UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1998 OR |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________ Commission File Number 1-12928 Agree Realty Corporation - ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 38-3148187 - ----------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 31850 Northwestern Highway, Farmington Hills, Michigan 48334 - ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, included area code: (248) 737-4190 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 No |X| |_| 4,346,313 Shares of Common Stock, $.0001 par value, were outstanding as of August 7, 1998
Agree Realty Corporation Form 10-Q Index - ----------------------------------------------------------------------------- Part I: Financial Information Page Item 1. Interim Consolidated Financial Statements 3 Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997. 4-5 Consolidated Statements of Operations for the six months ended June 30, 1998 and 1997. 6 Consolidated Statements of Operations for the three months ended June 30, 1998 and 1997. 7 Consolidated Statement of Stockholders' Equity for the six months ended June 30, 1998. 8 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997. 9 Notes to Consolidated Financial Statements 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 11-18 Part II: Other Information Item 1. Legal Proceedings 19 Item 2. Changes in Securities 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21 2
Agree Realty Corporation Part I: Financial Information - ------------------------------------------------------------------------------ ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS 3
Agree Realty Corporation Consolidated Balance Sheets (Unaudited) - ------------------------------------------------------------------------------ <TABLE> <CAPTION> June 30, December 31, 1998 1997 - ------------------------------------------------------------------------------ <S> <C> <C> Assets Real Estate Investments Land $ 33,197,481 $ 29,952,532 Buildings 114,308,527 112,307,266 Property under development 2,482,819 488,651 ------------- ------------- 149,988,827 142,748,449 Less accumulated depreciation (21,466,460) (20,043,235) ------------- ------------- Net Real Estate Investments 128,522,367 122,705,214 Cash and Cash Equivalents 1,041,228 1,785,968 Accounts Receivable - Tenants 474,319 473,918 Restricted Asset - Cash Held in Escrow 310,078 276,564 Investments In and Advances To Unconsolidated Entities 1,336,277 1,810,241 Unamortized Deferred Expenses Financing costs 1,924,448 2,133,426 Leasing costs 242,935 236,151 Other Assets 1,288,596 1,070,022 ------------- ------------- $ 135,140,248 $ 130,491,504 ============= ============= <FN> See accompanying notes to consolidated financial statements. </TABLE> 4
Agree Realty Corporation Consolidated Balance Sheets (Unaudited) - ------------------------------------------------------------------------------ <TABLE> <CAPTION> June 30, December 31, 1998 1997 - ------------------------------------------------------------------------------ <S> <C> <C> Liabilities and Stockholders' Equity Mortgages Payable $ 50,775,045 $ 50,954,026 Construction Loans 7,720,913 5,575,091 Note Payable 12,873,944 8,641,016 Dividends and Distributions Payable 2,292,765 2,284,792 Accrued Interest Payable 261,349 248,742 Accounts Payable Operating 460,149 602,862 Capital expenditures 782,509 1,516,379 Tenant Deposits 52,907 51,240 ------------- ------------- Total Liabilities 75,219,581 69,874,148 ------------- ------------- Minority Interest 5,514,501 5,651,347 ------------- ------------- Stockholders' Equity Common stock, $.0001 par value, 20,000,000 shares authorized, 4,346,313 and 4,328,980 shares issued and outstanding 435 433 Additional paid-in capital 62,873,987 62,503,487 Deficit (8,468,256) (7,537,911) ------------- ------------- Total Stockholders' Equity 54,406,166 54,966,009 ------------- ------------- $ 135,140,248 $ 130,491,504 ============= ============= <FN> See accompanying notes to consolidated financial statements. </TABLE> 5
Agree Realty Corporation Consolidated Statements of Operations (Unaudited) - ------------------------------------------------------------------------------ <TABLE> <CAPTION> Six Months Ended Six Months Ended June 30, 1998 June 30, 1997 - ------------------------------------------------------------------------------ <S> <C> <C> Revenues Rental income $ 8,347,856 $ 8,027,824 Operating cost reimbursement 1,040,904 956,845 Management fees and other 47,062 46,079 ----------- ----------- Total Revenues 9,435,822 9,030,748 ----------- ----------- Operating Expenses Real estate taxes 723,847 630,833 Property operating expenses 524,611 529,315 Land lease payments 271,364 223,000 General and administrative 547,379 592,648 Depreciation and amortization 1,465,946 1,386,455 ----------- ----------- Total Operating Expenses 3,533,147 3,362,251 ----------- ----------- Income From Operations 5,902,675 5,668,497 ----------- ----------- Other Income (Expense) Interest expense, net (2,438,725) (3,178,804) Development fee income 59,031 23,275 Equity in net income (loss) of unconsolidated entities (4,641) 784 Gain on land sales -- 103,270 ----------- ----------- Total Other Expense (2,384,335) (3,051,475) ----------- ----------- Income Before Minority Interest 3,518,340 2,617,022 Minority Interest (450,077) (465,859) ----------- ----------- Net Income $ 3,068,263 $ 2,151,163 =========== =========== Earnings Per Share $ .71 $ .71 =========== =========== Weighted Average Number of Common Shares Outstanding 4,346,313 3,048,596 =========== =========== <FN> See accompanying notes to consolidated financial statements. </TABLE> 6
Agree Realty Corporation Consolidated Statements of Operations (Unaudited) - ------------------------------------------------------------------------------ <TABLE> <CAPTION> Three Months Ended Three Months Ended June 30, 1998 June 30, 1997 - ------------------------------------------------------------------------------ <S> <C> <C> Revenues Rental income $4,177,315 $3,998,671 Operating cost reimbursement 515,982 457,498 Management fees and other 22,805 19,929 ---------- ---------- Total Revenues 4,716,102 4,476,098 ---------- ---------- Operating Expenses Real estate taxes 363,222 322,203 Property operating expenses 249,642 191,771 Land lease payments 129,443 111,500 General and administrative 269,383 296,906 Depreciation and amortization 739,240 693,049 ---------- ---------- Total Operating Expenses 1,750,930 1,615,429 ---------- ---------- Income From Operations 2,965,172 2,860,669 ---------- ---------- Other Income (Expense) Interest expense, net (1,198,668) (1,501,867) Equity in net loss of unconsolidated entities (1,642) (6,029) Gain on land sales -- 103,270 Development fee income -- 23,275 ---------- ---------- Total Other Expense (1,200,310) (1,381,351) ---------- ---------- Income Before Minority Interest 1,764,862 1,479,318 Minority Interest (223,693) (247,004) Net Income $1,541,169 $1,232,314 ========== ========== Earnings Per Share $ .36 $ .36 ========== ========== Weighted Average Number of Common Shares Outstanding 4,346,313 3,414,694 ========== ========== <FN> See accompanying notes to consolidated financial statements </TABLE> 7
Agree Realty Corporation Consolidated Statement of Stockholders' Equity (Unaudited) - ------------------------------------------------------------------------------ <TABLE> <CAPTION> Common Stock Additional ----------------- Paid-In Shares Amount Capital Deficit - ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Balance, January 1, 1998 4,328,980 $ 433 $ 62,503,487 $ (7,537,911) Issuance of shares under the Stock Incentive Plan 19,033 2 405,828 -- Shares redeemed under the Stock Incentive Plan (1,700) -- (35,328) -- Dividends declared for the period January 1, 1998 to June 30, 1998 -- -- -- (3,998,608) Net income for the period January 1, 1998 to June 30, 1998 -- -- -- 3,068,263 --------- ------ ------------ ------------ Balance, June 30, 1998 4,346,313 $ 435 $ 62,873,987 $ (8,468,256) ========= ====== ============ ============ <FN> See accompanying notes to consolidated financial statements. </TABLE> 8
Agree Realty Corporation Consolidated Statements of Cash Flows (Unaudited) - ------------------------------------------------------------------------------ <TABLE> <CAPTION> Six Months Ended Six Months Ended June 30, 1998 June 30, 1997 - ------------------------------------------------------------------------------ <S> <C> <C> Cash Flows From Operating Activities Net income $ 3,068,263 $ 2,151,163 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 1,423,037 1,350,853 Amortization 259,886 239,042 Equity in net (income) loss of unconsolidated entities 4,641 (784) Minority interests 450,077 465,859 Gain on land sales -- (103,270) (Increase) decrease in accounts receivable (401) 415,034 Increase in other assets (5,970) (382,586) Decrease in accounts payable (142,713) (326,519) Increase (decrease) in accrued interest 12,607 (138,216) Increase in tenant deposits 1,667 10,667 ------------ ------------ Net Cash Provided By Operating Activities 5,071,094 3,681,243 ------------ ------------ Cash Flows From Investing Activities Acquisition of real estate investments (including capitalized interest of $210,671 in 1998 and $13,222 in 1997) (7,240,378) (1,378,227) Investments in and advances to unconsolidate entities 463,700 (142,746) Proceeds from sale of land -- 148,270 ------------ ------------ Cash Flows Used In Investing Activities (6,776,678) (1,372,703) ------------ ------------ Cash Flows From Financing Activities Dividends and limited partners' distributions paid (4,577,558) (2,971,720) Line-of-credit proceeds 4,232,928 10,869,452 Construction loan proceeds 2,145,822 -- Net increase in (repayment of) capital expenditure payables (555,890) 11,644 Payments of mortgages payable (178,981) (174,514) Redemption of restricted stock (35,328) -- Increase in escrow deposits (33,514) (31,168) Payments of leasing costs (28,635) (18,289) Payments for financing costs (8,000) (16,924) Proceeds from issuance of common stock -- 31,814,700 Payment on line-of-credit -- (31,250,375) Payment of construction loans -- (8,915,530) ------------ ------------ Net Cash Provided By (Used In) Financing Activities 960,844 (682,724) ------------ ------------ Net Increase (Decrease) In Cash and Cash Equivalents (744,740) 1,625,816 Cash and Cash Equivalents, beginning of period 1,785,968 294,389 ------------ ------------ Cash and Cash Equivalents, end of period $ 1,041,228 $ 1,920,205 ============ ============ Supplemental Disclosure of Cash Flow Information Cash paid for interest (net of amounts capitalized) $ 2,243,230 $ 3,147,328 ============ ============ Supplemental Disclosure of Non-Cash Transactions Dividends and limited partners' distributions declared and unpaid $ 2,292,765 $ 2,236,608 Shares issued under Stock Incentive Plan $ 405,830 $ 618,913 ============ ============ <FN> See accompanying notes to consolidated financial statements. </TABLE> 9 Agree Realty Corporation Notes to Consolidated Financial Statements (Unaudited) - ------------------------------------------------------------------------------ 1. Basis of Presentation The accompanying unaudited 1998 consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated balance sheet at December 31, 1997 has been derived from the audited consolidated financial statements at that date. Operating results for the six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998, or for any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report for the year ended December 31, 1997. 2. Earnings Per Share Earnings per share has been computed by dividing the income by the weighted average number of common shares outstanding. The per share amounts reflected in the consolidated statements of income are presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share"; the amounts of the Company's "basic" and "diluted" earnings per share (as defined in SFAS No. 128) are the same. 3. Comprehensive Income The amounts of the Company's net and comprehensive income (as defined in SFAS No. 130, "Reporting Comprehensive Income") are the same. 10
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company was established to continue to operate and expand the retail property business of its Predecessors. The Company commenced its operations on April 22, 1994 with the sale of 2,500,000 shares of common stock in an initial public offering. The net cash proceeds to the Company from the completion of this offering were approximately $45.4 million, which were used primarily to reduce outstanding indebtedness, pay stock issuance costs and establish a working capital reserve. On May 21, 1997, the Company completed an offering of 1,625,000 shares of common stock at $20.625 per share; on June 18, 1997 the underwriters exercised their overallotment option for an additional 28,850 shares at the same per share price (collectively, "the 1997 Offering"). The net proceeds from the 1997 Offering of approximately $31.9 million were used to repay amounts outstanding under the Company's Credit Facility. The assets of the Company are held by, and all operations are conducted through, Agree Limited Partnership (the "Operating Partnership"), of which the Company is the sole general partner and held an 87.20% interest as of June 30, 1998. The Company is operating so as to qualify as a real estate investment trust ("REIT") for federal income tax purposes. The following should be read in conjunction with the Consolidated Financial Statements of Agree Realty Corporation, including the respective notes thereto, which are included in this Form 10-Q. Comparison of Six Months Ended June 30, 1998 to Six Months Ended June 30, 1997 Rental income increased $320,000, or 4%, to $8,348,000 in 1998, compared to $8,028,000 in 1997. The increase is primarily the result of the development of two properties. Operating cost reimbursements, which represent additional rent required by substantially all of the Company's leases to cover the tenants' proportionate share of the property operating expenses, increased $84,000, or 9%, to $1,041,000 in 1998, compared to $957,000 in 1997. Operating cost reimbursements increased due to the increase in real estate taxes and property operating expenses from 1997 to 1998 as explained below. 11
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ Management fees and other income remained relatively constant at $47,000 in 1998 versus $46,000 in 1997. Real estate taxes increased $93,000, or 15%, to $724,000 in 1998 versus $631,000 in 1997. The increase is the result of the addition of new properties. Property operating expense (shopping center maintenance, insurance and utilities) decreased $4,000, or 1% to $524,000 in 1998 versus $529,000 in 1997. The decrease was the result of decreased snow removal costs of $34,000; an increase in shopping center maintenance costs of $46,000; and increase in utility costs of $14,000 and a decrease in insurance costs of $30,000 in 1997 versus 1996. Land lease payments increased $48,000 to $271,000 in 1998 versus $223,000 in 1997 as a result of the acquisition of a ground lease for the free standing property in Lawrence, Kansas. General and administrative expenses decreased by $46,000, or 8%, to $547,000 in 1998 versus $593,000 in 1997. The decrease was primarily the result of decreased directors' and officers' liability insurance of $13,000 and decreased expenses in connection with the management of the Company's properties of $33,000. General and administrative expenses as a percentage of rental income decreased from 7.4% for 1997 to 6.6% for 1998. Depreciation and amortization increased $80,000, or 6%, to $1,466,000 in 1998 versus $1,386,000 in 1997. This increase was the result of the completion of two new properties. Interest expense decreased $740,000, or 23%, to $2,439,000 in 1997, from $3,179,000 in 1997. The decrease in interest expense was the result of the Company using the proceeds of the 1997 Offering to reduce the Company's indebtedness. The Company recognized income of $103,000 on the sale of a parcel of land in 1997. There were no land sales in 1998. Development fee income increased $36,000, to $59,000 in 1998, from $23,000 in 1997. The above amount was not included in the Company's calculation of Funds from Operations due to the non-recurring nature of this type of income. 12
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ Equity in net income (loss) of unconsolidated entities decreased $6,000 to a loss of ($5,000) in 1998 versus income of $1,000 in 1997 as a result of additional expenses related to certain of the seven properties held in joint ventures, in which the Company holds interests ranging from 8% to 20%. The Company's income before minority interest increased $901,000 as a result of the foregoing factors. Comparison of Three Months Ended June 30, 1998 to Three Months Ended June 30, 1997 Rental income increased $179,000, or 4%, to $4,177,000 in 1998, compared to $3,998,000 in 1997. The increase is primarily the result of the development and acquisition of two properties. Operating cost reimbursements increased $58,000, or 13%, to $516,000 in 1998, compared to $458,000 in 1997. Operating cost reimbursements increased due to the increase in real estate taxes and property operating expenses from 1997 to 1998 as explained below. Management fees and other income remained relatively constant at $23,000 in 1998 and $20,000 in 1997. Real estate taxes increased $41,000, or 13%, to $363,000 in 1998 versus $322,000 in 1997. The increase is the result of the addition of new properties. Property operating expense (shopping center maintenance, insurance and utilities) increased $58,000, or 30% to $250,000 in 1998 versus $192,000 in 1997. The increase was the result of increased snow removal costs of $5,000; an increase in shopping center maintenance costs of $64,000; an increase in utility costs of $4,000 and a decrease in insurance costs of $15,000 in 1998 versus 1997. Land lease payments increased $18,000 to $129,000 in 1998 versus $111,000 in 1997 as a result of the acquisition of a ground lease for the free standing property in Lawrence, Kansas. General and administrative expenses decreased by $28,000, or 9%, to $269,000 in 1998 versus $297,000 in 1997. This decrease was primarily the result of decreases in expenses in connection with the management of the Company's properties. General and administrative expenses as a percentage of rental income decreased from 7.4% for 1997 to 6.4% for 1998. 13
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ Depreciation and amortization increased $46,000, or 7%, to $739,000 in 1998 versus $693,000 in 1997. This increase was the result of the completion of two new properties. Interest expense decreased $303,000, or 20%, to $1,199,000 in 1998, from $1,502,000 in 1997. The decrease in interest expense was the result of the Company using the proceeds of the 1997 Offering to reduce the Company's indebtedness. The Company recognized income of $103,000 on the sale of a parcel of land in 1997. There were no land sales in 1998. The Company received $23,000 of development fee income in 1997 in connection with the completion of four joint venture properties. There was no development fee income in 1998. Equity in net loss of unconsolidated entities decreased $4,000 to $2,000 in 1998 versus $6,000 in 1997 as a result of additional expenses in 1997 related to certain of the seven properties held in joint ventures, in which the Company holds interests ranging from 8% to 20%. The Company's income before minority interest increased $286,000 as a result of the foregoing factors. Funds from Operations Management considers funds from operations ("FFO") to be a supplemental measure of the Company's operating performance. FFO is defined by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") to mean net income (loss) before minority interest, computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization (excluding amortization of financing costs), and after adjustments for unconsolidated partnerships and joint ventures. 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. FFO should not be considered as an alternative to net income as the primary indicator of the Company's operating performance or as an alternative to net income as the primary indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. 14
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ The following table illustrates the calculation of FFO for the six months and three months ended June 30, 1998 and 1997: <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 - ------------------------- ---- ----- <S> <C> <C> Net income before minority interest $ 3,518,340 $ 2,617,022 Depreciation of real estate assets 1,418,884 1,338,449 Amortization of leasing costs 37,285 41,225 Amortization of stock awards 78,000 64,950 Depreciation of real estate assets held in unconsolidated entities 350,440 343,843 Gain on sale of assets -- (103,270) Development fee income (59,031) (23,275) ----------- ----------- Funds from Operations $ 5,343,918 $ 4,278,944 ----------- ----------- Funds from Operations Per Share $ 1.07 $ 1.16 ----------- ----------- Weighted Average Shares and OP Units Outstanding 4,984,272 3,686,555 =========== =========== <CAPTION> FFO increased $1,065,000, or 25%, to $5,344,000. The increase in FFO is primarily the result of the reduction in interest expense as a result of the completion of the 1997 Offering and the development of additional properties. Three Months Ended June 30, 1998 1997 - --------------------------- ---- ---- <S> <C> <C> Net income before minority interest $ 1,764,862 $ 1,479,318 Depreciation of real estate assets 715,350 669,577 Amortization of leasing costs 20,105 20,832 Amortization of stock awards 39,000 32,475 Depreciation of real estate assets held in unconsolidated entities 175,221 175,847 Gain on sale of assets -- (103,270) Development fee income -- (23,275) ----------- ----------- Funds from Operations $ 2,714,538 $ 2,251,504 ----------- ----------- Funds from Operations Per Share $ .54 $ .55 ----------- ----------- Weighted Average Shares and OP Units Outstanding 4,984,272 4,052,653 =========== =========== <CAPTION> FFO increased $463,000, or 21%, to $2,715,000. The increase in FFO is primarily the result of the reduction in interest expense as a result of the completion of the 1997 Offering and the development of additional properties. </TABLE> 15
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ Forward-Looking Statements Management has included herein certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. When used, statements which are not historical in nature including the words "anticipate," "estimate," "should," "expect," "believe," "intend" and similar expressions are intended to identify forward-looking statements. Such statements are, by their nature, subject to certain risks and uncertainties. Risks and other factors that might cause such a difference include, but are not limited to, the effect of economic and market conditions; risks that the Company's acquisition and development projects will fail to perform as expected; financing risks, such as the inability to obtain debt or equity financing on favorable terms; the level and volatility of interest rates; loss or bankruptcy of one or more of the Company's major retail tenants; and failure of the Company's properties to generate additional income to offset increases in operating expenses. Liquidity and Capital Resources The Company's principal demands for liquidity are distributions to its stockholders, debt repayment, development of new properties and future property acquisitions. During the quarter ended June 30, 1998, the Company declared a quarterly dividend of $.46 per share. The dividend was paid on July 16, 1998 to holders of record on June 30, 1998. As of June 30, 1998, the Company had total mortgage indebtedness of $50,775,045 with a weighted average interest rate of 7.54%. Future scheduled annual maturities of mortgages payable for the years ending June 30 are as follows: 1999 - $8,111,544; 2000 - $933,709; 2001 - $1,007,666; 2002 - $1,087,656; 2003 - $1,174,186. This mortgage debt is all fixed rate debt. In addition, the Operating Partnership has in place a $50 million line of Credit Facility (the "Credit Facility") which is guaranteed by the Company. The loan matures in August 2000 and can be extended by the Company for an additional three years. Advances under the Credit Facility bear interest within a range of one-month to six-month LIBOR plus 150 basis points to 213 basis points or the bank's prime rate less 50 basis points to plus 13 basis points, at the option of the Company, based on certain factors such as debt to property value and debt service coverage. The Credit Facility is used to fund property acquisitions and development activities and is secured by most of the Company's Properties which are not otherwise encumbered and properties to be acquired or developed. As of June 30, 1998, $11,673,944 was outstanding under the Credit Facility. 16
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ The Company also has in place a $5 million line of credit (the "Line of Credit"), which matures September 1998, and which the Company expects to renew for an additional 12-month period. The Line of Credit bears interest at the bank's prime rate or 200 basis points in excess of the one-month LIBOR rate, at the option of the Company. The purpose of the Line of Credit is to provide working capital to the Company and fund land options and start-up costs associated with new projects. As of June 30, 1998, $1,200,000 was outstanding under the Line of Credit. The Company's two wholly-owned subsidiaries have obtained construction financing of approximately $6,850,000 to fund the development of two retail properties. The notes require quarterly interest payments, based on a weighted average interest rate based on LIBOR, computed by the lender. The notes mature on October 16, 2002 and are secured by the underlying land and buildings. As of June 30, 1998, $5,990,423 was outstanding under these notes. The Company has received funding from an unaffiliated third party for the construction of certain of its Properties. Advances under this agreement bear no interest and are required to be repaid within sixty (60) days after the date construction has been completed. The advances are secured by the specific land and buildings being developed. As of June 30, 1998, $1,730,490 was outstanding under this arrangement. In June 1998, the Company completed development of a property that added 14,000 square feet to the portfolio. The property is located in Chesterfield Township, Michigan. The development of this retail project is expected to have a positive effect on cash generated by operating activities and Funds from Operations. The Company has three development projects under construction that will add an additional 53,000 square feet of retail space to the Company's portfolio. The projects are expected to be completed during the third and fourth quarters of 1998. Additional Company funding required for this project is estimated to be $4,500,000 and will come from available construction financing and the Credit Facility. Management expects the development of these projects to have a positive effect on cash generated by operating activities and Funds from Operations. 17
Agree Realty Corporation Part I - ------------------------------------------------------------------------------ The Company intends to meet its short-term liquidity requirements, including capital expenditures related to the leasing and improvement of the Properties, through its cash flow provided by operations and the Line of Credit. Management believes that adequate cash flow will be available to fund the Company's operations and pay dividends in accordance with REIT requirements. The Company may obtain additional funds for future development or acquisitions through other borrowings or the issuance of additional shares of capital stock. The Company intends to incur additional debt in a manner consistent with its policy of maintaining a ratio of total debt (including construction and acquisition financing) to total market capitalization of 65% or less. The Company plans to begin construction of additional pre-leased developments and may acquire additional properties, which will initially be financed by the Credit Facility and Line of Credit. Management intends to periodically refinance short-term construction and acquisition financing with long-term debt and/or equity. Upon completion of refinancing, the Company intends to lower the ratio of total debt to market capitalization to 50% or less. Nevertheless, the Company may operate with debt levels or ratios which are in excess of 50% for extended periods of time prior to such refinancing. Year 2000 Costs The Company, like most owners of computer software, will be required to modify certain portions of its software so that it will function properly in the year 2000. Maintenance or modification costs will be expensed as incurred, while the costs of any new software will be capitalized and amortized over the software's useful life. Management believes these "year 2000" costs will be immaterial. Inflation The Company's leases generally contain provisions designed to mitigate the adverse impact of inflation on net income. These provisions include clauses enabling the Company to pass through to tenants certain operating costs, including real estate taxes, common area maintenance, utilities and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. Certain of the Company's leases contain clauses enabling the Company to receive percentage rents based on tenants' gross sales, which generally increase as prices rise, and, in certain cases, escalation clauses, which generally increase rental rates during the terms of the leases. In addition, expiring tenant leases permit the Company to seek increased rents upon re-lease at market rates if rents are below the then existing market rates. 18
Agree Realty Corporation Part II - ------------------------------------------------------------------------------ Other Information Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders On May 11, 1998, the Company held its Annual Meeting of Stockholders. The following were the results of the meeting: The stockholders elected Edward Rosenberg and Ellis Wachs as Directors until the annual meeting of stockholders in 2001 or until a successor is elected and qualified. The vote was as follows: Edward Rosenberg Votes cast for 4,076,376 Votes withheld 48,768 Abstained 221,169 Ellis Wachs Votes cast for 4,068,331 Votes withheld 56,813 Abstained 221,169 19
Agree Realty Corporation Part II - ------------------------------------------------------------------------------ Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Articles of Incorporation and Articles of Amendment of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-11 (Registration Statement No. 33-73858, as amended ("Agree S-11")) 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.3 to Agree S-11) 27.1 Financial Data Schedule (b) Reports on Form 8-K None 20
Agree Realty Corporation Signatures - ------------------------------------------------------------------------------ Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has fully caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Agree Realty Corporation /s/ RICHARD AGREE - ------------------------------------- Richard Agree President and Chief Executive Officer /s/ KENNETH R. HOWE - -------------------------------------- Kenneth R. Howe Vice President - Finance and Secretary (Principal Financial Officer) Date: August 7, 1998 -------------- 21