partnership Colorado
American Emerald Partners, L.P. Delaware
American Timberleaf Partners, L.P. Delaware
American Quadrangles Partners, L.P. Delaware
American Sedona Partners, L.P. Colorado
American Emerald Corp. Delaware
American Timberleaf Corp. Delaware
American Quandrangles Corp. Delaware
American Sedona Corp. Colorado
RROP, L.L.C. New Jersey
McBride Properties New Jersey
New Jersey Associates New Jersey
UFSC, L.L.C. New Jersey
OIP/BRE, L.L.C. New Jersey
MBP/BRE, L.L.C. New Jersey
NJA/BRE, L.L.C. New Jersey
FLIP/BRE II, L.L.C. New Jersey
REA/SPC II, Inc. New Jersey
American Real Estate Management Inc. Pennsylvania
Avalanche Investment Corporation Maryland
Winchester Corporate Center GP Corp. Pennsylvania
Winchester Corporate Center, L.P. Pennsylvania
American DE/SPE L.L.C. Delaware
American DE/SPE 2, L.L.C. Delaware
American DE/SPE 1, Inc. Delaware
American DE/SPE 2, Inc. Delaware
American DE/SPE 3, Inc. Delaware
American DE/SPE 4, Inc. Delaware
American DE/SPE 4, L.P. Delaware
</TABLE>
23.1 CONSENT OF ARTHUR ANDERSEN, LLP
27. FINANCIAL DATA SCHEDULE
- ------------------------
(B) Reports on Form 8-K:
- A Report on Form 8-K dated October 30, 1998 was filed by the Company with
the Securities and Exchange Commission on November 13, 1998. The Company
reported the acquisition of the Chambersburg Properties located in
Chambersburg, PA.
- A Report on Form 8-K dated December 4, 1998 was filed by the Company with
the Securities and Exchange Commission on December 18, 1998. The Company
reported the acquisition of the Browning Portfolio located in
Indianapolis, IN.
30
<PAGE>
SCHEDULE III:
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1998
(IN 000'S)
<TABLE>
<CAPTION>
GROSS AMOUNT CARRIED
AT CLOSE OF PERIOD
COSTS
CAPITALIZED 12/31/98
INITIAL COSTS SUBSEQUENT TO ------------------------
LOCATION (C) -------------------- ACQUISITION OR BUILDING AND
BUILDING ADDRESS (CITY/STATE) ENCUMBRANCES LAND BUILDINGS COMPLETION LAND IMPROVEMENTS TOTAL
- ----------------- ------------------ ------------- --------- --------- ---------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office Properties
40 Potash Road... Oakland, NJ 7,821 2,312 9,746 -- 2,312 9,746 12,058
1655 Valley
Road........... Wayne, NJ 15,063 4,580 19,302 -- 4,580 19,302 23,882
16-00 Route 208.. FairLawn, NJ 1,343 646 2,746 281 646 3,027 3,673
128 Bauer Drive.. Oakland, NJ (b) 420 1,774 -- 420 1,774 2,194
22-08 Route 208.. FairLawn, NJ (b) 990 4,175 139 990 4,314 5,304
15-00 Pollitt
Drive.......... Oakland, NJ 978 308 1,300 -- 308 1,300 1,608
19-00 Pollitt
Drive.......... FairLawn, NJ 4,963 1,450 6,105 -- 1,450 6,105 7,555
95 Bauer Drive... Oakland, NJ 568 160 678 -- 160 678 838
99 Bauer Drive... Oakland, NJ 876 276 1,167 -- 276 1,167 1,443
Thirteen Columbia
Circle......... Albany, NY 1,561 441 1,883 441 1,883 2,324
Nine Columbia
Circle......... Albany, NY (b) 218 891 65 218 956 1,174
Seventeen
Columbia
Circle......... Albany, NY (b) 1,330 5,683 -- 1,330 5,683 7,013
One Columbia
Circle......... Albany, NY 4,581 1,365 5,822 -- 1,365 5,822 7,187
Fifteen Columbia
Circle......... Albany, NY 6,809 1,843 8,076 3 1,843 8,079 9,922
Three Columbia
Circle......... Albany, NY 5,021 1,533 6,522 146 1,533 6,668 8,201
8 Airline Drive.. Albany, NY (b) 1,298 5,300 -- 1,298 5,300 6,598
6 British
American
Boulevard...... Latham, NY (b) 780 3,082 4 780 3,086 3,866
Executive Park... Wyomissing, PA (b) 1,145 4,285 -- 1,145 4,285 5,430
Treeview
Corporate
Center......... Wyomissing, PA (b) 1,412 5,055 52 1,412 5,107 6,519
Corporate Center
15............. Mechanicsburg, PA (b) 1,226 3,811 -- 1,226 3,811 5,037
Hillside
Corporate
Center......... Mechanicsburg, PA (b) 1,483 6,040 -- 1,483 6,040 7,523
Winchester
Plaza.......... Allentown, PA (b) 2,834 13,282 47 2,834 13,329 16,163
125 Indigo Creek
Drive.......... Greece, NY (b) 524 3,012 -- 524 3,012 3,536
5009 Campuswood
Drive.......... East Syracuse, NY (a) 144 625 -- 144 625 769
5000 Campuswood
Drive.......... East Syracuse, NY 2,089 373 2,611 -- 373 2,611 2,984
<CAPTION>
ACCUMULATED YEAR DEPRECIABLE
DEPRECIATION BUILT/ LIVES
BUILDING ADDRESS 12/31/98 RENOVATED (YEARS)
- ----------------- ------------ ----------- ---------------
<S> <C> <C> <C>
Office Properties
40 Potash Road... 290 1992 (d)
1655 Valley
Road........... 574 1989 (d)
16-00 Route 208.. 100 1983 (d)
128 Bauer Drive.. 53 1981 (d)
22-08 Route 208.. 124 1960/68 (d)
15-00 Pollitt
Drive.......... 39 1970/92 (d)
19-00 Pollitt
Drive.......... 182 1970/84, 95 (d)
95 Bauer Drive... 20 1974/91 (d)
99 Bauer Drive... 35 1971 (d)
Thirteen Columbia
Circle......... 1996 (d)
Nine Columbia
Circle......... 24 1992 (d)
Seventeen
Columbia
Circle......... 103 1995 (d)
One Columbia
Circle......... 106 1991 (d)
Fifteen Columbia
Circle......... 143 1995 (d)
Three Columbia
Circle......... 127 1992 (d)
8 Airline Drive.. 101 1997 (d)
6 British
American
Boulevard...... 44 1980 (d)
Executive Park... 55 1979 (d)
Treeview
Corporate
Center......... 70 1991 (d)
Corporate Center
15............. 59 1979 (d)
Hillside
Corporate
Center......... 71 1991 (d)
Winchester
Plaza.......... 139 1992/1998 (d)
125 Indigo Creek
Drive.......... 29 1992 (d)
5009 Campuswood
Drive.......... 10 1989 (d)
5000 Campuswood
Drive.......... 23 1988 (d)
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
GROSS AMOUNT CARRIED
AT CLOSE OF PERIOD
COSTS
CAPITALIZED 12/31/98
INITIAL COSTS SUBSEQUENT TO ------------------------
LOCATION (C) -------------------- ACQUISITION OR BUILDING AND
BUILDING ADDRESS (CITY/STATE) ENCUMBRANCES LAND BUILDINGS COMPLETION LAND IMPROVEMENTS TOTAL
- ----------------- ------------------ ------------- --------- --------- ---------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5010 Campuswood
Drive.......... East Syracuse, NY (a) 767 6,516 -- 767 6,516 7,283
5015 Campuswood
Drive.......... East Syracuse, NY (a) 876 9,732 -- 876 9,732 10,608
308 Maltbie
Street......... Syracuse, NY (b) 325 1,870 -- 325 1,870 2,195
400 West Division
Street......... Syracuse, NY (b) 562 3,231 -- 562 3,231 3,793
One Clinton
Square......... Syracuse, NY (a) 371 2,132 8 371 2,140 2,511
1045 James
Street......... Syracuse, NY 3,355 716 4,564 -- 716 4,564 5,280
507 Plum Street.. Syracuse, NY (a) 1,372 7,890 -- 1,372 7,890 9,262
250 South Clinton
Street......... Syracuse, NY (a) 4,135 23,782 -- 4,135 23,782 27,917
------------- --------- --------- ------- --------- ------------- ---------
Subtotal Office
Properties..... 55,028 38,215 182,690 745 38,215 183,435 221,650
Industrial
Properties
5 Thornton
Road........... Oakland, NJ 6,203 1,844 7,775 -- 1,844 7,775 9,619
2 Volvo Drive.... Rockleigh, NJ (b) 994 4,192 -- 994 4,192 5,186
17-01 Pollitt
Drive.......... Oakland, NJ 2,567 1,200 5,053 66 1,200 5,119 6,319
19-05 Nevins
Road........... Oakland, NJ 3,909 1,200 5,053 -- 1,200 5,053 6,253
100 Oak Hill
Road........... Mountaintop, PA (b) 546 2,274 -- 546 2,274 2,820
1057 Arnold
Road........... Reading, PA (b) 1,152 4,750 -- 1,152 4,750 5,902
1091 Arnold
Road........... Reading, PA (b) 768 3,206 -- 768 3,206 3,974
1305 Goshen
Parkway........ West Chester, PA 3,266 901 4,084 -- 901 4,084 4,985
One Tabas Lane... Exton, PA 2,797 842 3,552 -- 842 3,552 4,394
Two Tabas Lane... Exton, PA 4,262 1,211 5,342 -- 1,211 5,342 6,553
101 Commerce
Drive.......... Mechanicsburg, PA 16,856 5,267 21,083 -- 5,267 21,083 26,350
1 Phillips
Drive.......... Mountaintop, PA 7,437 2,213 8,855 -- 2,213 8,855 11,068
Gettysburg Rd.... Camp Hill, PA (b) 1,351 4,236 -- 1,351 4,236 5,587
AIP Drive........ Middletown, PA (a) 1,539 7,225 2 1,539 7,227 8,766
Steelway
Boulevard...... Liverpool, NY (a) 2,611 10,375 -- 2,611 10,375 12,986
Northeastern Ind.
Park Bldg. 8... Albany, NY (a) 1,254 5,124 -- 1,254 5,124 6,378
Northeastern Ind.
Park Bldg.
21............. Albany, NY (a) 1,340 5,472 -- 1,340 5,472 6,812
<CAPTION>
ACCUMULATED YEAR DEPRECIABLE
DEPRECIATION BUILT/ LIVES
BUILDING ADDRESS 12/31/98 RENOVATED (YEARS)
- ----------------- ------------ ----------- ---------------
<S> <C> <C> <C>
5010 Campuswood
Drive.......... 62 1989 (d)
5015 Campuswood
Drive.......... 93 1991 (d)
308 Maltbie
Street......... 18 1992 (d)
400 West Division
Street......... 31 1992 (d)
One Clinton
Square......... 20 1991 (d)
1045 James
Street......... 39 1992 (d)
507 Plum Street.. 75 1991 (d)
250 South Clinton
Street......... 226 1991 (d)
------------
Subtotal Office
Properties..... 3,119
Industrial
Properties
5 Thornton
Road........... 231 1973/81 (d)
2 Volvo Drive.... 125 1966/93 (d)
17-01 Pollitt
Drive.......... 151 1968 (d)
19-05 Nevins
Road........... 150 1955 (d)
100 Oak Hill
Road........... 71 1996 (d)
1057 Arnold
Road........... 141 1995 (d)
1091 Arnold
Road........... 95 1996 (d)
1305 Goshen
Parkway........ 114 1991 (d)
One Tabas Lane... 104 1970 (d)
Two Tabas Lane... 149 1970/91 (d)
101 Commerce
Drive.......... 602 1997 (d)
1 Phillips
Drive.......... 253 1991-1993 (d)
Gettysburg Rd.... 115 1952/1993 (d)
AIP Drive........ 131 1991 (d)
Steelway
Boulevard...... 222 1977 (d)
Northeastern Ind.
Park Bldg. 8... 97 1950/1997 (d)
Northeastern Ind.
Park Bldg.
21............. 104 1989 (d)
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
GROSS AMOUNT CARRIED
AT CLOSE OF PERIOD
COSTS
CAPITALIZED 12/31/98
INITIAL COSTS SUBSEQUENT TO ------------------------
LOCATION (C) -------------------- ACQUISITION OR BUILDING AND
BUILDING ADDRESS (CITY/STATE) ENCUMBRANCES LAND BUILDINGS COMPLETION LAND IMPROVEMENTS TOTAL
- ----------------- ------------------ ------------- --------- --------- ---------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Northeastern Ind.
Park Bldg.
22............. Albany, NY (a) 971 3,964 -- 971 3,964 4,935
Marway Circle.... Gates, NY (a) 826 3,318 -- 826 3,318 4,144
16725 Square
Drive.......... Marysville, OH (a) 564 2,459 -- 564 2,459 3,023
1030 Edgewood
Drive.......... Urbana, OH (b) 782 2,293 -- 782 2,293 3,075
3530 East Pike... Zanesville, OH (a) 1,002 4,685 -- 1,002 4,685 5,687
5555 Massillon
Road........... Green, OH (b) 1,573 6,309 -- 1,573 6,309 7,882
One Apollo
Drive.......... Glen Falls, NY (b) 1,933 11,129 -- 1,933 11,129 13,062
2294 Molly
Pitcher
Highway........ Chambersburg, PA (a) 1,894 19,661 -- 1,894 19,661 21,555
1440 Sheffler
Drive.......... Chambersburg, PA (b) 2,253 10,116 -- 2,253 10,116 12,369
1465 Nitterhouse
Drive.......... Chambersburg, PA (b) 3,191 11,944 -- 3,191 11,944 15,135
4400 West 96th
Street......... Indianapolis, IN 6,619 1,384 7,845 -- 1,384 7,845 9,229
6402 Corporate
Drive.......... Indianapolis, IN 6,079 1,250 7,424 -- 1,250 7,424 8,674
8677 Logo
Court.......... Indianapolis, IN 8,931 2,547 15,109 -- 2,547 15,109 17,656
Piedmont Highway.
Ind. Park...... Piedmont, SC (b) 1,310 7,433 -- 1,310 7,433 8,743
Highway 14
Industrial
Park........... Greer, SC (b) 790 4,483 -- 790 4,483 5,273
Buncombe Road
Ind. Park...... Greer, SC (b) 1,010 5,734 -- 1,010 5,734 6,744
Batesville Road
Ind. Park...... Greer, SC (b) 1,497 8,498 -- 1,497 8,498 9,995
Rocky Creek
Business Park.. Greenville, SC (b) 617 3,499 -- 617 3,499 4,116
Augusta Road Ind.
Park........... Greenville, SC (b) 1,129 6,405 -- 1,129 6,405 7,534
White Horse Road
Ind. Park...... Greenville, SC (b) 1,272 7,218 -- 1,272 7,218 8,490
------------- --------- --------- ------- --------- ------------- ---------
Subtotal
Industrial
Properties..... 68,926 54,028 257,177 68 54,028 257,245 311,273
<CAPTION>
ACCUMULATED YEAR DEPRECIABLE
DEPRECIATION BUILT/ LIVES
BUILDING ADDRESS 12/31/98 RENOVATED (YEARS)
- ----------------- ------------ ----------- ---------------
<S> <C> <C> <C>
Northeastern Ind.
Park Bldg.
22............. 75 1988 (d)
Marway Circle.... 47 1976-1977 (d)
16725 Square
Drive.......... 32 1987 (d)
1030 Edgewood
Drive.......... 45 1988 (d)
3530 East Pike... 58 1991 (d)
5555 Massillon
Road........... 60 1996 (d)
One Apollo
Drive.......... 106 1992 (d)
2294 Molly
Pitcher
Highway........ 51 1986 (d)
1440 Sheffler
Drive.......... 61 1996 (d)
1465 Nitterhouse
Drive.......... 86 1995 (d)
4400 West 96th
Street......... 19 1998 (d)
6402 Corporate
Drive.......... 17 1996 (d)
8677 Logo
Court.......... 34 1993 (d)
Piedmont Highway.
Ind. Park...... -- 1995/1997 (d)
Highway 14
Industrial
Park........... -- 1994/1997 (d)
Buncombe Road
Ind. Park...... -- 1988/1995 (d)
Batesville Road
Ind. Park...... -- 1970/1985 (d)
Rocky Creek
Business Park.. -- 1997 (d)
Augusta Road Ind.
Park........... -- 1996 (d)
White Horse Road
Ind. Park...... -- 1989/1997 (d)
------------
Subtotal
Industrial
Properties..... 3,546
</TABLE>
S-3
<PAGE>
<TABLE>
<CAPTION>
GROSS AMOUNT CARRIED
AT CLOSE OF PERIOD
COSTS
CAPITALIZED 12/31/98
INITIAL COSTS SUBSEQUENT TO ------------------------
LOCATION (C) -------------------- ACQUISITION OR BUILDING AND
BUILDING ADDRESS (CITY/STATE) ENCUMBRANCES LAND BUILDINGS COMPLETION LAND IMPROVEMENTS TOTAL
- ----------------- ------------------ ------------- --------- --------- ---------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other Properties
Urban Farms
Shopping
Center......... Franklin Lakes, NJ (b) 1,540 6,606 93 1,540 6,699 8,239
------------- --------- --------- ------- --------- ------------- ---------
Subtotal Other
Properties..... -- 1,540 6,606 93 1,540 6,699 8,239
------------- --------- --------- ------- --------- ------------- ---------
Total All
Properties..... 123,954 93,783 446,473 906 93,783 447,379 541,162
------------- --------- --------- ------- --------- ------------- ---------
------------- --------- --------- ------- --------- ------------- ---------
<CAPTION>
ACCUMULATED YEAR DEPRECIABLE
DEPRECIATION BUILT/ LIVES
BUILDING ADDRESS 12/31/98 RENOVATED (YEARS)
- ----------------- ------------ ----------- ---------------
<S> <C> <C> <C>
Other Properties
Urban Farms
Shopping
Center......... 202 1965/82 (d)
------------
Subtotal Other
Properties..... 202
------------
Total All
Properties..... 6,867
------------
------------
</TABLE>
- ------------------------
NOTES:
(a) Collateralizes the debt with Column Financial, Inc. of $94,779,000 at
December 31, 1998.
(b) Collateralizes the Company's Credit Facility
(c) See description of encumbrances in Item 1--Summary of Indebtedness
(d) Reconciliation of encumbrances as shown above to total consolidated debt,
excluding unamortized debt premium of $3,542, at December 31, 1998.
<TABLE>
<S> <C>
Amount shown above.......... $ 123,954
Credit Facility............. 123,830
Column Financial, Inc....... 94,779
---------
Total consolidated debt... $ 342,563
---------
---------
</TABLE>
(e) Depreciation is computed based on the following estimated lives:
<TABLE>
<S> <C>
Buildings and Improvements............ 35 years
Tenant/Leasehold Improvements......... Life of lease
Furniture, Fixtures and Equipment..... 5 to 10 years
</TABLE>
(f) At December 31, 1998, the aggregate cost of land, buildings and equipment
for federal income tax reporting was approximately $445,000,000.
Summary of Real Estate and Accumulated Depreciation Activity:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
<S> <C> <C> <C> <C>
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
---------- ------------- ---------- -------------
Balance at beginning of year.............................................. $ 153,143 $ 2,955 $ 46,193 $ 3,827
Property acquisitions..................................................... 418,835 -- 121,438 --
Capital improvements...................................................... 906 -- 1,152 --
Properties sold........................................................... (31,723) (2,838) (15,640) (1,781)
Depreciation expense...................................................... -- 6,750 -- 909
---------- ------ ---------- ------
Balance at end of year.................................................... $ 541,162 $ 6,867 $ 153,143 $ 2,955
---------- ------ ---------- ------
---------- ------ ---------- ------
</TABLE>
S-4
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheet as of December 31, 1998 and 1997........................... F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and
1996................................................................................ F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998,
1997, and 1996...................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and
1996................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of American Real Estate Investment Corporation:
We have audited the accompanying consolidated balance sheets of American
Real Estate Investment Corporation (a Maryland Corporation) and subsidiaries as
of December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These consolidated financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Real Estate
Investment Corporation and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule included
in Item 14 of the Company's Form 10-K is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 18, 1999
F-2
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
<S> <C> <C>
1998 1997
--------- ---------
ASSETS
INVESTMENT IN REAL ESTATE
Land and land improvements........................................................... $ 92,243 $ 23,336
Buildings and improvements........................................................... 440,680 98,102
Assets held for sale................................................................. 8,239 31,705
Investment in direct financing lease................................................. 1,707 1,920
--------- ---------
542,869 155,063
Less--Accumulated depreciation....................................................... (6,867) (2,955)
--------- ---------
Total investment in real estate, net................................................. 536,002 152,108
CASH AND CASH EQUIVALENTS.............................................................. 3,247 17,672
RESTRICTED CASH AND CASH ESCROWS....................................................... 2,100 5,007
ACCOUNTS RECEIVABLE.................................................................... 2,007 132
DEFERRED FINANCING COSTS, net of accumulated amortization of $616 and $6, December 31,
1998 and 1997........................................................................ 6,154 688
DEFERRED LEASING COSTS, net of accumulated amortization of $149 at December 31, 1998
only................................................................................. 1,614 782
INVESTMENT IN AMERICAN REAL ESTATE MANAGEMENT INC., at equity.......................... 5,207 4,377
OTHER ASSETS, net of accumulated amortization of $112 at December 31, 1997............. 3,035 189
--------- ---------
Total assets......................................................................... $ 559,366 $ 180,955
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgage notes payable and other debt, including unamortized debt premium of
$3,542............................................................................. $ 346,105 $ 86,501
Accounts payable..................................................................... 968 378
Accrued interest payable............................................................. 662 540
Accrued expenses and other liabilities............................................... 1,782 692
Accrued dividends and distributions.................................................. 3,713 --
Deferred rent revenue................................................................ 1,534 119
Accrued leasing commissions.......................................................... 895 782
Security deposits.................................................................... 566 650
--------- ---------
Total liabilities.................................................................. 356,225 89,662
--------- ---------
MINORITY INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP.............................. 88,205 39,364
--------- ---------
CONVERTIBLE PREFERRED UNITS, SERIES A, $.001 PAR VALUE; 300,000 UNITS OUTSTANDING at
December 31, 1998; liquidation preference of $7,500.................................. 7,500 --
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Convertible Preferred Stock, Series A; $.001 par value; 800,000 shares authorized,
issued and outstanding at December 31, 1998; liquidation preference of $20,000..... 1 --
Common stock, $.001 par value; 65,000,000 shares authorized; 7,391,765 and 5,363,281
shares issued and outstanding at December 31, 1998 and 1997........................ 7 5
Warrants............................................................................. 685 685
Additional paid-in capital........................................................... 104,324 51,726
Cumulative net income available for common shareholders.............................. 14,292 3,119
Cumulative dividends................................................................. (11,873) (3,606)
--------- ---------
Total shareholders' equity......................................................... 107,436 51,929
--------- ---------
Total liabilities and shareholders' equity......................................... $ 559,366 $ 180,955
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUE:
Minimum rent...................................................................... $ 36,332 $ 7,713 $ 9,943
Tenant reimbursements............................................................. 3,843 19 --
Other income...................................................................... 853 465 297
--------- --------- ---------
Total revenue................................................................... 41,028 8,197 10,240
--------- --------- ---------
OPERATING EXPENSES:
Property operating expenses....................................................... 8,814 3,112 4,350
General and administrative........................................................ 759 732 515
Depreciation and amortization..................................................... 6,911 909 1,366
Buyout of employment agreements, options and warrants............................. -- 3,203 --
Interest expense.................................................................. 14,539 3,134 3,897
--------- --------- ---------
Total operating expenses........................................................ 31,023 11,090 10,128
--------- --------- ---------
Income (loss) before equity in (losses) earnings from equity method investments,
gains on sales of assets, distributions to preferred unitholders and preferred
shareholders, minority interest of unitholders in Operating Partnership and
extraordinary item................................................................ 10,005 (2,893) 112
Equity in (losses) earnings from equity method investments.......................... (1,167) 404 570
Gains on sales of assets............................................................ 11,952 4,608 1,786
--------- --------- ---------
Income (loss) before distributions to preferred unitholders, and preferred
shareholders, minority interest of unitholders in Operating Partnership and
extraordinary item................................................................ 20,790 2,119 2,468
Distributions to preferred unitholders.............................................. (15) -- --
--------- --------- ---------
Income before minority interest of unitholders in Operating Partnership and
extraordinary item................................................................ 20,775 2,119 2,468
Minority interest of unitholders in Operating Partnership........................... (9,452) (876) (1,364)
Extraordinary loss on debt extinguishment, net of $110 allocated to minority
interest of unitholders in Operating Partnership.................................. 110 -- --
Income Allocated to Preferred Shares................................................ (40) -- --
--------- --------- ---------
Income Allocated to Common Shares................................................... 11,173 1,243 1,104
--------- --------- ---------
--------- --------- ---------
Earnings Per Common Share--Basic:
Income before extraordinary item.................................................... $ 1.79 $ .92 $ 1.00
Extraordinary Item.................................................................. (.02) -- --
--------- --------- ---------
Net Income Allocated to Common Shares............................................... $ 1.77 $ .92 $ 1.00
--------- --------- ---------
--------- --------- ---------
Earnings Per Common Share--Diluted:
Income before extraordinary item.................................................... $ 1.75 $ .88 $ 1.00
Extraordinary item.................................................................. (.02) -- --
--------- --------- ---------
Net Income Allocated to Common Shares............................................... $ 1.73 $ .88 $ 1.00
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ---------------------- DEFERRED PAID-IN
SHARES AMOUNT SHARES AMOUNT WARRANTS COMPENSATION CAPITAL
--------- --------- --------- ----------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1996... $ -- 1,096,004 $ 1 $ -- $ -- $ 5,159
Net income................ -- -- -- -- --
Dividends paid ($.85 per
share).................. -- -- -- -- --
Common stock issued for
services provided....... 6,176 -- -- -- 53
Common stock issued to
officers and
directors............... 19,450 -- -- -- 162
--------- --------- --------- ----- ----- ------- -----------
BALANCES, DECEMBER 31,
1996...................... $ -- 1,121,630 $ 1 $ -- -- $ 5,374
Net income................ -- -- -- -- --
Dividends paid ($.87 per
share).................. -- -- -- -- --
Common stock issued for
cash, net of $870 of
issuance costs.......... 1,963,635 2 -- -- 20,728
Common stock issued to
officers and
directors............... 9,378 -- -- -- 99
Common stock issued for
FLIP net assets......... 2,001,132 2 -- -- 22,010
Common stock issued to
terminate employment
agreements and
options................. 171,266 -- -- -- 2,536
Common stock issued for OP
Unit conversions........ 96,240 -- -- -- 979
Warrants issued........... -- -- 685 -- --
--------- --------- --------- ----- ----- ------- -----------
BALANCES, DECEMBER 31,
1997...................... -- $ -- 5,363,281 $ 5 $ 685 $ -- $ 51,726
Net income................ -- -- -- -- -- -- --
Dividends paid ($.97 per
share).................. -- -- -- -- -- -- --
Dividends declared........ -- -- -- -- -- -- --
Common stock issued net of
$1,042 of issuance
costs................... -- -- 1,812,794 2 -- -- 28,459
Restricted Common Stock
issued.................. -- -- 37,242 -- -- (540) 540
Common stock issued for
stock options
exercised............... -- -- 38,500 -- -- -- 385
Common stock issued for OP
Unit conversions........ -- -- 139,948 -- -- 1,631 --
Adjustment for minority
interest of Unitholders
in Operating Partnership
at dates of capital
transactions............ -- -- -- -- -- -- 2,815
Issuance of convertible
Preferred Stock, net of
$692 in issuance
costs................... 800,000 1 -- -- -- -- 19,308
--------- --------- --------- ----- ----- ------- -----------
BALANCES, December 31,
1998...................... 800,000 $ 1 7,391,765 $ 7 $ 685 $ (540) $ 104,864
--------- --------- --------- ----- ----- ------- -----------
--------- --------- --------- ----- ----- ------- -----------
<CAPTION>
RETAINED
EARNINGS/ TOTAL
(ACCUMULATED SHAREHOLDERS
DEFICIT) EQUITY
--------------- -------------
<S> <C> <C>
BALANCES, JANUARY 1, 1996... $ (906) $ 4,254
Net income................ 1,104 1,104
Dividends paid ($.85 per
share).................. (943) (943)
Common stock issued for
services provided....... -- 53
Common stock issued to
officers and
directors............... -- 162
------ -------------
BALANCES, DECEMBER 31,
1996...................... $ (745) $ 4,630
Net income................ 1,243 1,243
Dividends paid ($.87 per
share).................. (985) (985)
Common stock issued for
cash, net of $870 of
issuance costs.......... -- 20,730
Common stock issued to
officers and
directors............... 99
---
Common stock issued for
FLIP net assets......... -- 22,012
Common stock issued to
terminate employment
agreements and
options................. -- 2,536
Common stock issued for OP
Unit conversions........ -- 979
Warrants issued........... -- 685
------ -------------
BALANCES, DECEMBER 31,
1997...................... $ (487) $ 51,929
Net income................ 11,173 11,173
Dividends paid ($.97 per
share).................. (6,308) (6,308)
Dividends declared........ (1,959) (1,959)
Common stock issued net of
$1,042 of issuance
costs................... -- 28,461
Restricted Common Stock
issued.................. -- --
Common stock issued for
stock options
exercised............... -- 385
Common stock issued for OP
Unit conversions........ 1,631
Adjustment for minority
interest of Unitholders
in Operating Partnership
at dates of capital
transactions............ -- 2,815
Issuance of convertible
Preferred Stock, net of
$692 in issuance
costs................... -- 19,309
------ -------------
BALANCES, December 31,
1998...................... $ 2,419 $ 107,436
------ -------------
------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................................ $ 11,173 $ 1,243 $ 1,104
Adjustments to reconcile net income to net cash Provided by operating activities--
Depreciation and amortization................................................... 7,554 909 1,366
Amortization of debt premium.................................................... (221) -- --
Gain on sales of property....................................................... (11,952) (4,608) (1,786)
Extraordinary loss.............................................................. 110 -- --
Increase in straight line rents................................................. (1,282) -- --
Decrease in investment in direct financing lease................................ 213 -- --
Buyout of employment agreements and options..................................... -- 2,536 --
Equity in losses (earnings) from equity method investments...................... 1,167 (404) (570)
Amortization of investment in partnership in excess of underlying equity........ -- 356 530
Common stock compensation....................................................... -- 41 162
Minority interest............................................................... 9,452 876 1,364
Cash provided by (used in)--
Restricted cash............................................................... 367 (11) 50
Accounts receivable........................................................... (593) (11) 17
Other assets.................................................................. (2,734) 314 45
Accrued interest.............................................................. 122 283 69
Accrued property taxes........................................................ -- -- (43)
Accrued expenses and other liabilities........................................ 1,680 652 (33)
Deferred rent revenue......................................................... 1,415 -- --
Security deposits............................................................. (84) (89) (21)
--------- --------- ---------
Net cash provided by operating activities..................................... 16,387 2,087 2,254
--------- --------- ---------
INVESTING ACTIVITIES:
Properties acquired, net of cash acquired......................................... (300,757) (17,933) --
Advances to American Real Estate Management Inc................................... (1,997) (150) --
Capital expenditures.............................................................. (906) (1,152) (566)
Payments of leasing commissions................................................... (981) -- --
Increase (decrease) in cash escrows............................................... 2,540 (3,764) --
Proceeds from sales of property, net.............................................. 41,001 19,840 2,907
Partnership cash distributions received........................................... -- 25 230
--------- --------- ---------
Net cash (used in) provided by investing activities........................... (261,100) (3,134) 2,571
--------- --------- ---------
FINANCING ACTIVITIES:
Issuance of common stock for stock options exercised.............................. 385 -- --
Issuances of common and convertible preferred stock, net of issuance costs........ 36,748 $ 20,780 --
Dividends paid.................................................................... (6,308) (985) (943)
Minority interest distributions................................................... (4,994) (688) (675)
Proceeds from mortgage notes payable.............................................. 137,064 9,200 --
Net borrowings under Credit Facility.............................................. 123,830 -- --
Payment of deferred financing costs............................................... (6,326) (694)
Repayment of mortgage notes payable............................................... (50,111) (10,236) (322)
Repayment of other notes payable.................................................. -- -- (83)
Repayment of other notes payable from sale........................................ -- -- (2,096)
--------- --------- ---------
Net cash provided by (used in) financing activities........................... 230,288 17,377 (4,119)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................ (14,425) 16,330 706
CASH AND CASH EQUIVALENTS, beginning of year........................................ 17,672 1,342 636
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year.............................................. $ 3,247 $ 17,672 $ 1,342
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.............................................................. $ 14,091 $ 3,188 $ 3,084
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
</TABLE>
See Notes 3, 4 and 5 for disclosure of non-cash investing and financing
activities in 1998 and 1997.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND FORMATION OF THE COMPANY
American Real Estate Investment Corporation (the "Company") is a
self-administered and self-managed equity real estate investment trust ("REIT")
that was organized in the state of Maryland in 1994. The Company was previously
engaged in the ownership and operation of multi-family residential properties
located in the southwestern United States. As a result of the transactions
consummated on December 12, 1997 (the "Reorganization")(see Note 3), the Company
modified it's strategy to focus on the acquisition of industrial and office
properties located in the eastern United States. During 1998, the Company
completed its plan to dispose of all of it's multi-family properties.
As of December 31, 1998 the Company owns 97 office and industrial properties
located in southeastern and central Pennsylvania, northern New Jersey, northern
New York State, Ohio, Indianapolis, Indiana, and Greenville and Spartanburg,
South Carolina containing an aggregate of approximately 12,000,000 square feet
and which have an overall occupancy of 98%; a community shopping center located
in northern New Jersey and an investment in a direct financing lease related to
a property located in northern New Jersey. The Company conducts all of its
service operations, including leasing, property management and other services
through an equity investee of American Real Estate Investment, L.P. (the
"Operating Partnership"), American Real Estate Management, Inc. (the "Management
Company"), which was acquired as part of the Reorganization.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The Company is the sole general partner of the Operating Partnership with an
ownership interest of approximately 53% as of December 31, 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 on a
consolidated basis. All significant intercompany accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
INVESTMENT IN REAL ESTATE
Investment in real estate is recorded at cost and depreciated over the
estimated useful lives of the related assets. Expenditures for additions,
renewals and betterments that extend the useful life of the properties are
capitalized. Routine maintenance and repairs are charged to expense as incurred.
The estimated useful lives of the assets are as follows:
<TABLE>
<CAPTION>
YEARS
--------------
<S> <C>
Buildings and improvements.................................................... 10-35
Land improvements............................................................. 15
Tenant improvements........................................................... Applicable
Lease Term
</TABLE>
F-7
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Company accounts for properties as assets held for sale when they have
committed to a formal plan of disposition. The Company reports its assets to be
disposed of at the lower of carrying value or fair value less the cost to sell
the related asset. As of December 31, 1998, the community shopping center
located in New Jersey has been presented in the accompanying consolidated
balance sheet as held for sale. In accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"), the
Company has suspended depreciation charges on assets held for sale since the
disposition plans were adopted.
In accordance with SFAS No. 121, the Company assesses its assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of a respective asset that the Company expects to hold and use
may not be recoverable. In performing the review for recoverability, the Company
estimates the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, the Company will recognize an impairment loss. The impairment loss is
measured as the amount that the carrying value of the asset exceeds the fair
value of the asset. Estimates of fair value are based on quoted market prices in
active markets or, if quoted market prices are not available, the best
information available in the circumstances, such as the present value of
estimated expected future cash flows. Based upon management's review, no such
provisions were necessary in 1998, 1997 or 1996.
At December 31, 1998 and 1997, the Company has an investment in a direct
financing lease, the net investment in this lease was $1,707,000 and $1,920,000
which consists of the gross investment of $2,625,000 and $3,150,000, net of
unearned income of $918,000 and $1,230,000, respectively. The unearned income is
amortized over the lease term as annual rent payments are collected in order to
produce a constant periodic rate of return on the net investment in this lease.
EQUITY METHOD INVESTMENTS
The equity method of accounting is used to account for the Company's
noncontrolling interest in 100% of the preferred stock of the Management
Company. The Company sold its non controlling general partner interest in
Emerald Vista Associates, L.P. in September 1997, as part of its strategy to
sell its interest in multifamily assets.
In December 1998, the Company entered into an agreement to develop 457 acres
of land located in Indianapolis, Indiana. The terms of the agreement give the
Company an option and right of first refusal to develop distinct land parcels
through joint ventures in which the Company will have a 50% noncontrolling
interest. The Company's investment was recorded at the Company's cost and will
be subsequently adjusted for the Company's net equity in income and
contributions and distributions from the joint venture in accordance with the
equity method of accounting.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
For purposes of reporting cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents. Restricted cash represents security deposits from
tenants and amounts in escrow for payment of property taxes, insurance or
capital improvements.
F-8
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
DEFERRED FINANCING AND LEASING COSTS
Deferred financing costs are amortized on a straight-line basis over the
life of the related mortgage loans which approximates the effective interest
method. Amortization is included in interest expense in the accompanying
statements of operations. Deferred leasing costs, which include all direct and
indirect costs associated with the rental of the Company's properties, are
amortized on a straight-line basis over the term of the related leases.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of current assets and payables approximate their carrying amount
due to their short-term nature. The carrying amounts of the mortgage notes
payable at December 31, 1998 and 1997 approximated their respective fair values,
as determined by using year end interest rates and market conditions.
ALLOCATIONS OF INCOME AND LOSSES
Net income and losses of the Operating Partnership are allocated to the
Company and limited partners in accordance with their respective ownership
interests which were approximately 53% and 47%, respectively, at December 31,
1998. For the periods prior to the restatement of the partnership agreement in
connection with the Reorganization, the net income of the Operating Partnership
for each year was allocated as follows: an amount representing 80% of the number
of common shares outstanding at the end of each calendar year (equivalent to
approximately $904,000 and $897,000, respectively, for 1997 and 1996) was
allocated to the Company. Any remaining net income for each such year was then
allocated to the limited partners until the cumulative net income allocated to
the limited partners for the current and all prior years was equal to
approximately 42% of total cumulative net income since inception. Net losses of
the Operating Partnership are allocated to all the partners in proportion to
their percentage interests in accordance with the terms of the amended and
restated partnership agreement.
REVENUE RECOGNITION
Revenue is recognized on the accrual basis of accounting. Rental income
under leases in excess of one year in length is recognized using the
straight-line method under which contractual rent increases are recognized
evenly over the lease term. Tenant reimbursements are accrued as revenue in the
same period the related expenses are incurred by the Company.
INCOME TAXES AND OTHER
The Company elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code and applicable Treasury Regulations, commencing with
its taxable year ended December 31, 1993. The Company believes that it is
organized and will continue to operate in such a manner as to qualify for
taxation as a REIT under the Internal Revenue Code.
A REIT is generally not subject to federal income taxes on that portion of
its ordinary income or capital gain that is currently distributed to
shareholders as the REIT provisions of the Internal Revenue Code generally allow
a REIT to deduct dividends paid to its shareholders to the extent it distributes
annually at least 95% of its taxable income and satisfies certain other
requirements. Accordingly, no provision has been made for federal income taxes
in the accompanying consolidated financial statements. If the Company fails to
qualify as a REIT in any taxable year, the Company will be subject to federal
F-9
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
income tax at regular corporate rates on its taxable income. The Company and
certain of its subsidiaries are subject to certain state and local taxes. The
provision for these taxes has been reflected in general and administrative
expense in the accompanying financial statements. The Management Company is
subject to federal, state and local taxes on its income as it is organized as a
"C" corporation.
A summary of the tax status of the Company's distributions for the three
years ended December 31 is as follows:
<TABLE>
<CAPTION>
COMMON SHARE DISTRIBUTIONS 1998 1997 1996
- ---------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Total dividends paid per share (1).............................. $ .97 $ .87 $ .85
Percent taxable as ordinary income.............................. 100.00% 6.92% 61.12%
Percent taxable as long term capital gains...................... 0.00% .28% 0.00%
Percent non-taxable as return of capital........................ 0.00% 92.80% 38.88%
Classified as ordinary income--per share (1).................... $ 1.14 $ .06 $ .52
Classified as return of capital--per share...................... $ -- $ .81 $ .33
PREFERRED SHARE DISTRIBUTIONS
- ----------------------------------------------------------------
Distributions declared (2)...................................... $ 40,000 -- --
</TABLE>
- ------------------------
(1) The Company reported that $.17 or approximately 64% of the dividend declared
on December 11, 1998 with a record date of December 31, 1998 which was paid
on January 29, 1999, is taxable in 1998 in accordance with Internal Revenue
Code section 857(b)(8). The remaining $.10 of the dividend will be reported
to shareholders as a 1999 distribution.
(2) Preferred share distributions of $.05 per share for the period from December
24, 1998 until December 31, 1998.
There are differences in the Company's bases of assets and liabilities,
specifically relating to minority interests, between those used in financial
reporting and the tax basis used for completion of annual federal and state
income tax returns. The federal tax basis of the Company's real estate at
December 31, 1998 and 1997 was approximately $445,000,000 and $87,000,000,
respectively.
EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standard No.
128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 established simplified
standards for computing and presenting earnings per share ("EPS") and supercedes
the standards in Accounting Principles Board ("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. EPS
for 1996 has been restated to reflect the requirements of SFAS No. 128.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 consolidated financial statements have
been reclassified in order to conform with the presentation in the 1998
consolidated financial statements.
F-10
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FUTURE ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") is effective for
fiscal years beginning after June 15, 1999. SFAS No. 133 expands the definition
of derivatives and requires every derivative to be recorded on the balance sheet
as either an asset or liability measured at its fair value. It requires that
companies must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 requires that changes
in the derivative's fair value be recognized in the applicable financial
reporting period in earnings unless specific hedge criteria are met. At December
31, 1998, the Company does not have any investments in derivative products, as a
result, the impact of adopting SFAS No. 133, is not determinable. The Company is
planning to adopt SFAS No. 133 beginning January 1, 2000.
3. ACQUISITIONS AND DISPOSITIONS OF REAL ESTATE INVESTMENTS
1998 TRANSACTIONS
During 1998, the Company acquired 78 properties (24 office properties and 54
industrial properties) which contained an aggregate of approximately 9.9 million
square feet (1.5 million square feet of office and 8.4 million square feet of
industrial) for an aggregate purchase price of approximately $418,000,000.
Consideration for these acquisitions consisted of cash of approximately
$300,000,000, $49,000,000 of debt assumed (including debt premiums of
$3,763,000), $51,000,000 in units of limited partnership interest ("OP Units")
in the Operating Partnership, issued at prices ranging from $16.50 to $17.50 per
unit, $7,500,000 in Convertible Preferred OP Units, and the issuance of
$11,000,000 of Common Stock. The 300,000 Convertible Preferred OP Units issued
are convertible into Common Stock at $16.50 and require a quarterly guaranteed
payment at the annual rate of 9%. These Convertible Preferred OP Units are
redeemable by the Company at par at any time.
In 1998, the Company sold the two remaining multi-family properties
(Americana Lakewood Apartments and Quadrangle Village Apartments) which
generated net proceeds of $41,001,000 and gains of $11,952,000. The net proceeds
from these asset sales were reinvested in industrial and office acquisitions in
1998.
The following unaudited pro forma financial information of the Company for
the years ended December 31, 1998 and 1997 gives effect to the properties
acquired and sold during 1998 as if the purchases and sale had occurred on
January 1, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
(UNAUDITED)
Pro forma total revenue............................................................ $ 71,834,000 $ 67,331,000
Pro forma net income allocated to Common Shares.................................... $ 6,365,000 $ 5,479,000
Pro forma net income per Common Share--Basic....................................... $ .86 $ .74
--Diluted..................................... $ .82 $ .71
</TABLE>
1997 TRANSACTIONS
On December 12, 1997, the Company consummated the acquisition of the McBride
Portfolio which was effected through the contribution by McBride Hudson Bay,
L.P. and various entities affiliated with it
F-11
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITIONS OF REAL ESTATE INVESTMENTS (CONTINUED)
(collectively, "McBride") of interests in certain entities owning 15 office and
industrial properties located in northern New Jersey, the merger of Fairlawn
Industrial Park, Inc. ("FLIP") with and into the Company and $8,400,000 in cash
in return for the issuance of 2,001,132 shares of common stock, 2,998,867 OP
Units, (representing aggregate consideration valued at approximately
$55,000,000), 125,000 of seven-year warrants to acquire OP Units at an exercise
price of $11 per OP Unit and the assumption of $45,000,000 of mortgage debt. The
Company also acquired all of the outstanding preferred stock of the Management
Company, a full service real estate management, construction and brokerage
company located in Plymouth Meeting, Pennsylvania in consideration for the
issuance of 363,636 OP Units valued at $4,000,000, and warrants with a
seven-year term to acquire 250,000 OP Units at an exercise price of $11 per OP
Unit.
In December 1997, the Company, through its Operating Partnership, also
acquired six industrial properties aggregating approximately 850,000 square
feet. The aggregate purchase price for these acquisitions was $28,580,000,
consisting of $12,600,000 in cash and $15,980,000 in debt assumed, which
included $680,000 of debt premiums.
Simultaneous with these transactions, Hudson Bay Partners II, L.P. ("Hudson
Bay"), CRA Real Estate Securities and Robert Branson, a director of the Company,
invested an aggregate of $21,600,000 in the Company in return for the issuance
of an aggregate of 1,963,635 shares of common stock. In addition, Hudson Bay was
issued 300,000 common stock warrants in the Company with a seven-year term at an
exercise price of $11 per share. Hudson Bay is a discretionary investment fund
formed to make strategic investments in real estate and real estate related
securities.
The Company sold two multi-family properties (Timberleaf and Sedona
Apartments) in 1997 and its 50% general partnership interest in Emerald Vista
which generated net proceeds of $19,840,000 and gains totaling $4,608,000.
The following unaudited pro forma financial information of the Company for
the years ended December 31, 1997 gives effect to the properties acquired during
1997 as if the purchases had occurred on January 1, 1997 and January 1, 1996,
respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
Pro forma total revenues........................................................... $ 26,327,000 $ 25,491,000
Pro forma net income (loss) allocated to Common Shares............................. $ 4,059,000 $ 3,155,000
Pro forma net income (loss) per Common Share--Basic................................ $ 0.76 $ 0.60
--Diluted................................ $ 0.75 $ 0.60
</TABLE>
All acquisitions described above were accounted for by the purchase method.
The results of operations for each of the acquired properties have been included
from the respective purchase dates. All pro forma financial information
presented within this footnote is unaudited and is not necessarily indicative of
the results that actually would have occurred if acquisitions had been
consummated on the respective dates indicated, nor does the pro forma
information purport to represent the results of operations for future periods.
F-12
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS IN UNCONSOLIDATED COMPANIES
The Company accounts for its investment in 100% of the nonvoting preferred
stock of the Management Company in accordance with the equity method of
accounting. The Company is entitled to receive 95% of the amounts paid as
dividends by the Management Company. The Management Company is responsible for
various activities including the management, leasing and development of the
Company's properties and properties owned by third parties as well as providing
other real estate related services for third parties.
In December 1998, the Company entered into an agreement to develop 457 acres
of land located outside Indianapolis, Indiana. The terms of the agreement give
the Company an option and right of first refusal until December 13, 2003 to
develop distinct land parcels through joint ventures in which the Company will
have a 50% non controlling interest. As consideration for its investment in each
joint venture the Company will issue OP Units to its joint venture partner based
upon a predetermined formula that is based on the number of acres in the
specific development parcel. In addition, the Company will be required to fund
its 50% share of any additional capital requirements for each venture. The
Company is also required to make option payments on a quarterly basis at a rate
equal to its then current distribution rate to unitholders in the Operating
Partnership for the OP Units that have yet not been issued in consideration for
interests in specific joint ventures. On the earlier of December 31, 2003 or the
date in which the Company acquires a 50% interest in at least 75% of the 457
acres of land, the joint venture partner has an option to require the Company to
purchase a 50% interest in the then remaining undeveloped land. As of December
31, 1998, the Company had incurred $30,000 related to this option.
At December 31, 1998, OP Units equivalent to approximately $200,000 have
been issued related to this venture's development of a 495,740 square foot
office and industrial building on 34 acres. In conjunction with this development
the Company agreed to jointly and severally coguarantee $19.5 million of
construction financing, and contribute $2,500,000 of capital. The Company also
has a commitment to acquire the building from the joint venture at the
completion of its construction which is anticipated to be in the first quarter
of 2000 for $28,561,000. This purchase price will be funded by assumption of the
$19,500,000 in debt, the issuance of OP Units and cash payments not to exceed
$2,000,000.
The Company accounts for this investment in accordance with the equity
method of accounting as the joint venture partner's approval is required for all
major decisions and the joint venture partner has equal control regarding the
primary daily operations of the venture.
5. INDEBTEDNESS
REVOLVING CREDIT FACILITY
On April 30, 1998 the Company obtained a three year $150,000,000 senior
secured revolving credit facility (the "Credit Facility"). At December 31, 1998,
the Company has $123,830,000 outstanding related to the Credit Facility. The
Credit Facility is recourse to the Company and the Operating Partnership and is
secured by cross-collateralized and cross-defaulted first mortgage loans on 53
properties. Borrowings under the Credit 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% (7.39% at December 31, 1998) or the prime rate at the Company's
option. In addition, a fee of .25% per annum on the unused amount of the Credit
Facility is payable quarterly. The weighted average balance outstanding and
weighted average interest rate during 1998 for borrowings under the Credit
Facility were $77,784,000 and 7.39%, respectively. The Credit Facility requires
the Company to meet
F-13
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INDEBTEDNESS (CONTINUED)
certain financial covenants on a quarterly, annual and ongoing basis. The
Company is in compliance with these debt covenants at December 31, 1998.
MORTGAGE NOTES PAYABLE
Mortgage notes of $218,733,000 and $86,501,000 encumbered 45 and 17 of the
properties as of December 31, 1998 and 1997, respectively. At December 31, 1998
and 1997, interest rates on the mortgage loans ranged from fixed rates of 7.03%
to 9.75% and 6.35% to 8.50%, respectively. Mortgage notes had weighted average
interest rates of 7.75%, 7.61% and 7.87% at December 31, 1998, 1997 and 1996,
respectively. The maturities for these notes range from September 2000 through
October 2022.
In connection with several acquisitions in 1998 and 1997 the Company assumed
certain mortgage notes with an aggregate principal value of $49,141,000 and a
fair value of $52,904,000. The difference between the principal value and the
fair value was recorded as a debt premium. The debt premium is being amortized
into interest expense over the term of the related mortgage debt. In 1998,
$221,000 was amortized into interest expense related to this debt premium.
Certain limited partners of the Operating Partnership have guaranteed an
aggregate of $83,200,000 of certain of the mortgage loans as of December 31,
1998.
In October 1998, the Company refinanced $66,000,000 of amounts borrowed
under the Credit Facility and $8,430,000 of other mortgage debt with $77,700,000
of mortgage debt with a fixed rate of 7.50%. As a result of this refinancing,
the Company wrote off $220,000 of unamortized deferred financing costs
associated with this mortgage debt as an extraordinary loss on debt
extinguishment.
As a condition of certain of the mortgage loans, initial and ongoing cash
reserves are required to be funded for real estate taxes, insurance, tenant
rollover costs and capital reserves. The aggregate balances in these reserve
accounts at December 31, 1998 and 1997 were approximately $2,100,000 and
$330,000.
Maturities of mortgage notes payable, excluding debt premiums as of December
31, 1998, are as follows:
<TABLE>
<S> <C>
1999.......................................................... $ 3,151,000
2000.......................................................... 6,048,000
2001.......................................................... 128,993,000
2002.......................................................... 10,917,000
2003.......................................................... 7,587,000
2004 and thereafter........................................... 185,867,000
-----------
$342,563,000
-----------
-----------
</TABLE>
F-14
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SHAREHOLDER'S EQUITY
The following table summarizes the Company's issuance of shares of
Convertible Preferred Common Stock, Common Stock, and warrants in 1998 and 1997:
<TABLE>
<CAPTION>
NUMBER OF
CONVERTIBLE
DATE OF PREFERRED NUMBER OF
TYPE OF ISSUANCE ISSUANCE SHARES COMMON SHARES SHARE PRICE
- ----------------------------------------------------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
1998 Activity
Convertible Preferred Stock offering (1)............. 12/24/98 800,000 -- $ --
Restricted Stock Awards(2)........................... 12/11/98 -- 37,242 --
Stock offering (3)................................... 8/19/98 -- 720,743 $ 15.81
Stock offering (4)................................... 7/9/98 -- 1,092,051 $ 16.50
Unit redemptions (5)................................. Various -- 139,948 --
Stock options exercised.............................. Various -- 38,500 --
----------- ---------------
800,000 2,028,484
----------- ---------------
----------- ---------------
</TABLE>
<TABLE>
<CAPTION>
NET
NUMBER OF EXERCISE CASH
TYPE OF ISSUANCE WARRANTS PRICE PROCEEDS
- ---------------------------------------------------------------------------- ------------- ----------- -------------
<S> <C> <C> <C>
1998 Activity
Convertible Preferred Stock offering (1).................................... -- -- $ 19,308,000
Restricted Stock Awards(2) -- -- --
Stock offering (3).......................................................... -- -- --
Stock offering (4).......................................................... -- -- 17,440,000
Unit redemptions (5)........................................................ -- -- --
Stock options exercised..................................................... -- $ 10.00 385,000
--- -------------
-- $ 37,133,000
--- -------------
--- -------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
CONVERTIBLE
DATE OF PREFERRED NUMBER OF
TYPE OF ISSUANCE ISSUANCE SHARES COMMON SHARES SHARE PRICE
- ----------------------------------------------------- --------------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
1997 Activity
Share Offering (6)................................... 12/12/97 -- 1,963,635 $ 11.00
Stock issuance for FLIP net assets (7)............... 12/12/97 -- 2,001,132 $ 11.00
Stock issuance to terminate employment agreements and
options (8)........................................ 12/12/97 -- 171,266 --
Stock issuance to officers and directors............. Various -- 4,378 --
Unit redemptions (5)................................. Various -- 96,240 --
Stock options exercised.............................. 12/2/97 -- 5,000 --
--- ---------------
Totals for 1997...................................... -- 4,241,651
--- ---------------
--- ---------------
</TABLE>
F-15
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDER'S EQUITY (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
TYPE OF ISSUANCE WARRANTS PRICE NET CASH PROCEEDS
- ------------------------------------------------------------------------ ----------- ----------- -----------------
<S> <C> <C> <C>
1997 Activity
Share Offering (6)...................................................... 300,000 $ 11.00 $ 20,730,000
Stock issuance for FLIP net assets (7).................................. -- -- --
Stock issuance to terminate employment agreements and options (8)....... -- -- --
Stock issuance to officers and directors................................ -- -- --
Unit redemptions (5).................................................... -- -- --
Stock options exercised................................................. -- $ 10.00 50,000
----------- -----------------
Totals for 1997......................................................... 300,000 $ 20,780,000
----------- -----------------
----------- -----------------
</TABLE>
- ------------------------
(1) Offering for 800,000 shares of nonvoting Series A Convertible Preferred
Stock, par value $.001 per share, with a liquidation preference of $25.00
per share. These shares are convertible into Common Stock at any time at
$16.50 per share. Dividends are payable quarterly at an annual rate of $2.25
per Series A Preferred Share. The Series A Preferred Shares are not
redeemable by the Company prior to December 15, 2003.
(2) These awards were issued to certain executives and employees and vest over a
two-year period from the grant date.
(3) These shares were issued as a partial repayment for certain indebtedness
encumbering certain properties in the Pioneer Portfolio which was acquired
on August 19, 1998.
(4) Investors were institutional investors and certain funds managed by Morgan
Stanley Asset Management, Inc. and CRA Real Estate Securities, L.P. This
private placement included provisions for a purchase price adjustment on the
earlier of the first business day after the first anniversary of the closing
or the first business day after a Liquidating Event, as defined in the
agreement, has occurred and the average price of the Company's Common Stock
for a 30-day period preceding such date is greater than $19.50 or less than
$15.50 per share. In the event the average price is less than $15.50, the
Company is required to deliver to the purchasers cash in an amount equal to
(i) the difference between $15.50 and the average price, multiplied by (ii)
the number of shares of Common Stock purchased. In the event the average
price is greater than $19.50, the purchasers are required to deliver to the
Company the number of shares of Common Stock equal to (i) the difference
between the average price and $19.50, divided by (ii) the average price,
multiplied by(iii) the number of shares of Common Stock purchased in the
private placement.
(5) Unit redemptions represent Common stock issued upon conversion of OP Units.
(6) These share offering included the issuance of shares of Common Stock to
Robert Branson and Hudson Bay II, L.P. Mr. Branson and one of the principals
of Hudson Bay Partners II, L.P. are directors of the Company.
(7) As discussed in Note 3, FLIP was merged into the Company as a result of the
transactions with McBride.
F-16
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDER'S EQUITY (CONTINUED)
(8) As discussed in Notes 9 and 11, these shares were issued as consideration
for the termination of various options and employment agreements with
certain individuals who ceased to be executive officers of the Company on
December 12, 1997.
7. RELATED PARTY TRANSACTIONS
The Company subleases office space in Denver, Colorado from Black Creek
Capital, LLC. The lease agreement contains provisions for a monthly lease
payment of $1,346 and expires December 31, 1999. Two directors of the Company
are principal officers and members of Black Creek Capital, LLC.
The Company has leases with companies in which directors of the Company are
officers and shareholders. The annual aggregate base rental revenue under these
leases was approximately $1,070,000 at December 31, 1998.
The Company incurred costs during 1998 related to capital and tenant
improvements of $397,000, leasing commissions of $92,000, repair and maintenance
costs and other costs of $55,000 which were earned by the companies in which the
Company's Chairman and one of its directors are officers and shareholders.
Through the Operating Partnership's 100% ownership of the preferred stock of
the Management Company, the Operating Partnership is entitled to receive 95% of
the amounts paid as dividends by the Management Company. The remaining amounts
paid as dividends by the Management Company are paid to the holders of common
stock of the Management Company. Jeffrey E. Kelter, Hudson Bay Partners, L.P.
and McBride own 40%, 30% and 30%, respectively, of the common stock of the
Management Company. No dividends were paid by the Management Company in 1998 or
1997. Total management fees paid by the Operating Partnership's properties to
the Management Company are included in property operating expenses in the
accompanying statements of operations and amounted to $1,119,000 during 1998.
The Management Company also receives reimbursements of certain costs
attributable to the operation of the properties. Such reimbursements are
included in property operating expenses in the accompanying statements of
operations and amounted to $294,000 during 1998. The Company also incurred
$84,000 of leasing commissions in 1998 related to service performed by the
Management Company. No management fees, other reimbursements or leasing
commissions were incurred in 1997. The Management Company also manages two
properties which are owned by entities, other than the Company, in which Mr.
Kelter has a general partnership interest. Certain executives of the Company are
also limited partners in one of these entities.
F-17
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. OPERATING LEASES
The Company's properties are leased to tenants generally under operating
leases with expiration dates extending through 2015. Future minimum rentals
under noncancellable operating leases, excluding tenant reimbursements of
operating expenses as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999.......................................................... $61,771,000
2000.......................................................... $53,050,000
2001.......................................................... $42,155,000
2002.......................................................... $34,201,000
2003.......................................................... $29,769,000
Thereafter.................................................... $112,279,000
</TABLE>
The revenue resulting from straight-line rental income adjustments for the
year ended December 31, 1998 was $1,282,000. No straight line rent revenue was
recognized in 1997. No tenant represented more than 10% of the minimum rental
revenues for 1998, 1997 and 1996.
9. STOCK OPTIONS, STOCK WARRANTS AND CONVERSION RIGHTS
STOCK OPTIONS AND RESTRICTED STOCK AWARDS
The Company's Omnibus Incentive Plan (the "Plan"), as amended in 1998, has
authorized the grant of compensatory awards consisting of stock options, stock
awards, stock appreciation rights and other stock-based awards representing up
to 10% of the combined number of shares of Common Stock and OP Units of the
Operating Partnership to certain officers and employees. Incentive stock
options, are to be granted at not less than the fair market value of the
Company's stock on the date of the grant and the term cannot exceed ten years.
The vesting period of each grant varies and is determined at the date of grant.
During 1998, the Company granted 156,250 incentive stock options and 447,500
nonqualified options to certain executive officers and employees. Each option is
exchangeable for one share of the Company's Common Stock and has an exercise
price ranging from $14.50 to $16.50, the Company's market price at the grant
date. These options have a ten-year term and vest pro-rata in annual
installments ranging from two to five years from the grant date.
In December 1998, the Company issued 37,242 shares of restricted Common
Stock to certain executives and employees under the Plan as compensation. These
shares carry dividend and voting rights and vest over a two-year period. The
shares issued under this Plan were recorded at their fair market value on the
date of grant with a corresponding charge of $540,000 to shareholders' equity
which was recorded in additional paid-in capital. The unearned portion is
amortized to compensation expense over the two-year vesting period.
In 1994, the Company adopted and authorized the Non-Employee Stock Option
Plan (the "Non-Employee Plan") and 300,000 shares were authorized thereunder in
the form of nonqualified stock options for issuance to certain directors or
consultants. The exercise price for each option granted under the Non-Employee
Plan cannot be less than the fair market value of the Company's Common Stock
underlying the option at the date of grant. The term of each option is ten years
and each option is exercisable upon the date of grant, provided that the option
holder remains a director, employee or consultant to the Company during the
exercise period.
F-18
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS, STOCK WARRANTS AND CONVERSION RIGHTS (CONTINUED)
The following table summarizes the activity and balance outstanding for each
plan for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ----------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
GRANT GRANT GRANT
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Omnibus Incentive Plan
Outstanding, beginning of year.......................... -- -- 82,000 $ 10.00 47,000 $ 10.00
Granted................................................. 603,750 $ 15.18 45,000 $ 10.00 35,000 $ 10.00
Exercised............................................... -- -- -- -- -- --
Forfeited............................................... (500) $ 16.50 (127,000) $ 10.00 -- --
--------- ----------- ---------- ----------- --------- -----------
Outstanding, end of year................................ 603,250 $ 15.18 -- -- 82,000 $ 10.00
--------- ----------- ---------- ----------- --------- -----------
Non-Employee Plan
Outstanding, beginning of year.......................... 56,500 $ 10.00 104,000 $ 10.00 64,000 $ 10.00
Granted................................................. -- -- 55,000 $ 10.00 40,000 $ 10.00
Exercised............................................... (38,500) $ 10.00 (5,000) $ 10.00 -- --
Forfeited............................................... -- -- (97,500) $ 10.00 -- --
--------- ----------- ---------- ----------- --------- -----------
Outstanding, end of year................................ 18,000 $ 10.00 56,500 $ 10.00 104,000 $ 10.00
--------- ----------- ---------- ----------- --------- -----------
--------- ----------- ---------- ----------- --------- -----------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
WEIGHTED AVERAGES OPTIONS EXERCISABLE
NUMBER OF REMAINING ------------------------------------
RANGE OF EXERCISE OUTSTANDING AT CONTRACTUAL LIFE NUMBER EXERCISABLE AT EXERCISE
PRICES DECEMBER 31, 1998 (YEARS) DECEMBER 31, 1998 PRICE
- -------------------- ----------------- ----------------- --------------------- -------------
<S> <C> <C> <C> <C>
$10.00 18,000 8.14 18,000 $ 10.00
$14.50 380,000 10.00 -- --
$15.75 50,000 9.67 16,667 15.75
$16.50 173,250 9.08 -- --
------- ----- ------
621,250 9.66 34,667
------- ----- ------
------- ----- ------
</TABLE>
Any award issued under the plans that is forfeited, expires or terminates
prior to vesting or exercise is available for future award under the plans. In
connection with the Reorganization, 388,700 options (including the 186,700 of
options issued in connection with the Initial Public Offering ("IPO") in 1993)
held by certain executives were cancelled in consideration for payments
aggregating $1,423,924 which the executives elected to receive in the form of
129,449 shares of Common Stock that were issued as a result of the
Reorganization and 22,500 options awarded to certain directors in 1997 were
cancelled at no cost to the Company. In addition, the Company had entered into
employment agreements with two former officers of the Company and a consulting
agreement with the former Chairman of the Board. These agreements were
terminated with the Reorganization. Pursuant to the terms of these agreements,
these former officers elected to receive these payments in 41,817 shares of
Common Stock. Accordingly, the cost
F-19
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS, STOCK WARRANTS AND CONVERSION RIGHTS (CONTINUED)
of terminating these agreements of approximately $620,000, based upon the
December 12, 1997 market price of the Common Stock, was expensed upon the
closing of the Reorganization.
The Company accounts for its stock-based options under APB Opinion No. 25,
under which no compensation expense related to options has been recognized, as
all options have been granted with an exercise price equal to or greater than
the fair value of the Company's Common Stock on the date of grant. The Company
adopted Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") for disclosure purposes in 1996. In
accordance with SFAS No. 123, the fair value of each option grant has been
estimated as of the date of grant using an option pricing model with the
following assumptions for 1998, 1997 and 1996, respectively: 7.00% dividend
yield; a weighed average expected life of 3.5 years; expected weighted
volatility of 29%, 27% and 20%; and a weighted average risk free interest rate
of 4.97%, 5.74% and 6.42%. The weighted average fair value of those options
granted in 1998, 1997 and 1996 was $1.96, $1.08 and $.59, respectively, per
option granted.
Using these assumptions, the fair value of the stock options granted in
1998, 1997 and 1996, which were not cancelled as a result of the Reorganization,
was approximately $385,000, $8,000 and $44,000, respectively. Had compensation
cost been determined consistent with SFAS 123, utilizing the assumptions
detailed above, the Company's net income would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Net income:
As reported......................................................... $ 11,173,000 $ 1,243,000 $ 1,104,000
Pro Forma........................................................... $ 10,961,000 $ 1,238,000 $ 1,078,000
Basic earnings per share:
As reported......................................................... $ 1.77 $ .92 $ 1.00
Pro forma........................................................... $ 1.74 $ .92 $ .97
Diluted earnings per share
As reported......................................................... $ 1.73 $ .88 $ 1.00
Pro forma........................................................... $ 1.70 $ .88 $ .97
</TABLE>
WARRANTS
In conjunction with the IPO, Dickinson & Co. received a warrant to purchase
up to 107,500 shares of Common Stock at an exercise price of $16.50 per share at
any time during the period from November 3, 1993 to November 2, 1998. In
conjunction with the acquisition of Quadrangles Village apartments, another
investor received a warrant to purchase 175,000 shares of Common Stock at a
price of $10.00 per share at any time during the period from December 2, 1994 to
December 2, 1999. The warrant was transferred to a limited partner of the
Operating Partnership at the time the note was purchased. Both of these warrants
were terminated in connection with the Reorganization for cash payments of
$25,000 and $641,000, respectively.
In connection with the Reorganization, 300,000 Common Stock warrants were
issued to Hudson Bay and 250,000 and 125,000 OP Unit warrants were issued to
Jeffrey Kelter and David McBride, respectively, at an exercise price of $11 per
share or OP Unit. The Common Stock and OP Unit warrants expire on December 12,
2004. The Common Stock warrants issued to Hudson Bay and the OP Unit warrants
issued
F-20
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS, STOCK WARRANTS AND CONVERSION RIGHTS (CONTINUED)
to Jeffrey Kelter and David McBride were valued at $685,000 and are shown in the
accompanying balance sheet as a separate component of shareholders' equity.
CONVERSION RIGHTS
Pursuant to the amended and restated partnership agreement, the limited
partners of the Operating Partnership received a conversion right, which enables
each limited partner to convert their interests in the Operating Partnership
into shares of Common Stock or cash, at the election of the Company at any time
on a one for one basis. Limited partners may exercise their conversion right
only once during each calendar quarter. The number of shares relating to the
conversion right remains stable irrespective of the market price of the
Company's Common Stock. The limited partners, in the aggregate, excluding
300,000 of Convertible Preferred Units outstanding, could convert their
partnership interests in the Operating Partnership into 6,988,542, 4,058,270 and
725,064 shares of Common Stock as of December 31, 1998, 1997 and 1996,
respectively. OP Units totaling 139,948 and 96,240 were converted in 1998 and
1997 and no OP Units were converted during 1996. The Company elected to convert
all OP Units for shares in Common Stock and none for cash in both 1998 and 1997.
F-21
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations.
<TABLE>
<CAPTION>
BASIC DILUTED
------------- -------------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Net Income......................................................................... $ 11,173,000 $ 11,173,000
------------- -------------
Add: Minority interest allocation.................................................. -- 9,342,000
Preferred dividends and distributions............................................ -- 55,000
-------------
$ 20,570,000
Weighted average number of shares outstanding...................................... 6,299,281 6,299,281
Stock equivalents.................................................................. -- 5,609,480
------------- -------------
6,299,281 11,908,761
------------- -------------
------------- -------------
Earnings per share................................................................. $ 1.77 $ 1.73
------------- -------------
------------- -------------
YEAR ENDED DECEMBER 31, 1997
Net Income......................................................................... $ 1,243,000 $ 1,243,000
------------- -------------
Add: Minority interest allocation.................................................. -- 876,000
------------- -------------
$ 2,119,000
Weighted average number of shares outstanding...................................... 1,347,297 1,347,297
Stock equivalents.................................................................. -- 1,056,707
------------- -------------
1,347,297 2,404,004
------------- -------------
------------- -------------
Earnings per share................................................................. $ .92 $ .88
------------- -------------
------------- -------------
YEAR ENDED DECEMBER 31, 1996
Net Income......................................................................... $ 1,104,000
-------------
-------------
Add: Minority interest allocation..................................................
Weighted average number of shares outstanding...................................... 1,106,379
Stock equivalents.................................................................. --
-------------
1,106,379
Earnings per share................................................................. $ 1.00
-------------
-------------
</TABLE>
The diluted EPS calculation for 1996 was not included above as the effect of
the convertible OP Units of 680,746 were anti-dilutive.
F-22
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EARNINGS PER SHARE: (CONTINUED)
The Company's stock equivalents consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Options and warrants......................................................... 233,623 92,973 --
Convertible Preferred Stock and OP units..................................... 35,284 -- --
Convertible OP Units......................................................... 5,340,573 963,734 680,746
---------- ---------- ---------
5,609,480 1,056,707 680,746
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
The Company has leases, certain of which are month-to-month leases, for
office space which require aggregate monthly rental payments of $18,100, plus
its share of operating expenses. The expiration date of the Company's long-term
leases is March 2000.
Three officers of the Company have employment agreements which provide for
aggregate initial base compensation of $600,000 subject to increases as approved
by the Compensation Committee, among other incentive compensation. In addition,
one executive has a non-interest bearing loan of $392,000 from Company which the
executive used to acquire 25,000 shares of Common Stock. Under the terms of his
employment agreement, $33,333 of this loan is forgiven annually on each
anniversary date of the start of his employment by the Company.
The Company has commitments to provide certain debt guarantees and capital
to a joint venture formed in December 1998. In addition, the Company has
committed to acquire a 495,740 square foot office and industrial building from
the joint venture for $28,561,000. See Note 4 for further discussion of these
commitments.
The Company has agreed to guarantee bank loans held by certain executives
with which these executives acquired stock in the Company. The Company advanced
funds to these executives on an interest bearing basis to fund these purchases
until the respective executives bank loans were funded in January 1999. At
December 31, 1998, the Company had $464,000 outstanding from these executives
for stock purchases. These advances were repaid by the executives in January
1999.
See Note 6 for additional discussion of commitments related to equity
issuances in 1998.
LITIGATION
In the normal course of business the Company is involved in legal actions
relating to the ownership and operations of its properties. In management's
opinion, the liabilities, if any, that may ultimately result from such legal
actions are not expected to have a materially adverse effect on the consolidated
financial position, results of operations, or cash flows of the Company.
F-23
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INTERIM RESULTS (UNAUDITED)
The following presents a summary of the unaudited quarterly financial
information for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------
THREE MONTH PERIOD ENDED
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues............................................... $ 5,741,000 $ 7,994,000 $ 11,869,000 $ 15,424,000
Income before equity in earnings (losses) from equity
method investments, gains on sales of assets,
distributions to preferred Unitholders and preferred
shareholders, minority interest of Unitholders in
Operating Partnership and extraordinary item......... 1,792,000 2,249,000 2,921,000 3,043,000
Equity in loss from equity method investments.......... (162,000) (299,000) (562,000) (144,000)
Gains on sales of assets............................... 6,880,000 5,072,000 -- --
Distributions to preferred Unitholders................. -- -- -- (15,000)
Minority interest of Unitholders in Operating
Partnership.......................................... (3,617,000) (3,403,000) (1,086,000) (1,346,000)
Extraordinary loss on debt extinguishment, net of
$110,000 allocated to minority interest of
Unitholders in Operating Partnership................. -- -- -- 110,000
------------ ------------ ------------- -------------
Net income............................................. 4,893,000 3,619,000 1,273,000 1,428,000
Income allocated to preferred shareholders............. -- -- -- (40,000)
------------ ------------ ------------- -------------
Net income available to common shareholders............ $ 4,893,000 $ 3,619,000 $ 1,273,000 $ 1,388,000
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Basic earnings per common share........................ $ 0.90 $ 0.66 $ 0.19 $ .19
Diluted earnings per common share...................... $ 0.87 $ 0.66 $ 0.18 $ .18
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
THREE MONTH PERIOD ENDED
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues................................................ $ 2,226,000 $ 1,867,000 $ 1,738,000 $ 2,366,000
Loss before equity in earnings (losses) from equity
method investments, gains on sales of assets, and
minority interest of Unitholders in Operating
Partnership........................................... (125,000) (23,000) (53,000) (2,692,000)
Equity in earnings (loss) from equity method
investments........................................... 130,000 134,000 173,000 (33,000)
Gains on sales of assets................................ 403,000 -- 4,205,000 --
Minority interest of Unitholders in Operating
Partnership........................................... -- -- (1,988,000) 1,112,000
------------ ------------ ------------- -------------
Net income (loss)....................................... $ 408,000 $ 111,000 $ 2,337,000 $ (1,613,000)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Basic earnings per common share......................... $ 0.36 $ 0.10 $ 2.07 $ (.79)
Diluted earnings per common share....................... $ 0.22 $ 0.06 $ 2.07 $ (.92)
</TABLE>
F-24
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SEGMENTS
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," in 1998
which changes the way the Company reports information about its operating
segments.
The Company considers its reportable segments to be office, industrial,
multi-family and other. Other properties consist of a community shopping center
and an investment in a direct financing lease. The accounting policies of the
reportable segments are consistent with those described in Note 2. Summarized
financial information concerning the Company reportable segments is shown in the
following table.
<TABLE>
<CAPTION>
BUSINESS SEGMENTS 1998 1997 1996
- ----------------------------------------------------------------- -------------- -------------- -------------
<S> <C> <C> <C>
REVENUES
Industrial properties............................................ $ 18,545,000 $ 287,000 $ --
Office properties................................................ 18,478,000 320,000 --
Multifamily properties........................................... 1,860,000 7,304,000 10,229,000
Other properties................................................. 1,863,000 88,000 --
Other (1)........................................................ 282,000 198,000 11,000
-------------- -------------- -------------
$ 41,028,000 $ 8,197,000 $ 10,240,000
-------------- -------------- -------------
-------------- -------------- -------------
PROPERTY OPERATING INCOME
Industrial properties............................................ $ 12,330,000 $ 213,000 $ --
Office properties................................................ 10,299,000 227,000 --
Multifamily properties........................................... 1,234,000 3,464,000 4,513,000
Other properties................................................. 1,158,000 74,000 --
-------------- -------------- -------------
$ 25,021,000 $ 3,978,000 $ 4,513,000
-------------- -------------- -------------
-------------- -------------- -------------
CAPITAL EXPENDITURES
Industrial properties............................................ $ 67,000 $ -- $ --
Office properties................................................ 746,000 -- --
Multifamily properties........................................... -- 1,152,000 566,000
Other properties................................................. 93,000 -- --
-------------- -------------- -------------
$ 906,000 $ 1,152,000 $ 566,000
-------------- -------------- -------------
-------------- -------------- -------------
DEPRECIATION AND AMORTIZATION EXPENSE
Industrial properties............................................ $ 3,623,000 $ 53,000 $ --
Office properties................................................ 3,094,000 57,000 --
Multifamily properties........................................... -- 792,000 1,366,000
Other properties................................................. 194,000 7,000 --
-------------- -------------- -------------
$ 6,911,000 $ 909,000 $ 1,366,000
-------------- -------------- -------------
-------------- -------------- -------------
INVESTMENT IN REAL ESTATE
Industrial properties............................................ $ 311,273,000 $ 55,205,000 $ --
Office properties................................................ 221,650,000 58,082,000 --
Multifamily properties........................................... -- 31,705,000 47,382,000
Other properties................................................. 9,946,000 10,071,000 --
-------------- -------------- -------------
$ 542,869,000 $ 155,063,000 $ 47,382,000
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
F-25
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SEGMENTS (CONTINUED)
The following is a reconciliation of segment property operating income as
shown above to the accompanying consolidated statement of operations for each
respective year:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Segment property operating income as shown above.................... $ 25,021,000 $ 3,978,000 $ 4,513,000
General and administrative expense.................................. (759,000) (732,000) (515,000)
Buyout of employment agreements, options and warrants............... -- (3,203,000) --
Interest expense.................................................... (14,539,000) (3,134,000) (3,897,000)
Other income (1).................................................... 282,000 198,000 11,000
-------------- ------------- -------------
Income (loss) before equity in (losses) earnings from equity method
investments, gains on sales of assets, distributions to preferred
Unitholders and preferred shareholders, minority interest of
Unitholders in Operating Partnership and extraordinary items...... $ 10,005,000 $ (2,893,000) $ 112,000
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
- ------------------------
(1) Amount consists of interest income not allocated to a specific business
segment.
F-26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
By: /s/ JEFFREY E. KELTER
-----------------------------------------
Jeffrey E. Kelter, President and
Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ DAVID F. MCBRIDE
- ------------------------------ Chairman and Director March 31, 1999
David F. McBride
JEFFREY E. KELTER
- ------------------------------ President, Chief Executive March 31, 1999
Jeffrey E. Kelter Officer and Director
/s/ TIMOTHY A. PETERSON Executive Vice President,
- ------------------------------ Chief Financial Officer March 31, 1999
Timothy A. Peterson and Secretary
/s/ TIMOTHY E. MCKENNA
- ------------------------------ Treasurer (Principal March 31, 1999
Timothy E. McKenna Accounting Officer)
/s/ TIMOTHY B. MCBRIDE
- ------------------------------ Director March 31, 1999
Timothy B. McBride
/s/ ROBERT J. BRANSON
- ------------------------------ Director March 31, 1999
Robert J. Branson
/s/ JAMES R. MULVIHILL
- ------------------------------ Director March 31, 1999
James R. Mulvihill
/s/ FRANCESCO GALESI
- ------------------------------ Director March 31, 1999
Francesco Galesi
/s/ MICHAEL J. FALCONE
- ------------------------------ Director March 31, 1999
Michael J. Falcone
/s/ EVAN ZUCKER
- ------------------------------ Director March 31, 1999
Evan Zucker
/s/ DAVID H. LESSER
- ------------------------------ Director March 31, 1999
David H. Lesser
</TABLE>
II-1
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated February 18, 1999 included in this Form 10-K, into the
Company's previously filed: Form S-3 Registration Statements File Nos.
333-25327, 333-58915, 333-58971, 333-59251, 333-67637, 333-74277 and Form S-8
Registration Statements File Nos. 333-70529.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
December 31, 1998 financial statements and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,247
<SECURITIES> 0
<RECEIVABLES> 16,010
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,107
<PP&E> 542,869
<DEPRECIATION> 6,867
<TOTAL-ASSETS> 559,366
<CURRENT-LIABILITIES> 10,120
<BONDS> 346,105
0
95,705<F1>
<COMMON> 8
<OTHER-SE> 107,428
<TOTAL-LIABILITY-AND-EQUITY> 559,366
<SALES> 41,028
<TOTAL-REVENUES> 41,028
<CGS> 16,484
<TOTAL-COSTS> 16,484
<OTHER-EXPENSES> 10,619<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,594
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 11,952<F3>
<EXTRAORDINARY> 110<F4>
<CHANGES> 0
<NET-INCOME> 11,173
<EPS-PRIMARY> 1.77<F5>
<EPS-DILUTED> 1.73<F5>
<FN>
<F1> Represents minority interest.
<F2> Represents loss from equity investment and minority interest.
<F3> Represents gains from property sales.
<F4> Extraordinary loss on debt refinancing.
<F5> After extraordinary item.
</FN>
</TABLE>
