SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
------- ACT OF 1934
For the fiscal year ended December 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------- EXCHANGE ACT OF 1934
Commission File Number 1-13239
AEGIS REALTY, INC.
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(Exact name of Registrant as specified in its Charter)
MARYLAND 13-3916825
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
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Common Stock, par value $.01 per share
Name of each exchange on which registered:
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American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The approximate aggregate market value of the voting and non-voting
common equity held by non-affiliates of the Registrant as of March 14, 2002 was
$87,199,068, based on a price of $11.08 per share, the closing sales price for
the Registrant's Common Stock on the American Stock Exchange on that date.
As of March 14, 2002, there were 8,054,631 outstanding shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Index to exhibits may be found on page 37
Page 1 of 47
DOCUMENTS INCORPORATED BY REFERENCE
PART III: Those portions of the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held on June 11, 2002, which are incorporated into
Items 10, 11, 12 and 13.
Index to exhibits may be found on page 44.
CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.
2
PART I
Item 1. Business.
GENERAL
Aegis Realty, Inc. ("Aegis" or the "Company") is a Maryland corporation that has
qualified as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986 as amended (the "Code"). The Company was formed to acquire,
renovate, own and operate primarily supermarket-anchored neighborhood shopping
centers. As of December 31, 2001, the Company owned a portfolio of 28 retail
properties (the "Retail Properties") containing a total of approximately 3.0
million gross leaseable square feet ("GLA") and held partnership interests in
two suburban garden apartment properties (the "Multifamily Properties"). The
locations of the assets in 14 states provide the Company with a geographically
diverse portfolio. Moreover, the Company has a predictable and stable revenue
stream that, for the year ended December 31, 2001, was derived approximately 47%
from either base rent from anchor tenants or from interest payments on one FHA
insured participating mortgage secured by a suburban garden apartment property
(the "FHA Mortgage"), which was sold in April 2001.
The Retail Properties are well located neighborhood shopping centers anchored by
nationally recognized and/or credit tenants such as Kroger, Publix, Safeway,
Food Lion, Bi-Lo, Hy-Vee, Walgreens and CVS Stores. The neighborhood centers are
typically open air centers ranging in size from 58,000 GLA to approximately
214,000 GLA, with an average of approximately 108,000 GLA. These centers are
usually leased to tenants that provide consumers with convenient access to every
day necessity items, such as food and pharmacy items; therefore, the Company
believes that the economic performance of these centers is less affected by
downturns than other retail property types. As of December 31, 2001, the Retail
Properties had an average financial occupancy of 89.3%. Through 2006, no more
than 11.7% of leased GLA is subject to expiration in any one year. The
Multifamily Properties total 290 units and had an average physical occupancy of
96.6% as of December 31, 2001.
ORGANIZATION
The Company was formed on October 1, 1997 as the result of the consolidation
(the "Consolidation") of four publicly registered, non-listed limited
partnerships, Summit Insured Equity L.P. ("Insured I"), Summit Insured Equity
L.P. II ("Insured II"), Summit Preferred Equity L.P. and Eagle Insured, L.P.
(the "Partnerships", and each individually a "Partnership"). One of the general
partners of the Partnerships was an affiliate of Related Capital Company
("Related"), a nationwide, fully integrated real estate financial services firm.
Pursuant to the Consolidation, the Company issued shares of its common stock,
par value $.01 per share (the "Common Stock") to all partners in the
Partnerships in exchange for their interests in the Partnerships based upon each
partner's proportionate interest in the Common Stock issued to their Partnership
in the Consolidation. The Common Stock commenced trading on the American Stock
Exchange on October 10, 1997 under the symbol "AER".
The Company is governed by a board of directors comprised of two independent
directors and three directors who are affiliated with Related. The Company has
engaged Related Aegis LP (the "Advisor"), a Delaware limited partnership and an
affiliate of Related, to manage its day to day affairs. Through the Advisor,
Related offers the Company a core group of experienced staff and executive
management, who provide the Company with services on both a full and part-time
basis. These services include, among other things, acquisition, financial,
accounting, capital markets, asset monitoring, portfolio management, investor
relations and public relations services. The Company believes that it benefits
significantly from its relationship with Related, since Related provides the
Company with resources that are not generally available to small capitalized,
self-managed REITs.
In addition, RCC Property Advisors (the "Property Manager"), also an affiliate
of Related, has been retained by the Company to provide property management and
leasing services to the Retail Properties. The Property Manager is a full
service retail management company which has 23 employees, employed in the areas
of leasing, accounting, management and redevelopment. The Company represents
substantially all of the Property Manager's property management revenue and
therefore substantially all of its staff is engaged, on a full-time basis,
providing services to the Company.
The Company owns all of its assets directly or indirectly through Aegis Realty
Operating Partnership, LP, a Delaware limited partnership (the "Operating
Partnership" or "OP"), of which the Company is the sole general partner and
holder of 91.31% of the units of partnership interest (the "OP Units") at
December 31, 2001. Also, at December 31, 2001, 5.54% of the OP Units are held by
the sellers of three of the Retail Properties and 3.15% are held by affiliates
of Related.
BUSINESS PLAN
On December 21, 2000, the Company entered into a definitive acquisition
agreement to acquire a portfolio of 19 shopping centers and several retail
development opportunities (the "Acquisition Transaction") from P'OB. Montgomery
& Company ("POB"). On August 7, 2001, the Company announced that it had
terminated the Acquisition Transaction, by mutual consent with POB, for a fee of
$350,000.
In light of the decision to terminate the Acquisition Transaction, the Company,
at the direction of the Board of Trustees, has retained Robertson Stephens to
assist in developing an appropriate marketing strategy for the potential sale of
the Company or its assets. If acceptable values cannot be achieved, the Board of
Trustees will then pursue alternative strategies with the goal of maximizing
stockholder value. The Company has discontinued its pursuit of additional
investments and is focusing on the continuation of active management, leasing
and redevelopment of the property portfolio in order to maintain the value of
its portfolio upon a sale.
3
RETAIL PROPERTIES
As of December 31, 2001, the Company owned 28 neighborhood shopping centers. See
"Item 2. Properties" for a description of each property.
None of the Company's investment properties accounted for 10% or more of the
Company's total gross revenues for any of the three years in the period ended
December 31, 2001.
During the years ended December 31, 2001, 2000 and 1999, the Kroger Company,
which is a tenant at six shopping centers, accounted for approximately 12%, 11%
and 12%, respectively, of the Company's total revenues.
Based on the carrying value at December 31, 2001, approximately 16% of the
Company's investment properties are located in Ohio, 11% are located in Florida,
and 11% are located in Virginia. No other state comprises more than 10% of the
total carrying value.
The Company has been notified that K-Mart, which has declared bankruptcy,
intends to close its store located in the Centre Stage Shopping Center in
Springfield, Tennessee. The store has approximately 86,479 feet of gross
leasable area and represents approximately $397,000 in annualized base rent. The
store is currently in operation and rental payments are current; however, the
Company cannot currently assess how the closing of the store will affect 2002
operating results until more details are provided by K-Mart.
INVESTMENTS IN PARTNERSHIPS
As of December 31, 2001, the Company owned equity interests in two partnerships,
each of which owns a multi-family residential garden apartment property. See
"Item 2. Properties" for a description of each property.
MORTGAGE LOAN RECEIVABLE
As of December 31, 2000, the Company held a FHA mortgage and an equity loan
secured by Woodgate Manor, an apartment complex located in Gainesville, Florida.
The FHA mortgage, in the original amount of $3,110,300, had a stated interest
rate of 8.95% and matured January 1, 2024.
The equity loan, in the original amount of $339,700, represented a non-interest
bearing advance made to the developer for such items as initial operating
deficit escrow requirements and HUD related contingencies such as working
capital escrow and cash requirements.
On April 23, 2001, the owner of Woodgate Manor sold the property to a third
party. The Company received approximately $3.2 million from the borrower which
approximated the carrying value of the receivable.
COMPETITION
The real estate business is highly competitive and substantially all of the
properties owned by the Company have active competition from similar properties
in their respective vicinities. See the table in "Item 2. Properties" for
additional competitive information. In particular, additional rental payments
which are not insured are dependent upon the economic performance of the
properties and may be affected by competitive conditions. In addition, various
other entities have been or may, in the future, be formed by affiliates of the
Advisor to engage in businesses which may be competitive with the Company or
compete for the time and services of management of the Advisor.
REGULATIONS
A current or previous owner or operator of real property may be legally liable
for the costs of removal or remediation of hazardous or toxic substances on,
under or in such property. Such liability may exist whether or not the owner or
operator knew of, or was responsible for, such hazardous or toxic substances. In
addition, the presence of hazardous or toxic substances may adversely affect the
owner's ability to borrow funds using such real property as collateral. Certain
environmental laws impose liability for release of asbestos-containing materials
("ACMs") into the air and third parties may seek recovery from owners or
operators of real properties for personal injury associated with ACMs. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, the Company may be liable for removal or
remediation costs, as well as certain other potential costs which could relate
to such hazardous or toxic substances or ACMs (including governmental fines and
injuries to persons and property). To date, the Company has not incurred any
costs of removal or remediations of such hazardous or toxic substances. However,
the presence, with or without the Company's knowledge, of hazardous or toxic
substances at any property held or operated by the Company could have an adverse
effect on the Company's business, operating results and financial condition.
Phase I Environmental Site Assessments have been undertaken on all of the
Company's properties. In certain cases, additional Phase II site investigations
have also been undertaken where deemed appropriate. Based on these reports, no
on-site hazardous chemicals or petroleum products were detected or found to
exist in the soil or in the groundwater at those properties which would result
in action by state environmental agencies and which would require additional
investigation and/or remediation. In February 1998, a Phase II investigation of
the Mountain Park Plaza property determined that there were detectable levels of
certain hazardous materials above threshold levels which are ascertained by the
Georgia State Department of Natural Resources Environmental Protection Division
("GAEPD"). A subsequent re-sampling indicated that no hazardous materials remain
detectable above the threshold levels which are ascertained by GAEPD to require
remediation and management has installed wells on the site to monitor ongoing
levels of hazardous materials in the ground water pursuant to GAEPD policy.
4
NOTES PAYABLE
For information regarding the Company's notes payable, see Note 7 of Notes to
Consolidated Financial Statements in "Item 8. Financial Statements and
Supplementary Data".
EMPLOYEES
The Company does not directly employ anyone. All services are performed for the
Company by the Advisor and its affiliates. The Advisor receives compensation in
connection with such activities as set forth in Items 8, 11 and 13. In addition,
the Company reimburses the Advisor and certain of its affiliates for expenses
incurred in connection with the performance by their employees of services for
the Company in accordance with the Advisory Agreement between the Company, the
OP and the Advisor dated October 1, 1997 which was renewed on October 1, 2001.
The 28 Retail Properties owned by the Company are managed by the Property
Manager, an affiliate of the Advisor, for a fee equal to 4.5% of the gross
rental receipts from the Retail Properties, which is competitive with such fees
paid in the areas in which the properties are located. The Property Manager also
receives standard leasing commissions for space leased to new tenants and for
lease renewals and is reimbursed for certain expenses. Management fees earned by
the Property Manager for the years ended December 31, 2001, 2000 and 1999
totaled approximately $1,138,000, $1,085,000 and $1,037,000, respectively.
The Company has qualified as a REIT under the Code. A REIT is generally not
subject to federal income tax on that portion of its REIT taxable income
("Taxable Income") which is distributed to its stockholders provided that at
least 90% of Taxable Income is distributed and provided that such income meets
certain other conditions. Accordingly, no provision for federal income taxes is
required. The Company may be subject to state taxes in certain jurisdictions.
Item 2. Properties.
RETAIL PROPERTIES
As of December 31, 2001, the Company owned 28 neighborhood shopping centers. The
following is a description of these shopping centers:
% SQUARE COMPARABLE
FEET ANNUALIZED COMPETITION
GROSS LEASED AT BASE RENT AT MAIN WITHIN A
PURCHASE DATE LEASABLE DECEMBER DECEMBER ANCHOR THREE-MILE
NAME AND LOCATION PRICE PURCHASED SQUARE FEET 31, 2001 31, 2001 TENANT RADIUS
----------------- ----------- --------- ----------- ---------- ------------ ----------- ------------
Cactus Village $ 6,330,000 7/25/87 72,598 90% $476,000 Safeway(a) 11 shopping
Glendale, AZ & Walgreens centers
Hickory Plaza 4,902,000 4/23/87 67,336 100 549,000 Kroger & 8 shopping
Nashville, TN CVS centers
Highland Fair 5,950,000 7/24/87 74,764 95 624,000 Safeway 7 shopping
Gresham, OR centers
Pablo Plaza 7,500,000 2/18/87 145,565 99 1,102,000 Publix(b) 11 shopping
Jacksonville, FL & Eckerds centers
Southhaven 5,666,000 2/28/87 83,750 84 466,000 Kroger 1 shopping
Southhaven, MS center
Town West 4,932,000 5/11/87 88,200 96 462,000 Kroger & 5 shopping
Indianapolis, IN Office Max (c) centers
Westbird 7,000,000 12/31/86 100,087 95 887,000 Publix & 7 shopping
Miami, FL Eckerds centers
Winery Square 12,801,700 12/22/87 121,950 95 1,101,000 Food 4 5 shopping
Fairfield, CA Less & centers
Walgreens
Mountain View Village 10,350,000 7/25/88 99,908 99 865,000 Kroger 4 shopping
Snellville, GA centers
Forest Park Square 8,950,000 5/19/89 92,824 100 949,000 Kroger 2 shopping
Cincinnati, OH centers
Kokomo Plaza 6,987,000 5/19/89 89,546 100 621,000 Kroger 6 shopping
Kokomo, IN centers
Rolling Hills Square 6,100,000 08/18/88 114,081(d) 96 858,000 Fry's 6 shopping
Tucson, AZ Food centers
& Drug
5
% SQUARE COMPARABLE
FEET ANNUALIZED COMPETITION
GROSS LEASED AT BASE RENT AT MAIN WITHIN A
PURCHASE DATE LEASABLE DECEMBER DECEMBER ANCHOR THREE-MILE
NAME AND LOCATION PRICE PURCHASED SQUARE FEET 31, 2001 31, 2001 TENANT RADIUS
----------------- ----------- --------- ----------- ---------- ------------ ----------- ------------
Mountain Park Plaza 6,650,000 12/14/89 77,686 90 260,000 Publix(e) 9 shopping
Atlanta, GA & Eckerds centers
Applewood Centre 7,700,000 11/08/90 101,130 95 690,000 Hy-Vee 5 shopping
Omaha, NE Food centers
Store
Birdneck Center 3,115,000 12/31/97 67,060 96 461,000 Eckerds & 8 shopping
Virginia Beach, VA Food Lion centers
The Market Place 5,400,000 12/31/97 126,435 95 699,000 Bi-Lo & 3 shopping
Newton, NC Big Lots cemters
Barclay Place 3,800,000 3/31/98 81,459 78 505,000 Food Lion(f) 13 shopping
Lakeland, FL centers
The Village At Waterford 6,250,000 4/22/98 79,162 97 672,000 Winn-Dixie 1 shopping
Midlothian, VA center
Governor's Square 8,200,000 5/28/98 183,339 94 1,059,000 Odd Lots 5 shopping
Montgomery, AL centers
Marion City Square 5,100,000 6/25/98 164,921 84 759,000 Roses, Bi-Lo 1 shopping
Marion, NC & CVS center
Dunlop Village 5,000,000 9/1/98 77,315 87 508,000 Food Lion 6 shopping
Colonial Heights, VA & CVS centers
Centre Stage 6,990,000 9/2/98 146,549 94 737,000 K-Mart (k) & 2 shopping
Springfield, TN Food Lion centers
White Oaks Plaza 8,125,000 9/9/98 186,758 71 469,000 Winn-Dixie & 2 shopping
Spindale, NC Wal-Mart (g) centers
Cape Henry 3,900,000 9/29/98 58,424 100 533,000 Food Lion & 8 shopping
Virginia Beach, VA Rite-Aid centers
Emporia West 2,900,000 11/17/98 76,705 100 386,000 Dillon Food 6 shopping
Emporia, KS Store centers
Oxford Mall 8,650,000 11/24/98 166,880 73 1,037,000 Goody's, 2 shopping
Oxford, MS JC Penney, centers
& Wal-Mart(h)
Southgate 15,100,000 12/9/98 214,321 97 1,666,000 Big Bear 4 shopping
Heath, OH Stores(i), centers
Dunham's
Sporting &
Odd-Lots
Crossroads East 4,800,000 12/9/98 71,925 86 511,000 (j) 3 shopping
Columbus, OH centers
(a) Tenant has vacated but continues to be liable for all amounts due
under its lease. The tenant is currently in arrears as it relates to a
contractual increase in minimum rent of $.10 per square foot per year
(approximately $4,200 per year). The aggregate arrears as of December
31, 2001 was $20,910. The arrears is due to different interpretations
of the lease which is expected to be resolved in 2002. With the
exception of this amount, lease payments are current as of December
31, 2001.
(b) Publix has vacated and has subleased the space to Office Depot. Publix
continues to be liable for all amounts due under its lease. Payments
due under sublease were current as of December 31, 2001.
(c) Tenant closed its store on February 28, 2000 but original lessee is
still obligated to pay rent under its lease. Tenant stopped paying
rents in April 2001. Aggregate arrears at December 31, 2001 was
$88,742.
(d) Square footage does not include the 5,400 Brake Max parcel under
construction at December 31, 2001.
(e) A new lease has been executed with Publix, which is expected to open
in July 2002. Annual base rent is $409,507. The anchor tenant space
was under construction at December 31, 2001. Annualized rent does not
include the Publix base rent amount. Gross leasable square footage
contains a demolished portion of the building (44,026 square feet) not
the square feet under construction at December 31, 2001 (46,971 square
feet).
(f) Tenant was vacated on November 4, 2000, but is still responsible for
rent through the termination of lease. Lease rents were current as of
December 31, 2001.
(g) Both Winn-Dixie and Wal-Mart have vacated but are responsible for rent
through the termination of the lease. Lease rents were current as of
December 31, 2001.
6
(h) The portion of the property occupied by Wal-Mart (92,950 square feet)
is not owned by the Company.
(i) The tenant's parent corporation, Penn Traffic Co. filed for Chapter 11
bankruptcy on March 1, 1999. Lease payments are current as of December
31, 2001.
(j) The current configuration of the shopping center does not include an
anchor tenant.
(k) The Company has been notified that K-Mart intends to close its 86,479
square foot facility which paid a base rent of $397,000 per annum.
For further information regarding the Company's Retail Properties, including
information regarding the mortgage indebtedness encumbering certain properties,
see "Item 8. Financial Statements and Supplementary Data" and "Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K - Financial
Statement Schedules - Schedule III".
INVESTMENTS IN PARTNERSHIPS
As of December 31, 2001, the Company owned partnership interests in two
partnerships, each of which owns a multi-family residential garden apartment
property.
The Company owns a 98.99% limited partnership interest in the TCR-Pinehurst
Limited Partnership ("Pinehurst"), which acquired and operates the Pinehurst
apartment complex in Kansas City, Missouri. Under the original terms of this
investment, the Company is entitled to a preferred equity return of 8.8% per
annum on an initial investment of $3,799,620, and 9.85% on a subsequent
investment of $1,949,805. These preferred equity returns are cumulative and non
interest-bearing. The cumulative, unrecorded and undistributed preferred equity
returns to the Company totaled $1,880,466 and $1,826,245 at December 31, 2001
and 2000, respectively. These preferred equity returns are payable from excess
cash flow from operations or proceeds from a sale or refinancing of Pinehurst's
rental property. The Pinehurst apartment complex contains 96 apartment units and
was approximately 97.9% occupied as of December 31, 2001.
On August 26, 1998, the Company invested $895,200 for a 40% interest as a
limited partner in FAI, Ltd. ("FAI"), the limited partnership which owns
Weatherly Walk Apartments. This equity interest earns an annual preferred return
of 10.5% on $895,200, paid monthly, plus 40% of excess cash flow and sale or
refinancing proceeds. As of December 31, 2001, the Company had received most of
the preferred returns due from FAI. Weatherly Walk Apartments contains 194
apartment units and was approximately 96% occupied as of December 31, 2001.
Item 3. Legal Proceedings
As of October 29, 2001 each of three lawsuits filed in connection with the Aegis
transaction had been dismissed without prejudice. No money was paid by any of
the defendants to any plaintiff or any plaintiff's attorney in connection with
their dismissals. Following is a brief description of these lawsuits:
On or about February 8, 2001, a complaint was filed in the New York Supreme
Court, County of New York, against the Advisor. Also individually named in the
suit were Messrs. Boesky, Hirmes, Ross, Brenner, Allen and Fisch, each of whom
is either a director of Aegis or the Advisor. Aegis was also named as a nominal
defendant. The action is entitled PAUL V. THE RELATED COMPANIES L.P., ET AL.,
Index No. 01-600669. On or about March 23, 2001, a second action, entitled
SCHNIPPER V. AEGIS REALTY, INC., ET AL., Case No. 219736-V, was filed in the
Circuit Court for Montgomery County, Maryland against Aegis and each of Aegis's
five directors (Messrs. Boesky, Brenner, Hirmes, Allen and Fisch). On or about
April 2, 2001, a third action, entitled OPPORTUNITY PARTNERS, L.P. V. STUART J.
BOESKY, ET AL., Civ. No. 24-C-01-001579, was filed in the Circuit Court for
Baltimore County, Maryland against, among others, Aegis, each of its five
directors, and the Advisors. Each suit was purportedly a class and derivative
action in connection with the Acquisition Transaction. On August 27, 2001, the
Company announced that it had terminated the Acquistion Transaction by mutual
consent with POB.
The Company is subject to routine litigation and administrative proceedings
arising in the ordinary course of business. Management does not believe that
such matters will have a material adverse impact on the Company's financial
position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Stockholders.
None
7
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
As of March 14, 2002, there were 1,383 registered stockholders of record owning
8,054,631 shares of Common Stock. The Company's Common Stock has been listed on
the American Stock Exchange since October 10, 1997 under the symbol "AER". Prior
to October 10, 1997, there was no established public trading market for the
Company's Common Stock.
The high and low prices for each quarterly period of the last two years for
which the shares of Common Stock were traded were as follows:
2001 2001 2000 2000
QUARTER ENDED LOW HIGH LOW HIGH
------------- -------- -------- ------- -------
March 31 $10.6500 $10.6900 $8.3750 $8.9375
June 30 10.1500 10.8000 8.6250 10.8750
September 30 10.4600 11.9000 9.6250 10.5000
December 31 10.9000 11.7300 9.7500 10.1875
The last reported sale price of Common Stock on the American Stock Exchange on
March 14, 2002 was $11.08.
INCENTIVE STOCK OPTION PLAN
The Company has adopted an incentive stock option plan (the "Incentive Stock
Option Plan"), the purpose of which is to (i) attract and retain qualified
persons as directors and officers and (ii) to incentivize and more closely align
the financial interests of the Advisor and its affiliates and their respective
employees and officers with the interests of the stockholders by providing the
Advisor and its affiliates with substantial financial interest in the Company's
success. The Compensation Committee administers the Incentive Stock Option Plan.
Pursuant to the Incentive Stock Option Plan, if the Company's distributions per
share of Common Stock in the immediately preceding calendar year exceed $0.9869
per share, the Compensation Committee has the authority to issue options to
purchase, in the aggregate, that number of shares of Common Stock which does not
exceed three percent of the shares outstanding as of December 31 of the
immediately preceding calendar year (or in the initial year, as of October 1,
1997). Any options not granted in a given year are carried over and become
available to be granted in subsequent years. The maximum number of shares that
can be issued over the life of the Incentive Stock Option Plan is 805,073.
These options were issued as part of the Company's employee retention program
which was adopted after the announcement that the Company would seek to sell its
assets as described under the heading "Recent Developments" above. Under the
program, the options generally expire if the optionee leaves the Company prior
to the expiration of the three year period or sale of the Company.
SHARE REPURCHASE PLAN
On October 9, 1998, the Board of Directors authorized the implementation of a
stock repurchase plan, enabling the Company to repurchase, from time to time, up
to 500,000 shares of its Common Stock. The repurchases will be made in the open
market and the timing will be dependent on the availability of shares and other
market conditions. As of both December 31, 2001 and 2000, the Company had
acquired 6,300 shares of its Common Stock for an aggregate purchase price of
$58,579 (including commissions and service charges). Repurchased shares are
accounted for as retired.
STOCKHOLDER RIGHTS PLAN
On January 29, 1999, the Company adopted a stockholder rights plan (the
"Stockholder Rights Plan"), the purpose of which is to better protect
stockholders and assure that they receive the full value of their investment in
the event of any proposed takeover of the Company. The Company noted that the
adoption of the Stockholder Rights Plan was not in response to any specific
attempt to acquire control of the Company and that the Company had no knowledge
of any such interest on the part of any person or entity.
The Stockholder Rights Plan, which is similar to plans adopted by many other
U.S. companies, strengthens the ability of the Board of Directors to assure that
the Company's stockholders receive fair and equal treatment and protects the
interests of the Company's stockholders in the event of an unsolicited offer to
acquire control of the Company. Importantly, it is intended to encourage any
potential acquirer to negotiate the manner and terms of any proposed acquisition
with the Board of Directors.
Terms of the Stockholder Rights Plan provide for a distribution to common
stockholders of record at the close of business on February 16, 1999 of one
Right for each outstanding share of Common Stock of the Company. Subject to
limited exceptions, the Rights will be exercisable if a person or group acquires
15% or more of the Company's Common Stock or announces a tender offer for 15% or
more of the Common Stock. Depending on the circumstances, the effect of the
exercise of the Rights will be to permit each holder of a Right to either
purchase stock in the Company or stock of the buyer, at a substantial discount,
and, in so doing, materially dilute the level of ownership of the buyer in the
Company. The Company will be entitled to redeem the Rights at $.01 per Right at
any time before a person has acquired 15% or more of the outstanding Common
Stock. The Stockholder Rights Plan will expire on February 16, 2009.
8
OTHER
Through calendar year 1999, each independent director was entitled to receive
annual compensation for serving as a director in the aggregate amount of $15,000
payable in cash (maximum of $5,000 per year) and/or shares of Common Stock
valued based on the fair market value at the date of issuance. Beginning in
calendar year 2000, the annual compensation for each independent director
increased from $15,000 to $17,500 and the maximum payable in cash increased from
$5,000 to $7,500. In addition, each independent director received $7,500 in cash
and stock valued at $10,000 as compensation for serving on the special committee
of the Board of Directors in connection with the Acquisition Transaction. As of
December 31, 2001 and 2000, 4,210 and 2,376 shares, respectively, having an
aggregate value at the time of issuance of $42,500 and $22,500, respectively,
have been issued to each of the Company's two independent directors as
compensation for their services. An additional 892 shares with an aggregate
value of $10,000 were issued to each independent Director in January 2002.
DISTRIBUTION INFORMATION
DISTRIBUTIONS PER SHARE
Quarterly cash distributions per common share and OP Unit for the years ended
December 31, 2001 and 2000 were as follows:
CASH DISTRIBUTION TOTAL AMOUNT
FOR QUARTER ENDED DATE PAID PER SHARE DISTRIBUTED
----------------- --------- --------- --------------
March 31, 2001 5/15/01 $ .240 $2,116,061
June 30, 2001 8/14/01 .240 2,116,061
September 30, 2001 11/14/01 .240 2,116,470
December 31, 2001 2/14/02 .240 2,116,471
------- ---------
Total for 2001 $ .960 $8,465,063
======= =========
CASH DISTRIBUTION TOTAL AMOUNT
FOR QUARTER ENDED DATE PAID PER SHARE DISTRIBUTED
----------------- --------- --------- --------------
March 31, 2000 5/15/00 $ .240 $2,118,334
June 30, 2000 8/14/00 .240 2,117,421
September 30, 2000 11/14/00 .240 2,115,590
December 31, 2000 2/14/01 .240 2,115,590
------- ---------
Total for 2000 $ .960 $8,466,935
======= =========
There are no material legal restrictions upon the Company's present or future
ability to make distributions in accordance with the provisions of the Company's
Articles of Amendment and Restatement. However, in connection with the Credit
Facility, the Company must comply with various financial covenants including
maximum loan to value ratios, interest and fixed charge coverage ratios, and net
worth requirements. In connection with the Company's covenant compliance
certification required subsequent to the filing of the Company's second and
third quarter 10-q, the Company was in compliance with all but one of these
covenants. The Company was not in compliance with a covenant requiring that
aggregate distributions by the Company during any consecutive four quarters not
exceed ninety percent of the Company's funds from operations ("FFO") for such
period. Unlike the covenant provisions based on adjusted net income, under the
covenant in question, the Company's FFO is not adjusted for extraordinary or
nonrecurring items. In the second, third and fourth quarters of 2001, FFO was
significantly reduced by nonrecurring expenses related to the termination of the
POB transaction. The Company received a waiver on this covenant from each of the
syndicate banks of the Credit Facility for each of the quarters' of
non-compliance. Future distributions paid by the Company will be at the
discretion of the Directors and will depend on the actual cash flow of the
Company, its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Code and such other factors as the
Directors deem relevant.
OPERATING PARTNERSHIP UNITS
The following table sets forth the date of issuance, title and amount of
unregistered securities issued by the Company's subsidiary, the Operating
Partnership:
DATE OF SALE/ISSUANCE TITLE NUMBER
--------------------- ----- ---------
Prior to 1999 OP Units 517,625
05/28/99 OP Units 28,187
12/09/99 OP Units 231,401
04/18/00 OP Units (3,371)
06/19/00 OP Units (8,062)
---------
765,780
=========
The acquisitions of Governor's Square, Southgate and Crossroad East, three
Retail Properties with purchase prices of $8,200,000, $15,100,000 and
$4,800,000, respectively, were partially financed through the issuance of
94,726, 208,914 and 167,149 OP Units (subject to adjustment) valued at
$1,231,438, $2,715,882 and $2,172,937. Of the OP units offered in the Southgate
and Crossroad East transactions, 596,031 and 122,913 OP units, respectively (as
subsequently adjusted, see below) were issued to affiliates of the Advisor.
These 470,789 OP Units were convertible to shares of Common Stock on a
one-to-one basis, subject to adjustment, on the
9
one year anniversary of their respective closing dates. The OP Units were issued
at an agreed upon value of $13 per OP Unit. If as of the last trading day prior
to the first anniversary of the closing date (the "Post-Closing Adjustment
Date"), the "Average Price Per Share" (as defined below) was less than $13, the
Company was obligated to issue additional OP Units to the respective sellers in
the amount of the difference between (i) the quotient obtained by dividing the
OP Unit value at $13 per OP Unit by the Average Price Per Share as of the
Post-Closing Adjustment Date and (ii) the number of OP Units issued on the
closing date. The Average Price Per Share means, with respect to any given date,
the average final closing price per share of Common Stock during the twenty
trading day period ending on such date. An additional 28,187 OP Units were
issued to the seller of Governor's Square on the Post-Closing Adjustment Date
(May 28, 1999) based on an Average Price Per Share of $10.01875. An additional
92,439 and 73,957 OP Units were issued to the sellers of Southgate and
Crossroads East, respectively, on the Post-Closing Adjustment Date (December 9,
1999) based on an Average Price Per Share of $9.0125.
OP Units, aggregating 718,944, have certain rights with respect to the sale,
transfer or other disposition of respective properties contributed to the
Company in return for such OP Units. Upon sale, transfer or other disposition of
such properties within a designated restricted period, other than an exchange or
other transaction which does not cause an OP Unitholder to recognize income or
gain for federal income tax purposes (a "Restricted Sale"), the Company is
required to pay an amount equal to their tax obligation payable, including the
amount of taxes resulting from receipt of such payment, as a result of such
event.
OP Units, aggregating 596,031, related to the Southgate and the Crossroad East
properties have a restricted period through December 10, 2008. OP Units,
aggregating 122,913, related to the Governor's Square property have a restricted
period through May 28, 2003.
The amount the Company may be required to pay upon a Restricted Sale is
dependent on the OP Unitholder's tax-basis capital account, effective federal
tax rate and entity structure at the time a Restricted Sale occurs. The Company
estimates that the additional payment required upon a Restricted Sale of all
subject properties would range from $4,800,000 to $5,700,000, assuming effective
tax rates ranging from 35% to 40%, respectively.
In addition, a note payable to the sellers of Southgate and the two notes
payable to the sellers of Crossroads East in the amounts of $200,000, $230,000
and $275,000, respectively, were partially repaid in the amounts of $135,400,
$213,708 and $236,646 through the issuance of 15,030, 23,716 and 26,259 OP Units
on December 9, 1999 based on an Average Price Per Share of $9.0125.
10
Item 6. Selected Financial Data.
The information set forth below presents selected financial data of the Company.
Additional financial information is set forth in the audited financial
statements and notes thereto contained in "Item 8. Financial Statements and
Supplementary Data".
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
OPERATIONS 2001 2000 1999 1998 1997(a)
---------- ---------- ----------- ----------- -----------
Total revenues $26,099,761 $26,167,270 $ 25,354,501 $ 19,504,803 $ 10,755,797
Total expenses (25,798,039) (20,147,117) (19,133,837) (13,544,516) (7,309,038)
---------- ---------- ----------- ----------- -----------
Income before gain on sales 301,722 6,020,153 6,220,664 5,960,287 3,446,759
Gain on sale of real estate - 108,332 - - -
Gain on sale of investment in
partnership (b) - - - 779,893 -
---------- ---------- ----------- ----------- -----------
Income before minority interest 301,722 6,128,485 6,220,664 6,740,180 3,446,759
Minority interest in income of the
Operating Partnership (27,831) (535,490) (397,583) (93,547) (8,263)
---------- ---------- ----------- ----------- -----------
Net income $ 273,891 $ 5,592,995 $ 5,823,081 $ 6,646,633 $ 3,438,496
========== ========== =========== =========== ===========
Net income applicable to common
stockholders $ 273,891 $ 5,592,995 $ 5,823,081 $ 6,646,633 $ 1,420,370(d)
========== ========== =========== =========== ===========
Net income per share (f) (c)
Basic $ .03 $ .69 $ .72 $ .83 $ .18(d)
========== ========== =========== =========== ===========
Diluted $ .03 $ .69 $ .72 $ .82 $ .18(d)
========== ========== =========== =========== ===========
Weighted average shares outstanding: (c)
Basic 8,051,555 8,048,894 8,046,574 8,049,987 8,050,727(d)
========== ========== ========== ========== ==========
Diluted 8,051,555 8,048,952 8,046,574 8,075,390 8,050,727(d)
========== ========== ========== ========== ==========
DECEMBER 31,
---------------------------------------------------------------------
FINANCIAL POSITION 2001 2000 1999 1998 1997(a)
----------- ----------- ----------- ----------- -----------
Total assets $190,038,068 $197,693,943 $193,392,424 $195,389,970 $148,639,328
=========== =========== =========== =========== ===========
Notes payable $66,147,599 $ 64,972,605 $ 59,239,944 $ 58,864,099 $ 18,544,242
=========== =========== =========== =========== ===========
Total liabilities $ 72,032,138 $ 71,564,672 $ 64,830,450 $ 65,402,567 $ 22,866,886
=========== =========== =========== =========== ===========
Minority interest $ 6,234,566 $ 6,941,884 $ 7,260,370 $ 6,803,895 $ 727,431
=========== =========== =========== =========== ===========
Total stockholders' equity/partners'
capital $111,771,364 $119,187,387 $121,301,604 $123,183,508 $125,045,011
=========== =========== =========== =========== ===========
DISTRIBUTIONS
Total BUC$holder distributions N/A N/A N/A N/A $ 2,700,004(e)
=========== =========== =========== =========== ===========
Total stockholder distributions and OP $ 8,465,063 8,466,935 8,251,846 8,467,486 $ 1,932,174(d)
=========== =========== =========== =========== ===========
Distributions per share (c) $ .96 $ .96 $ .96 $ 1.04 $ .24(d)
=========== =========== =========== =========== ===========
11
OTHER DATA
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
----------- ------------ ------------
Funds From Operations ("FFO") (g) $ 8,326,640 $ 10,980,864 $ 11,043,607
=========== ============ ============
Funds Available for Distribution ("FAD") (g) $ 7,478,611 $ 3,408,846 $ 8,652,037
=========== ============ ============
FFO payout ratio (h) 101.7% 77.1% 74.7%
=========== ============ ============
Cash flows from:
Operating activities $10,520,507 $ 11,189,802 $ 9,567,923
=========== ============ ============
Investing activities $ (1,718,776) $ (8,090,815) $ (1,970,601)
=========== ============ ============
Financing activities $ (7,359,667) $ (3,850,809) $ (8,374,501)
=========== ============ ============
(a) Information prior to October 1, 1997 (the date of the Consolidation) is only
with respect to Insured I. Information subsequent to September 30, 1997 is with
respect to the Company and its consolidated subsidiaries which include Insured I
and the other Partnerships pursuant to the Consolidation.
(b) The 1998 results of operations reflect a gain of $779,893 recognized upon
the sale of the Company's limited partnership interest in Dominion Totem Park
Limited Partnership.
(c) Net income and distribution per share information for periods before October
1, 1997 is not presented because it is not indicative of the Company's
continuing capital structure.
(d) Represents amount for the three months ended December 31, 1997.
(e) Represents amount for the nine months ended September 30, 1997.
(f) Net income per share equals net income divided by the weighted average
shares outstanding for the period.
(g) See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a definition and calculation of Funds From
Operations and Funds Available for Distribution.
(h) Represents total stockholder distributions divided by FFO.
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires long-term financing in order to invest in and maintain its
portfolio of Retail Properties and other investments. To date, this long-term
liquidity has come from proceeds from the Credit Facility, notes payable assumed
upon the purchase of certain properties and the issuance of shares of the
Company's Common Stock or OP Units in exchange for real estate. Although the
Credit Facility may be increased, the Company's Charter dictates leverage of no
more than 50% of the Company's Total Market Value. On a short-term basis, the
Company requires funds to pay its operating expenses and those of the Retail
Properties, to make improvements to the Retail Properties, pay its debt service
and make distributions to its stockholders. The primary source of the Company's
short-term liquidity needs are the cash flow received from the Retail Properties
and interest income.
As a REIT, the Company is required to distribute at least 90% of its taxable
income to maintain REIT status. Funds generated from operations are expected to
be sufficient to allow the Company to meet this requirement.
The Advisor believes that the stability of the Company's operations and its
ability to maintain liquidity are enhanced by:
(i) Geographic diversity of its portfolio of real estate.
(ii) 47% of total revenues for the year ended December 31, 2001 were earned from
shopping center anchor tenants, which are national retailers or credit tenants,
and from interest on an FHA Mortgage.
(iii) No single asset accounts for 10% or more of total revenues for the year
ended December 31, 2001.
(iv) Leases that provide for recovery of actual common area maintenance charges
and real estate taxes, thereby minimizing any effects from inflation.
(v) Leases that provide for increases in rents based on a percentage of tenants'
sales.
During the year ended December 31, 2001, cash and cash equivalents of the
Company and its consolidated subsidiaries increased approximately $1,442,000.
This increase was primarily due to cash from operations of approximately
$10,521,000, principal payments received on a mortgage loan $3,217,000, and
proceeds from notes payable $1,500,000, offset by distributions paid to
stockholders $8,464,000, improvements to real estate $3,500,000, an increase in
deferred acquisition expenses of $1,459,000 and $325,000 in periodic principal
payments on notes payable. Included in the adjustments to reconcile the net
income to cash provided by operating activities is depreciation and amortization
in the amount of $5,991,000 and a loss on impairment of asset of $2,500,000.
As part of the renewal of the lease for the anchor tenant at the Westbird
property, the Company made approximately $2,140,000 in tenant improvements
during 2000. The term of the new lease is 20 years with a minimum annual rent of
$246,000. The minimum annual rent under the old lease was $103,000. In addition,
Governors Square had over $1,250,000 in improvements and Rolling Hills had
$810,000. The total amount of all property's tenant improvements during 2000
totaled over $6,200,000 and were funded by cash from continuing operations and
borrowings on the Credit Facility.
The Company has the following problem assets which may adversely affect future
operations and liquidity:
(i) Safeway, the anchor tenant of Cactus Village Shopping Center closed its
facility in December 1991 due to poor sales. The tenant is currently in arrears
as it relates to a contractual increase in minimum rent of $.10 per square foot
per year (approximately $4,200 per year). The aggregate arrears as of December
31, 2001 is $20,910. The arrearage is due to different interpretations of the
lease which is expected to be resolved in 2002. With the exception of this
amount, the tenant continues to fully abide by all aspects of its lease which
will expire in September 2006. The Company is currently negotiating, with
Safeway, final terms which would enable Safeway to buy-out and terminate its
lease.
(ii) In July 1994, A&P closed its store in the Mountain Park Plaza Shopping
Center due to reduced sales and increased competition. The Company received
rental payments from the vacated tenant pursuant to the terms of the lease. In
December 2000, A&P bought out its lease for $300,000 and the Company entered
into a new lease with Publix. The former A&P space has been demolished and is
under reconstruction as of December 31, 2001. The Company's estimated cost to
reconstruct this space is $3,500,000 of which approximately $1,300,000 was paid
in 2001. Publix is expected to take occupancy of the new space in July 2002.
(iii) White Oaks Plaza shopping center, located in Spindale, NC, was deemed to
be impaired. The Company determined that it needed to analyze this property for
potential impairment due to three anchors have vacating their spaces and
increased competition in the surrounding area. Two of these anchors, Walmart and
Winn Dixie, are still paying rent and are current in their rent payments. Using
undiscounted cash flows compared to the book value of approximately $6.2 million
resulted in a deficit, indicating impairment. The Company recognized a loss on
impairment of $2.5 million during the fourth quarter of 2001, resulting from
comparing discounted cash flows (at a market discount rate for this type of
property) to the book value.
(iv) Office Max, one of the anchor tenants of Town West which was under
sublease, vacated its space in February 2000 but the original lessee is still
obligated to pay rent. The lessee stopped paying rent in April 2001 and has been
in default since that date. The Company has reserved 50% of the outstanding
balance of $88,743 at December 31, 2001.
(v) Food Lion, located in Barclay Place, closed their store in December 2000.
They are still obligated to pay rent through the expiration of its lease. To
date, Food Lion is current with all rent payments.
13
(vi) The Company has been notified that K-Mart, which has filed for bankruptcy,
intends to close its store located in the Centre Stage Shopping Center in
Springfield, Tennessee. The store has approximately 86,479 square feet of gross
leasable area and represents approximately $397,000 in annualized base rent. The
store is currently in operation and rental payments are current; however, the
Company cannot currently assess how the closing of the store will affect 2002
operating results until more details are provided by K-Mart.
In February 2002, a distribution of $2,116,471 ($.24 per share), which was
declared in December 2001, was paid to the stockholders from cash flow from
operations for the quarter ended December 31, 2001.
Management is not aware of any trends or events, commitments or uncertainties,
which have not otherwise been disclosed that will or are likely to impact
liquidity in a material way.
CRITICAL ACCOUNTING POLICIES
The Company has several accounting policies that require significant judgments
to be made by Company management.
Real estate assets are recorded at the lower of cost of fair value, if impaired.
Costs incurred for the acquisition, development, construction, and improvement
of properties are capitalized. Buildings are depreciated on a straight-line
basis over their estimated useful lives, generally 40 years. Maintenance and
repairs are charged to expense as incurred. Renewals and betterments that
significantly extend the useful life of a property are capitalized and amortized
over their estimated useful lives. Tenant improvements are capitalized and
amortized over the life of the lease. For redevelopment of existing operating
properties, the net book value of the existing property under redevelopment plus
the cost for the construction and improvements incurred in connection with the
redevelopment are capitalized to the extent the capitalized costs of the
property do not exceed the estimated fair value of the redeveloped property when
completed. If the total cost of the redeveloped property, including the
undepreciated net book value of the property carried forward, exceeds the
estimated fair value of the redeveloped property, the excess is charged to
expense. During 2001, the total amount of undepreciated book value carried
forward on redeveloped properties totaled approximately $1.8 million.
The Company reviews each of its property investments, including those held by
the partnerships which own the multifamily properties, for possible impairment
at least annually, and more frequently if circumstances warrant. Impairment of
properties is determined to exist when estimated amounts recoverable through
future operations on an undiscounted basis are below the properties' carrying
value. If a property is determined to be impaired, it is written down to its
estimated fair value.
At least annually, and more frequently if circumstances warrant, the Company
evaluates the collectibility of both interest and principal of its mortgage loan
receivable to determine whether it is impaired. A loan is considered to be
impaired when, based on current information and events, it is probable the
Company will be unable to collect all amounts due according to the existing
contractual terms. When a loan is considered to be impaired, the amount of the
loss accrual is determined by discounting the expected future cash flows at the
loan's effective interest rate or, for practical purposes, from the estimated
fair value of the collateral.
The determination of impairment is based not only upon future cash flows, which
rely upon estimates and assumptions including expense growth, occupancy and
rental rates, but also upon market capitalization and discount rates as well as
other market indicators. Management believes that the estimates and assumptions
used are appropriate in evaluating the carrying amount of the Company's
properties and loan. However, changes in market conditions and circumstances may
occur in the near term which would cause these estimates and assumptions to
change, which, in turn, could cause the amounts ultimately realized upon the
sale or other disposition of the investments to differ materially from their
estimated fair value. Such changes may also require write-downs in future years.
Amounts estimated to be recoverable from future operations and ultimate sales
are greater than the carrying value of each property owned at December 31, 2001
and 2000. However, the carrying value of certain properties may be in excess of
their fair values as of such dates. During 2001, one property became impaired
due to the continued inability to replace the existing anchor tenants and
attract smaller store tenants. The Company determined that the undiscounted
future cash flows were less than the property's fair market value and
accordingly wrote down the property to its estimated fair value, which resulted
in a loss on impairment of $2.5 million.
The Company has qualified as a REIT under the Code. A REIT is generally not
subject to federal income tax on that portion of its REIT taxable income
("Taxable Income") which is distributed to its stockholders provided that at
least 90% of Taxable Income is distributed and provided that such income meets
certain other conditions. Accordingly, no provision for federal income taxes is
required. The Company may be subject to state taxes in certain jurisdictions.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000
Net income for the year ended December 31, 2001 decreased by approximately
$5,319,000, or 95%, as compared to the year ended 2000. Revenue for the period
decreased by approximately $68,000, or .3%, as compared 2000, while expenses
increased approximately $5,651,000, due to the one time writeoff of expenses
associated with the POB Transaction and an impairment loss of $2,500,000 on
White Oaks Plaza. Minority interest in income decreased by approximately
$508,000. During the year ended December 31, 2000, the Company recognized a gain
on sale of real estate of approximately $108,000. There was no such transaction
in 2001.
14
The decrease in revenues for the year ended December 31, 2001 as compared to
2000 was primarily due to approximate decreases in early lease termination
payments of $483,000, decrease in income from equity investments of $134,000
offset by an increase in rental income of $27,000 an increase in tenant
reimbursements of $297,000 and an increase in interest income of $206,000.
Approximately $483,000 of the total decrease in early lease terminations was due
to the lease settlements received in 2000 for Mountain Park, Marion City Square
and White Oak Plaza. The decrease in income from equity investments was
primarily due to $80,000 decrease in Pinehurst income and $54,000 decrease in
Weatherly Walk income. The increase in tenant reimbursements was primarily due
to $103,000 of real estate taxes of Pablo Plaza, Rolling Hills, Southgate and
Emporia West. The increase in interest income was primarily due to a $167,000
increase in Woodgate mortgage interest and $65,000 increase in Merrill Lynch
dividend income.
The increase in expenses for the year ended December 31, 2001 as compared to
2000 was primarily due to approximate increases of $2,847,000 in expenses
associated with the terminated POB transaction and other terminated
transactions, $2,500,000 due to an impairment loss on White Oaks Plaza, $809,000
in depreciation, $37,000 in general and administrative expenses, $48,000 in real
estate taxes and $24,000 in management fees partially offset by decreases of
$54,000 in operating expenses, $71,000 in repairs and maintenance and $522,000
in interest expense.
Repairs and maintenance decreased approximately $71,000 due to reduced snow
removal costs and $82,000 due to reduced paving costs, partially offset by a
$62,000 increase in landscaping. The decrease in operating expenses is due to
lease costs becoming fully amortized and reduced legal and government service
expense. The increase in real estate taxes was primarily due to a $54,000
increase in Rolling Hills, Southgate and Emporia West real estate taxes offset
by $28,000 decrease in Mountain Park real estate taxes. Interest expense
decreased $342,000 due to the decreased interest rates of the Credit Facility
and $180,000 less in interest expense due to the repayment of the New York Life
note payable. During the year ended December 31, 2001, the Company had expenses
for terminated transactions of approximately $2,847,000. These costs were
primarily related to the P.O.B. acquisition. There was no such transaction in
2000. Of the increase in depreciation and amortization, $457,000 was due to
increased depreciation in improvement of Westbird, Governor's Square and several
other properties and $236,000 was due to increased amortization of the deferred
costs associated with the Credit Facility.
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999
Net income for the year ended December 31, 2000 decreased by approximately
$230,000, or 4%, as compared to the year ended 1999. Revenues, for the period,
increased by approximately $813,000, or 3%, as compared to the same period for
1999, while expenses increased by approximately $1,013,000, or 5.3%. Minority
interest in income increased by approximately $138,000. During the year ended
December 31, 2000, the Company recognized a gain on sale of real estate of
approximately $108,000. There was no such transaction in 1999.
The increase in revenues for the year ended December 31, 2000 as compared to
1999 was primarily due to approximate increases in rental income of $276,000, an
increase in income from equity investments of $86,000, an increase in early
lease termination payments of $406,000 and an increase in interest income of
$79,000 partially offset by decreases in tenant reimbursements of $8,000 and in
other income of $27,000.
Approximately $378,000 of the total increase in rental income was due to the
minimum rent of Winery Square, Pablo Plaza, Rolling Hills and reimbursement
charges offset by the decrease in White Oak Plaza minimum rent and Oxford Mall,
Southgate, Emporia West and Crossroads retro property taxes. Included in early
lease termination payments is a $300,000 lease settlement paid by A&P as a fee
for terminating their lease at Mountain Park. The increase in income from equity
investments was primarily due to $23,000 increase in Pinehurst income and
$63,000 increase in Weatherly Walk income. The increase in interest income was
primarily due to the $74,000 increase in the Crossroads and Southgate OP Unit
Loan mortgage interest income.
The increase in expenses for the year ended December 31, 2000 as compared to
1999, was primarily due to increases of $187,000 in repairs and maintenance,
$58,000 in operating expenses, $461,000 in interest expense, $289,000 in
depreciation and $145,000 in other expenses, partially offset by a decrease in
real estate taxes of approximately $45,000 and $80,000 in general and
administrative expenses.
Repairs and maintenance increased $88,000 due to parking lot light repairs,
$70,000 in snow removal and $24,000 in grounds landscaping, offset by a decrease
in painting of approximately $29,000. The increase in operating expenses is due
to unamortized lease costs, property management fees, and water and sewer
expenses of approximately $130,000. These operating expenses were offset by a
decrease of $62,000 in legal expenses incurred in 1999 but not in 2000. The
decrease in real estate taxes was primarily due to $125,000 of Southgate and
Crossroads prior year adjustments offset by $80,000 increase of real estate
taxes. Interest expense increased $857,000 due to the increased use of the
Credit Facility and was offset by $288,000 decrease due to the repayment of the
New York Life note payable and $104,000 decrease in rate swap interest. Of the
increase in depreciation and amortization, approximately $224,000 was due to
increased depreciation of additional improvements of Governor's Square, Westbird
and several other properties and $151,000 was due to increased amortization of
the deferred costs associated with the Credit Facility. These increases were
partially offset by $200,000 due to the repayment of the New York Life note
payable. The increase in other expenses was due to $193,000 in a write-off of
projects that were abandoned, offset by $61,000 decrease in bad debt expense.
A gain on sale of real estate of approximately $108,000 was recognized in the
year ended December 31, 2000. No such transaction occurred in 1999.
15
Minority interest in the income of the Operating Partnership increased
approximately $138,000 for the year ended December 31, 2000 as compared to 1999
primarily due to the increase in OP Units in connection with the post closing
price adjustment and settlement of the seller notes relating to the acquisition
of Southgate and Crossroads on December 9, 1999.
FUNDS FROM OPERATIONS AND FUNDS AVAILABLE FOR DISTRIBUTION
Funds from operations ("FFO"), represents net income (computed in accordance
with generally accepted accounting principles) ("GAAP"), excluding gains (or
losses) from debt restructuring or repayments and sales of property, impairment
losses, plus depreciation and amortization and including funds from operations
for unconsolidated joint ventures calculated on the same basis. FFO is
calculated in accordance with the National Association of Real Estate Investment
Trusts ("NAREIT") definition. FFO does not represent cash generated from
operating activities in accordance with GAAP and is not necessarily indicative
of cash available to fund cash needs which is disclosed in the Consolidated
Statements of Cash Flows included in the financial statements, for the
applicable periods. There are no material legal or functional restrictions on
the use of FFO. FFO should not be considered as an alternative to net income as
an indicator of the Company's operating performance or as an alternative to cash
flows as a measure of liquidity. Management considers FFO a supplemental measure
of operating performance and along with cash flow from operating activities,
financing activities and investing activities, it provides investors with an
indication of the ability of the Company to incur and service debt, to make
capital expenditures, pay distributions to stockholders, and to fund other cash
needs. The Company's calculation of FFO may not be comparable to calculations of
FFO by similar companies.
Funds available for distribution ("FAD") represents FFO plus recurring principal
receipts from mortgage loans less lease commissions, recurring capital
expenditures (excluding property acquisitions) and debt principal amortization.
Net income computed in accordance with GAAP includes straight-lining of property
rentals for rent escalations in the amounts of $82,829, $241,592 and $367,078
for the years ended December 31, 2001, 2000 and 1999, respectively. FAD should
not be considered an alternative to net income as a measure of the Company's
financial performance or to cash flow from operating activities (computed in
accordance with GAAP) as a measure of the Company's liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the Company's
needs.
FFO, as calculated in accordance with the NAREIT definition, and FAD for the
years ended December 31, 2001, 2000 and 1999 are summarized in the following
table:
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------- ------------
Income before minority interest $ 301,722 $ 6,128,485 $ 6,220,664
Loss on impairment of property 2,500,000 -- --
Gain on sale of real estate -- (108,332) --
Depreciation and amortization of real property 5,281,788 4,718,128 4,377,099
Amortization of insurance contract -- -- 200,195
Depreciation and amortization from equity investments 243,130 242,583 245,649
------------ ------------- ------------
Funds From Operations ("FFO") 8,326,640 10,980,864 11,043,607
Amortization of deferred financing costs 760,549 525,513 377,665
Principal payments received on mortgage loans 3,217,220 35,439 32,416
Straight-lining of property rentals for rent escalations (82,829) (241,592) (367,078)
Improvements to real estate (3,499,851) (6,198,584) (1,308,093)
Principal repayments on notes payable (325,006) (296,865) (538,401)
Leasing commissions (918,112) (1,395,929) (588,079)
------------ ------------- ------------
Funds Available for Distribution ("FAD") $ 7,478,611 $ 3,408,846 $ 8,652,037
============ ============ ============
Distributions to stockholders and minority interest $ 8,465,063 $ 8,466,935 $ 8,251,846
------------ ------------- ------------
FFO payout ratio 101.7% 77.1% 74.7%
============ ============ ============
Cash flows from:
Operating activities $ 10,520,507 $ 11,189,802 $ 9,567,923
============ ============ ============
Investing activities $ (1,718,776) $ (8,090,815) $ (1,970,601)
============ ============ ============
Financing activities $ (7,359,667) $ (3,850,809) $ (8,374,501)
============ ============ ============
Weighted average common shares outstanding 8,051,555 8,048,952 8,046,574
============ ============ ============
Weighted average common shares and OP Units outstanding 8,817,335 8,819,484 8,594,904
============ ============ ============
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments em-
16
bedded in other contracts, and for hedging activities, and was effective for the
Company beginning January 1, 2001. The Company has no derivative instruments at
or during the year ended December 31, 2001, so implementation of this standard
had no effect on the Company's financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations" (SFAS 141) and Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). These statements establish new standards for
accounting and reporting for business combinations and for goodwill and
intangible assets resulting from business combinations. SFAS 141 applies to all
business combinations initiated after June 30, 2001; the Company is required to
implement SFAS 142 on January 1, 2002. Implementation of these statements did
not have a material impact on the Company's financial statements.
In June of 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (effective January 1, 2003) and, in August of 2001, SFAS No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets" (effective
January 1, 2002). SFAS No. 143 requires the recording of the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. SFAS No. 144 supercedes existing accounting literature dealing with
impairment and disposal of long-lived assets, including discontinued operations.
It addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of, and expands current
reporting for discontinued operations to include disposals of a "component" of
an entity that has been disposed of or is classified as held for sale. The
impact of SFAS No. 144 will be to the extent that the Company disposes of
property; it will be treated as discontinued operations according to NAREIT.
FORWARD-LOOKING STATEMENTS
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include statements regarding the intent, belief or
current expectations of the Company and its management and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, the
following: general economic and business conditions, which will, among other
things, affect the demand for retail space or retail goods, availability and
creditworthiness of prospective tenants, lease rents and the terms and
availability of financing; adverse changes in the real estate markets including,
among other things, competition with other companies; risks of real estate
development and acquisition; governmental actions and initiatives; and
environment/safety requirements.
INFLATION
Inflation did not have a material effect on the Company's results for the
periods presented.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The debt financing used to raise capital for the acquisition of the Company's
investments exposes the Company to fluctuations in market interest rates. Market
interest rates are highly sensitive to many factors, including governmental
policies, domestic and international political considerations and other factors
beyond the control of the Company.
Cash flows from the Company's investments do not fluctuate with changes in
market interest rates. In addition, as of December 31, 2001, approximately 34.7%
of the Company's total notes payable outstanding are either fixed rate or
non-interest bearing, and so the payments on these instruments do not fluctuate
with changes in market interest rates. In contrast, payments required under the
Credit Facility vary based on market interest rates, primarily the 30 day
Euro-contract rate. Thus, an increase in market interest rates would result in
increased payments under the Credit Facility, without a corresponding increase
in cash flows from the Company's investments in the same amounts. For example,
based on the $43,193,000 outstanding under the Credit Facility at December 31,
2001, the Company estimates that an increase of 1% in the 30 day Euro-contract
rate would decrease the Company's annual net income by approximately $432,000; a
2% increase in the 30 day Euro-contract rate would decrease annual net income by
approximately $864,000. For the same reasons, a decrease in market interest
rates would generally benefit the Company, as a result of decreased payments
under the Credit Facility without corresponding decreases in cash flows from the
Company's investments. Various financial vehicles exist which would allow
Company management to mitigate the impact of interest rate fluctuations on the
Company's cash flows and earnings. On December 1, 1998, the Company entered into
an interest rate swap agreement with a notional amount of $10,000,000 at a fixed
rate of 5.44%. This agreement expired on December 1, 2000. Management may engage
in additional hedging strategies in the future, depending on management's
analysis of the interest rate environment and the costs and risks of such
strategies.
17
Item 8. Financial Statements and Supplementary Data.
PAGE
--------
(a) 1. Financial Statements
--------------------
Independent Auditors' Report 19
Consolidated Balance Sheets as of December 31, 2001 and 2000 20
Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 21
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 22
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 23
Notes to Consolidated Financial Statements 25
18
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors of
Aegis Realty, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Aegis Realty,
Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2001.
Our audits also included the financial statement schedules listed in Item 14
Schedule III. These financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Aegis Realty, Inc. and subsidiaries
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
New York, New York
March 11, 2002
19
AEGIS REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
2001 2000
----------- -----------
ASSETS
Real estate, net $171,356,539 $175,156,729
Investment in partnerships 5,475,418 5,746,841
Mortgage loan receivable -- 3,170,322
Loans receivable from affiliates 2,289,470 2,312,543
Cash and cash equivalents 2,916,537 1,474,473
Accounts receivable-tenants, net of allowance for doubtful
accounts of $378,000 and $383,000, respectively 3,005,333 3,215,665
Deferred costs, net 4,085,776 5,679,884
Other assets 908,995 937,486
----------- -----------
Total Assets $190,038,068 $197,693,943
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 66,147,599 $ 64,972,605
Accounts payable and other liabilities 3,768,068 4,476,477
Distributions payable 2,116,471 2,115,590
----------- -----------
Total Liabilities 72,032,138 71,564,672
----------- -----------
Minority interest of unitholders in the Operating Partnership 6,234,566 6,941,884
----------- -----------
Commitments and Contingencies
Stockholders' equity:
Common stock; $.01 par value; 50,000,000 shares authorized;
8,052,847 and issued 8,049,179 and outstanding in 2001
and 2000, respectively 80,528 80,491
Additional paid in capital 125,379,016 125,339,053
Distributions in excess of net income (13,688,180) (6,232,157)
----------- -----------
Total Stockholders' Equity 111,771,364 119,187,387
----------- -----------
Total Liabilities and Stockholders' Equity $190,038,068 $197,693,943
=========== ===========
See accompanying notes to consolidated financial statements.
20
AEGIS REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
---------- ---------- ----------
Revenues:
Rental income $19,983,396 $19,956,353 $19,680,116
Tenant reimbursements 4,970,870 4,674,235 4,682,075
Early lease termination payments 16,760 500,162 93,846
Income from equity investments 243,005 376,903 291,082
Interest income 767,703 561,693 482,442
Other 118,027 97,924 124,940
---------- ---------- ----------
Total revenues 26,099,761 26,167,270 25,354,501
---------- ---------- ----------
Expenses:
Repairs and maintenance 2,025,686 2,097,007 1,910,194
Operating 1,355,095 1,409,018 1,397,782
Real estate taxes 2,439,193 2,391,257 2,436,047
Interest 4,428,429 4,950,058 4,489,556
Management fees 2,392,170 2,368,481 2,304,330
General and administrative 884,639 848,246 946,519
Depreciation and amortization 5,995,152 5,186,493 4,897,811
Terminated transaction costs 2,846,804 -- --
Loss on impairment of asset 2,500,000 -- --
Other 930,871 896,557 751,598
---------- ---------- ----------
Total expenses 25,798,039 20,147,117 19,133,837
---------- ---------- ----------
Income before gains on sale 301,722 6,020,153 6,220,664
Gain on sale of real estate -- 108,332 --
---------- ---------- ----------
Income before minority interest 301,722 6,128,485 6,220,664
Minority interest in income of the
Operating Partnership (27,831) (535,490) (397,583)
---------- ---------- ----------
Net income $ 273,891 $ 5,592,995 $ 5,823,081
========== ========== ==========
Net income per share:
Basic $ .03 $ .69 $ .72
========== ========== ==========
Diluted $ .03 $ .69 $ .72
========== ========== ==========
Weighted average shares outstanding:
Basic 8,051,555 8,048,894 8,046,574
========== ========== ==========
Diluted 8,051,555 8,048,952 8,046,574
========== ========== ==========
See accompanying notes to consolidated financial statements.
21
AEGIS REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL DISTRIBUTIONS
--------------------- PAID-IN IN EXCESS OF
SHARES AMOUNT CAPITAL NET INCOME TOTAL
--------- ------ ----------- ----------- -----------
Balance at January 1, 1999 8,044,859 $80,448 $125,299,096 $ (2,196,036) $123,183,508
Net income -- -- -- 5,823,081 5,823,081
Issuance of shares of common stock 2,000 20 19,980 -- 20,000
Distributions -- -- -- (7,724,985) (7,724,985)
--------- ------ ----------- ----------- -----------
Balance at December 31, 1999 8,046,859 80,468 125,319,076 (4,097,940) 121,301,604
Net income -- -- -- 5,592,995 5,592,995
Issuance of shares of common stock 2,320 23 19,977 -- 20,000
Distributions -- -- -- (7,727,212) (7,727,212)
--------- ------ ----------- ----------- -----------
Balance at December 31, 2000 8,049,179 80,491 125,339,053 (6,232,157) 119,187,387
Net Income -- -- -- 273,891 273,891
Issuance of shares of common stock 3,668 37 39,963 40,000
Distributions -- -- -- (7,729,914) (7,729,914)
--------- ------ ----------- ----------- -----------
Balance at December 31, 2001 8,052,847 $80,528 $125,379,016 $ (13,688,180) $111,771,364
========= ======= =========== =========== ===========
See accompanying notes to consolidated financial statements
22
AEGIS REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------ ----------- -----------
Cash flows from operating activities:
Net income $ 273,891 $ 5,592,995 $ 5,823,081
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of real estate -- (108,332) --
Loss on impairment of asset 2,500,000 -- --
Depreciation and amortization 5,990,972 5,243,641 4,954,959
Minority interest in income of the Operating
Partnership 27,831 535,490 397,583
Distributions from equity investments
in excess of income 228,705 133,640 129,626
Terminated transaction costs 2,846,804 -- --
Leasing commissions and costs (918,112) (1,395,929) (659,579)
Changes in operating assets and liabilities:
Accounts receivable-tenants 214,918 (297,359) (474,991)
Allowance for doubtful accounts (4,587) 39,727 (40,146)
Other assets (412,860) 463,833 (165,577)
Accounts payable and other liabilities (227,055) 982,096 (397,033)
------------ ----------- -----------
Net cash provided by operating activities 10,520,507 11,189,802 9,567,923
------------ ----------- -----------
Cash flows from investing activities:
Net proceeds from sale of real estate -- 154,409 --
Improvements to real estate (3,499,851) (6,198,584) (1,308,093)
Acquisitions of real estate including
acquisition expenses -- (557,823) (653,015)
Increase in deferred acquisition expenses (1,459,217) (1,289,599) (45,038)
Repayments of loans receivable from affiliates 23,072 21,280 3,129
Loans made to affiliate -- (255,937) --
Principal payments received on mortgage loans 3,217,220 35,439 32,416
------------ ----------- -----------
Net cash used in investing activities (1,718,776) (8,090,815) (1,970,601)
------------ ----------- -----------
Cash flows from financing activities:
Repayments of notes payable -- (4,845,474) --
Periodic principal payments on notes payable (325,006) (296,865) (538,401)
Proceeds from notes payable 1,500,000 10,875,000 1,500,000
Distributions paid to stockholders (7,729,033) (7,726,655) (8,327,874)
Increase in deferred loan costs (70,479) (1,041,747) (553,324)
Distributions paid to minority interest (735,149) (815,068) (454,902)
------------ ----------- -----------
Net cash used in financing activities (7,359,667) (3,850,809) (8,374,501)
------------ ----------- -----------
(continued)
23
AEGIS REALTY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
--------- --------- ---------
Net increase/(decrease) in cash and cash equivalents 1,442,064 (751,822) (777,179)
Cash and cash equivalents at the beginning of
the year 1,474,473 2,226,295 3,003,474
--------- --------- ---------
Cash and cash equivalents at the end of the year $2,916,537 $1,474,473 $2,226,295
========= ========= =========
Supplemental information:
Interest paid $4,288,167 $4,950,059 $4,841,223
========= ========= =========
Supplemental disclosure of noncash activities:
Payable to directors liquidated
through the issuance of shares
of common stock $ 40,000 $ 20,000 $ 20,000
========= ========= =========
Reclassification of deferred acquisition expenses
to real estate upon purchase $ 61,278
=========
Repayment of purchase money notes
to sellers through the issuance
of units in the Operating Partnership $ 585,754
=========
See accompanying notes to consolidated financial
24
AEGIS REALTY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - General
Aegis Realty, Inc. ("Aegis" or the "Company") is a Maryland corporation that has
qualified as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986 as amended (the "Code"). The Company was formed to acquire, own,
operate and renovate primarily supermarket-anchored neighborhood and community
shopping centers. As of December 31, 2001, the Company owned a portfolio of 28
retail properties containing a total of approximately 3.0 million gross
leaseable square feet and held partnership interests in two suburban garden
apartment properties.
The Company was formed on October 1, 1997 as the result of the consolidation
(the "Consolidation") of four publicly registered, non-listed limited
partnerships, Summit Insured Equity L.P. ("Insured I"), Summit Insured Equity
L.P. II ("Insured II"), Summit Preferred Equity L.P. and Eagle Insured, L.P.
(the "Partnerships", and each individually a "Partnership"). One of the general
partners of the Partnerships was an affiliate of Related Capital Company
("Related"), a nationwide, fully integrated real estate financial services firm.
Pursuant to the Consolidation, the Company issued shares of its common stock,
par value $.01 per share (the "Common Stock") to all partners in the
Partnerships in exchange for their interests in the Partnership based upon each
partner's proportionate interest in the Common Stock issued to their Partnership
in the Consolidation.
The Company is governed by a board of directors comprised of two independent
directors and three directors who are affiliated with Related. The Company has
engaged Related Aegis LP (the "Advisor"), a Delaware limited partnership and an
affiliate of Related, to manage its day to day affairs.
The Company owns all of its assets directly or indirectly through Aegis Realty
Operating Partnership, LP, a Delaware limited partnership (the "Operating
Partnership" or "OP"), of which the Company is the sole general partner and
holder of 91.31% of the units of partnership interest (the "OP Units") at
December 31, 2001. At December 31, 2001, 5.54% of the OP Units are held by the
sellers of three of the retail properties and 3.15% were held by affiliates of
Related.
On December 21, 2000, the Company entered into a definitive acquisition
agreement to acquire a portfolio of 19 shopping centers and several retail
development opportunities (the "Acquisition Transaction") from P'OB. Montgomery
& Company ("POB"). On August 7, 2001, the Company announced that it had
terminated the Acquisition Transaction, by mutual consent with POB, for a fee of
$350,000. This fee, plus prior deferred expenses relating to the Acquisition
Transaction of approximately $2,227,000 have been included in the consolidated
statement of operations as terminated transaction costs.
In light of the decision to terminate the Acquisition Transaction, the Company,
at the direction of the Board of Trustees, has retained Robertson Stephens to
assist in developing an appropriate marketing strategy for the potential sale of
the Company or its assets. If acceptable values cannot be achieved, the Board of
Trustees will then pursue alternative strategies with the goal of maximizing
stockholder value. The Company has discontinued its pursuit of additional
investments and is focusing on the continuation of active management, leasing
and redevelopment of the property portfolio in order to maintain the value of
its portfolio upon a sale.
NOTE 2 - Summary of Significant Accounting Policies
a) Basis of Presentation
The books and records of the Company are maintained on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of financial statements in
conformity with GAAP requires the Advisor to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
b) Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiary partnerships. All intercompany accounts and transactions have
been eliminated in consolidation.
c) Real Estate
Real estate assets are recorded at the lower of cost or fair value, if impaired.
Costs incurred for the acquisition, development, construction, and improvement
of properties are capitalized. Buildings are depreciated on a straight-line
basis over their estimated useful lives, generally 40 years. Maintenance and
repairs are charged to expense as incurred. Renewals and betterments that
significantly extend the useful life of a property are capitalized and amortized
over their estimated useful lives. Tenant improvements are capitalized and
amortized over the life of the lease. For redevelopment of existing operating
properties, the net book value of the existing property under redevelopment plus
the cost for the construction and improvements incurred in connection with the
redevelopment are capitalized to the extent the capitalized costs of the
property do not exceed the estimated fair value of the redeveloped property when
completed. If the total cost of the redeveloped property, including the
undepreciated net book value of the property carried forward, exceeds the
estimated fair value of the redeveloped property, the excess is charged to
expense. During 2001, the total amount of undepreciated book value carried
forward on redeveloped properties totaled approximately $1.8 million.
25
d) Investment in Partnerships
The Company accounts for its investment as a limited partner in partnerships,
which own the multifamily properties, using the equity method of accounting
because it exercises significant influence over, but does not control, these
limited partnerships.
e) Impairment
The Company reviews each of its property investments, including those held by
the partnerships which own the multifamily properties, for possible impairment
at least annually, and more frequently if circumstances warrant. Impairment of
properties is determined to exist when estimated amounts recoverable through
future operations on an undiscounted basis are below the properties' carrying
value. If a property is determined to be impaired, it is written down to its
estimated fair value.
At least annually, and more frequently if circumstances warrant, the Company
evaluates the collectibility of both interest and principal of its mortgage loan
receivable to determine whether it is impaired. A loan is considered to be
impaired when, based on current information and events, it is probable the
Company will be unable to collect all amounts due according to the existing
contractual terms. When a loan is considered to be impaired, the amount of the
loss accrual is determined by discounting the expected future cash flows at the
loan's effective interest rate or, for practical purposes, from the estimated
fair value of the collateral.
The determination of impairment is based not only upon future cash flows, which
rely upon estimates and assumptions including expense growth, occupancy and
rental rates, but also upon market capitalization and discount rates as well as
other market indicators. Management believes that the estimates and assumptions
used are appropriate in evaluating the carrying amount of the Company's
properties and loan. However, changes in market conditions and circumstances may
occur in the near term which would cause these estimates and assumptions to
change, which, in turn, could cause the amounts ultimately realized upon the
sale or other disposition of the investments to differ materially from their
estimated fair value. Such changes may also require write-downs in future years.
Amounts estimated to be recoverable from future operations and ultimate sales
are greater than the carrying value of each property owned at December 31, 2001
and 2000. However, the carrying value of certain properties may be in excess of
their fair values as of such dates. During 2001, one property became impaired
due to the continued inability to replace the existing anchor tenants and
attract smaller store tenants. The Company determined that the undiscounted
future cash flows were less than the property's carrying value and accordingly
wrote down the property to its estimated fair value, which resulted in a loss on
impairment of $2.5 million.
f) Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and money market funds, and
temporary investments in short-term instruments with original maturities equal
to or less than three months.
g) Deferred Loan Costs
Costs incurred in connection with the Company's debt have been capitalized and
are being amortized over the life of the respective debt using the effective
yield method.
h) Deferred Leasing Commissions
Costs incurred in connection with the lease-up of vacant space and lease
renewals have been capitalized and are being amortized over the term of the
underlying leases.
Amortization related to the deferred costs described in (g) and (h) above is
included in depreciation and amortization expense.
i) Deferred Acquisition Expenses
Direct costs incurred in connection with the proposed purchase of retail
properties are deferred. Upon acquisition of a property, the associated costs
are capitalized as real estate. Direct costs incurred in connection with
properties which are not acquired, and all indirect acquisition costs, are
charged to operations.
j) Revenue Recognition
Rental income includes amounts received and accrued from operating leases. The
straight-line basis is used to recognize base rents under leases which provide
for varying rents over the lease terms. Rentals based on a percentage of tenant
sales over a specified threshold are accrued after the threshold is exceeded.
Payments received from tenants to induce the Company to release the tenant from
its lease obligation prior to expiration are recognized upon termination of the
lease. Amounts due from tenants as reimbursements of common area maintenance,
real estate taxes and insurance are accrued as the related expenses are
incurred. Interest income on the mortgage loan receivable is accrued as it is
earned.
26
k) Income Taxes
The Company has qualified as a REIT under the Code. A REIT is generally not
subject to federal income tax on that portion of its REIT taxable income
("Taxable Income") which is distributed to its stockholders provided that at
least 90% of Taxable Income is distributed and provided that such income meets
certain other conditions. Accordingly, no provision for federal income taxes is
required. The Company may be subject to state taxes in certain jurisdictions.
During 2001, the Company declared distributions of $.96 per share. For federal
income tax purposes, $.40 and $.56 per share of ordinary income and return of
capital, respectively, was reported to stockholders for 2001.
l) Comprehensive Income
Because the Company has no items of other comprehensive income, the Company's
net income and comprehensive income are the same for all periods presented.
m) Segment Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", requires enterprises to report certain financial and descriptive
information about their reportable operating segments, and certain
enterprise-wide disclosures regarding products and services, geographic areas
and major customers. The Company is an investor in real estate related assets
and operates in only one reportable segment. All of the Company's investments
are, or are secured by, real estate properties located in the United States;
accordingly, all of its revenues were derived from U.S. operations.
n) Mortgage Loan Receivable
The Company accounts for its investments in mortgage loans and notes receivable
under the provisions of Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). Under SFAS 114,
a loan is impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. SFAS No. 114 requires lenders to
measure impaired loans based on: (i) the present value of expected future cash
flows discounted at the loans' effective interest rate; (ii) the loan's
observable market price; or (iii) the fair value of the collateral if the loan
is collateral-dependent. An allowance for loan losses is maintained if the
measure of an impaired loan is less than its recorded investment. Adjustments to
the allowance are made through corresponding charges or credits to the provision
for loan losses.
Interest on mortgage loans and notes receivable is recognized on the accrual
basis. Interest which was accrued but not received is reversed from income if
deemed to be uncollectible.
o) Fair Value of Financial Instruments
The Company has determined that the fair value of its financial instruments,
including cash and cash equivalents, mortgage loan receivable, accounts
receivable -- tenants and notes payable approximate their carrying values at
December 31, 2001 and 2000.
p) New Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
establishes acounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 was implemented by the Company beginning on
January 1, 2001. Because the Company does not utilize derivatives,
implementation of this statement had no effect on the Company's financial
statements.
In June 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations" (SFAS 141) and Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). These statements establish new standards for
accounting and reporting for business combinations and for goodwill and
intangible assets resulting from business combinations. SFAS 141 applies to all
business combinations initiated after June 30, 2001; the Company is required to
implement SFAS 142 on January 1, 2002. Implementation of these statements did
not have a material impact on the Company's financial statements.
In June of 2001, the FASB issued SFAS No, 143, "Accounting for Asset Retirement
Obligations" (effective January 1, 2003) and in August of 2001, SFAS No. 144,
"Accounting for the Impairment of Disposal of Long Lived Assets" (effective
January 1, 2002). SFAS No. 143 requires the recording of the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. SFAS No. 144 supercedes existing accounting literature dealing with
impairment and disposal of long-lived assets, including discontinued operations.
It addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of, and expands current
reporting for discontinued operations to include disposals of a "component" of
an entity that has been disposed of or is classified as held for sale.
Management believes the implementation of these standards will not have a
material impact on the financial statements.
27
q) Reclassifications
Certain amounts in the 2000 and 1999 financial statements have been reclassified
to conform to the 2001 presentation.
NOTE 3 - Real Estate
The components of real estate are as follows:
DECEMBER 31,
------------------------------
2001 2000
----------- ------------
Land $ 42,041,873 $ 40,267,037
Buildings and improvements 161,165,742 162,348,285
----------- ------------
203,207,615 202,615,322
Less: Accumulated depreciation (31,851,076) (27,458,593)
----------- ------------
$171,356,539 $175,156,729
=========== ===========
Amounts estimated to be recoverable from future operations and ultimate sales
are greater than the carrying value of each property owned at December 31, 2001
and 2000. However, the carrying value of certain properties may be in excess of
their fair values as of such dates.
During 2001, the Company determined that White Oaks Plaza had become impaired
and accordingly wrote the property down to its estimated fair market value and
incurred a loss on impairment of $2,500,000 due to the fact the undiscounted
future cash flow was less than the carrying value (see Note 2.e) -- Impairment).
During 2001, a portion of Mountain Park Plaza Shopping Center was demolished in
order to construct new space for Publix. The unamortized amount of the portion
of the building that was demolished, approximately $1.8 million, was capitalized
and will be included in the basis of the reconstructed facility.
On May 19, 2000, the Company acquired an out-parcel of developable land
contiguous to the Forest Park Square property for $500,000 plus acquisition
costs of approximately $32,360.
As part of the renewal of the lease for the anchor tenant at the Westbird
property, the Company made $2,140,000 in tenant improvements during 2000. The
term of the new lease is 20 years with a minimum rental of $246,000. The minimum
annual rent under the old lease was $103,000.
The acquisitions of Governor's Square, Southgate and Crossroad East, three
properties with purchase prices of $8,200,000, $15,100,000 and $4,800,000,
respectively, were partially financed through the issuance of 94,726, 208,914
and 167,149 OP Units (subject to adjustment) valued at $1,231,438, $2,715,882
and $2,172,937. These OP Units were convertible to shares of Common Stock on a
one-to-one basis, subject to adjustment, beginning on the one year anniversary
of their respective closing dates. The OP Units were issued at an agreed upon
value of $13 per OP Unit. If, as of the last trading day prior to the first
anniversary of the closing date (the "Post-Closing Adjustment Date"), the
"Average Price Per Share" (as defined) was less than $13, the Company was
obligated to issue additional OP Units to the respective sellers in the amount
of the difference between (i) the quotient obtained by dividing the OP Unit
value at $13 per OP Unit by the Average Price Per Share as of the Post-Closing
Adjustment Date and (ii) the number of OP Units issued on the closing date. An
additional 28,187 OP Units were issued to the seller of Governor's Square on the
Post-Closing Adjustment Date (May 28, 1999) based on an Average Price Per Share
of $10.01875. An additional 92,439 and 73,957 OP Units were issued to the
sellers of Southgate and Crossroads East, respectively, on the Post-Closing
Adjustment Date (December 9, 1999) based on an Average Price Per Share of
$9.0125.
None of the Company's investment properties accounted for 10% or more of the
Company's total gross revenues for any of the three years in the period ended
December 31, 2001.
During the years ended December 31, 2001, 2000 and 1999, the Kroger Company,
which is a tenant at six shopping centers, accounted for approximately 12%, 11%
and 12%, respectively, of the Company's total revenues.
Based on the carrying value at December 31, 2001, approximately 16% of the
Company's investment properties are located in Ohio, 11% are located in Florida,
and 11% are located in Virginia. No other states comprise more than 10% of the
total carrying value.
The Company has been notified that K-Mart, which has filed for bankruptcy,
intends to close its store located in the Centre Stage Shopping Center in
Springfield, Tennessee. The store has approximately 86,479 square feet of gross
leasable area and represents approximately $397,000 in annualized base rent. The
store is currently in operation and rental payments are current; however, the
Company cannot currently assess how the closing of the store will affect 2002
operating results until more details are provided by K-Mart.
Insured II, an indirectly wholly-owned subsidiary of the Company, is the record
owner of three of the retail properties. Insured II is the beneficiary of an
insurance policy (the "Policy") from Continental Casualty Company ("CNA") which,
in effect, insures that
28
the cumulative amount of cash available for distribution, from all sources, as
determined in accordance with the Policy and related agreement together with the
appraised values of the Retail Properties then owned by Insured II, will equal
at least 100% of the aggregate original capital contributions to Insured II
allocated to investment in properties on the day on which the last such Retail
Property was acquired by Insured II. The Policy expired in May 2001. Insured I
had been the beneficiary of a similar policy that expired in November 1999. No
payments were received on either policy.
NOTE 4 - Deferred Costs
The components of deferred costs are as follows:
DECEMBER 31,
--------------------------
2001 2000
--------- ---------
Deferred loan costs $3,508,151 $3,437,672
Deferred leasing commissions and costs 3,330,350 2,667,216
Deferred acquisition expenses -- 1,387,588
--------- ---------
6,838,501 7,492,476
Less: Accumulated amortization (2,752,725) (1,812,592)
--------- ---------
$4,085,776 $5,679,884
========= =========
The decrease in deferred acquisition expenses in 2001 is due to the write-off of
approximately $2.8 million of various deferred acquisition expenses including
the deferred acquisition expenses related to the termination of the Acquisition
Transaction discussed in Note 1.
NOTE 5 - Investments in Partnerships
The Company owns a 98.99% limited partnership interest in the TCR-Pinehurst
Limited Partnership ("Pinehurst"), which acquired and operates the Pinehurst
apartment complex in Kansas City, Missouri. Under the original terms of this
investment, the Company is entitled to a preferred equity return of 8.8% per
annum on its initial investment of $3,799,620, and 9.85% on a subsequent
investment of $1,949,805. These preferred equity returns are cumulative and non
interest-bearing. The cumulative, unrecorded and undistributed preferred equity
returns to the Company totaled $1,880,466 and $1,826,245 at December 31, 2001
and 2000, respectively. These preferred equity returns are payable from excess
cash flow from operations or proceeds from a sale or refinancing of Pinehurst's
rental property.
On August 26, 1998, the Company invested $895,200 for a 40% interest as a
limited partner in FAI Ltd. ("FAI"), the limited partnership which owns the
Weatherly Walk Apartments located in Fayetteville, Georgia. This equity interest
earns an annual preferred return of 10.5% on $895,200, paid monthly, plus 40% of
excess cash flow and sale or refinancing proceeds. As of December 31, 2001, the
Company had not received approximately $47,000 of the preferred returns due from
FAI.
Amounts estimated to be recoverable from future operations or ultimate sales are
greater than the carrying value of the Company's investments in partnerships at
December 31, 2001.
NOTE 6 - Mortgage Loan Receivable
As of December 31, 2000, the Company held a FHA mortgage and an equity loan
secured by Woodgate Manor, an apartment complex located in Gainesville, Florida.
The FHA mortgage, in the original amount of $3,110,300, had a stated interest
rate of 8.95% and matured January 1, 2024.
The equity loan, in the original amount of $339,700, represented a non-interest
bearing advance made to the developer for such items as initial operating
deficit escrow requirements and HUD related contingencies such as working
capital escrow and cash requirements.
On April 23, 2001, the owner of Woodgate Manor sold the property to a third
party. The Company received approximately $3.2 million from the borrower, which
approximated the carrying value of the loans at the time of repayment.
29
NOTE 7 - Notes Payable
As of December 31, 2001 and 2000, the Company had notes payable as follows:
COLLATERAL/
DATE OF MONTHLY CARRYING
NOTE/ PAYMENT OUTSTANDING OUTSTANDING BALLOON VALUE AT
MATURITY INTEREST OF PRINCIPAL BALANCE BALANCE PAYMENT/ DECEMBER
NOTEHOLDER DATE RATE AND INTEREST AT 12/31/01 AT 12/31/00 DUE DATE 31, 2001
---------- ---------- --------- ------------ ----------- ----------- -------- ------------
(a) 12/29/97 (b) Interest $43,193,000 $41,693,000(c) (d)
12/29/03 only
Heller 6/24/97 (e) 8.50% $19,992 2,496,829 2,523,267 $2,307,314 Barclay Place/
Financial, Inc. 7/1/07 7/1/07 $4,032,117
Nomura 10/28/97 (f) 7.54% $33,130 3,689,580 3,800,498 Village At
Asset Capital 11/11/22 Waterford/
Corporation $6,163,471
Chase Bank 12/16/96 (g) 8.875% $51,717 6,226,054 6,290,934 $5,808,553 Oxford Mall/
1/1/07 1/1/07 $8,564,950
Merrill Lynch 9/18/97 (h) 7.73% $79,509 10,542,136 10,664,906 $9,634,530 Southgate/
---------- ----------
Credit 10/1/07 10/1/07 $15,432,723
Corporation
$66,147,599 $64,972,605
========== ==========
(a) The Credit Facility is shared among Fleet Bank (28.57%), KeyBank National
Association (28.57%), Citizens Bank of Rhode Island (28.57%) and Sovereign Bank
(14.29%).
In connection with the Credit Facility, the Company must comply with various
financial covenants including maximum loan to value ratios, interest and fixed
charge coverage ratios, and net worth requirements. In connection with the
Company's covenant compliance certification required subsequent to the filing of
the Company's second and third quarter 2001 10-Qs, the Company was in compliance
with all but one of these covenants. The Company was not in compliance with a
covenant requiring that aggregate distributions by the Company during any
consecutive four quarters not exceed ninety percent of the Company's funds from
operations ("FFO") for such periods. Unlike the covenant provisions based on
adjusted net income, under the covenant in question, the Company's FFO is not
adjusted for extraordinary or nonrecurring items. In the second, third and
fourth quarters of 2001, FFO was significantly reduced by nonrecurring expenses
related to the termination of the POB transaction (Note 1). The Company received
a waiver on this covenant from each of the syndicate banks of the Credit
Facility for each of the quarters' of non-compliance.
(b) The interest rate under the Credit Facility can float 1/2% under Fleet
Bank's base rate or can be fixed in 30, 60, 90 and 180 day periods at various
spreads over the indicated Euro-contract, ranging from 1.75% to 2.125% depending
on the Company's ratio of total debt to total assets. The Company has currently
elected the 30 day rate which was 1.94% at December 31, 2001.
(c) Outstanding balance of an $80 million senior revolving credit facility
("Credit Facility").
(d) The Credit Facility was collateralized at December 31, 2001 by nineteen
Retail Properties and one investment in a partnership with carrying values of
$108,387,680 and $4,844,599, respectively. In addition, the obligation under the
Credit Facility is guaranteed by the Company, Summit Insured I, Summit Insured
II (two of the Company's subsidiaries) and TCR-Pinehurst Limited Partnership
(one of the two partnerships in which the Company has invested).
(e) Note was assumed upon purchase by the Company on March 31, 1998 of the
property collateralizing the note.
(f) Note was assumed upon purchase by the Company on April 22, 1998 of the
property collateralizing the note.
(g) Note was assumed upon purchase by the Company on November 24, 1998 of the
property collateralizing the note.
(h) Note was assumed upon purchase by the Company on December 9, 1998 of the
property collateralizing the note .
30
On December 1, 1998, the Company entered into an interest rate swap agreement
with a notional amount of $10,000,000, intended to reduce the impact of changes
in interest rates on the Credit Facility. This agreement effectively changed the
Company's interest rate on $10,000,000 of the Credit Facility debt to a fixed
rate of 5.44% and matured on December 1, 2000. The Company accounted for the net
cash settlements under this swap agreement as adjustments to the interest
expense on the Credit Facility.
Annual principal payment requirements as of December 31, 2001 for each of the
next five fiscal years and thereafter are as follows:
YEAR ENDING AMOUNT
----------- ----------
2002 $ 349,726
2003 43,571,907*
2004 407,394
2005 444,489
2006 481,587
Thereafter 20,892,496
----------
$66,147,599
==========
*Includes the maturity of the Credit Facility.
The Company has determined that the carrying value of the notes payable
approximates their fair value at December 31, 2001 and 2000, either because the
interest rate on such notes fluctuates according to a market index, or because
the fixed rate notes bear interest at rates comparable to market rates for
similar instruments.
NOTE 8 - Related Party Transactions
Pursuant to the Advisory Agreement, the Advisor receives (i) acquisition fees
equal to 3.75% of the acquisition prices of properties acquired; (ii) mortgage
selection fees based on the principal amount of mortgage loans funded; (iii)
asset management fees equal to .375% of the total invested assets of the
Company; (iv) a liquidation fee based on the gross sales price of the assets
sold by the Company in connection with a liquidation of the Company's assets;
and (v) reimbursement of certain administrative costs incurred by the Advisor on
behalf of the Company.
The original term of the Advisory Agreement terminated on October 1, 2001.
Thereafter, the Advisory Agreement is renewable annually by the Company and the
OP, subject to the majority approval of the Company's Board of Directors and the
OP. On September 13, 2001, the Advisor, OP and the Company executed an amendment
to the original Advisor Agreement which extended the term for a one year period.
The Advisory Agreement cannot be terminated by the Company, other than for gross
negligence or willful misconduct of the Advisor and by a majority vote of the
Company's independent directors. The Advisory Agreement may be terminated
without cause by the Advisor at any time.
The Company's Retail Properties are managed by RCC Property Advisors (the
"Property Manager"), an affiliate of the Advisor, for a fee equal to 4.5% of the
gross rental receipts from the retail properties. The Property Manager also
receives standard leasing commissions for space leased to new tenants and for
lease renewals and is reimbursed for certain expenses.
The costs incurred to related parties for the years ended December 31, 2001 and
2000 and 1999 were as follows:
2001 2000 1999
--------- --------- ---------
Acquisition fees $ -- $ 19,699 $ 23,805
Expense reimbursement 289,506 289,962 271,972
Property management fees 1,138,054 1,084,563 1,037,014
Leasing commissions and costs 727,423 1,126,850 471,888
Asset management fee 771,358 779,379 779,561
--------- --------- ---------
$2,926,341 $3,300,453 $2,584,240
========= ========= =========
On December 9, 1998, in connection with the acquisition of Southgate and
Crossroads East, the Company made loans (the "OP Unit Loans") totaling
$2,081,015 to Standard Investment Company ("SIC"), a partner in the partnerships
(unaffiliated with the Advisor) which owned the two properties. The loans were
originally secured by 163,517 OP units issued to SIC in exchange for its
partnership interests in the partnerships which owned the properties and also by
a guarantee from the principals of SIC for 25% of the total loan amounts. On
January 4, 2000, in connection with the repayment of seller notes payable (see
Note 7(i)), an additional 101,518 OP units were issued, the OP Unit Loans were
increased by $255,937 and the interest rate was increased from 7.613% to 10.03%.
The OP Unit Loans mature on the earlier of December 9, 2015 or the sale date of
the underlying properties. Interest and principal are payable only to the extent
of distributions with respect to the OP Units. Such distributions will be
retained by the Company until all accrued interest and the outstanding balances
of the loans are repaid. As of December 31, 2001 and 2000, the balances of
31
these OP Unit Loans totaled $2,289,470 and $2,312,543, respectively, and are
shown as Loans Receivable from Affiliates on the consolidated balance sheets.
The amounts owed or due to the advisor and affiliates at December 31, 2001 and
2000, were $441,351 and ($47,521) respectively; these amounts are included in
other assets.
The OP units have certain rights with respect to the sale, transfer or other
disposition of respective properties contributed to the Company in return for
such OP units. Upon sale, transfer or other disposition of such properties
within a designated restricted period, other than an exchange or other
transaction which does not cause an OP unitholder to recognize income or gain
for federal income tax purposes, the Company is required to pay an amount equal
to their tax obligation payable. The Company estimates that may be required upon
a restricted sale of all subject properties, to affiliates of the Company, would
range from approximately $1.2 million to $1.6 million, assuming effective tax
rates ranging from 35% to 40%, respectively.
NOTE 9 - Earnings Per Share
Basic net income per share in the amount of $.03, $.69 and $.72 for the years
ended December 31, 2001, 2000 and 1999, respectively, equals net income for the
periods ($273,891, $5,592,995 and $5,823,081, respectively), divided by the
weighted average number of shares outstanding for the periods (8,051,555,
8,048,894 and 8,046,574, respectively).
Diluted net income per share in the amount of $.03, $.69 and $.72 for the years
ended December 31, 2001, 2000 and 1999, respectively, equals net income for the
periods, divided by the weighted average number of diluted shares outstanding
for the periods (8,051,555, 8,048,952 and 8,046,574, respectively). For the year
ended December 31, 2001, the stock options were potentially antidilutive by
approximately 3,000 shares, so were not included in the calculation of weighted
average diluted shares.
There is no difference between basic and diluted net income per share with
respect to the conversion of the minority interests' OP Units outstanding at
December 31, 2001, 2000 and 1999 into an additional 765,780, 765,780 and 777,213
shares, respectively, of Common Stock because the earnings of an OP Unit are
equivalent to the earnings of a share of Common Stock.
NOTE 10 - Leases
Future minimum base rentals due from tenants under non-cancelable operating
leases as of December 31, 2001 are as follows:
YEAR ENDING DECEMBER 31 AMOUNT
----------------------- ------------
2002 $ 19,266,000
2003 17,544,000
2004 15,263,000
2005 13,167,000
2006 10,978,000
Thereafter 40,963,000
------------
Total $117,181,000
===========
Certain leases require the lessees to reimburse the Company for real estate
taxes, insurance costs and certain other reimbursable expenses.
All 28 retail properties have certain tenants with leases that require payment
of percentage rent. Percentage rent is an amount paid by the tenant which
represents a portion of its sales over a specified threshold amount as called
for in the lease. Percentage rent received during the years ended December 31,
2001, 2000 and 1999 was approximately $126,000, $328,000 and $183,000,
respectively.
NOTE 11 - Common Stock
The Company has adopted an incentive stock option plan (the "Incentive Stock
Option Plan"), the purpose of which is to (i) attract and retain qualified
persons as directors and officers and (ii) to incentivize and more closely align
the financial interests of the Advisor and its affiliates and their respective
employees and officers with the interests of the stockholders by providing the
Advisor and its affiliates with substantial financial interest in the Company's
success. The Compensation Committee of the Company's Board of Directors
administers the Incentive Stock Option Plan. Pursuant to the Incentive Stock
Option Plan, if the Company's distributions per share of Common Stock in the
immediately preceding calendar year exceed $0.9869 per share, the Compensation
Committee has the authority to issue options to purchase, in the aggregate, that
number of shares of Common Stock which does not exceed three percent of the
shares outstanding as of December 31 of the immediately preceding calendar year
(or in the initial year, as of October 1, 1997). Any options not granted in a
given year are carried over and become available to be granted in subsequent
years. The maximum number of shares that can be issued over the life of the
Incentive Stock Option Plan is 805,073.
All options granted will have an exercise price equal to or greater than the
fair market value of the shares of Common Stock on the date of the grant. The
maximum option term is ten years from the date of grant. All stock options
granted pursuant to the Incen-
32
tive Stock Option Plan may vest immediately upon issuance or may vest later, as
determined by the Compensation Committee. The Company's distributions per share
of Common Stock for the years ended December 31, 1999 and 1997 did not exceed
$.9869 per share. In 1998, the Company distributed $1.035 per share of Common
Stock ($0.96 from continuing operations and a $0.075 special capital gains
distribution), thus enabling the Compensation Committee, at their discretion, to
issue up to 241,522 options.
On August 2, 2001, the Board of Directors, including the members of the
compensation committee, approved the grant of options to acquire 241,552 shares
of common stock to employees and affiliates and the Advisor. The exercise price
of the option is $10.57. The shares underlying the options have been placed in a
trust. Any dividends or other distributions attributed to the shares will be
paid into the trust. The accumulative dividends will earn interest which will
also be accumulated.
The options will become vested and exercisable on the earlier of August 2, 2004,
or thirty days before the final liquidation date of the Company (as determined
by the Board of Directors based on a reasonable expectation of the date on which
the Company's stockholders will receive a final distribution liquidating their
shares). If the options become exercisable on August 2, 2004, they shall remain
exercisable until August 2, 2011. If the options become exercisable due to the
earlier liquidation of the Company, they must be exercised before the final
liquidation date; if not exercised by such date, the options will automatically
terminate on that date. The weighted average grant date fair value of the
options was $128,007. At December 31, 2001, none of the options were
exercisable, nor had any been exercised.
Through calendar year 1999, each independent director was entitled to receive
annual compensation for serving as a director in the aggregate amount of $15,000
payable in cash (maximum of $5,000 per year) and/or shares of Common Stock
valued based on the fair market value at the date of issuance. Beginning in
calendar year 2000, the annual compensation for each independent director was
increased from $15,000 to $17,500 and the maximum payable in cash was increased
from $5,000 to $7,500. In addition, each independent director received $7,520 in
cash and stock valued at $10,000 as compensation for serving on the special
committee of the Board of Directors in connection with the Acquisition
Transaction. As of December 31, 2001 and 2000, 4,210 and 2,376 shares,
respectively, having an aggregate value at the date of issuance of $42,500 and
$22,500, respectively, have been issued to each of the Company's two independent
directors as compensation for their services. An additional 892 shares with an
aggregate value of $10,000 were issued to each independent Director in January,
2002.
On January 29, 1999, the Company adopted a stockholder rights plan (the
"Stockholder Rights Plan"). Terms of the Stockholder Rights Plan provide for a
distribution to common stockholders of record at the close of business on
February 16, 1999 of one Right for each outstanding share of Common Stock of the
Company. Subject to limited exceptions, the Rights will be exercisable if a
person or group acquires 15% or more of the Company's Common Stock or announces
a tender offer for 15% or more of the Common Stock. Depending on the
circumstances, the effect of the exercise of the Rights will be to permit each
holder of a Right to either purchase stock in the Company or stock of the buyer,
at a substantial discount, and, in so doing, materially dilute the level of
ownership of the buyer in the Company. The Company will be entitled to redeem
the Rights at $.01 per Right at any time before a person has acquired 15% or
more of the outstanding Common Stock. The Stockholder Rights Plan will expire on
February 16, 2009.
On October 9, 1998, the Board of Directors authorized the implementation of a
stock repurchase plan, enabling the Company to repurchase, from time to time, up
to 500,000 shares of its Common Stock. The repurchases will be made in the open
market and the timing will be dependent on the availability of shares and other
market conditions. As of both December 31, 2001 and 2000, the Company had
acquired 6,300 shares of its Common Stock for an aggregate purchase price of
$58,579 (including commissions and service charges). Repurchased shares are
accounted for as retired.
33
NOTE 12 - Selected Quarterly Financial Data (unaudited)
2001 QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
Revenues:
Rental income $ 4,996,183 $ 4,991,722 $ 4,962,540 $ 5,032,951
Tenant reimbursements 1,251,550 1,171,234 1,142,841 1,405,245
Early lease termination 14,000 2,510 250 0
Income from equity investments 96,349 62,670 46,362 37,624
Interest income 129,511 460,571 100,625 76,996
Other 28,398 39,931 27,986 21,712
------------ ------------ ------------ ------------
Total revenues 6,515,991 6,728,638 6,280,604 6,574,528
------------ ------------ ------------ ------------
Expenses:
Repairs and maintenance 404,125 414,005 510,041 697,515
Operating 346,494 324,749 347,548 336,304
Real estate taxes 619,946 625,777 609,656 583,814
Interest 1,273,561 1,154,940 1,072,028 927,900
Management fees 630,393 589,230 581,590 590,957
General and administrative 252,232 188,340 191,258 252,809
Depreciation and amortization 1,453,112 1,516,503 1,511,975 1,513,562
Terminated transaction costs 0 2,326,351 463,961 56,492
Loss on impairment of asset 2,500,000
Other 246,345 250,634 200,737 233,155
------------ ------------ ------------ ------------
Total expenses 5,226,208 7,390,529 5,488,794 7,692,508
============ ============ ============ ============
Income (loss) before minority interest 1,289,783 (661,891) 791,810 (1,117,980)
Minority interest in income of the
Operating Partnership (111,744) 57,508 (70,143) 96,548
------------ ------------ ------------ ------------
Net income (loss) $ 1,178,039 $ (604,383) $ 721,667 $(1,021,432)
============ ============ ============ ============
Net income (loss) per share:
Basic $ 0.15 $ (0.08) $ 0.09 $ (0.13)
============ ============ ============ ============
Diluted $ 0.15 $ (0.08) $ 0.09 $ (0.13)
============ ============ ============ ============
2000 QUARTER ENDED
------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------ -----------
Revenues:
Rental income $5,187,635 $4,975,979 $4,883,709 $4,909,030
Tenant reimbursements 1,150,940 1,107,932 1,132,515 1,282,848
Income from equity investments 101,592 98,327 82,206 94,778
Interest income 133,679 151,311 139,391 137,312
Other 185,913 61,125 29,222 321,826
--------- --------- --------- ---------
Total revenues 6,759,759 6,394,674 6,267,043 6,745,794
--------- --------- --------- ---------
Expenses:
Repairs and maintenance 505,043 454,674 511,980 625,310
Operating 330,589 330,342 335,928 412,159
Real estate taxes 612,901 589,348 581,376 607,632
Interest 1,186,856 1,202,234 1,256,735 1,304,233
Management fees 600,667 600,989 560,842 605,983
General and administrative 198,616 243,166 233,130 173,334
Depreciation and amortization 1,215,844 1,257,981 1,350,911 1,361,757
Other 296,194 199,848 231,520 168,995
---------- ---------- ---------- ----------
Total expenses 4,946,710 4,878,582 5,062,422 5,259,403
--------- --------- --------- ---------
34
2000 QUARTER ENDED
-----------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------ -----------
Income before gain on sale of real
estate and minority interest 1,813,049 1,516,092 1,204,621 1,486,391
Gain on sale of real estate 0 0 108,332 0
--------- --------- --------- ---------
Income before minority interest 1,813,049 1,516,092 1,312,953 1,486,391
Minority interest in income of the
Operating Partnership (159,856) (132,462) (114,149) (129,023)
--------- --------- --------- ---------
Net income $1,653,193 $1,383,630 $1,198,804 $1,357,368
========= ========= ========= =========
Net income per share:
Basic $ .21 $ .17 $ .15 $ .17
========= ========= ========= =========
Diluted $ .21 $ .17 $ .15 $ .17
========= ========= ========= =========
NOTE 13 - Commitments and Contingencies
OP Units, aggregating 718,944, have certain rights with respect to the sale,
transfer or other disposition of respective properties contributed to the
Company in return for such OP Units. Upon sale, transfer or other disposition of
such properties within a designated restricted period, other than an exchange or
other transaction which does not cause an OP Unitholder to recognize income or
gain for federal income tax purposes (a "Restricted Sale"), the Company is
required to pay an amount equal to their tax obligation payable, including the
amount of taxes resulting from receipt of such payment, as a result of such
event.
OP Units, aggregating 596,031, related to the Southgate and the Crossroad
properties have a restricted period through December 10, 2008. OP Units,
aggregating 122,913, related to the Governor's Square property have a restricted
period through May 28, 2003.
The amount the Company may be required to pay upon a Restricted Sale is
dependent on the OP Unitholder's tax-basis capital account, effective federal
tax rate and entity structure at the time a Restricted Sale occurs. The Company
estimates that the additional payment required upon a Restricted Sale of all
subject properties would range from $4.8 million to $5.7 million, assuming
effective tax rates ranging from 35% to 40%, respectively.
On or about February 8, 2001, a complaint was filed in the New York Supreme
Court, County of New York, against the Advisor. Also individually named in the
suit were Messrs. Boesky, Hirmes, Ross, Brenner, Allen and Fisch, each of whom
is either a director of Aegis or the Advisor. Aegis was also named as a nominal
defendant. The action is entitled PAUL V. THE RELATED COMPANIES L.P., ET AL.,
Index No. 01-600669. On or about March 23, 2001, a second action, entitled
SCHNIPPER V. AEGIS REALTY, INC., ET AL., Case No. 219736-V, was filed in the
Circuit Court for Montgomery County, Maryland against Aegis and each of Aegis's
five directors (Messrs. Boesky, Brenner, Hirmes, Allen and Fisch). On or about
April 2, 2001, a third action, entitled OPPORTUNITY PARTNERS, L.P. V. STUART J.
BOESKY, ET AL., Civ. No. 24-C-01-001579, was filed in the Circuit Court for
Baltimore County, Maryland against, among others, Aegis, each of its five
directors, and the Advisors. Each suit was purportedly a class and derivative
action in connection with the Acquisition Transaction. On August 27, 2001, the
Company announced that it had terminated the Acquistion Transaction by mutual
consent with POB. As of October 29, 2001 each of the three lawsuits had been
dismissed without prejudice. No money was paid by any of the defendants to any
plaintiff or any plaintiff's attorney in connection with their dismissals.
The Company is subject to routine litigation and administrative proceedings
arising in the ordinary course of business. Management does not believe that
such matters will have a material adverse impact on the Company's financial
position, results of operations or cash flows.
A current or previous owner or operator of real property may be legally liable
for the costs of removal or remediation of hazardous or toxic substances on,
under or in such property. Such liability may exist whether or not the owner or
operator knew of, or was responsible for, such hazardous or toxic substances. In
addition, the presence of hazardous or toxic substances may adversely affect the
owner's ability to borrow funds using such real property as collateral. Certain
environmental laws impose liability for release of asbestos-containing materials
("ACMs") into the air and third parties may seek recovery from owners or
operators of real properties for personal injury associated with ACMs. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, the Company may be liable for removal or
remediation costs, as well as certain other potential costs which could relate
to such hazardous or toxic substances or ACMs (including governmental fines and
injuries to persons and property). To date, the Company has not incurred any
costs of removal or remediations of such hazardous or toxic substances. However,
the presence, with or without the Company's knowledge, of hazardous or toxic
substances at any property held or operated by the Company could have an adverse
effect on the Company's business, operating results and financial condition.
35
Phase I Environmental Site Assessments have been undertaken on all of the
Company's properties. In certain cases, additional Phase II site investigations
have also been undertaken where deemed appropriate. Based on these reports, no
on-site hazardous chemicals or petroleum products were detected or found to
exist in the soil or in the groundwater at those properties which would result
in action by state environmental agencies and which would require additional
investigation and/or remediation of the Mountain Park Plaza property. In
February 1998, a Phase II investigation determined that there were detectable
levels of certain hazardous materials above threshold levels which are
ascertained by the Georgia State Department of Natural Resources Environmental
Protection Division ("GAEPD"). A subsequent re-sampling indicated that no
hazardous materials remain detectable above the threshold levels which are
ascertained by GAEPD to require remediation, and management has installed wells
on the site to monitor ongoing levels of hazardous materials in the ground water
pursuant to GAEPD policy.
NOTE 14 - Subsequent Events
The Company has been notified that K-mart, which has declared bankruptcy,
intends to close its store located in the Centre Stage Shopping Center in
Springfield, Tennessee. The store has approximately 86,479 square feet of gross
leasable area and represents approximately $397,000 in annualized base rent. The
store is currently in operation and rental payments are current; however, the
Company cannot currently assess how the closing of the store will affect 2002
operating results until more details are provided by K-Mart.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Company.
Incorporated by reference to Aegis' definitive proxy statement to be filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
Item 11. Executive Compensation.
Incorporated by reference to Aegis' definitive proxy statement to be filed
pursuant to Regulation 14A under the Exchange Act.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to Aegis' definitive proxy statement to be filed
pursuant to Regulation 14A under the Exchange Act.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference to Aegis' definitive proxy statement to be filed
pursuant to Regulation 14A under the Exchange Act.
36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SEQUENTIAL
PAGE
----------
(a) 1. FINANCIAL STATEMENTS
Independent Auditors' Report 19
Consolidated Balance Sheets as of December 31, 2001 and 2000 20
Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 21
Consolidated Statements of Changes in Stockholders' Equity/Partners' Capital (Deficit) for the years
ended December 31, 2001, 2000 and 1999 22
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 23
Notes to Consolidated Financial Statements 25
(a) 2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts for the three years ended December 31, 2001 44
Schedule III - Real Estate and Accumulated Depreciation and Notes to Schedule at December 31, 2001 45
All other schedules have been omitted because they are not required
or because the required information is contained in the financial
statements or notes hereto.
(a) 3. EXHIBITS
(3.1A) Articles of Incorporation dated as of August 13, 1996 (incorporated
by reference to the Company's Registration Statement on Form 10, File
No. 001-13239)
(3.1B) Amended Articles of Incorporation dated as of September 26, 1996
(incorporated by reference to the Company's Registration Statement on
Form 10, File No. 001-13239)
(3.1C) Articles of Amendment and Restatement of Articles of Incorporation
dated as of October 1, 1997 (incorporated by reference to the
Company's Registration Statement on Form 10, File No. 001-13239)
(3.1D) Certificate of Correction dated as of October 22, 1997 (incorporated
by reference to the Company's Current Report on Form 8-K, filed with
the Commission on March 19, 1998)
(3.2) Bylaws (incorporated by reference to the Company's Current Report on
Form 8-K, filed with the Commission on March 19, 1998)
(4.1) Specimen Copy of Stock Certificate for shares of the Company's Common
Stock (incorporated by reference to the Company's Amendment No. 1 on
Form 10/A to the Company's Registration Statement on Form 10, File
No. 001-13239)
(10A) Continental Casualty Company Insurance Policy issued to the Company
(incorporated by reference to Exhibit 10(C) to the Company's
Registration Statement on Form S-11, File No. 33-8755, as amended)
37
SEQUENTIAL
PAGE
----------
(10B) Indemnity Agreement among Continental Casualty Company, the Company
and the General Partners (incorporated by reference to Exhibit 10(D)
to the Company's Registration Statement on Form S-11, File No.
33-8755, as amended)
(10C) Secured Promissory Note between Principal Mutual Life Insurance
Company and Insured II dated December 11, 1992 (incorporated by
reference to Exhibit 10F to Insured II's Annual Report on Form 10-K
for the year ended December 31, 1992)
(10D) Form of Purchase and Sale Agreement pertaining to Summit Preferred's
acquisition of Preferred Equity Investments (incorporated herein by
reference to exhibit 10C to Summit Preferred's S-11 Registration
Statement)
(10E) Form of Amended and Restated Agreement of Limited Partnership of
Operating Partnerships (incorporated herein by reference to Exhibit
10B to Summit Preferred's S-11 Registration Statement)
(10F) Mortgage Note, dated June 10, 1988, with respect to Cross Creek
Apartments in Charlotte, North Carolina, in the principal amount of
$17,494,100 (incorporated by reference to Exhibit 10(b) in Eagle's
Current Report on Form 8-K dated June 15, 1988)
(10G) Equity Loan Note, dated June 10, 1988, with respect to Cross Creek
Apartments in Charlotte, North Carolina, in the principal amount of
$1,783,900 (incorporated by reference to Exhibit 10(c) in Eagle's
Current Report on Form 8-K dated June 15, 1988)
(10H) Subordinated Loan Note, dated June 10, 1988, with respect to Cross
Creek Apartments in Charlotte, North Carolina (incorporated by
reference to Exhibit 10(d) in Eagle's Current Report on Form 8-K
dated June 15, 1988)
(10I) Mortgage Note, dated August 18, 1988, with respect to Weatherly Walk
Apartments in Fayetteville, Georgia, in the principal amount of
$7,772,500 (incorporated by reference to Exhibit 10(e) in Eagle's
Current Report on Form 8-K dated August 19, 1988)
(10J) Equity Loan Note, dated August 18, 1988, with respect to Weatherly
Walk Apartments in Fayetteville, Georgia, in the principal amount of
$895,200 (incorporated by reference to Exhibit 10(f) in Eagle's
Current Report on Form 8-K dated August 19, 1988)
(10K) Subordinated Loan Note, dated August 18, 1988, with respect to
Weatherly Walk Apartments in Fayetteville, Georgia (incorporated by
reference to Exhibit 10(g) in Eagle's Current Report on Form 8-K
dated August 19, 1988)
(10L) Mortgage Note, dated December 12, 1988, with respect to Woodgate
Manor in Gainesville, Florida, in the principal amount of $3,110,300
(incorporated by reference to Exhibit 10(h) in Eagle's Current Report
on Form 8-K dated December 12, 1988)
(10M) Equity Loan Note, dated December 12, 1988, with respect to Woodgate
Manor in Gainesville, Florida, in the principal amount of $339,700
(incorporated by reference to Exhibit 10(i) in Eagle's Current Report
on Form 8-K dated December 12, 1988)
(10N) Subordinated Promissory Note, dated December 12, 1988, with respect
to Woodgate Manor in Gainesville, Florida (incorporated by reference
to Exhibit 10(j) in Eagle's Current Report on Form 8-K dated December
12, 1988)
38
SEQUENTIAL
PAGE
----------
(10O) Advisory Agreement dated as of October 1, 1997, between the Company,
Aegis Realty Operating Partnership, LP (the "OP") and Related Aegis
LP (the "Advisor") (incorporated by reference to the Company's
Current Report on Form 8-K, filed with the Commission on March 19,
1998)
(10P) Agreement and Plan of Consolidation dated as of October 1, 1997, by
and among the Company, the OP, Aegis Realty Holding Partnership, LP
("Aegis Holding"), AOP Merger Sub I, Inc. ("AOP Sub I"), AOP Merger
Sub II, Inc. ("AOP Sub II"), Summit Insured Equity L.P. ("Insured I"),
Summit Insured Equity II L.P. ("Insured II"), Summit Preferred Equity
L.P. ("Summit Preferred"), Eagle Insured L.P. ("Eagle"), the Advisor,
Related Insured Equity Associates, Inc. ("Related GP I"), RIDC II,
L.P. ("Related GP II"), Related Equity Funding, Inc. ("Related GP
III"), Partnership Monitoring Corporation ("PMC"), Related Federal
Insured, L.P. ("Related GP IV"), Related Insured BUC$ Associates,
Inc., as assignor limited partner of Insured I and Insured II
("Assignor LP I/II"), Related BUC$ Associates, Inc. ("Assignor LP
III") and Related FI BUC$, Inc. ("Assignor LP IV") (incorporated by
reference to the Company's Current Report on Form 8-K, filed with the
Commission on March 19, 1998)
(10Q) Incentive Share Option Plan (incorporated by reference to the
Company's Current Report on Form 8-K, filed with the Commission on
March 19, 1998)
(10R) Omnibus Assignment Agreement dated as of October 1, 1997, by and
among the Company, the OP, Aegis Holding, AOP Sub I, AOP Sub II,
Insured I, Insured II, Summit Preferred, Eagle, the Advisor, Related
GP I, Related GP II, Related GP III, PMC, Assignor LP I/II, Assignor
LP III and Assignor LP IV (incorporated by reference to the Company's
Current Report on Form 8-K, filed with the Commission on March 19,
1998)
(10S) Revolving Credit Agreement dated as of December 29, 1997 by and
between the OP, as borrower and BankBoston, N.A. for itself and as
Agent (incorporated by reference to the Company's Current Reports on
Form 8-K, filed with the Commission on January 9, 1998)
(10T) Management Agreement between the Company, Insured I, Insured II, the
OP and the Property Manager dated October 1, 1997 (incorporated by
reference to Exhibit 10Z in the Company's Annual Report on Form 10-K
for the period ended December 31, 1997)
(10U) Amendment No.1 dated as of September 13, 2001 to the Advisory
Agreement dated as of October 1, 1999, between the Company, Aegis
Realty Operating Partnership L.P. (the "OP") and Related Aegis L.P.
("the Advisor") (incorporated by reference to Exhibit 99.3 to the
Company's Current Report of Form 10Q, filed with the Commission on
November 14, 2001)
21 List of Subsidiaries (filed herewith) 47
(b) Reports On Form 8-K
-------------------
No reports on Form 8-K were filed during the current year.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AEGIS REALTY, INC.
(Company)
Date: March 29, 2002 By:
-----------------------------------
Stuart J. Boesky
Director, Chairman of the Board,
President and Chief Executive Officer
Date: March 29, 2002 By:
-----------------------------------
Michael I. Wirth
Chief Financial Officer
40
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the Company
and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
------------------- ------------------------------------- --------------
------------------- Director, Chairman of the Board,
Stuart J. Boesky President and Chief Executive Officer March 29, 2002
-------------------
Michael J. Brenner Director March 29, 2002
-------------------
Alan P. Hirmes Director and Senior Vice President March 29, 2002
-------------------
Peter T. Allen Director March 29, 2002
-------------------
Arthur P. Fisch Director March 29, 2002
------------------- Senior Vice President and
Michael I. Wirth Chief Financial Officer March 29, 2002
-------------------
Gary J. Parkinson Treasurer and Controller March 29, 2002
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AEGIS REALTY, INC.
(Company)
Date: March 29, 2002 By: /s/ Stuart J. Boesky
-----------------------------------
Stuart J. Boesky
Director, Chairman of the Board,
President and Chief Executive Officer
Date: March 29, 2002 By: /s/ Michael I. Wirth
-----------------------------------
Michael I. Wirth
Chief Financial Officer
42
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the Company
and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------------------- ------------------------------------- --------------
/s/ Stuart J. Boesky Director, Chairman of the Board,
--------------------- President and Chief Executive Officer March 29, 2002
Stuart J. Boesky
/s/ Michael J. Brenner
---------------------
Michael J. Brenner Director March 29, 2002
/s/ Alan P. Hirmes
---------------------
Alan P. Hirmes Director and Senior Vice President March 29, 2002
/s/ Peter T. Allen
---------------------
Peter T. Allen Director March 29, 2002
/s/ Arthur P. Fisch
---------------------
Arthur P. Fisch Director March 29, 2002
/s/ Michael I. Wirth Senior Vice President and
--------------------- Chief Financial Officer March 29, 2002
Michael I. Wirth
/s/ Gary J. Parkinson
---------------------
Gary J. Parkinson Treasurer and Controller March 29, 2002
43
AEGIS REALTY, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS
YEAR ENDED BEGINNING DURING DEDUCTION- BALANCE AT
DECEMBER 31 NAME OF PERIOD* YEAR* WRITE-OFFS* END OF PERIOD
----------- ------------------------------- ---------- --------- ----------- -------------
2001 Allowance for Doubtful Accounts $383,000 $414,000 $(418,000) $378,000
2000 Allowance for Doubtful Accounts $343,000 $360,000 $(320,000) $383,000
1999 Allowance for Doubtful Accounts $383,000 $384,000 $(424,000) $343,000
44
AEGIS REALTY, INC.
ITEM 14, SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
COST CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO PARTNERSHIP (F) ACQUISITION PURCHASE PRICE ADJUSTMENTS (E)
------------------------------- ---------------- ------------------------------
ENCUM- BUILDINGS AND BUILDINGS AND
BRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS
---------- ----------- ------------- ------------ ---------- -------------
Shopping Centers:
Cactus Village $ 0 $ 2,093,532 $ 4,631,948 $ 33,517 $ (42,583) $ (67,253)
Glendale, AZ
Hickory Plaza (H) 1,288,328 3,931,633 18,291 (3,750) 69,166
Nashville, TN
Highland Fair 0 1,288,328 5,059,079 138,661 (67,968) 15,951
Gresham, OR
Pablo Plaza (H) 2,147,213 5,922,120 508,141 (7,866) 789,857
Jacksonville, FL
Southhaven (H) 1,288,328 4,793,938 31,050 0 (1,635)
Southhaven, MS
Town West (H) 1,932,491 3,303,752 20,814 0 18,094
Indianapolis, IN
Westbird (H) 1,566,070 5,475,510 660,577 2,474 2,296,027
Miami, FL
Winery Square (H) 4,320,555 8,916,731 157,429 (227,319) (421,703)
Fairfield, CA
Mountain View (H) 2,675,960 8,661,498 88,972 (143,357) (538,770)
Village
Shellville, GA
Forest Park Square 0 1,532,064 7,841,725 10,000 494,430 (81,321)
Cincinnati, OH
Kokomo Plaza (H) 695,912 6,643,748 31,557 (8,784) (5,496)
Kokomo, IN
Rolling Hills Square (H) 2,624,639 2,516,365 (7) 332,233 839,908
Tucson, AZ
Mountain Park Plaza 0 1,566,015 3,791,633 0 0 96,325
Atlanta, GA
Applewood Centre (H) 1,795,469 4,574,757 0 0 (4,279)
Omaha, NE
Birdneck Center (H) 469,227 2,837,048 0 0 63,313
Virginia Beach, VA
The Market Place (H) 810,910 4,875,966 0 0 240,801
Newton, NC
Barclay Place 2,523,267 573,079 3,452,804 28,402 0 201,081
Lakeland, FL
The Village At 3,800,498 940,193 5,629,239 0 0 62,260
Waterford
Midlothian, VA
Governor's Square (H) 1,220,408 7,297,832 14,401 0 1,293,999
Montgomery, AL
Marion City (H) 765,950 4,619,926 0 0 95,560
Square
Marion, NC
Dunlop Village (H) 751,518 4,505,067 0 0 36,711
Colonial Heights,
VA
LIFE ON
WHICH
GROSS AMOUNT AT WHICH DEPRECIATION
CARRIED AT CLOSE OF PERIOD (D) IN LATEST
--------------------------------------------- INCOME
BUILDINGS AND ACCUMULATED YEAR OF DATE STATEMENT
LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
----------- ----------- ----------- ------------ ------------ --------- ------------
Shopping Centers:
Cactus Village $ 2,050,949 $ 4,622,717 $ 6,673,666 $ 1,668,915 1986 July 1987 40 years
Glendale, AZ
Hickory Plaza 1,284,579 4,019,090 5,303,669 1,470,250 1974 (A) Apr. 1987 40 years
Nashville, TN
Highland Fair 1,220,360 5,203,450 6,423,810 1,870,459 1986 July 1987 40 years
Gresham, OR
Pablo Plaza 2,139,347 7,562,118 9,701,465 2,410,729 1972 (B) Feb. 1987 40 years
Jacksonville, FL
Southhaven 1,288,328 4,823,353 6,111,681 1,763,432 1984 (C) Feb. 1987 40 years
Southhaven, MS
Town West 1,932,491 3,346,872 5,279,363 1,247,764 1985 May 1987 40 years
Indianapolis, IN
Westbird 1,568,544 8,653,578 10,222,122 2,452,045 1977 Dec. 1986 40 years
Miami, FL
Winery Square 4,093,236 8,614,209 12,707,445 3,044,552 1987 Dec. 1987 40 years
Fairfield, CA
Mountain View 2,532,603 8,211,700 10,744,303 2,682,393 1987 July 1988 40 years
Village
Shellville, GA
Forest Park Square 2,026,908 7,766,752 9,793,660 2,490,194 1988 May 1989 40 years
Cincinnati, OH
Kokomo Plaza 687,128 6,721,949 7,409,077 2,121,426 1988 May 1989 40 years
Kokomo, IN
Rolling Hills Square 2,956,872 3,588,232 6,545,104 519,255 1980 Oct. 1997 30.5 years
Tucson, AZ
Mountain Park Plaza 3,355,398 3,238,764 6,594,162 242,324 1988 Oct. 1997 31.2 years
Atlanta, GA
Applewood Centre 1,795,469 4,570,478 6,365,947 592,535 1989 Oct. 1997 33.1 years
Omaha, NE
Birdneck Center 469,227 2,930,134 3,399,361 351,061 1987 (G) Dec. 1997 40 years
Virginia Beach, VA
The Market Place 810,910 5,131,767 5,942,677 500,505 1989 Dec. 1997 40 years
Newton, NC
Barclay Place 573,079 3,820,345 4,393,424 361,307 1974 (J) Mar. 1998 40 years
Lakeland, FL
The Village At 940,193 5,758,084 6,698,277 534,806 1991 Apr. 1998 40 years
Waterford
Midlothian, VA
Governor's Square 1,220,408 8,804,838 10,025,246 908,998 1960 (K) May 1998 40 years
Montgomery, AL
Marion City 765,950 4,756,019 5,521,969 429,037 1988 June 1998 40 years
Square
Marion, NC
Dunlop Village 751,518 4,670,105 5,421,623 394,091 1986 Sep. 1998 40 years
Colonial Heights,
VA
45
COST CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO PARTNERSHIP (F) ACQUISITION PURCHASE PRICE ADJUSTMENTS (E)
------------------------------- ---------------- ------------------------------
ENCUM- BUILDINGS AND BUILDINGS AND
BRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS
---------- ----------- ------------- ------------ ---------- -------------
Centre Stage (H) 1,052,698 6,305,930 0 0 336,999
Springfield, TN
White Oaks Plaza 0 1,237,309 7,445,072 0 0 0
Spindale, NC
Cape Henry (H) 587,486 3,548,028 0 0 47,549
Virginia Beach,
VA
Emporia West (H) 435,001 2,679,059 0 0 62,815
Emporia, KS
Oxford Mall 6,290,934 1,289,377 7,745,666 0 0 161,989
Oxford, MS
Southgate 10,664,906 2,269,668 13,391,965 0 0 327,236
Heath, OH
Crossroads East (H) 721,798 4,273,252 0 0 0
Columbus, OH
---------- ---------- ----------- --------- -------- ---------
$66,472,605 $39,939,526 $154,671,291 $1,741,805 $ 327,510 $5,935,184
========== ========== =========== ========= ======== =========
LIFE ON
WHICH
GROSS AMOUNT AT WHICH DEPRECIATION
CARRIED AT CLOSE OF PERIOD (D) IN LATEST
--------------------------------------------- INCOME
BUILDINGS AND ACCUMULATED YEAR OF DATE STATEMENT
LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
----------- ----------- ----------- ------------ ------------ --------- ------------
Centre Stage 1,037,737 6,554,408 7,592,145 577,390 1989 Sep. 1998 40 years
Springfield, TN
White Oaks Plaza 1,237,309 4,945,073 6,182,382 620,190 1988 Sep. 1998 40 years
Spindale, NC
Cape Henry 587,486 3,653,908 4,241,394 304,054 1986 Sep. 1998 40 years
Virginia Beach,
VA
Emporia West 435,001 2,746,749 3,181,750 224,890 1980 Nov. 1998 40 years
Emporia, KS
Oxford Mall 1,289,377 7,907,656 9,197,033 632,083 1982 Nov. 1998 40 years
Oxford, MS
Southgate 2,269,668 14,270,142 16,539,810 1,107,087 1962 (L) Dec. 1998 40 years
Heath, OH
Crossroads East 721,798 4,273,252 4,995,050 329,304 1984 (M) Dec. 1998 40 years
Columbus, OH ---------- ----------- ----------- ----------
$42,041,873 $161,165,742 $203,207,615 $31,851,076
========== =========== =========== ==========
(A) Renovated and expanded in 1985.
(B) Expanded and remodeled from 1983 through 1985.
(C) Expanded in 1986.
(D) Aggregate cost for federal income tax purposes is $185,422,823.
(E) Amounts received and accrued from sellers' rental guarantees from the
sellers of the properties purchased by the Company.
(F) Included in buildings and improvements are acquisition fees.
(G) Expanded in 1997.
(H) This shopping center is part of a pool of assets collateralizing the Credit
Facility which has an outstanding balance of $43,193,000 at December 31,
2001.
(J) Renovated and expanded in 1988.
(K) Developed and renovated in four phases from 1960 through 1990.
(L) Renovated in 1984 and from 1996 through 1997.
(M) Renovated from 1996 through 1997.
Reconciliation of Real Estate Owned:
2001 2000 1999
----------- ------------ -----------
Balance at beginning of period: $202,615,322 $196,037,997 $194,144,910
Acquisitions 1,790,284 557,823 714,293
Dispositions (2,131,160) (46,077) 0
Improvements 3,628,987 6,227,319 1,753,345
Write-off of improvements (2,695,818) (161,740) (574,551)
----------- ------------ -----------
Balance at close of period: $203,207,615 $202,615,322 $196,037,997
=========== =========== ===========
Reconciliation of Accumulated Depreciation:
2001 2000 1999
----------- ------------ -----------
Balance at beginning of period: $ 27,458,593 $23,253,033 $ 19,268,330
Depreciation Expense 4,800,037 4,338,565 4,114,002
Write-off of accumulated depreciation
on improvements (407,554) (133,005) (129,299)
----------- ------------ -----------
Balance at close of period: $31,851,076 $ 27,458,593 $ 23,253,033
=========== =========== ===========
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