1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-12386 LEXINGTON CORPORATE PROPERTIES TRUST (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) <TABLE> <S> <C> MARYLAND 13-3717318 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 355 LEXINGTON AVENUE NEW YORK, NY 10017 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 692-7260 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------------------------------- ---------------------------------------------- COMMON SHARES, PAR VALUE $.0001 NEW YORK STOCK EXCHANGE </TABLE> 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 (sec.229.405 of this chapter) 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 aggregate market value of the voting shares held by non-affiliates of the Registrant as of February 26, 1999 was $196,297,862. Number of common shares outstanding as of February 26, 1999 was 17,279,537. Number of preferred shares outstanding as of February 26, 1999 was 2,000,000. DOCUMENTS INCORPORATED BY REFERENCE: The Definitive Proxy Statement for Registrant's 1999 Annual Meeting of Shareholders is incorporated herein by reference into Part III. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 PART I. FORWARD-LOOKING STATEMENTS When used in this Form 10-K Annual Report, the words "believes," "expects," "estimates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially. In particular, among the factors that could cause actual results to differ materially are continued qualification as a real estate investment trust, general business and economic conditions, competition, increases in real estate construction costs, interest rates, accessibility of debt and equity capital markets and other risks inherent in the real estate business including tenant defaults or financial difficulties, potential liability relating to environmental matters and illiquidity of real estate investments. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ITEM 1. BUSINESS GENERAL Lexington Corporate Properties Trust (the "Company"), is a self-managed and self-administered real estate investment trust that acquires, owns and manages a geographically diverse portfolio of net leased office, industrial and retail properties. The Company's predecessor was organized in October 1993 and merged into the Company on December 31, 1997. As of December 31, 1998, the Company's real property portfolio consisted of 66 properties (or interests therein) (the "Properties") located in twenty-nine states, including warehousing, distribution and manufacturing facilities, office buildings and retail properties containing an aggregate 10.9 million net rentable square feet of space. The Company's Properties are subject to triple net leases, which are generally characterized as leases in which the tenant bears all, or substantially all, of the costs and cost increases for real estate taxes, insurance and ordinary maintenance. The Company manages its real estate and credit risk through geographic, industry, tenant and lease maturity diversification. As of December 31, 1998 the five largest tenants/guarantors, which occupy 9 Properties, represented 39.3% of annualized revenues: <TABLE> <CAPTION> % OF RENTAL TENANT/GUARANTOR REVENUE ---------------- ------- <S> <C> Kmart Corporation -- 1 property............................. 11.9% Northwest Pipeline Corp. -- 1 property...................... 11.4% Exel Logistics, Inc. -- 4 properties........................ 6.6% Honeywell, Inc. -- 2 properties............................. 4.7% FirstPlus Financial Group, Inc. -- 1 property............... 4.7% ---- 39.3% ==== </TABLE> As of December 31, 1997 and 1996 the five largest tenants/guarantors represented 48.1% and 45.7% of annualized revenues, respectively. Northwest Pipeline Corp. is the only current tenant that represented greater than 10% of annualized revenues in 1997 and 1996. OBJECTIVES AND STRATEGY The Company's primary objectives are to increase Funds From Operations and cash available for distribution per share to its shareholders. In an effort to obtain these objectives management focuses on: - effectively managing assets through lease extensions, revenue enhancing property expansions, opportunistic property sales and redeployment of assets, when advisable; 1
3 - acquiring portfolios and individual net lease properties from third parties, completing sale/lease-back transactions, acquiring build-to-suit properties, acquiring properties from affiliated net lease partnerships and opportunistic use of our operating partnership units; - refinancing existing indebtedness at lower average interest rates and increasing the Company's access to capital to finance property acquisitions and expansions; - entering into strategic co-investment programs which generate higher equity returns than direct investments due to acquisition and asset management fees and in some cases increased leverage levels; and - strategic repurchase of common shares. Internal Growth; Effectively Managing Assets Tenant Relations and Lease Compliance. The Company maintains close contact with its tenants in order to understand their future real estate needs. The Company monitors the financial, property maintenance and other lease obligations of its tenants through a variety of means, including periodic reviews of financial statements and physical inspections of the Properties. The Company performs annual inspections of those Properties where it has an ongoing obligation with respect to the maintenance of the Property and for all Properties during each of the last three years immediately prior to a scheduled lease expiration. Biannual physical inspections are undertaken for all other Properties. Extending Lease Maturities. The Company seeks to extend its leases in advance of their expiration in order to maintain a balanced lease rollover schedule. Since February 1994, the Company has entered into lease extensions of three years or more on 12 of its Properties. As of December 31, 1998, the scheduled lease maturities for each of the next five years are as follows: <TABLE> <CAPTION> NUMBER CURRENT % OF OF SQUARE ANNUAL ANNUALIZED LEASES FOOTAGE RENT ($000'S) RENTS --------- --------- ------------- ---------- <S> <C> <C> <C> <C> 1999.................................. 0 0 $ 0 0 2000.................................. 2 249,240 654 0.87% 2001.................................. 4 818,944 3,255 4.33% 2002.................................. 4 653,386 2,833 3.77% 2003.................................. 1 179,280 1,900 2.53% -- --------- ------ ----- 11 1,900,850 $8,642 11.50% == ========= ====== ===== </TABLE> Revenue Enhancing Property Expansions. The Company undertakes expansions of its Properties based on tenant requirements. The Company believes that selective property expansions can provide it with attractive rates of return and actively seeks such opportunities. Property Sales and Redeployment of Assets. The Company may determine to sell a Property, either to the Property's existing tenant or to a third party, if it deems such disposition to be in the Company's best interest. Since 1993, the Company has sold three Properties, generating an aggregate net gain of $4.6 million. Acquisition Strategies The Company seeks to enhance its net lease property portfolio through acquisitions of general purpose, efficient, well-located properties in growing markets. Management has diversified the Company's portfolio by geographical location, tenant industry segment, lease term expiration and property type with the intention of providing steady internal growth with low volatility. Management believes that such diversification should help insulate the Company from regional recession, industry specific downturns and price fluctuations by property type. Prior to effecting any acquisitions, management analyzes the (i) property's design, construction quality, efficiency, functionality and location with respect to the immediate sub-market, city and region; (ii) lease integrity with respect to term, rental rate increases, corporate guarantees and property maintenance provisions; 2
4 (iii) present and anticipated conditions in the local real estate market; and (iv) prospects for selling or releasing the property on favorable terms in the event of a vacancy. Management also evaluates each potential tenant's financial strength, growth prospects, competitive position within its respective industry and a property's strategic location and function within a tenant's operations or distribution systems. Management believes that its comprehensive underwriting process is critical to the assessment of long-term profitability of any investment by the Company. Operating Partnership Structure. The operating partnership structure enables the Company to acquire properties by issuing to a seller, as a form of consideration, interests in the Company's operating partnerships ("OP Units"). Management believes that this structure facilitates the Company's ability to raise capital and to acquire portfolio and individual properties by enabling the Company to structure transactions which may defer tax gains for a contributor of property while preserving the Company's available cash for other purposes, including the payment of dividends and distributions. The Company has used OP Units as a form of consideration in connection with the acquisition of 22 Properties. Acquisitions of Portfolio and Individual Net Lease Properties. The Company seeks to acquire portfolio and individual properties that are leased to creditworthy tenants under long-term net leases. Management believes there is significantly less competition for the acquisition of property portfolios containing a number of net leased properties located in more than one geographic region. Management also believes that the Company's geographical diversification, acquisition experience and access to capital will allow it to compete effectively for the acquisition of such net leased properties. Sale/Leaseback Transactions. The Company seeks to acquire portfolio and individual net lease properties in sale/leaseback transactions. The Company selectively pursues sale/leaseback transactions with creditworthy sellers/tenants with respect to properties that are integral to the sellers/tenants ongoing operations. Build-to-suit Properties. The Company may also acquire, after construction has been completed, "build-to-suit" properties that are entirely pre-leased to their intended corporate users before construction. As a result, the Company does not assume the risk associated with the construction phase of a project. During 1998, the Company acquired two "build-to-suit" properties net leased to Fleet Mortgage Group, Inc. and Lear Technologies LLC (General Motors guarantor) for an aggregate cost of $29.0 million and an average unleveraged yield of 10.35%. The Company is also obligated to purchase a third "build-to-suit" property, which will be net leased to Blue Cross/Blue Shield of South Carolina, for $38.7 million with a scheduled delivery date no later than January 2000. Acquisitions from Affiliated Net Lease Partnerships. Management believes that net lease partnerships affiliated with the Company provide it with an opportunity to acquire properties with which management is already familiar. As of December 31, 1998, the Company had acquired 14 Properties from affiliated limited partnerships. In addition, on January 29, 1998, the Company completed the acquisition of partnership interests in two limited partnerships, one of which was an affiliate of an officer of the Company, in exchange for the Company's OP Units. The sole assets of the partnerships acquired was approximately $23.5 million in cash. The LCP Group, L.P. ("LCP"), an affiliate of E. Robert Roskind, Chairman of the Board of Trustees and Co-Chief Executive Officer of the Company, has granted the Company an option exercisable at any time, to acquire general partnership interests currently owned by LCP in two limited partnerships, Net 1, L.P. and Net 2, L.P. (together, the "Net Partnerships"), which own net leased office, industrial and retail properties. The Net Partnerships own a total of 62 single-tenant properties located in 16 states which contain approximately 1.6 million net rentable square feet. The tenants of such properties include Alco Standard Corporation, Ameritech Services, Honeywell, Inc. and Wal-Mart Stores, Inc. Under the terms of the option, the Company, subject to review of any such transaction by the independent members of its Board of Trustees, may acquire the general partnership interests at their fair market value based upon a formula relating to partnership cash flows, with the Company retaining the option of paying such fair market value in securities of the Company, OP Units, cash or a combination thereof. 3
5 Refinancing Existing Indebtedness and Increasing Access to Capital As a result of the Company's financing activities, the weighted average interest rate on the Company's outstanding indebtedness has been reduced from approximately 10.00% as of December 31, 1994 to approximately 7.65% as of December 31, 1998. In addition, management is constantly pursuing opportunities to increase the Company's access to public and private capital in order to achieve maximum operating flexibility. Scheduled balloon payments, excluding the $52.6 million outstanding on the variable rate unsecured credit facility, over the next five years are as follows: <TABLE> <CAPTION> WEIGHTED AVERAGE BALLOON AMOUNT INTEREST RATE -------------- ------------- <S> <C> <C> 1999..................................................... $ 5,563,000 10.750% 2000..................................................... 13,093,000 8.875% 2001..................................................... 1,000,000 9.500% 2002..................................................... 9,559,000 7.250% 2003..................................................... -- -- ----------- ------ $29,215,000 8.72 % =========== ====== </TABLE> The Company's variable rate unsecured credit facility bears interest at 137.5 basis points over the Company's option of 1, 3 or 6 month LIBOR and is scheduled to mature in July 2001. As of December 31, 1998, $51.2 million of the outstanding borrowing under this facility bears interest at 6.6875% fixed through June 1, 1999 with the remaining $1.4 million bearing interest at 6.4375% through March 1, 1999. On March 1, 1999 the $1.4 million borrowing was extended through April 1, 1999 at an interest rate of 6.375%. Common Share Repurchase. On September 15, 1998, the Company's Board of Trustees authorized the repurchase of up to 1 million common shares. As of December 31, 1998 the Company has repurchased 129,875 common shares at an average price of $11.92, all of which have been retired. Competition. The real estate business is highly competitive and the Company competes with numerous established companies having significant resources and experience. Environmental Matters. Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the costs of removal or redemption of certain hazardous or toxic substances at, on, in or under such property as well as certain other potential costs relating to hazardous or toxic substances (including government fines and penalties and damages for injuries to persons and adjacent property). Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances. Although the Company's tenants are primarily responsible for any environmental damage and claims related to the leased premises, in the event of the bankruptcy or inability of the tenant of such premises to satisfy any obligations with respect thereto, the Company may be required to satisfy such obligations. In addition, under certain environmental laws, the Company, as the owner of such properties, may be held directly liable for any such damages or claims irrespective of the provisions of any lease. From time to time, in connection with the conduct of the Company's business, and prior to the acquisition of any property from a third party or as required by the Company's financing sources, the Company authorizes the preparation of Phase I environmental reports with respect to its Properties. Based upon such environmental reports and management's ongoing review of its Properties, as of the date of this Annual Report, management was not aware of any environmental condition with respect to any of the Company's Properties which management believed would be reasonably likely to have a material adverse effect on the Company. There can be no assurance, however, that (i) the discovery of environmental conditions, the existence or severity of which were previously unknown, (ii) changes in law, (iii) the conduct of tenants or (iv) activities relating to properties in the vicinity of the Company's Properties, will not expose the Company to material liability in the future. Changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in 4
6 significant unanticipated expenditures or may otherwise adversely affect the operations of the Company's tenants, which would adversely affect the Company's financial condition and results of operations, including funds from operations. Employees. As of December 31, 1998, the Company had twenty-five employees. Industry Segments. The Company operates in one industry segment, investment in net leased real property. ITEM 2. PROPERTIES Real Estate Portfolio As of December 31, 1998, the Company's real estate portfolio was comprised of approximately 10.9 million square feet of rentable space in 66 office, industrial and retail properties. The Company's Properties are currently 98.5% leased. The number, and percentage of annualized revenues and square footage mix of the Company's portfolio is as follows: <TABLE> <CAPTION> SQUARE NUMBER REVENUE FOOTAGE ------ ------- ------- <S> <C> <C> <C> Office................................................... 17 48% 27% Industrial............................................... 25 34% 56% Retail................................................... 24 18% 17% -- --- --- 66 100% 100% == === === </TABLE> The Company's Properties are subject to triple net leases, however, in certain leases the Company is responsible for roof and structural repairs. In such situations the Company performs annual inspections of the Properties. During each of the years in three year period ended December 31, 1998, the Company expended less than $250,000 relating to such leases. The Company's Property in Palm Beach Gardens, Florida is subject to a lease in which the Company is responsible for a portion of the real estate taxes and utilities. The Company's tenants represent a variety of industries including banking, computer and software services, health and fitness, general purpose retailing, manufacturing, insurance and warehousing, and have a weighted average credit strength of investment grade quality. A substantial portion of the Company's income consists of base rent under long-term leases. As of December 31, 1998, the average remaining term under the Company's leases is approximately 9.5 years. Of the 65 current leases as of December 31, 1998, 35 contain scheduled rent increases and 8 contain increases based upon the Consumer Price Index. In addition four leases contain percentage rent clauses. The Company has 12 Properties accounting for $16.1 million of annualized rental revenue that are subject to long term ground leases where a third party owns and has leased the underlying land to the Company. In each of these situations the rental payments made to the land owner are passed on to the Company's tenant. At the end of these long-term ground leases, unless extended, the land together with all improvements thereon revert to the land owner. These ground leases, including renewal options, expire at various dates through 2074. The Company has 17 Properties that are subject to lessee purchase options. As of December 31, 1998, only one purchase option can be exercised. In each case the Property can be purchased for no less than its current fair market value. TABLE REGARDING REAL ESTATE HOLDINGS The table on the following pages sets forth certain information relating to the Company's real property portfolio as of December 31, 1998. 5
7 <TABLE> <CAPTION> PROPERTY NET TENANT TYPE/YEAR LAND AREA RENTABLE PROPERTY LOCATION (GUARANTOR) CONSTRUCTED (ACRES) SQUARE FEET ----------------- ----------------------------- ------------------- --------- ----------- <S> <C> <C> <C> <C> 904 Industrial Road Walker Manufacturing Company Industrial 20.00 195,640 Marshall, MI (Tenneco Automotive, Inc.) 1968 & 1972 1601 Pratt Avenue Walker Manufacturing Company Industrial 8.26 53,600 Marshall, MI (Tenneco Automotive, Inc.) 1979 19019 No. 59th Avenue Honeywell, Inc. Research/ 51.79 252,300 Glendale, AZ Development 1985 6950 Greenwood Parkway Allegiance Healthcare Industrial 10.15 123,924 Bessemer, AL Corp.(1) 1990 (Baxter International, Inc.) 567 South Riverside Drive Crown Cork & Seal Co., Inc. Warehouse/ 5.80 146,000 Modesto, CA Manufacturing 1970 & 1976 Tappan Park White Consolidated Warehouse/ 26.57 296,720 22 Chambers Road Industries, Distribution Mansfield, OH Inc.(3) 1970 10419 North 30th Street Time Customer Service, Inc. Office 14.38 132,981 Tampa, FL (Time, Inc.) 1986 3102 Queen Palm Drive Time Customer Service, Inc. Office/Warehouse 15.02 229,605 Tampa, FL (Time, Inc.) 1986 109 Stevens Street Unisource Worldwide, Inc. Warehouse/ 6.97 168,800 Jacksonville, FL Industrial 1958 & 1969 4450 California Street Mervyn's Retail 11.00 122,000 Bakersfield, CA (Dayton Hudson Corp.) 1976 3615 North 27th Avenue Bank One, Arizona, N.A.(2) Office 10.26 179,280 Phoenix, AZ 1960 & 1979 Amigoland Shopping Montgomery Ward & Co., Inc. Retail 7.61 115,000 Center (1) 1973 Mexico St. & Palm Blvd. Brownsville, TX 13430 N. Black Canyon Bull HN Information Systems, Office 13.37 137,058 Fwy. Inc. 1985 & 1994 Phoenix, AZ <CAPTION> 1999 1999(E) BASE LEASE TERM AND MINIMUM STRAIGHT-LINE ANNUAL RENTS PER NET RENEWAL CASH RENTAL PROPERTY LOCATION RENTABLE SQUARE FOOT OPTIONS RENT ($000) REVENUE ($000) ----------------- ----------------------------------- ------------- ----------- -------------- <S> <C> <C> <C> <C> 904 Industrial Road 08/18/87 - 08/17/00 None $ 487 $ 487 Marshall, MI 08/18/97 - 08/17/00: $2.49 1601 Pratt Avenue 08/18/87 - 08/17/00 None $ 167 $ 167 Marshall, MI 08/18/97 - 08/17/00: $3.11 19019 No. 59th Avenue 07/16/86 - 07/15/01 (3) 5 year $ 1,892 $ 1,892 Glendale, AZ 07/16/96 - 07/15/01: $7.50 6950 Greenwood Parkway 09/01/91 - 09/01/01 (2) 5 year $ 472 $ 472 Bessemer, AL 09/01/91 - 09/01/01: $3.81 567 South Riverside Drive 09/26/86 - 09/25/01 (1) 5 year $ 298 $ 298 Modesto, CA 09/26/96 - 09/25/01: $2.04 Tappan Park 12/31/86 - 12/31/01 (2) 5 year $ 593 $ 593 22 Chambers Road 01/01/97 - 12/31/01: $2.00 Mansfield, OH 10419 North 30th Street 04/01/87 - 03/31/02 (4) 5 Year $ 1,238 $ 1,099 Tampa, FL 01/01/99 - 12/31/99: $9.31 01/01/00 - 12/31/00: $9.87 01/01/01 - 12/31/01: 10.46 01/01/02 - 03/31/02: 11.09 3102 Queen Palm Drive 08/01/87 - 07/31/02 (1) 5 year $ 955 $ 957 Tampa, FL 08/01/98 - 07/31/01: $4.16 08/01/01 - 07/31/02: $4.39 109 Stevens Street 10/01/87 - 09/30/02 None $ 380 $ 380 Jacksonville, FL 10/01/97 - 09/30/02: $2.25 4450 California Street 02/23/77 - 12/31/02 (5) 5 year $ 407 $ 397 Bakersfield, CA 01/01/78 - 12/31/02: $3.34 3615 North 27th Avenue 11/30/88 - 11/30/03 (1) 5 year $ 1,900 $ 1,900 Phoenix, AZ 12/01/98 - 11/30/03: 10.60 Amigoland Shopping 11/01/74 - 10/31/04 (3) 5 year $ 153 $ 153 Center 11/01/74 - 10/31/04: $1.33 Mexico St. & Palm Blvd. Brownsville, TX 13430 N. Black Canyon 10/11/94 - 10/10/05 None $ 972 $ 1,032 Fwy. 10/11/94 - 10/10/00: $7.35 Phoenix, AZ 10/11/00 - 10/10/01: $7.70 10/11/01 - 10/10/02: $7.90 10/11/02 - 10/10/03: $8.10 10/11/03 - 10/10/04: $8.30 10/11/04 - 10/10/05: $8.50 </TABLE> 6
8 <TABLE> <CAPTION> PROPERTY NET TENANT TYPE/YEAR LAND AREA RENTABLE PROPERTY LOCATION (GUARANTOR) CONSTRUCTED (ACRES) SQUARE FEET ----------------- ----------------------------- ------------------- --------- ----------- <S> <C> <C> <C> <C> 1301 California Circle Stevens-Arnold, Inc. Office/Research 6.34 100,026 Milpitas, CA (BICC Public Ltd. Co.) & Development 1985 200 Southington Hartford Fire Insurance Co. Office 12.40 153,364 Executive Park 1983 Southington, CT 24100 Laguna Hills Mall Federated Department Stores, Retail 11.00 160,000 Laguna Hills, CA Inc.(1) 1974 7111 Westlake Terrace Hechinger & Company(1) Retail 7.61 95,000 Bethesda, MD 1980 6910 S. Memorial Highway Toys "R" Us, Inc.(1) Retail 4.44 43,123 Tulsa, OK 1981 12535 SE 82nd Avenue Toys "R" Us, Inc.(1) Retail 5.85 42,842 Clackamas, OR 1981 18601 Alderwood Mall Blvd. Toys "R" Us, Inc.(1) Retail 3.64 43,105 Lynnwood, WA 1981 4425 Purks Road Lear Technologies, LLC Industrial 12.00 183,717 Auburn Hills, MI (Lear Corporation) 1989 & 1998 (General Motors Corp.) West Wingfoot Road Toys "R" Us, Inc.(1) Industrial 7.56 123,293 Houston, TX 1981 245 Salem Church Road Exel Logistics Inc. Warehouse 12.52 252,000 Mechanicsburg, PA (NFC plc) 1985 6 Doughton Road Exel Logistics Inc. Warehouse 24.38 330,000 New Kingston, PA (NFC plc) 1998 34 East Main Street Exel Logistics Inc. Warehouse 9.66 179,200 New Kingston, PA (NFC plc) 1981 401 Elm Street Lockheed Martin Corp Office/Research 36.94 126,000 Marlborough, MA (Honeywell, Inc.) & Development 1960 & 1988 <CAPTION> 1999 1999(E) BASE LEASE TERM AND MINIMUM STRAIGHT-LINE ANNUAL RENTS PER NET RENEWAL CASH RENTAL PROPERTY LOCATION RENTABLE SQUARE FOOT OPTIONS RENT ($000) REVENUE ($000) ----------------- ----------------------------------- ------------- ----------- -------------- <S> <C> <C> <C> <C> 1301 California Circle 12/10/85 - 12/10/05 (9) 5 year $ 2,377 $ 2,667 Milpitas, CA 06/01/98 - 11/30/00: $23.76 12/01/00 - 05/31/03: $26.88 06/01/03 - 12/10/05: $30.36 200 Southington 09/01/91 - 12/31/05 (1) 5 year $ 2,166 $ 2,009 Executive Park 01/01/95 - 12/31/05: $14.12 Southington, CT 24100 Laguna Hills Mall 02/01/76 - 01/31/06 (1) 8 year $ 677 $ 673 Laguna Hills, CA 02/01/80 - 01/31/06: $4.23 (2) 15 year (1) 6 year 7111 Westlake Terrace 05/01/81 - 04/30/06 (1) 10 year $ 772 $ 648 Bethesda, MD 05/01/96 - 04/30/06: $8.13 (3) 5 year 6910 S. Memorial Highway 06/01/81 - 05/31/06 (5) 5 year $ 356 $ 356 Tulsa, OK 02/01/98 - 05/31/01: $8.26 06/01/01 - 05/31/06: $8.40 12535 SE 82nd Avenue 06/01/81 - 05/31/06 (5) 5 year $ 417 $ 417 Clackamas, OR 02/01/98 - 05/31/01: $9.74 06/01/01 - 05/31/06: $9.91 18601 Alderwood Mall Blvd. 06/01/81 - 05/31/06 (5) 5 year $ 389 $ 389 Lynnwood, WA 02/01/98 - 05/31/01: $9.03 06/01/01 - 05/31/06: $9.18 4425 Purks Road 07/23/98 - 07/22/06 none $ 1,325 $ 1,365 Auburn Hills, MI 07/23/98 - 07/22/02: $7.21 07/23/02 - 07/22/06: $7.63 West Wingfoot Road 09/01/81 - 08/31/06 (5) 5 year $ 491 $ 478 Houston, TX 05/01/98 - 08/31/06: $3.98 245 Salem Church Road 11/15/91 - 11/30/06 (2) 5 year $ 924 $ 1,000 Mechanicsburg, PA 12/01/97 - 11/30/00: $3.67 12/01/00 - 11/30/03: $4.01 12/01/03 - 11/30/06: $4.38 6 Doughton Road 11/15/91 - 11/30/06 (2) 5 year $ 1,245 $ 1,349 New Kingston, PA 12/01/97 - 11/30/00: $3.77 12/01/00 - 11/30/03: $4.12 12/01/03 - 11/30/06: $4.51 34 East Main Street 11/15/91 - 11/30/06 (2) 5 year $ 603 $ 654 New Kingston, PA 12/01/97 - 11/30/00: $3.37 12/01/00 - 11/30/03: $3.68 12/01/03 - 11/30/06: $4.02 401 Elm Street 07/22/97 - 12/17/06 (6) 5 year $ 1,671 $ 1,671 Marlborough, MA 07/22/97 - 12/17/01: $13.26 12/18/01 - 12/17/06: 75% of cumulative increase in CPI </TABLE> 7
9 <TABLE> <CAPTION> PROPERTY NET TENANT TYPE/YEAR LAND AREA RENTABLE PROPERTY LOCATION (GUARANTOR) CONSTRUCTED (ACRES) SQUARE FEET ----------------- ----------------------------- ------------------- --------- ----------- <S> <C> <C> <C> <C> 46600 Port Street Johnson Controls, Inc. Industrial 24.00 134,160 Plymouth, MI 1996 450 Stern Street Johnson Controls, Inc. Industrial 20.10 111,160 Oberlin, OH 1996 15911 Progress Drive Johnson Controls, Inc. Industrial 22.20 58,800 Cottondale, AL 1996 12000 Tech Center Drive Kelsey-Hayes (Tech I) Office 5.72 80,230 Livonia, MI 1987 & 1988 12025 Tech Center Drive Kelsey-Hayes (Tech II) Research/ 9.18 100,000 Livonia, MI Development 1987 & 1988 2300 Litton Lane Fidelity Corporate Office 24.00 81,744 Hebron, KY Real Estate, LLC (4) 1987 5917 S. La Grange Road Bally Total Fitness Corp. Retail/Health Club 2.73 25,250 Countryside, IL 1987 1160 White Horse Road Physical Fitness Centers of Retail/Health Club 2.87 31,750 Voorhees, NJ Philadelphia, Inc. 1987 (Bally Total Fitness Corp.) 5801 Bridge Street Champion Fitness IV, Inc. Retail/Health Club 3.66 24,990 DeWitt, NY (Bally Total Fitness Corp.) 1977 & 1987 One Spricer Drive Dana Corp. Industrial 20.95 148,000 Gordonsville, TN 1983 & 1985 <CAPTION> 1999 1999(E) BASE LEASE TERM AND MINIMUM STRAIGHT-LINE ANNUAL RENTS PER NET RENEWAL CASH RENTAL PROPERTY LOCATION RENTABLE SQUARE FOOT OPTIONS RENT ($000) REVENUE ($000) ----------------- ----------------------------------- ------------- ----------- -------------- <S> <C> <C> <C> <C> 46600 Port Street 12/23/96 - 12/22/06 (2) 5 year $ 709 $ 709 Plymouth, MI 12/23/98 - 12/22/99: $5.28 12/23/99 - 12/22/06: Annual increase of 3x CPI, but not more than 4.5% 450 Stern Street 12/23/96 - 12/22/06 (2) 5 year $ 536 $ 536 Oberlin, OH 12/23/98 - 12/22/99: $4.82 12/23/99 - 12/22/06: Annual increase of 3x CPI, but not more than 4.5% 15911 Progress Drive 02/19/97 - 02/18/07 (2) 5 year $ 313 $ 313 Cottondale, AL 02/19/98 - 02/18/99: $5.13 02/19/99 - 02/18/00: $5.32 02/19/00 - 02/18/07: Annual increase of 3x CPI, but not more than 4.5% 12000 Tech Center Drive 05/01/97 - 04/30/07 (2) 5 year $ 629 $ 679 Livonia, MI 05/01/97 - 04/30/99: $7.70 05/01/99 - 04/30/02: $7.91 05/01/02 - 04/30/05: $8.75 05/01/05 - 04/30/07: $9.25 12025 Tech Center Drive 05/01/97 - 04/30/07 (2) 5 year $ 912 $ 958 Livonia, MI 05/01/97 - 04/30/99: $9.05 05/01/99 - 04/30/02: $9.16 05/01/02 - 04/30/05: $9.75 05/01/05 - 04/30/07: $10.25 2300 Litton Lane 05/01/97 - 04/30/07 (2) 5 year $ 777 $ 817 Hebron, KY 05/01/97 - 04/30/02: $9.50 05/01/02-04/30/07: $11.00 5917 S. La Grange Road 07/13/87 - 07/12/07 (2) 5 year $ 574 $ 542 Countryside, IL 07/13/97 - 07/12/02: $22.73 07/13/02 - 07/12/07: $26.14 1160 White Horse Road 07/14/87 - 07/13/07 (2) 5 year $ 713 $ 673 Voorhees, NJ 07/14/97 - 07/13/02: $22.45 07/14/02 - 07/13/07: $25.82 5801 Bridge Street 08/19/87 - 08/18/07 (2) 5 year $ 444 $ 419 DeWitt, NY 08/19/97 - 08/18/02: $17.78 08/19/02 - 08/18/07: $20.45 One Spricer Drive 01/01/84 - 08/31/07 (2) 5 year $ 329 $ 341 Gordonsville, TN 08/01/96 - 07/31/99: $2.20 (1) 4 year, 08/01/99 - 07/31/02: $2.26 11 months 08/01/02 - 07/31/05: $2.33 08/01/05 - 08/31/07: $2.40 </TABLE> 8
10 <TABLE> <CAPTION> PROPERTY NET TENANT TYPE/YEAR LAND AREA RENTABLE PROPERTY LOCATION (GUARANTOR) CONSTRUCTED (ACRES) SQUARE FEET ----------------- ----------------------------- ------------------- --------- ----------- <S> <C> <C> <C> <C> 541 Perkins Jones Road Kmart Corp. Warehouse/ 103.00 1,700,000 Warren, OH Distribution 1982 160 Clairemont Avenue Allied Holdings, Inc. Office 2.98 112,248 Decatur, GA 1983 2655 Shasta Way Fred Meyer, Inc. Retail 13.90 178,204 Klamath Falls, OR 1986 2210 Enterprise Drive Fleet Mortgage Group, Inc. Office 16.53 177,747 Florence, SC 1998 7272 55th Street Circuit City Stores, Inc. Retail 3.93 45,308 Sacramento, CA 1988 6405 South Virginia St. Comp USA, Inc. Retail 2.72 31,400 Reno, NV 1988 5055 West Sahara Avenue Circuit City Stores, Inc. Retail 2.57 36,053 Las Vegas, NV 1988 4733 Hills & Dales Road Scandinavian Health Spa, Inc. Retail/Health Club 3.32 37,214 Canton, OH (Bally Total Fitness 1987 Holding Corp.) Highway 21 South Wal-Mart Real Estate Retail 5.21 56,132 Jacksonville, AL Business Trust 1982 (Wal-Mart Stores, Inc.) 6475 Dobbin Road Upton's, Inc. Retail 2.50 60,000 Columbia, MD 1983 295 Chipeta Way Northwest Pipeline Corp.(1) Office 19.79 295,000 Salt Lake City, UT 1982 Fort Street Mall Liberty House, Inc.(1) Retail 1.22 85,610 King St. 1980 Honolulu, HI <CAPTION> 1999 1999(E) BASE LEASE TERM AND MINIMUM STRAIGHT-LINE ANNUAL RENTS PER NET RENEWAL CASH RENTAL PROPERTY LOCATION RENTABLE SQUARE FOOT OPTIONS RENT ($000) REVENUE ($000) ----------------- ----------------------------------- ------------- ----------- -------------- <S> <C> <C> <C> <C> 541 Perkins Jones Road 10/01/82 - 09/30/07 (10) 5 year $ 8,409 $ 8,932 Warren, OH 10/01/98 - 09/30/02: $4.95 10/01/02 - 09/30/07: $5.51 160 Clairemont Avenue 01/01/98 - 12/31/07 (2) 5 year $ 1,388 $ 1,530 Decatur, GA 01/01/98 - 12/31/99: $12.36 01/01/00 - 12/31/07: Rent increases 2.75% annually 2655 Shasta Way 03/10/88 - 03/31/08 (3) 10 year $ 1,009 $ 1,009 Klamath Falls, OR 03/10/88 - 03/31/08: $5.66 2210 Enterprise Drive 06/10/98 - 06/30/08 (2) 5 year $ 1,520 $ 1,635 Florence, SC 06/10/98 - 06/30/03: $8.55 07/01/03 - 06/30/08: $9.84 7272 55th Street 10/28/88 - 10/27/08 (3) 10 year $ 387 $ 376 Sacramento, CA 10/28/98 - 10/27/03: $8.54 10/28/03 - 10/27/08: $9.30 6405 South Virginia St. 12/16/88 - 12/15/08 (3) 10 year $ 335 $ 325 Reno, NV 12/16/98 - 12/15/03: $10.65 12/16/03 - 12/15/08: $11.60 5055 West Sahara Avenue 12/16/88 - 12/15/08 (3) 10 year $ 286 $ 278 Las Vegas, NV 12/16/98 - 12/15/03: $7.93 12/16/03 - 12/15/08: $8.64 4733 Hills & Dales Road 01/01/89 - 12/31/08 (2) 5 year $ 640 $ 685 Canton, OH 01/01/99 - 12/31/99: $17.20 01/01/00 - 12/31/08: Rent increases 2.2% annually Highway 21 South 08/31/83 - 01/31/09 (5) 5 year $ 146 $ 146 Jacksonville, AL 09/01/87 - 01/31/09: $2.60 plus 1% of gross sales in excess of $10 million ($46,000 in 1998) 6475 Dobbin Road 08/01/83 - 07/30/09 (4) 5 year $ 570 $ 549 Columbia, MD 08/01/98 - 07/30/04: $9.50 08/01/04 - 07/30/09: $8.75 295 Chipeta Way 10/01/82 - 09/30/09 (1) 9 year $ 8,571 $ 8,571 Salt Lake City, UT 10/01/97 - 09/30/09: $29.06 (1) 10 year subject to a CPI adjustment on a portion of the rent. Fort Street Mall 10/01/80 - 09/30/09 (1) 9 year, $ 963 $ 971 King St. 10/01/95 - 09/30/05: $11.25 7 months Honolulu, HI 10/01/05 - 09/30/09: $11.56 (1) 2 year (3) 5 year </TABLE> 9
11 <TABLE> <CAPTION> PROPERTY NET TENANT TYPE/YEAR LAND AREA RENTABLE PROPERTY LOCATION (GUARANTOR) CONSTRUCTED (ACRES) SQUARE FEET ----------------- ----------------------------- ------------------- --------- ----------- <S> <C> <C> <C> <C> 16275 Technology Drive Cymer, Inc. Office/Research 2.73 65,755 San Diego, CA & Development 1989 9950 Mayland Drive Circuit City Stores, Inc.(1) Office Headquarters 19.71 288,562 Richmond, VA 1990 7055 Highway 85 South Wal-Mart Stores, Inc. Retail 8.61 81,911 Riverdale, GA 1985 4200 RCA Boulevard The Wackenhut Corp. Office 7.70 127,855 Palm Beach Gardens, FL 1996 Highway 101 Fred Meyer, Inc. Retail 8.81 118,179 Newport, OR 1986 6345 Brackbill Boulevard Exel Logistics, Inc. Warehouse/ 29.01 507,000 Mechanicsburg, PA (NFC plc) Distribution 1985 & 1991 2280 Northeast Drive Ryder Integrated Logistics, Warehouse 25.70 276,480 Waterloo, IA Inc. 1996 & 1997 (Ryder Systems, Inc.) 128 Crews Drive Stone Container Corp. Industrial/ 10.76 185,960 Columbia, SC Warehouse 1968 & 1998 1600 Viceroy Drive FirstPlus Financial Group, Office 8.17 247,968 Dallas, TX Inc. 1986 250 Rittenhouse Circle Jones Apparel Group, Inc.(5) Office/ 15.63 255,019 Bristol, PA Warehouse 1982 <CAPTION> 1999 1999(E) BASE LEASE TERM AND MINIMUM STRAIGHT-LINE ANNUAL RENTS PER NET RENEWAL CASH RENTAL PROPERTY LOCATION RENTABLE SQUARE FOOT OPTIONS RENT ($000) REVENUE ($000) ----------------- ----------------------------------- ------------- ----------- -------------- <S> <C> <C> <C> <C> 16275 Technology Drive 06/01/96 - 12/31/09 None $ 762 $ 860 San Diego, CA 06/01/97 - 05/31/99: $11.26 06/01/99 - 05/31/01: $11.82 06/01/01 - 05/31/03: $12.42 06/01/03 - 05/31/05: $13.04 06/01/05 - 05/31/07: $13.69 06/01/07 - 12/31/09: $14.26 9950 Mayland Drive 02/28/90 - 02/28/10 (4) 10 year $ 2,478 $ 2,791 Richmond, VA 01/01/98 - 02/29/00: $8.59 (1) 5 year 03/01/00 - 02/28/10: $9.91 7055 Highway 85 South 12/04/85 - 01/31/11 (5) 5 year $ 270 $ 270 Riverdale, GA 12/04/85 - 01/31/11: $3.29 4200 RCA Boulevard 02/15/96 - 02/28/11 (3) 5 year $ 2,241 $ 2,241 Palm Beach Gardens, FL 12/01/97 - 02/28/11: $17.53 Highway 101 06/01/86 - 05/31/11 (3) 5 year $ 826 $ 826 Newport, OR 06/01/86 - 05/31/11: $6.99 plus .5% of gross sales over $20 million ($66,000 in 1998) 6345 Brackbill Boulevard 10/29/90 - 03/19/12 (2) 10 year $ 1,771 $ 1,933 Mechanicsburg, PA 3/20/97 - 03/19/02: $3.49 3/20/02 - 03/19/07: $4.02 3/20/07 - 03/19/12: greater of $4.62 or fair market rent as specified in lease 2280 Northeast Drive 08/01/97 - 07/31/12 (3) 5 year $ 891 $ 1,004 Waterloo, IA 08/01/97 - 07/31/02: $3.22 08/01/02 - 07/31/07: $3.61 08/01/07 - 07/31/12: $4.04 128 Crews Drive 12/16/82 - 08/31/12 None $ 465 $ 549 Columbia, SC 09/01/98 - 08/31/00: $2.50 09/01/00 - 08/31/03: $2.71 09/01/03 - 08/31/06: $2.91 09/01/06 - 08/31/08: $3.12 09/01/08 - 08/31/12: $3.32 1600 Viceroy Drive 09/04/97 - 08/31/12 (4) 5 year $ 3,224 $ 3,557 Dallas, TX 09/04/97 - 08/31/02: $13.00 09/01/02 - 08/31/07: $14.30 09/01/07 - 08/31/12: $15.73 250 Rittenhouse Circle 03/26/98 - 03/25/13 (2) 5 year $ 1,150 $ 1,224 Bristol, PA 03/26/98 - 03/26/03: $4.51 03/27/03 - 03/26/08: $4.96 03/27/08 - 03/25/13: $5.46 </TABLE> 10
12 <TABLE> <CAPTION> PROPERTY NET TENANT TYPE/YEAR LAND AREA RENTABLE PROPERTY LOCATION (GUARANTOR) CONSTRUCTED (ACRES) SQUARE FEET ----------------- ----------------------------- ------------------- --------- ----------- <S> <C> <C> <C> <C> 3501 West Avenue H Michaels Stores, Inc. Warehouse/ 37.18 431,250 Lancaster, CA Distribution 1998 7150 Exchequer Drive Corporate Express Office Warehouse/ 5.23 65,043 Baton Rouge, LA Products, Inc. Distribution (CEX Holdings, Inc.) 1998 9580 Livingston Road GFS Realty, Inc. Retail 10.60 107,337 Oxon Hill, MD (Giant Food, Inc.) 1976 324 Industrial Park Road SKF USA, Inc. Manufacturing 21.13 72,868 Franklin, NC 1996 Rockshire Village Center GFS Realty, Inc.(1) Retail 7.32 51,682 West Ritchie Parkway (Giant Food, Inc.) 1977 Rockville, MD 35205 16th Avenue South Eagle Hardware & Garden Inc. Retail 8.19 133,861 Federal Way, WA 1992 333 East Tudor Road Eagle Hardware & Garden Inc. Retail 11.00 157,525 Anchorage, AK 1992 <CAPTION> 1999 1999(E) BASE LEASE TERM AND MINIMUM STRAIGHT-LINE ANNUAL RENTS PER NET RENEWAL CASH RENTAL PROPERTY LOCATION RENTABLE SQUARE FOOT OPTIONS RENT ($000) REVENUE ($000) ----------------- ----------------------------------- ------------- ----------- -------------- <S> <C> <C> <C> <C> 3501 West Avenue H 06/19/98 - 06/18/13 (3) 5 year $ 1,398 $ 1,430 Lancaster, CA 06/19/98 - 06/18/03: $3.24 06/19/03 - 06/18/08: $3.31 06/19/08 - 06/18/13: $3.39 7150 Exchequer Drive 11/01/98 - 10/31/13 (3) 5 year $ 327 $ 368 Baton Rouge, LA 11/01/98 - 10/31/01: $5.02 11/01/01 - 10/31/04: $5.32 11/01/04 - 10/31/07: $5.64 11/01/07 - 10/31/10: $5.98 11/01/10 - 10/31/13: $6.34 9580 Livingston Road 01/03/77 - 02/28/14 (4) 5 year $ 408 $ 274 Oxon Hill, MD 03/01/77 - 02/29/04: $3.80 03/01/04 - 02/28/14: $1.91 324 Industrial Park Road 12/23/96 - 12/31/14 (3) 10 year $ 322 $ 322 Franklin, NC 12/23/96 - 12/31/99: $4.42 01/01/00 - 12/31/14: CPI every 3 years Rockshire Village Center 01/01/78 - 04/30/17 (2) 10 year $ 224 $ 152 West Ritchie Parkway 01/01/78 - 02/28/05: $4.33 Rockville, MD 03/01/05 - 04/30/17: $2.23 35205 16th Avenue South 09/01/92 -08/31/17 None $ 1,233 $ 1,233 Federal Way, WA 09/01/97 - 08/31/02: $9.21 09/01/02 - 08/31/17: CPI adjusted every 5 years not to exceed 15%; plus 2% of annual sales in excess of $38.5 million ($0 in 1998) 333 East Tudor Road 11/01/92 - 10/31/17 None $ 1,588 $ 1,588 Anchorage, AK 11/01/97 - 10/31/02: $10.08 11/01/02 - 10/31/17: CPI adjusted every 5 years not to exceed 15%; plus 2% of annual sales in excess of $50 million ($53,000 in 1998) </TABLE> 11
13 <TABLE> <CAPTION> PROPERTY NET TENANT TYPE/YEAR LAND AREA RENTABLE PROPERTY LOCATION (GUARANTOR) CONSTRUCTED (ACRES) SQUARE FEET ----------------- ----------------------------- ------------------- --------- ----------- <S> <C> <C> <C> <C> 3350 Miac Cove Road Vacant Office/Industrial 10.92 141,359 Memphis, TN 1987 ------ ---------- 917.00 10,911,192 ====== ========== <CAPTION> 1999 1999(E) BASE LEASE TERM AND MINIMUM STRAIGHT-LINE ANNUAL RENTS PER NET RENEWAL CASH RENTAL PROPERTY LOCATION RENTABLE SQUARE FOOT OPTIONS RENT ($000) REVENUE ($000) ----------------- ----------------------------------- ------------- ----------- -------------- <S> <C> <C> <C> <C> 3350 Miac Cove Road N/A N/A N/A N/A Memphis, TN ------- ------- $73,065 $75,119 ======= ======= </TABLE> - --------------- (E) Estimated (1) The Company holds leasehold interest in the land. The leases, including renewal options, expire at various dates through 2074. (2) Tenant can cancel lease on November 30, 2000 with 12 months notice and a payment of $2.9 million. (3) Tenant can cancel lease anytime after March 1, 1999 with 12 months notice and a payment of four months rent. (4) Tenant can cancel lease on April 30, 2004 with 270 days notice and a payment of $899,184. (5) Tenant can cancel lease on March 26, 2008 with 12 months notice and a payment of $1,391,500. 12
14 ITEM 3. LEGAL PROCEEDINGS The Company is not presently involved in any litigation nor to its knowledge is any litigation threatened against the Company or its subsidiaries that, in management's opinion, would result in any material adverse effect on the Company's ownership, management or operation of its Properties. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 4A. EXECUTIVE OFFICERS AND TRUSTEES OF THE REGISTRANT The following sets forth certain information relating to the executive officers and Trustees of the Company: <TABLE> <CAPTION> NAME BUSINESS EXPERIENCE ---- ------------------- <S> <C> E. ROBERT ROSKIND.............. Mr. Roskind has served as the Chairman of the Board of Age 54 Trustees and Co-Chief Executive Officer of the Company since October 1993. He founded The LCP Group, L.P. in 1973 and has been its Chairman since 1976. LCP has acted as general partner in limited partnerships in which the Company has had prior dealings. Prior to founding LCP, Mr. Roskind headed the net-leasing financing area of Lehman Brothers Inc. He is also a general partner for a variety of entities which serve as the general partner of various partnerships that hold net leased real properties or interests therein. Mr. Roskind is a director of Berkshire Realty Company, Inc., Krupp Government Income Trust I and Krupp Government Income Trust II. Mr. Roskind received his B.S. in 1966 from the University of Pennsylvania and is a 1969 Harlan Fiske Stone Graduate of the Columbia Law School. He has been a member of the Bar of the State of New York since 1970. RICHARD J. ROUSE............... Mr. Rouse has served as Co-Chief Executive Officer and a Age 53 trustee of the Company since October 1993. He served as the President of the Company from October 1993 to April 1996, and since April 1996 has served as the Vice Chairman. Mr. Rouse was also a managing director of LCP. He had been associated with LCP since 1979 and had been engaged there in all aspects of net lease finance, acquisition and syndication and corporate financing transactions. Mr. Rouse graduated from Michigan State University in 1968 and received his M.B.A. in 1970 from the Wharton School of Finance and Commerce of the University of Pennsylvania. T. WILSON EGLIN................ Mr. Eglin has served as Chief Operating Officer of the Age 34 Company since October 1993 and a trustee since May 1994. He served as Executive Vice President from October 1993 to April 1, 1996, and since April 1996 has served as the President. Prior to his current position with the Company, Mr. Eglin had been associated with LCP from 1987 to 1993 and had been its Vice President -- Acquisitions from 1990 to 1993. In connection with his responsibilities with LCP, Mr. Eglin was an officer of affiliated companies that owned and managed over 400 net leased real estate properties and was involved in all aspects of real estate acquisition and finance, principally in net leased transactions. Mr. Eglin received his B.A. from Connecticut College in 1986. </TABLE> 13
15 <TABLE> <CAPTION> NAME BUSINESS EXPERIENCE ---- ------------------- <S> <C> PATRICK CARROLL................ Mr. Carroll has served as the Chief Financial Officer of the Age 35 Company since May 1998 and Treasurer effective January 1999. Prior to joining the Company, Mr. Carroll was, from 1993 to 1998, a Senior Manager in the real estate unit of Coopers & Lybrand L.L.P. serving both publicly and privately held real estate entities with a focus on due diligence and public equity/debt offerings. Mr. Carroll received his B.B.A. from Hofstra University in 1986, a M.S. in Taxation from C.W. Post in 1991 and is a Certified Public Accountant. PAUL R. WOOD................... Mr. Wood has served as the Vice President, Chief Accounting Age 38 Officer and Secretary of the Company since October 1993. He had been associated with LCP from 1988 to 1993 and from 1990 to 1993 had been responsible for all accounting activities relating to the net leased properties managed by LCP and its affiliates. Prior to joining LCP, Mr. Wood was, from 1987 to 1988, associated with E. F. Hutton & Company Inc. as a senior accountant. Mr. Wood received his B.B.A. from Adelphi University in 1982 and has been a Certified Public Accountant since 1985. STEPHEN C. HAGEN............... Mr. Hagen has served as Senior Vice President of the Company Age 56 since October 1996. Mr. Hagen had been associated with LCP from 1995 to 1996. Prior to joining LCP, Mr. Hagen was a principal of Pharus Realty Investments, a money manager focused on real estate shares, and also served as Chief Operating Officer of HRE Properties, a New York Stock Exchange listed REIT. Mr. Hagen received his B.S. from the University of Kansas in 1965 and his M.B.A. from the Wharton School of Finance and Commerce in 1968. JANET M. KAZ................... Ms. Kaz has served as Vice President of the Company since Age 35 May 1995 and as Asset Manager since October 1993. Prior to that, Ms. Kaz was a member of LCP's property acquisition team from 1986 to 1990 and a member of LCP's asset management team from 1991 to 1993. Ms. Kaz received her B.A. from Muhlenberg College in 1985. PHILIP L. KIANKA............... Mr. Kianka joined the Company in 1997 as Vice President of Age 42 Asset Management. Prior to joining the Company, from 1985 through 1997, Mr. Kianka served as a Vice President and Senior Asset Manager at Merrill Lynch Hubbard, Inc., a real estate division of Merrill Lynch & Co., Inc. Mr. Kianka was involved in real estate acquisitions, development and asset management for a national portfolio of diversified properties. Mr. Kianka received his B.A. from Clemson University in 1978 and his M.A. from Clemson University in 1981. CARL D. GLICKMAN............... Mr. Glickman has served as a trustee and the Chairman of the Age 72 Executive Committee of the Board of Trustees of the Company since May 1994 and as a member of the Compensation Committee of the Board of Trustees until May 1998. He has been President of the Glickman Organization since 1953. He is on the Board of Directors of Alliance Tire & Rubber Co., Ltd., Bear Stearns Companies, Inc., Kuala Healthcare, Inc., Infu- Tech, Inc., Jerusalem Economic Corporation Ltd. and OfficeMax Inc., as well as numerous private companies. </TABLE> 14
16 <TABLE> <CAPTION> NAME BUSINESS EXPERIENCE ---- ------------------- <S> <C> KEVIN W. LYNCH................. Mr. Lynch has served as a trustee of the Company since May Age 46 1996 and is a founder and principal of the Townsend Group, an institutional real estate consulting firm founded in 1983. Prior to forming the Townsend Group, Mr. Lynch was a Vice President for Stonehenge Capital Corporation. Mr. Lynch has been involved in the commercial real estate industry since 1974, and is a director of First Industrial Realty Trust. JOHN D. MCGURK................. Mr. McGurk became a member of the Board in January 1997 as Age 55 the designee of Five Arrows Realty Securities, L.L.C. ("Five Arrows") to the Board of Trustees. He is the founder and President of Rothschild Realty, Inc., the advisor to Five Arrows. Prior to starting Rothschild Realty, Inc. in 1981, Mr. McGurk served as a Regional Vice President for The Prudential Insurance Company of America where he oversaw its New York City real estate loan portfolio, equity holdings, joint ventures and projects under development. Mr. McGurk is a member of the Urban Land Institute, Pension Real Estate Association, Real Estate Board of New York and the National Real Estate Association, and is a member of the Trustee Committee of the Caedmon School. SETH M. ZACHARY................ Mr. Zachary has served as a trustee and a member of the Age 46 Audit Committee and Compensation Committee of the Board of Trustees of the Company since November 1993. Since 1987, he has been a partner in the law firm of Paul, Hastings, Janofsky & Walker LLP, counsel to the Company. </TABLE> PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The common shares of the Company are listed for trading on the New York Stock Exchange ("NYSE") under the symbol "LXP." The following table sets forth the high and low sales prices as reported by the NYSE for the common shares of the Company for each of the periods indicated below: <TABLE> <CAPTION> FOR THE QUARTERS ENDED: HIGH LOW CASH DIVIDEND ----------------------- -------- -------- ------------- <S> <C> <C> <C> December 31, 1998................................ $13.2500 $11.0000 $0.30 September 30, 1998............................... 14.6250 10.8125 $0.30 June 30, 1998.................................... 15.2500 13.7500 $0.29 March 31, 1998................................... 16.3750 14.2500 $0.29 December 31, 1997................................ 16.8125 13.7500 $0.29 September 30, 1997............................... 15.7500 13.8125 $0.29 June 30, 1997.................................... 14.5000 12.1250 $0.29 March 31, 1997................................... 15.0000 12.1250 $0.29 </TABLE> The closing price of the common shares of the Company was $11.75 on February 26, 1999. As of February 26, 1999, the Company had 2,326 common shareholders of record. Dividends. The Company has made quarterly distributions since October, 1986 without interruption. The Company paid a dividend of $.27 per share to shareholders in respect of each of the calendar quarters of 1994, 1995 and the first quarter of 1996; $.28 per share in respect of the second and third quarters of 1996; and $.29 per share in respect of the fourth quarter of 1996, each of the calendar quarters of 1997 and the first and second quarters of 1998; and $.30 per share in respect of the third and fourth quarters of 1998. The Company declared the dividend in respect of the fourth quarter of 1998, in the amount of $.30 per share to shareholders 15
17 of record as of February 1, 1999 which was paid on February 16, 1999. The Company's annualized dividend rate is currently $1.20 per share. Following is a summary of the average taxable nature of the Company's dividends for the three years ended December 31: <TABLE> <CAPTION> 1998 1997 1996 ------- ------- ------- <S> <C> <C> <C> Total dividends per share............................. $ 1.17 $ 1.16 $ 1.10 ======= ======= ======= Percent taxable as ordinary income.................. 88.06% 68.91% 95.46% Percent taxable as long-term capital gain........... 2.30% -- -- Percent non-taxable as return of capital............ 9.64% 31.09% 4.54% ------- ------- ------- 100.00% 100.00% 100.00% ======= ======= ======= </TABLE> While the Company intends to continue paying regular quarterly dividends, future dividend declarations will be at the discretion of the Board of Trustees 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 Board of Trustees deems relevant. The actual cash flow available to pay dividends will be affected by a number of factors, including the revenues received from rental properties, the operating expenses of the Company, the interest and principal payments required under various borrowing agreements, the ability of lessees to meet their obligations to the Company and any unanticipated capital expenditures. In addition to its common and preferred share offerings, the Company has capitalized the growth in its business through the issuance of secured and unsecured fixed and floating-rate debt. Borrowings under the Company's revolving credit facility have also been an interim source of funds to both finance the purchase of properties and meet any short-term working capital requirements. The various instruments governing the Company's issuance of its unsecured bank debt impose certain restrictions on the Company with regard to dividends and incurring additional debt obligation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 5 and 6 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. The Company does not believe that the financial covenants contained in its unsecured revolving credit agreement and secured indebtedness will have any adverse impact on the Company's ability to pay dividends in the normal course to its common shareholders or to distribute amounts necessary to maintain its qualifications as a REIT. The Company maintains a dividend reinvestment program pursuant to which common shareholders may elect to automatically reinvest their dividends to purchase common shares of the Company at a 5% discount to the market price and free of commissions and other charges. The Company may, from time to time, either (i) repurchase common shares in the open market, or (ii) issue new common shares, for the purpose of fulfilling its obligations under the dividend reinvestment program. ITEM 6. SELECTED FINANCIAL DATA The following sets forth selected consolidated financial data for the Company as of and for each of the years in the five-year period ended December 31, 1998. The selected consolidated financial data for the Company should be read in conjunction with the Consolidated Financial Statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. (All amounts, except per share data, in $000's.) The Company believes that the book value of its real estate assets, which reflects the historical costs of such real estate assets less accumulated depreciation, is not indicative of the current market value of its Properties. Historical operating results are not necessarily indicative of future operating results. 16
18 <TABLE> <CAPTION> 1998 1997 1996 1995 1994 --------- --------- -------- -------- -------- <S> <C> <C> <C> <C> <C> Total revenue............................. $ 65,117 $ 43,569 $ 31,675 $ 25,002 $ 26,038 Operating expenses, including minority interest................................ (48,433) (35,304) (26,209) (19,983) (20,559) Transactional expenses.................... (559) -- -- -- -- Gain (loss) on sale of properties......... (388) 3,517 -- 1,514 -- Proceeds from lease termination........... -- -- -- 1,600 -- Loss on extinguishment of debt............ -- (3,189) -- (4,849) -- --------- --------- -------- -------- -------- Net income................................ 15,737 8,593 5,466 3,284 5,479 ========= ========= ======== ======== ======== Net income per common share -- basic...... 0.79 0.33 0.58 0.35 0.59 ========= ========= ======== ======== ======== Net income per common share -- diluted.... 0.78 0.32 0.56 0.35 0.59 ========= ========= ======== ======== ======== Cash dividends declared per common share................................... 1.17 1.16 1.12 1.08 1.08 ========= ========= ======== ======== ======== Net cash provided by operating activities.............................. 32,008 23,823 14,975 7,216 12,423 ========= ========= ======== ======== ======== Net cash (used in) provided by investing activities.................... (111,080) (110,767) (16,955) 7,887 -- ========= ========= ======== ======== ======== Net cash provided by (used in) financing activities.................... 86,516 88,116 1,859 (15,610) (12,304) ========= ========= ======== ======== ======== Real estate assets, net................... 609,717 416,613 289,326 200,507 202,602 ========= ========= ======== ======== ======== Total assets.............................. 647,007 468,373 310,384 221,216 216,019 ========= ========= ======== ======== ======== Long-term obligations..................... 360,722 227,411 193,798 123,664 112,038 ========= ========= ======== ======== ======== Funds from operations(1).................. 35,700 21,483 14,371 12,049 11,486 ========= ========= ======== ======== ======== Rent received above (below) straight line rent.................................... (2,411) (924) (105) 400 569 ========= ========= ======== ======== ======== </TABLE> - --------------- (1) The Company believes that Funds From Operations ("FFO") enhances an investor's understanding of the Company's financial condition, results of operations and cash flows. The Company believes that Funds From Operations is an appropriate measure of the performance of an equity REIT, and that it can be one measure of a REIT's ability to make cash distributions. Funds From Operations is defined by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as "net income (or loss) (computed in accordance with generally accepted accounting principles ("GAAP")), excluding gains (or losses) from debt restructuring and sales of property, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures." The Company's method of calculating Funds From Operations excludes other non-recurring revenue and expense items and may be different from methods used by other REITs and accordingly, is not comparable to such other REITs. Funds From Operations should not be considered an alternative to net income as an indicator of operating performance or to cash flows from operating activities as determined in accordance with GAAP, or as a measure of liquidity to other consolidated income or cash flow statement data as determined in accordance with GAAP. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company, which has elected to qualify as a real estate investment trust under the Internal Revenue Code of 1986, acquires and manages net-leased commercial properties. The Company has operated as a REIT since October 1993 when it initially issued 9.3 million common shares, approximately 169,000 special limited partnership units (which are exchangeable for an equivalent number common shares) and approximately $1.9 million in 7.75% subordinated notes due in 2000. 17
19 As of December 31, 1998, the Company owned 66 real estate properties. During 1998, the Company purchased fourteen properties for $208.8 million. LIQUIDITY AND CAPITAL RESOURCES Since becoming a public company, the Company's principal source of capital for growth has been the public and private equity markets, selective secured indebtedness, its unsecured credit facility and issuance of OP Units. The Company's current $100 million unsecured credit facility, which is scheduled to expire in July 2001, has made available funds to finance acquisitions and meet any short-term working capital requirements. As of December 31, 1998, $52.6 million was outstanding under this credit facility with a weighted average interest rate of 6.68%. Since its formation in 1993, the Company has raised, through the issuance of common shares, preferred shares and OP Units, aggregate capital of approximately $126.3 million for the purposes of retiring indebtedness and acquiring properties. In addition, the Company has purchased $77.6 million in real estate through the direct issuance of its common shares and OP Units. Dividends. In connection with its intention to continue to qualify as a REIT for Federal income tax purposes, the Company expects to continue paying regular dividends to its shareholders. These dividends are expected to be paid from operating cash flows which are expected to increase due to property acquisitions and growth in rental revenues in the existing portfolio and from other sources. Since cash used to pay dividends reduces amounts available for capital investments, the Company generally intends to maintain a conservative dividend payout ratio, reserving such amounts as it considers necessary for the expansion of Properties in its portfolio, debt reduction, the acquisition of interests in new properties as suitable opportunities arise, and such other factors as the Board of Trustees considers appropriate. Cash dividends paid to common shareholders increased to $19.6 million in 1998, compared to $12.8 million in 1997 and $10.3 million in 1996. The Company's dividend and distribution FFO payout ratio for 1998, 1997, and 1996 was approximately 73.6%, 73.5%, and 77.9% respectively. Although the Company receives most of its rental payments on a monthly basis, it intends to continue paying dividends quarterly. Amounts accumulated in advance of each quarterly distribution are invested by the Company in short-term money market or other suitable instruments. The Company anticipates that cash flows from operations will continue to provide adequate capital to fund its operating and administrative expenses, regular debt service obligations and all dividend payments in accordance with REIT requirements in both the short-term and long-term. In addition, the Company anticipates that cash on hand, borrowings under its unsecured credit facility, issuance of equity and debt, as well as other debt and equity alternatives, will provide the necessary capital required by the Company. Cash flows from operations as reported in the Consolidated Statements of Cash Flows increased to $32.0 million for 1998 from $23.8 million for 1997 and $15.0 million for 1996. UPREIT Structure. The Company's UPREIT structure permits the Company to effect acquisitions by issuing to a seller of real estate, as a form of consideration, interests in partnerships controlled by the Company. All of such interests are redeemable at certain times for common shares on a one-for-one basis and all of such interests require the Company to pay certain distributions to the holders of such interests. The Company accounts for these interests in a manner similar to a minority interest holder. The number of common shares that will be outstanding in the future should be expected to increase, and minority interest expense should be expected to decrease, from time to time, as such partnership interests are redeemed for common shares. The following table provides certain information with respect to such partnership interests as of December 31, 1998 (assuming the Company's annual dividend rate remains at $1.20 per share). 18
20 <TABLE> <CAPTION> CURRENT TOTAL CURRENT TOTAL ANNUALIZED ANNUALIZED REDEEMABLE FOR NUMBER AFFILIATE PER UNIT DISTRIBUTION COMMON SHARES : OF UNITS UNITS DISTRIBUTION ($000) - --------------- --------- --------- ------------ ------------- <S> <C> <C> <C> <C> At any time....................................... 169,109 130,531 $1.20 $ 203 At any time....................................... 1,303,867 120,546 1.08 1,408 January 1999...................................... 147,246 52,144 1.12 165 January 1999...................................... 1,670,212 606,198 1.20 2,004 March 1999........................................ 125,416 -- 1.20 151 April 1999........................................ 480,028 -- 1.20 576 July 1999......................................... 279,191 -- 1.20 335 September 1999.................................... 1,450,036 475,785 1.20 1,740 December 1999..................................... 214,167 105,245 1.20 257 January 2003...................................... 7,441 978 -- -- March 2004........................................ 52,335 797 0.27 14 March 2004........................................ 27,314 -- -- -- November 2004..................................... 35,400 2,856 -- -- March 2005........................................ 38,661 1,933 -- -- January 2006...................................... 207,728 416 -- -- February 2006..................................... 34,852 1,743 -- -- May 2006.......................................... 11,766 695 0.29 3 --------- --------- ----- ------ Total................................... 6,254,769 1,499,867 $1.10 $6,856 ========= ========= ===== ====== </TABLE> Affiliate units, which are included in total units, represent OP Units held by two executive officers (including their affiliates) of the Company. FINANCING Partnership Mergers. On January 29, 1998 two affiliated partnerships merged into a controlled partnership, Lepercq Corporate Income Fund ("LCIF"). As a result of the merger, LCIF issued 1,454,906 partnership units redeemable for the Company's common shares, which units are entitled to distributions at the same dividend rate as common shares. At the time of the merger, the partnerships' sole assets were approximately $23.5 million in cash from prior property sales and the right to acquire properties in tax free exchanges under Internal Revenue Code Section 1031. During 1998, the Company completed such tax free exchanges. Revolving Credit Facility. In July 1998, the Company obtained a three year unsecured credit facility with a maximum borrowing availability of $100 million. This replaced the Company's $60 million, secured credit facility. The credit facility bears interest at 137.5 basis points over LIBOR and has an interest rate period of one, three, or six months, at the option of the Company. The credit facility contains various leverage, debt service coverage, net worth maintenance and other customary covenants. Approximately $6.4 million was available to the Company at December 31, 1998. The amount of available borrowings can increase by identifying additional unencumbered properties as eligible for the computation of the borrowing base which supports the credit facility. As of December 31, 1998 approximately $52.6 million was outstanding. Debt Service Requirements. The Company's principal liquidity needs are the payment of interest and principal on outstanding indebtedness. As of December 31, 1998, a total of forty-four properties were subject to outstanding mortgages which had an aggregate principal amount of $300.3 million. The weighted average interest rate on the Company's debt, including line of credit borrowings, on such date was approximately 7.65%. Approximate balloon payment amounts having an weighted average interest rate of 8.72% due the next five calendar years are as follows: $5.56 million in 1999; $13.1 million in 2000; $1.0 million in 2001; $9.6 million in 2002 and $0 in 2003. The ability of the Company to make such balloon payments will depend upon its ability to refinance the mortgage related thereto, sell the related property, have available amounts under its 19
21 unsecured credit facility or access other capital. The ability of the Company to accomplish such goals will be affected by numerous economic factors affecting the real estate industry, including the availability and cost of mortgage debt at the time, the Company's equity in the mortgaged properties, the financial condition of the Company, the operating history of the mortgaged properties, the then current tax laws and the general national, regional and local economic conditions. Lease Obligations. Since the Company's tenants bear all or substantially all of the cost of property maintenance and capital improvements, the Company does not anticipate significant needs for cash for property maintenance or repairs. The Company generally funds property expansions with additional secured borrowings, the repayment of which is funded out of rental increases under the leases covering the expanded properties. Shares Repurchase. On September 15, 1998, the Company announced that its Board of Trustees had authorized the Company to repurchase, from time to time, up to 1,000,000 common shares depending on market conditions and other factors. As of December 31, 1998, the Company had repurchased and retired 129,875 common shares, at an average price of approximately $11.92 per common share. IMPACT OF YEAR 2000 The Year 2000 compliance issue concerns the inability of computer systems to accurately calculate, store or use a date after 1999. This could result in a system failure or miscalculations causing disruptions of operations. The Year 2000 issue affects virtually all companies and organizations. The Company has been taking the necessary steps to understand the nature and extent of the work required to make its core information computer systems and non-information embedded systems Year 2000 compliant. The Company has determined that it will not be necessary to significantly modify, update or replace its computer hardware and software applications. The vendor that provides the Company's existing general ledger software has released a Year 2000 compliant version of its product which the Company is currently using. The cost of the general ledger system did not have a material effect on the Company's financial condition or results of operations. The Company's Properties, which have no scheduled lease expirations prior to August 17, 2000, are subject to net leases and accordingly the Year 2000 compliance of embedded systems (e.g., security, HVAC, fire and elevator systems) are the responsibility of the tenants. The Company has contacted each of its tenants asking them to identify and evaluate the changes and modifications necessary to make these systems compliant for Year 2000 processing. The costs associated with the effort to make the embedded systems Year 2000 compliant are the tenant's responsibility. However, no assurances can be given that the Properties embedded systems will be Year 2000 compliant by December 31, 1999. However, compliance costs, if any, incurred by the Company would not be significant. The Company is communicating with significant third-party service providers and vendors with which it does business to determine the efforts being made on their part for compliance. The Company is attempting to receive compliance certificates from all third parties that have a material impact on the Company's operations, but no assurance can be given with respect to the cost or timing of such efforts or the potential effects of any failure to comply. Management will closely monitor the Company's entire Year 2000 compliance function and will develop contingency plans no later than third quarter of 1999, if necessary. 20
22 RESULTS OF OPERATIONS ($000) <TABLE> <CAPTION> INCREASE ---------------------- SELECTED INCOME STATEMENT DATA 1998 1997 1996 1998-1997 1997-1996 - ------------------------------ ------- ------ ------ --------- --------- <S> <C> <C> <C> <C> <C> Total revenues............................ $65,117 43,569 31,675 $21,548 $11,894 Total expenses............................ 45,059 32,862 25,519 12,197 7,343 Interest................................ 23,055 16,644 12,818 6,411 3,826 Depreciation & amortization............. 15,083 10,608 7,627 4,475 2,981 General & administrative................ 4,518 3,644 3,050 874 594 Transactional expenses.................. 559 -- -- 559 -- Net Income................................ $15,737 8,593 5,466 $ 7,144 $ 3,127 </TABLE> Changes in the results of operations for the Company are primarily due to the growth of its portfolio and costs associated with such growth. The increase in interest expense due to the growth of the Company's portfolio has been offset by a reduction in the weighted average interest rate from 9.04% as of December 31, 1996 to 8.17% as of December 31, 1997, and 7.65% as of December 31, 1998 due to debt refinancings, repayments and lower variable interest rates negotiated on the credit facility and lower interest rates on new debt incurred by the Company. The Company's general and administrative expenses have decreased as a percentage of total revenue to 6.9% in 1998 from 8.4% in 1997 and 9.6% in 1996 due to the growth of the Company's portfolio relative to these expenses. Transactional expenses in 1998 relate to costs incurred in an abandoned private equity placement. The increase in net income for the year ended December 31, 1998 was primarily attributable to the growth in the Company's real estate portfolio combined with reduced borrowing costs offset by a slight increase in general and administrative expenses. The increase in net income for the year ended December 31, 1997 was primarily attributable to the gain on sale of one property in the amount of $3.5 million offset by a $3.2 million extraordinary loss on extinguishment of debt. FUNDS FROM OPERATIONS Management believes that Funds From Operations enhances an investor's understanding of the Company's financial condition, results of operations and cash flows and believes it is an appropriate performance measure for an equity REIT which provides an indication of a REIT's ability to make cash distributions. Funds From Operations is defined by NAREIT as "net income (or loss) (computed in accordance with generally accepted accounting principles ("GAAP")), excluding gains (or losses) from debt restructuring and sales of property, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures." The Company's method of calculating Funds From Operations excludes other non-recurring revenue and expense items and may be different from methods used by other REITs and, accordingly, is not comparable to such other REITs. Funds From Operations should not be considered an alternative to net income as an indicator of operating performance or to cash flows from operating activities as determined in accordance with GAAP, or as a measure of liquidity to other consolidated income or cash flow statement data as determined in accordance with GAAP. 21
23 The following table reflects the calculation of the Company's FFO and cash flow activities for each of the years in the three year period ended December 31, 1998 ($000): <TABLE> <CAPTION> 1998 1997 1996 --------- --------- -------- <S> <C> <C> <C> Net income............................................... $ 15,737 $ 8,593 $ 5,466 Depreciation and amortization of real estate........... 15,083 10,608 7,627 Minority interest's share of net income................ 3,933 2,442 690 Loss from debt restructuring........................... -- 3,189 -- Property arbitration litigation expense................ -- 168 -- Loss (gain) on sale of property........................ 388 (3,517) -- Transactional expenses................................. 559 -- -- --------- --------- -------- Funds from operations before items below............... 35,700 21,483 13,783 Adjustments for other items(1) Shares compensation.................................... -- -- 588 --------- --------- -------- Funds From Operations............................... $ 35,700 $ 21,483 $ 14,371 ========= ========= ======== Cash flows from operating activities..................... $ 32,008 $ 23,823 $ 14,975 Cash flows from investing activities..................... (111,080) (110,767) (16,955) Cash flows from financing activities..................... 86,516 88,116 1,859 </TABLE> The Company's dividend and distribution FFO payout ratio was 73.6%, 73.5% and 77.9% for the years ended December 31, 1998, 1997 and 1996 respectively. - --------------- (1) For purposes of the calculation of FFO, the Company has added back to net income amounts for shares compensation which management believes to be appropriate adjustments based on the infrequent and unusual nature of such amounts. The Company's method of calculating FFO may be different from methods used by other REITs. Shares compensation represents the expense of a simultaneous exercise and re-granting of options to the Company's management during the period between July 1995 and January 1996, which was intended to increase management's ownership in the Company (a practice which has been discontinued). The Board of Trustees has determined that the Company will not engage in such practices in the future. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's exposure to market risk relates to its variable rate unsecured credit facility. As of December 31, 1998 the Company's variable rate indebtedness represented 14.6% of total long-term indebtedness. During 1998, this variable rate indebtedness had a weighted average interest rate of 7.50%. Had the weighted average interest rate been 100 basis points higher the Company's net income would have been approximately $350,000 less. 22
24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES INDEX <TABLE> <CAPTION> PAGE ----- <S> <C> Independent Auditors' Report................................ 24 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... 25 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996.......................... 26 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996...... 27 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.......................... 28 Notes to Consolidated Financial Statements.................. 29-39 Financial Statement Schedule Schedule III -- Real Estate and Accumulated Depreciation.... 40-41 </TABLE> 23
25 INDEPENDENT AUDITORS' REPORT The Shareholders Lexington Corporate Properties Trust: We have audited the consolidated financial statements of Lexington Corporate Properties Trust and consolidated subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lexington Corporate Properties Trust and consolidated subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP New York, New York January 25, 1999 24
26 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($000 EXCEPT SHARE AND PER SHARE AMOUNTS) DECEMBER 31, 1998 AND 1997 <TABLE> <CAPTION> 1998 1997 -------- -------- <S> <C> <C> ASSETS Real estate, at cost: Buildings and building improvements....................... $578,836 $408,661 Land and land estates..................................... 85,781 47,769 Land improvements......................................... 2,831 2,831 Fixtures and equipment.................................... 8,345 8,345 -------- -------- 675,793 467,606 Less: accumulated depreciation............................ 66,076 50,993 -------- -------- 609,717 416,613 Property held for sale...................................... -- 24,501 Cash and cash equivalents................................... 11,084 3,640 Restricted cash............................................. 3,545 5,499 Deferred expenses (net of accumulated amortization of $3,515 in 1998 and $2,543 in 1997)............................... 4,942 4,283 Rent receivable............................................. 12,436 7,638 Escrow deposits............................................. 104 1,249 Other assets, net........................................... 5,179 4,950 -------- -------- $647,007 $468,373 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Mortgages payable........................................... $300,279 $207,553 Credit facility............................................. 52,621 12,000 Subordinated notes payable, including accrued interest...... 1,973 1,973 Origination fees payable, including accrued interest........ 5,849 5,885 Accounts payable and other liabilities...................... 4,588 4,880 Accrued interest payable.................................... 2,172 1,007 -------- -------- 367,482 233,298 Minority interests.......................................... 74,381 28,240 -------- -------- 441,863 261,538 -------- -------- Commitments and Contingencies (notes 4, 7 and 10) Preferred shares, par value $0.0001 per share; authorized 10,000,000 shares. Class A Senior Cumulative Convertible Preferred, liquidation preference $25,000, 2,000,000 issued and outstanding.................................... 24,369 24,369 -------- -------- Shareholders' equity: Common shares, par value $0.0001 per share, authorized 40,000,000 shares, 17,103,532 and 16,509,610 shares issued and outstanding in 1998 and 1997, respectively........................................... 2 2 Additional paid-in-capital................................ 241,924 235,469 Accumulated distributions in excess of net income......... (59,155) (53,005) -------- -------- 182,771 182,466 Less: notes receivable from officers/shareholders......... (1,996) -- -------- -------- Total shareholders' equity........................ 180,775 182,466 -------- -------- $647,007 $468,373 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 25
27 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME ($000 EXCEPT SHARE AND PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 <TABLE> <CAPTION> 1998 1997 1996 ----------- ----------- ---------- <S> <C> <C> <C> Revenues: Rental............................................. $ 62,846 $ 42,493 $ 31,244 Interest and other................................. 2,271 1,076 431 ----------- ----------- ---------- 65,117 43,569 31,675 ----------- ----------- ---------- Expenses: Interest expense................................... 23,055 16,644 12,818 Depreciation and amortization of real estate....... 15,083 10,608 7,627 Amortization of deferred expenses.................. 987 876 619 General and administrative expenses................ 4,518 3,644 3,050 Property operating expenses........................ 857 922 1,405 Transactional expenses............................. 559 -- -- Property arbitration litigation expense............ -- 168 -- ----------- ----------- ---------- 45,059 32,862 25,519 ----------- ----------- ---------- Income before gain (loss) on sale of properties, minority interests and extraordinary item.......... 20,058 10,707 6,156 (Loss) gain on sale of properties.................... (388) 3,517 -- ----------- ----------- ---------- Income before minority interests and extraordinary item............................................... 19,670 14,224 6,156 Minority interests................................... 3,933 2,442 690 ----------- ----------- ---------- Income before extraordinary item..................... 15,737 11,782 5,466 Extraordinary item................................... -- 3,189 -- ----------- ----------- ---------- Net income................................. $ 15,737 $ 8,593 $ 5,466 =========== =========== ========== Income per common share -- basic: Income before extraordinary item..................... $ 0.79 $ 0.61 $ 0.58 Extraordinary item................................... -- (0.28) -- ----------- ----------- ---------- Net income........................................... $ 0.79 $ 0.33 $ 0.58 =========== =========== ========== Weighted average common shares outstanding........... 16,835,414 11,444,589 9,392,727 =========== =========== ========== Income per common share -- diluted: Income before extraordinary item..................... $ 0.78 $ 0.59 $ 0.56 Extraordinary item................................... -- (0.27) -- ----------- ----------- ---------- Net income........................................... $ 0.78 $ 0.32 $ 0.56 =========== =========== ========== Weighted average common shares outstanding........... 21,983,876 11,639,683 10,897,011 =========== =========== ========== </TABLE> See accompanying notes to consolidated financial statements. 26
28 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ($000 EXCEPT SHARE AND PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 <TABLE> <CAPTION> ACCUMULATED NOTES ADDITIONAL DISTRIBUTIONS RECEIVABLE NUMBER PAID-IN IN EXCESS OF OFFICERS/ TOTAL OF SHARES AMOUNT CAPITAL NET INCOME SHAREHOLDERS EQUITY ----------- ------ ---------- ------------- ------------ -------- <S> <C> <C> <C> <C> <C> <C> Balance at December 31, 1995... 9,331,982 $ 1 $135,954 $(39,437) $ -- $ 96,518 Net income..................... -- -- -- 5,466 -- 5,466 Dividends paid to shareholders ($1.10 per share)............ -- -- -- (10,327) -- (10,327) Common shares issued, net of offering costs............... 94,918 -- 1,002 -- -- 1,002 ----------- --- -------- -------- ------- -------- Balance at December 31, 1996... 9,426,900 1 136,956 (44,298) -- 92,659 Net income..................... -- -- -- 8,593 -- 8,593 Dividends paid to common share- holders ($1.16 per share).... -- -- -- (12,836) -- (12,836) Dividends paid to preferred share-holders ($0.91 per share)....................... -- -- -- (916) -- (916) Deemed dividend related to issuance of preferred shares....................... -- -- 3,548 (3,548) -- -- Common shares issued, net of offering costs............... 7,082,710 1 94,965 -- -- 94,966 ----------- --- -------- -------- ------- -------- Balance at December 31, 1997... 16,509,610 2 235,469 (53,005) -- 182,466 Net income..................... -- -- -- 15,737 -- 15,737 Dividends paid to common share- holders ($1.17 per share).... -- -- -- (19,633) -- (19,633) Dividends paid to preferred share-holders ($1.2285 per share)....................... -- -- -- (2,254) -- (2,254) Common shares issued, net...... 723,797 -- 8,013 -- (1,996) 6,017 Common shares repurchased and retired...................... (129,875) -- (1,558) -- -- (1,558) ----------- --- -------- -------- ------- -------- Balance at December 31, 1998... 17,103,532 $ 2 $241,924 $(59,155) $(1,996) $180,775 =========== === ======== ======== ======= ======== </TABLE> See accompanying notes to consolidated financial statements. 27
29 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ($000) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 <TABLE> <CAPTION> 1998 1997 1996 --------- --------- -------- <S> <C> <C> <C> Cash flows from operating activities: Net income................................................ $ 15,737 $ 8,593 $ 5,466 Adjustments to reconcile net income to net cash provided by operating activities net of effects of acquisitions: Depreciation and amortization.......................... 16,070 11,484 8,246 Minority interests..................................... 3,933 2,442 690 Loss (gain) on sale of properties...................... 388 (3,517) -- Other non cash charges................................. 75 83 67 Extraordinary item..................................... -- 3,189 -- Decrease (increase) in accounts payable and other liabilities.......................................... (292) 3,280 746 Other adjustments, net................................. (3,903) (1,731) (240) --------- --------- -------- Net cash provided by operating activities......... 32,008 23,823 14,975 --------- --------- -------- Cash flows from investing activities: Net proceeds from sale of properties...................... 24,113 21,362 -- Acquisitions of real estate properties and partnerships, net of issuance of limited partnership units and common shares, cash received and liabilities assumed.......... (135,193) (132,129) (16,955) --------- --------- -------- Net cash used in investing activities............. (111,080) (110,767) (16,955) --------- --------- -------- Cash flows from financing activities: Proceeds of mortgages and notes payable................... 160,483 130,942 19,619 Dividends to common and preferred shareholders............ (21,887) (13,752) (10,327) Principal payments on debt, excluding normal amortization........................................... (64,412) (112,451) -- Principal amortization payments........................... (6,939) (5,950) (7,534) Proceeds from the issuance of limited partnership units... 23,449 -- -- Common shares issued, net of offering costs............... 293 75,133 1,002 Preferred shares issued, net of offering costs............ -- 24,369 -- Prepayment premium on early retirement of debt............ -- (3,560) -- Cash distributions to minority interests.................. (4,381) (2,034) (871) Decrease (increase) in escrow deposits.................... 1,145 (1,145) 550 Increase in deferred expenses............................. (1,631) (1,687) (294) Decrease (increase) in restricted cash.................... 1,954 (1,749) (286) Common shares repurchased................................. (1,558) -- -- --------- --------- -------- Net cash provided by financing activities......... 86,516 88,116 1,859 --------- --------- -------- Increase (decrease) in cash and cash equivalents............ 7,444 1,172 (121) Cash and cash equivalents, beginning of year................ 3,640 2,468 2,589 --------- --------- -------- Cash and cash equivalents, end of year...................... $ 11,084 $ 3,640 $ 2,468 ========= ========= ======== Supplemental disclosure of cash flow information: Cash paid during the year for interest.................... $ 21,916 $ 15,801 $ 12,828 ========= ========= ======== Cash paid during the year for taxes....................... $ 261 $ 106 $ 156 ========= ========= ======== </TABLE> See accompanying notes to consolidated financial statements. 28
30 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) THE COMPANY Lexington Corporate Properties Trust, (the "Company"), is a Maryland statutory real estate investment trust ("REIT") that acquires, owns, and manages a geographically diversified portfolio of net leased office, industrial and retail properties. As of December 31, 1998 the Company owned 66 properties in 29 states. The real properties owned by the Company are subject to triple net leases to corporate tenants. On September 15, 1998, the Company's Board of Trustees had authorized the Company to repurchase, from time to time, up to 1,000,000 common shares, depending on market conditions and other factors. During 1998, the Company repurchased and retired 129,875 common shares at an average price of approximately $11.92 per common share. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis Of Presentation and Consolidation. The Company's consolidated financial statements are prepared on the accrual basis of accounting. The financial statements reflect the accounts of the Company and its controlled subsidiaries, including Lepercq Corporate Income Fund L.P. ("LCIF") and Lepercq Corporate Income Fund II L.P. ("LCIF II"). The Company is the sole general partner and majority limited partner of LCIF and LCIF II. Real Estate. Real estate assets are stated at cost, less accumulated depreciation and amortization. If there is an event or change in circumstance that indicates an impairment in the value of a property has occurred, the Company's policy is to assess any impairment in value by making a comparison of the current and projected operating cash flows of each such property over its remaining useful life, on an undiscounted basis, to the carrying amount of the property. If such carrying amounts are in excess of the estimated projected operating cash flows of the property, the Company would recognize an impairment loss equivalent to an amount required to adjust the carrying amount to its estimated fair market value. No such impairment loss has occurred. Depreciation is determined by the straight-line method over the remaining estimated economic useful lives of the properties. The Company generally depreciates buildings and building improvements over a 40-year period, land improvements over a 20-year period, and fixtures and equipment over a 12-year period. All direct costs associated with the acquisition of real estate are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations which extend the useful life of the properties are capitalized. Revenue. Rental revenue is recognized on a straight-line basis over the minimum lease terms. The Company's rent receivable primarily represents the amounts of the excess of rental revenues recognized on a straight-line basis over the annual rents collectible under the leases. Deferred Expenses. Deferred expenses are composed principally of debt placement, mortgage loan and other loan fees, and are amortized using the straight-line method, which approximates the interest method, over the terms of the debt instruments. Tax Status. The Company has made an election to qualify, and believes it is operating so as to qualify, as a real estate investment trust under the Internal Revenue Code. A real estate investment trust is generally not subject to Federal income tax on that portion of its real estate investment trust taxable income which is distributed to its shareholders, provided that at least 95% of taxable income is distributed. As distributions have exceeded taxable income, no provision for Federal income taxes has been made. State income taxes are not significant. 29
31 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the average taxable nature of the Company's dividends for the three years ended December 31 is as follows: <TABLE> <CAPTION> 1998 1997 1996 ------- ------- ------- <S> <C> <C> <C> Total dividends per share............................. $ 1.17 $ 1.16 $ 1.10 ======= ======= ======= Percent taxable as ordinary income.................... 88.06% 68.91% 95.46% Percent taxable as long-term capital gains............ 2.30% -- -- Percent non-taxable as return of capital.............. 9.64% 31.09% 4.54% ------- ------- ------- 100.00% 100.00% 100.00% ======= ======= ======= </TABLE> Earnings Per Share. Basic net income per share is computed by dividing net income reduced by all preferred dividends by the weighted average number of common shares outstanding during the period. Diluted net income per share amounts are similarly computed but include the effect, when dilutive, of in-the-money common share options and the Company's other dilutive securities which can include operating partnership units, exchangeable notes and convertible preferred shares. In 1998, the exchangeable notes and preferred shares were not dilutive; in 1997 all the securities were not dilutive; and in 1996 the exchangeable notes were not dilutive. Cash and Cash Equivalents. The Company considers all highly liquid instruments with maturities of three months or less from the date of purchase to be cash equivalents. Restricted Cash. Includes tenants security deposits and amounts for certain debt obligations including funding requirements. Use of Estimates. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Reclassifications. Certain amounts included in prior years' financial statements have been reclassified to conform with the current year presentation. New Accounting Pronouncements. In June 1997, SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", were issued. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Reclassification of financial statements for earlier periods, provided for comparative purposes, is required. The statement also requires the accumulated balance of other comprehensive income to be displayed separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. SFAS No. 131 establishes standards for reporting information about operating segments in annual and interim financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Categories required to be reported as well as reconciled to the financial statements are segment profit or loss, certain specific revenue and expense items, and segment assets. SFAS No. 130 and No. 131 are effective for fiscal years beginning after December 15, 1997. The adoption of these standards had no impact on the Company's consolidated financial position and consolidated operating results as of and for the year ended December 31, 1998. 30
32 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) EARNINGS PER SHARE The following is a reconciliation of numerators and denominators of the basic and diluted earnings per share computations for each of the years in the three year period ended December 31, 1998 ($000's except per share data): <TABLE> <CAPTION> 1998 1997 1996 ----------- ----------- ----------- <S> <C> <C> <C> BASIC Income before extraordinary item............ $ 15,737 $ 11,782 $ 5,466 Less cash and deemed dividends attributable to preferred shares....................... (2,478) (4,871) -- ----------- ----------- ----------- Income attributed to common shareholders before extraordinary item................. 13,259 6,911 5,466 Extraordinary item.......................... -- (3,189) -- ----------- ----------- ----------- Net income attributed to common shareholders.............................. $ 13,259 $ 3,722 $ 5,466 =========== =========== =========== Weighted average number of common shares outstanding............................... 16,835,414 11,444,589 9,392,727 =========== =========== =========== Income per common share -- basic: Income before extraordinary item............ $ 0.79 $ 0.61 $ 0.58 Extraordinary item.......................... -- (0.28) -- ----------- ----------- ----------- Net income.................................. $ 0.79 $ 0.33 $ 0.58 =========== =========== =========== DILUTED Income attributed to common shareholders before extraordinary item................. $ 13,259 $ 6,911 $ 5,466 Add incremental income attributed to assumed conversion of dilutive securities......... 3,831 -- 588 ----------- ----------- ----------- Income attributed to common shareholders before extraordinary item................. 17,090 6,911 6,054 Extraordinary item.......................... -- (3,189) -- ----------- ----------- ----------- Net income attributed to common shareholders.............................. $ 17,090 $ 3,722 $ 6,054 =========== =========== =========== Weighted average number of shares used in calculation of basic earnings per share... 16,835,414 11,444,589 9,392,727 Add incremental shares representing: Shares issuable upon exercise of employee stock options.......................... 156,391 195,094 50,513 Shares issuable upon conversion of dilutive securities.................... 4,992,071 -- 1,453,771 ----------- ----------- ----------- Weighted average number of shares used in calculation of diluted earnings per common share..................................... 21,983,876 11,639,683 10,897,011 =========== =========== =========== Income per common share -- diluted: Income before extraordinary item............ $ 0.78 $ 0.59 $ 0.56 Extraordinary item.......................... -- (0.27) $ -- ----------- ----------- ----------- Net income.................................. $ 0.78 $ 0.32 $ 0.56 =========== =========== =========== </TABLE> 31
33 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) INVESTMENTS IN REAL ESTATE During 1998, 1997 and 1996 the Company made the following acquisitions: <TABLE> <CAPTION> ANNUALIZED BASE RENT NET ACQUISITION DECEMBER RENTABLE DATE OF COST 31, LEASE SQUARE ACQUISITION TENANT LOCATION ($000'S) ($000'S) EXPIRES FEET - ----------- --------------------------------------- ---------------------- ----------- ---------- ------- --------- <S> <C> <C> <C> <C> <C> <C> 1998 - ---- March 27 Jones Apparel Group, Inc. Bristol, PA $ 12,539 $ 1,224 03-13 255,019 March 27 Fidelity Corporate Real Estate, LLC Hebron, KY 8,077 817 04-07 81,744 March 27 Kelsey-Hayes (Tech I & II) Livonia, MI 16,442 1,637 04-07 180,230 May 11 Eagle Hardware & Garden. Inc Federal Way, WA 13,751 1,233 08-17 133,861 May 11 Eagle Hardware & Garden. Inc. Anchorage, AK 17,690 1,588 10-17 157,525 May 15 Stone Container Corporation Columbia, SC 4,230 549 08-12 185,960 May 18 The Wackenhut Corporation Palm Beach Gardens, FL 19,817 2,241 02-11 127,855 June 19 Michaels Stores, Inc. Lancaster, CA 15,102 1,430 06-13 431,250 July 2 Fleet Mortgage Group, Inc. Florence, SC 15,061 1,635 06-08 177,747 July 24 Lear Technologies LLC Auburn Hills, MI 13,939 1,365 07-06 183,717 August 27 Kmart Corporation Warren, OH 63,877 8,932 09-07 1,700,000 October 26 Corporate Express Office Products, Inc. Baton Rouge, LA 3,425 368 10-13 65,043 December 31 Upton's, Inc. Columbia, MD 4,880 549 07-09 60,000 -------- ------- --------- TOTAL $208,830 $23,568 3,739,951 ======== ======= ========= 1997 - ---- February 20 Johnson Controls, Inc. Cottondale, AL $ 2,910 $ 313 02-07 58,800 March 19 Exel Logistics Inc. Various * 27,428 3,003 11-06 761,200 May 1 Cymer, Inc. San Diego, CA 7,707 860 12-09 65,755 July 9 Bull HN Info. Systems, Inc. Phoenix, AZ 10,990 1,032 10-05 137,058 July 22 Lockheed Martin Corporation Marlborough, MA 15,541 1,671 12-06 126,000 September 4 FirstPlus Financial Group, Inc. Dallas, TX 32,645 3,557 08-12 247,968 October 31 Ryder Integrated Logistics, Inc. Waterloo, IA 9,321 1,002 07-12 276,480 December 31 Stevens-Arnold, Inc. Milpitas, CA 22,138 2,667 12-05 100,026 December 31 Allied Holdings, Inc. Decatur, GA 14,633 1,530 12-07 112,248 December 31 Circuit City Stores, Inc. Richmond, VA 27,234 2,791 02-10 288,562 December 31 Dana Corp. Gordonsville, TN 3,377 341 08-07 148,000 December 31 Allegiance Healthcare Corp. Bessemer, AL 4,902 472 09-01 123,924 -------- ------- --------- TOTAL $178,826 $19,239 2,446,021 ======== ======= ========= 1996 - ---- May 22 Northwest Pipeline Corp. Salt Lake City, UT $ 55,396 $ 8,571 09-09 295,000 May 31 Wal-Mart Stores, Inc. Jacksonville, AL 2,049 146 01-09 56,132 December 23 Johnson Controls, Inc Plymouth, MI 6,329 709 12-06 134,160 December 23 Johnson Controls, Inc. Oberlin, OH 4,791 536 12-06 111,160 December 23 SKF USA, Inc. Franklin, NC 3,448 322 12-14 72,868 December 31 Toys "R" Us, Inc. Tulsa, OK 2,711 356 05-06 43,123 December 31 Toys "R" Us, Inc. Clackamas, OR 3,173 417 05-06 42,842 December 31 Toys "R" Us, Inc. Lynwood, WA 2,963 389 05-06 43,105 December 31 Toys "R" Us, Inc. Houston, TX 3,793 478 08-06 123,293 December 31 Liberty House, Inc. Honolulu, HI 10,608 971 09-09 85,610 -------- ------- --------- TOTAL $ 95,261 $12,895 1,007,293 ======== ======= ========= </TABLE> - --------------- * Consists of three properties; two located in New Kingston, PA, one in Mechanicsburg, PA. 32
34 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company sold a property in each of 1998 and 1997 for cash proceeds of $24,113,000 and $21,362,000, respectively, which resulted in a 1998 loss of $388,000 and a 1997 gain of $3,517,000. In addition the Company is obligated to purchase a property for $38.7 million which is currently being developed and expected to be delivered no later than January 2000. The following unaudited pro forma operating information for the years ended December 31, 1998 and 1997 has been prepared as if the acquisitions and dispositions in 1998 and 1997 had been consummated as of January 1, 1997. The information does not purport to be indicative of what the operating results of the Company would have been had the acquisitions been consummated on that date. Pro forma amounts are as follows: <TABLE> <CAPTION> ($000'S, EXCEPT PER SHARE DATA) -------------------------------------- UNAUDITED UNAUDITED PRO FORMA PRO FORMA YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ----------------- <S> <C> <C> Revenues........................................... $76,242 $76,328 Net income......................................... 18,683 12,450 Per common share: Income before extraordinary item -- basic........ 0.96 0.92 Income before extraordinary item -- diluted...... 0.89 0.84 Net income -- basic.............................. 0.96 0.66 Net income -- diluted............................ 0.89 0.60 </TABLE> 33
35 (5) MORTGAGES AND NOTES PAYABLE The following table sets forth certain information regarding the Company's aggregate indebtedness as of December 31, 1998 and 1997 (in $000's): <TABLE> <CAPTION> INTEREST BALLOON PROPERTY LOCATION 1998 1997 RATE MATURITY PAYMENT - ----------------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> REMIC Financing (a)....................... $ 67,173 $ 68,020 8.100% 05-25-05 $ 60,001 Credit Facility (b)....................... 52,621 12,000 6.680% 07-24-01 52,621 Individually encumbered properties: Phoenix, AZ (Bank One).................... 5,538 5,630 10.750% 05-01-99 5,563 Richmond, VA.............................. 13,093 13,093 8.875% 03-01-00 13,093 Bessemer, AL.............................. 1,000 1,000 9.500% 09-01-01 1,000 Tampa, FL (Queen Palm Dr.) (c)............ 4,290 4,290 7.050% 08-15-02 4,020 Tampa, FL (North 30th) (c)................ 5,697 5,860 7.050% 08-15-02 4,768 Gordonsville, TN.......................... 1,158 1,238 9.500% 10-01-02 771 Columbia, MD.............................. 1,980 -- 10.750% 07-20-03 -- Oxon Hill, MD............................. 1,702 1,967 6.250% 03-01-04 -- Mechanicsburg, PA (3 Exel properties) (d)..................................... 25,000 25,000 8.000% 03-20-04 25,000 Brownsville, TX........................... 852 927 8.375% 11-01-04 260 Rockville, MD............................. 1,061 1,183 8.820% 03-01-05 -- Phoenix, AZ (Bull Promissory Note)........ 592 592 6.380% 09-30-05 592 Phoenix, AZ (Bull)........................ 5,692 5,844 8.120% 10-01-05 4,245 Salt Lake City, UT........................ 10,911 12,092 7.870% 10-01-05 -- Laguna Hills, CA.......................... 4,113 4,420 8.375% 02-01-06 1,020 Warren, OH................................ 40,624 -- 7.000% 10-01-07 -- Federal Way, WA........................... 8,635 -- 7.480% 05-11-08 7,655 Anchorage, AK............................. 11,267 -- 7.480% 05-11-08 9,988 Palm Beach Gardens, FL.................... 13,756 -- 7.010% 06-15-08 11,866 Hebron, KY................................ 5,642 -- 7.000% 10-23-08 4,935 Canton, OH................................ 2,523 2,664 9.490% 02-28-09 -- Salt Lake City, UT........................ 21,170 22,401 7.610% 10-01-09 -- Honolulu, HI.............................. 5,901 6,253 10.250% 10-01-10 -- San Diego, CA............................. 4,635 -- 7.500% 01-01-11 3,420 Dallas, TX................................ 22,800 22,800 7.490% 12-31-12 15,961 Lancaster, CA............................. 11,224 -- 7.020% 09-01-13 8,614 Franklin, NC.............................. 2,250 2,279 8.500% 04-01-15 -- -------- -------- ------- -------- Total..................................... $352,900 $219,553 7.650% $235,393 ======== ======== ======= ======== </TABLE> - --------------- (a) The REMIC Financing is secured by mortgages on 17 Properties. (b) The Company's $100 million unsecured revolving credit facility, which replaced the Company's $60 million secured credit facility, bears interest at 137.5 basis points over LIBOR and has an interest rate period of one, three or six months, at the option of the Company. The credit facility contains various leverage, debt service coverage, net worth maintenance and other customary covenants all of which the Company is in compliance. Due to these covenants, approximately $6.4 million was available to the Company at December 31, 1998. In addition, the Company has issued a letter of credit totaling $2.8 million. The amount of available borrowings can increase by identifying additional encumbered properties as eligible for the computation of the borrowing base which supports the credit facility. (c) The mortgages on the two Tampa, Florida Properties are cross-collateralized. (d) The Notes can be exchanged by the holders for the Company's common shares at $13 per share beginning in the year 2000, subject to adjustment. The Notes may be redeemed at the Company's option 34
36 beginning March 2000 at a price of 103.2% of the principal amount, declining to par after March 2002. The Notes are subordinated to obligations under the Company's credit facility. Scheduled principal paydowns of the mortgage notes payable, excluding borrowings under the credit facility, for the next five years and thereafter are as follows (in $000's): <TABLE> <CAPTION> YEARS ENDING SCHEDULED DECEMBER 31, AMORTIZATION BALLOON TOTAL - ------------ ------------ -------- -------- <S> <C> <C> <C> 1999.............................................. $ 9,608 $ 5,563 $ 15,171 2000.............................................. 10,669 13,093 23,762 2001.............................................. 11,524 1,000 12,524 2002.............................................. 12,303 9,559 21,862 2003.............................................. 12,948 -- 12,948 Thereafter........................................ 60,455 153,557 214,012 -------- -------- -------- $117,507 $182,772 $300,279 ======== ======== ======== </TABLE> (6) SUBORDINATED NOTES PAYABLE The notes bear interest at 7.75% per annum, payable semi-annually on January 1 and July 1 of each year, and are due on October 12, 2000. The Subordinated Notes are redeemable at the Company's option, in whole or in part at a redemption price equal to 100% of the principal amount plus all accrued and unpaid interest through the date of redemption. (7) LEASES Minimum future rental receipts under noncancellable tenant leases assuming no new or negotiated leases for the next five years and thereafter are as follows (in $000's): <TABLE> <CAPTION> YEAR ENDING DECEMBER 31, AMOUNT - ------------ -------- <S> <C> 1999........................................................ $ 73,070 2000........................................................ 72,720 2001........................................................ 70,174 2002........................................................ 67,826 2003........................................................ 68,077 Thereafter.................................................. 347,203 -------- $699,070 ======== </TABLE> The Company leases its corporate headquarters for approximately $233,000 per annum through June 30, 2004. (8) MINORITY INTERESTS In conjunction with several of the Company's acquisitions, sellers were given interests in Partnerships controlled by the Company as a form of consideration. All of such interests are redeemable at certain times for common shares on a one-for-one basis. As of December 31, 1998, there were 6,254,769 OP Units outstanding. These units, subject to certain adjustments through the date of conversion, have distributions per unit in varying amounts up to $1.20 per unit. (9) PREFERRED SHARES The preferred shares are cumulative and convertible at any time at the holder's option into common shares on a one-for-one basis and are entitled to quarterly dividends equal to the greater of $.295 per share or 105% of the quarterly common shares dividend. Currently the dividend is $.315 per share. 35
37 During 1997, the Company sold 2,000,000 preferred shares to a single entity. Based on the market price of the Company's common shares on the dates of issuance, the Preferred Shares were deemed to have a beneficial conversion feature equal to the difference between the market price per share and $12.50 per share. This difference, which is non-cash and non-recurring, amounted to approximately $3.5 million for the year ended December 31, 1997 and has been recorded as a dividend, with an offset to additional paid-in capital, in the accompanying statements of changes in shareholders' equity. The preferred shares may be redeemed by the Company after December 31, 2001 at a premium of 6% over the liquidation preference of $12.50 per share, with such premium declining to zero on or after December 31, 2011. Each share is entitled to one vote. In certain instances, including a change of control of the Company (as defined in the agreement), the holder of the Preferred Shares may require the Company to redeem its shares at a price equal to $12.75 per share plus any accrued dividends. (10) LEGAL PROCEEDINGS The Company is involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. (11) BENEFIT PLANS The Company maintains a common share option plan pursuant to which qualified and non-qualified options may be issued. In 1998 the number of options that can be issued under the plan were increased by 800,000. Options granted under the plan generally vest over a period of one to four years, expire five years from date of grant and are exercisable at the market price of the date of grant. Share option activity during the periods indicated is as follows: <TABLE> <CAPTION> WEIGHTED-AVERAGE NUMBER OF EXERCISE PRICE PER SHARES SHARE --------- ------------------ <S> <C> <C> Balance at December 31, 1995............................. 602,500 $10.45 Granted(1)............................................. 370,600 11.56 Exercised(1)........................................... (192,500) 9.15 Forfeited.............................................. (5,300) 11.39 --------- ------ Balance at December 31, 1996............................. 775,300 11.30 Granted................................................ 276,397 12.50 Exercised.............................................. (10,000) 10.09 Forfeited.............................................. (2,500) 14.25 --------- ------ Balance at December 31, 1997............................. 1,039,197 11.62 Granted................................................ 386,600 15.11 Exercised.............................................. (8,230) 10.28 Forfeited.............................................. (7,370) 14.51 --------- ------ Balance at December 31, 1998............................. 1,410,197 $12.58 ========= ====== </TABLE> - --------------- (1) In 1996, certain officers and employees exchanged existing options for new options with exercise prices equal to the fair market value of the common shares at that time. These options are reflected in the amounts exercised and granted in the table above. The difference between the exercise prices of the original and the new options, which amounted to $588,000 has been reflected in general and administrative expenses in the accompanying financial statements. At December 31, 1998, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $9.00 to $15.25 and 2.74 years, respectively. In addition, 989,803 options are still available for grant. 36
38 At December 31, 1998, 1997 and 1996, the number of options exercisable was 1,107,697, 837,300, and 767,800, respectively, and the weighted-average exercise price of those options was $11.88, $11.45 and $11.29, respectively. The per share weighted average fair value of options granted during 1998, 1997 and 1996 were estimated to be $3.46, $3.75 and $2.60, respectively, using a Black-Scholes option pricing formula. The more significant assumptions underlying the determination of such fair values include: (i) a risk free interest rate of 5% in 1998 and 6.5% in 1997 and 1996; (ii) an expected life of five years; (iii) volatility factors of 18.47%, 17.09% and 16.29%, for 1998, 1997 and 1996 respectively; (iv) and actual dividends paid. The Company has elected to adopt the disclosure only provisions of SFAS No. 123. Accordingly no compensation cost has been recognized with regard to options granted in the accompanying consolidated statements of income. If stock based compensation cost had been recognized based upon the fair value at the date of grant for options awarded in 1998, 1997 and 1996 the Company's pro forma net income and pro forma net income per share would have been: <TABLE> <CAPTION> 1998 1997 1996 ------- ------ ------ <S> <C> <C> <C> Pro forma net income.................................... $14,737 $8,276 $4,994 Pro forma net income per share.......................... Basic................................................. $ 0.73 $ 0.30 $ 0.52 Diluted............................................... $ 0.73 $ 0.29 $ 0.50 </TABLE> The Company has a 401(k) retirement savings plan covering all eligible employees. The Company will match 25% of the first 4% of employee contributions. In addition, based on its profitability, the Company may make a discretionary contribution at each fiscal year end to all eligible employees. The matching and discretionary contributions are subject to vesting under a schedule providing for 25% annual vesting starting with the first year of employment and 100% vesting after four years of employment. Approximately $77,000, $80,000 and $75,000 were contributed in 1998, 1997 and 1996, respectively. (12) RELATED PARTY TRANSACTIONS The Company has been granted an option by the LCP Group, L.P. ("LCP"), exercisable any time, to acquire the general partnership interests currently owned by LCP in two limited partnerships, Net 1 L.P. and Net 2 L.P. (collectively, the "Net Partnerships"), which own net leased office, industrial and retail properties. Under the terms of the option, the Company, subject to review of any such transaction by the independent members of its Board of Trustees, may acquire the general partnership interests in either or both of the Net Partnerships at their fair market value based upon a formula relating to partnership cash flows, with the Company retaining the option of paying such fair market value in securities of the Company, units representing interests in partnerships controlled by the Company or cash (or a combination thereof). The Chairman of the Company is a partner in LCP. The Company currently provides administrative and acquisition support to the Net Partnerships and is reimbursed for the costs of such services. The reimbursements amounted to $393,000, $279,000 and $197,000 for the years ended December 31, 1998, 1997 and 1996, respectively, and are shown net of the Company's general and administrative expenses in the accompanying statements of income. The Company also received brokerage commissions, relating to the purchase and sale of properties, from the Net Partnerships totaling $376,000 in 1998, which is included in other income in the accompanying statement of income. In connection with the acquisition of certain properties, the Company assumed an obligation to pay LCP an aggregate principal amount of $1,778,000 for rendering services in connection with the original acquisition of the properties in 1980 and 1981. These properties were acquired by the Company in 1996. Simple interest is payable monthly from available net cash flow of the respective original properties on the various unpaid principal portions of the fees, at annual rates ranging from 12.25% to 19%. Monthly installment payments are 37
39 to commence at various dates to satisfy principal and current interest payments as well as any unpaid accrued interest outstanding. During 1998, the Company issued 1,187,228 OP Units to the Co-Chief Executive Officers and an affiliate of one of the Co-Chief Executive Officers in exchange for their interests in certain partnerships and related contractual obligations. During 1998, the Company issued 131,000 common shares to two officers in exchange for notes aggregating $1,998,000 which mature on February 14, 2003, bear interest at 7.6% per annum and are secured by the common shares issued. (13) FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS Cash Equivalents and Restricted Cash The Company estimates that the fair value approximates carrying value due to the relatively short maturity of the instruments. Mortgages, Notes and Subordinated Notes Payables The Company determines the fair value of these instruments based on a discounted cash flow analysis using a discount rate that approximates the current borrowing rates for instruments of similar maturities. Based on this, the Company has determined that the fair value of these instruments approximates carrying values. (14) CONCENTRATION OF RISK The Company seeks to reduce its operating and leasing risks through diversification achieved by the geographic distribution of its Properties, avoiding dependency on a single property and the creditworthiness of its tenants. For each of the years in the three year period ended December 31, 1998 the following tenants represented 10% or greater of rental revenue: <TABLE> <CAPTION> 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Northwest Pipeline Corp..................................... 14% 20% 16% Ross Stores, Inc............................................ -- -- 10% </TABLE> The Ross Store, Inc. property was sold to the tenant in 1998. (15) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES During 1998, in connection with the acquisition of certain properties, the Company assumed $44.2 million in mortgage indebtedness as partial satisfaction of the purchase price. During 1998, in connection with the acquisition of certain properties, the Company issued $28.8 million in OP Units as partial satisfaction of the purchase price. The issuance of these OP Units have been recorded as minority interest in the accompanying consolidated balance sheets. During 1998, holders of an aggregate of 525,433 partnership units redeemed such units for common shares of the Company. This redemption resulted in an increase in shareholders' equity and a corresponding decrease in minority interest of $5.65 million. During 1998, the Company issued 131,000 common shares, at the current market price, to two officers in exchange for notes aggregating $1,998,000 which mature on February 14, 2003, bear interest at 7.6% per annum and are secured by the common shares issued. During 1997, the Company issued 1,284,725 common shares in exchange for all the shares of another company. The Company acquired three properties valued at $35.1 million less the $15.3 million of mortgage indebtedness assumed. 38
40 During 1997, in connection with a property acquisition, the Company assumed approximately $5.9 million of first mortgage financing and issued a $600,000 note to the seller. During 1997, in connection with an acquisition of properties involving a partnership, the Company issued $6 million in OP Units as partial satisfaction of the purchase price. The issuance of these OP Units have been recorded as minority interest in the accompanying consolidated financial statements. During 1996, the Company completed acquisitions whereby six properties were acquired in exchange for OP Units. Total assets acquired and total liabilities assumed in the exchanges were $79.1 million and $56.9 million, respectively. (16) UNAUDITED QUARTERLY FINANCIAL DATA (IN $000'S, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------------- MARCH 31, JUNE 30, ----------------- ---------------- 1998 1997 1998 1997 ------- ------ ------ ------ <S> <C> <C> <C> <C> Revenues....................................... $13,980 9,824 14,994 10,638 Income before extraordinary item............... $ 4,062 1,566 3,437 1,770 Net income..................................... $ 4,062 1,510 3,437 304 Income (loss) per common share: Before extraordinary item Basic..................................... $ 0.21 (0.01) 0.17 0.14 Diluted................................... $ 0.20 (0.01) 0.17 0.13 Net income (loss) Basic..................................... $ 0.21 (0.02) 0.17 (0.01) Diluted................................... $ 0.20 (0.02) 0.17 (0.01) </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------------- SEPTEMBER 30, DECEMBER 31, ----------------- ---------------- 1998 1997 1998 1997 ------- ------ ------ ------ <S> <C> <C> <C> <C> Revenues....................................... $17,155 11,405 18,988 11,702 Income before extraordinary item............... $ 4,131 5,492 4,107 2,954 Net income..................................... $ 4,131 3,825 4,107 2,954 Income (loss) per common share: Before extraordinary item Basic..................................... $ 0.21 0.40 0.21 0.04 Diluted................................... $ 0.20 0.37 0.20 0.04 Net income Basic..................................... $ 0.21 0.27 0.21 0.04 Diluted................................... $ 0.20 0.27 0.20 0.04 </TABLE> The sum of the quarterly income (loss) per common share amounts may not equal the full year amounts primarily because the computations of the weighted average number of common shares outstanding for each quarter and the full year are made independently. (17) SUBSEQUENT EVENTS (UNAUDITED) The Company borrowed an additional $3 million on its unsecured line of credit at an interest rate of 6.3125%. The Company purchased a property in Henderson, North Carolina leased to Corporate Express Office Products, Inc. for $7.3 million. The lease, which expires January 31, 2014, provides for annual revenues of $765,000. The Company obtained a $2.18 million mortgage on its property in Baton Rouge, Louisiana. The mortgage which bears interest at 7.375% provides for annual debt service payments of approximately $202,000 through February 16, 2009 when a balloon payment of approximately $1.5 million is due. 39
41 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION SCHEDULE III ($000) INITIAL COST TO COMPANY AND GROSS AMOUNT AT WHICH CARRIED AT END OF YEAR(A) <TABLE> <CAPTION> LAND ACCUMULATED AND BUILDINGS DEPRECIATION LAND AND AND DESCRIPTION LOCATION ENCUMBRANCES ESTATES IMPROVEMENTS TOTAL AMORTIZATION ----------- ------------------------ ------------ ------- ------------ -------- ------------- <S> <C> <C> <C> <C> <C> <C> Warehouse & Manufacturing....... Modesto, CA $ 2,101 $ 257 $ 3,809 $ 4,066 $ 1,171 Office.......................... Southington, CT 8,650 3,240 20,440 23,680 7,481 Research & Development.......... Glendale, AZ -- 4,996 24,392 29,388 9,868 Retail/Health Club.............. Countryside, IL 2,381 628 3,722 4,350 1,462 Retail/Health Club.............. Voorhees NJ 3,011 577 4,820 5,397 1,789 Retail/Health Club.............. DeWitt, NY 1,821 445 3,043 3,488 1,112 Warehouse & Distribution........ Mansfield, OH 3,291 120 4,597 4,717 1,494 Industrial...................... Marshall, MI 2,206 33 3,378 3,411 1,189 Industrial...................... Marshall, MI 840 14 926 940 327 Retail.......................... Newport, OR 6,162 1,400 7,270 8,670 2,392 Office & Warehouse.............. Memphis, TN 6,652 1,053 10,908 11,961 2,966 Warehouse & Distribution........ Mechanicsburg, PA 10,154 1,439 13,987 15,426 2,561 Office & Warehouse.............. Tampa, FL 4,290 1,389 7,629 9,018 2,284 Retail.......................... Klamath Falls, OR 7,003 727 9,160 9,887 2,471 Office.......................... Tampa, FL 5,697 1,900 9,736 11,636 2,538 Warehouse & Industrial.......... Jacksonville, FL -- 157 3,034 3,191 808 Retail.......................... Sacramento, CA 2,346 885 2,705 3,590 922 Office.......................... Phoenix, AZ 5,538 2,804 13,921 16,725 3,509 Retail.......................... Reno, NV 2,031 1,200 1,904 3,104 631 Retail.......................... Las Vegas, NV 1,821 900 1,759 2,659 581 Retail.......................... Rockville, MD 1,061 -- 1,784 1,784 372 Retail.......................... Oxon Hill, MD 1,702 403 2,765 3,168 450 Retail.......................... Brownsville, TX 852 -- 1,242 1,242 229 Retail.......................... Laguna Hills, CA 4,113 255 5,028 5,283 735 Retail.......................... Riverdale, GA -- 363 2,233 2,596 167 Retail/Health Club.............. Canton, OH 2,523 602 3,819 4,421 286 Office.......................... Salt Lake City, UT 32,081 -- 55,404 55,404 5,613 Retail.......................... Jacksonville, AL -- 286 1,763 2,049 115 Manufacturing................... Franklin, NC 2,250 386 3,062 3,448 153 Industrial...................... Plymouth, MI -- 1,461 4,868 6,329 243 Industrial...................... Oberlin, OH 2,235 276 4,515 4,791 226 Retail.......................... Tulsa, OK -- 447 2,432 2,879 265 Retail.......................... Clackamas, OR -- 523 2,847 3,370 311 Retail.......................... Lynwood, WA -- 488 2,658 3,146 290 Industrial...................... Houston, TX -- 217 3,745 3,962 329 Retail.......................... Honolulu, HI 5,901 -- 11,147 11,147 903 Industrial...................... Cottondale, AL -- 720 2,190 2,910 103 Warehouse....................... New Kingston, PA (Silver Springs) 5,498 674 5,360 6,034 240 Warehouse....................... New Kingston, PA (Cumberland) 11,250 1,380 10,963 12,343 491 Warehouse....................... Mechanicsburg, PA (Hampden IV) 8,252 1,012 8,039 9,051 360 <CAPTION> USEFUL LIFE COMPUTING DEPRECIATION IN LATEST INCOME DATE DATE STATEMENTS DESCRIPTION ACQUIRED CONSTRUCTED (YEARS) ----------- ---------- ----------- ----------------------- <S> <C> <C> <C> Warehouse & Manufacturing....... Sept. 1986 1970 & 1976 40 & 12 Office.......................... Oct. 1986 1983 40 & 12 Research & Development.......... Nov. 1986 1985 40 & 12 Retail/Health Club.............. Jul. 1987 1987 40 & 12 Retail/Health Club.............. Jul. 1987 1987 40 & 12 Retail/Health Club.............. Aug. 1987 1977 & 1987 40 & 12 Warehouse & Distribution........ Jul. 1987 1970 40, 20 & 12 Industrial...................... Aug. 1987 1968 & 1972 40, 20 & 12 Industrial...................... Aug. 1987 1979 40, 20 & 12 Retail.......................... Sept. 1987 1986 40, 20 & 12 Office & Warehouse.............. Feb. 1988 1987 40 Warehouse & Distribution........ Oct. 1990 1985 & 1991 40 Office & Warehouse.............. Nov. 1987 1986 40 & 20 Retail.......................... Mar. 1988 1986 40 Office.......................... Jul. 1988 1986 40 Warehouse & Industrial.......... Jul. 1988 1958 & 1969 40 & 20 Retail.......................... Oct. 1988 1988 40, 20 & 12 Office.......................... Nov. 1988 1960 & 1979 40 Retail.......................... Dec. 1988 1988 40, 20 & 12 Retail.......................... Dec. 1988 1988 40, 20 & 12 Retail.......................... Aug. 1995 1977 22.375, 16.583 & 15.583 Retail.......................... Aug. 1995 1976 21.292 Retail.......................... Aug. 1995 1973 18.542 Retail.......................... Aug. 1995 1974 20 & 20.5 Retail.......................... Dec. 1995 1985 40 Retail/Health Club.............. Dec. 1995 1987 40 Office.......................... May 1996 1982 25.958 Retail.......................... May 1996 1982 40 Manufacturing................... Dec. 1996 1996 40 Industrial...................... Dec. 1996 1996 40 Industrial...................... Dec. 1996 1996 40 Retail.......................... Dec. 1996 1981 23.583 & 13.583 Retail.......................... Dec. 1996 1981 23.583 & 13.583 Retail.......................... Dec. 1996 1981 23.583 & 13.583 Industrial...................... Dec. 1996 1981 24.5 & 14.5 Retail.......................... Dec. 1996 1980 24.33 Industrial...................... Feb. 1997 1996 40 Warehouse....................... Mar. 1997 1981 40 Warehouse....................... Mar. 1997 1989 40 Warehouse....................... Mar. 1997 1985 40 </TABLE> 40
42 LEXINGTON CORPORATE PROPERTIES TRUST AND CONSOLIDATED SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION SCHEDULE III ($000) -- (CONTINUED) <TABLE> <CAPTION> LAND ACCUMULATED AND BUILDINGS DEPRECIATION LAND AND AND DESCRIPTION LOCATION ENCUMBRANCES ESTATES IMPROVEMENTS TOTAL AMORTIZATION ----------- ------------------------ ------------ ------- ------------ -------- ------------- <S> <C> <C> <C> <C> <C> <C> Office/Research & Development... San Diego, CA 4,635 693 7,014 7,707 285 Office/Research & Development... Marlborough, MA -- 1,707 13,834 15,541 504 Office.......................... Phoenix, AZ 6,284 1,872 9,118 10,990 332 Office.......................... Dallas, TX 22,800 3,582 29,063 32,645 938 Warehouse....................... Waterloo, IA 4,468 1,025 8,296 9,321 251 Office/Research & Development... Milipitas, CA -- 3,542 18,603 22,145 465 Industrial...................... Gordonsville, TN 1,158 52 3,325 3,377 96 Office.......................... Decatur, GA -- 975 13,677 14,652 342 Office.......................... Richmond, VA 13,093 -- 27,282 27,282 846 Industrial...................... Bessemer, AL 1,000 664 4,238 4,902 126 Office/Warehouse................ Bristol, PA -- 2,508 10,031 12,539 188 Office.......................... Hebron, KY 5,642 1,615 6,462 8,077 121 Office.......................... Livonia, MI -- 1,554 6,219 7,773 117 Research & Development.......... Livonia, MI -- 1,733 6,936 8,669 130 Retail.......................... Federal Way, WA 8,635 2,749 11,015 13,764 176 Retail.......................... Anchorage, AK 11,267 3,537 14,169 17,706 226 Industrial/Warehouse............ Columbia, SC -- 636 3,608 4,244 44 Office.......................... Palm Beach Gardens, FL 13,756 3,960 15,870 19,830 249 Warehouse/Distribution.......... Lancaster, CA 11,224 2,028 13,117 15,145 174 Office.......................... Florence, SC -- 3,012 12,067 15,079 151 Industrial...................... Auburn Hills, MI -- 2,788 11,169 13,957 122 Warehouse/Distribution.......... Warren, OH 40,624 10,231 51,239 61,470 742 Warehouse/Distribution.......... Baton Rouge, LA -- 685 2,746 3,431 14 Retail.......................... Columbia, MD 1,980 976 3,910 4,886 -- -------- ------- -------- -------- -------- Total $300,279 $85,781 $590,012 $675,793 $ 66,076 ======== ======= ======== ======== ======== <CAPTION> USEFUL LIFE COMPUTING DEPRECIATION IN LATEST INCOME DATE DATE STATEMENTS DESCRIPTION ACQUIRED CONSTRUCTED (YEARS) ----------- ---------- ----------- ----------------------- <S> <C> <C> <C> Office/Research & Development... May 1997 1989 40 Office/Research & Development... Jul. 1997 1960 & 1988 40 Office.......................... Jul. 1997 1985 & 1994 40 Office.......................... Sept. 1997 1986 40 Warehouse....................... Oct. 1997 1996 & 1997 40 Office/Research & Development... Dec. 1997 1985 40 Industrial...................... Dec. 1997 1983 & 1985 34.75 Office.......................... Dec. 1997 1983 40 Office.......................... Dec. 1997 1990 32.25 Industrial...................... Dec. 1997 1990 33.75 Office/Warehouse................ Mar. 1998 1982 40 Office.......................... Mar. 1998 1987 40 Office.......................... Mar. 1998 1987 & 1988 40 Research & Development.......... Mar. 1998 1987 & 1988 40 Retail.......................... May 1998 1992 40 Retail.......................... May 1998 1992 40 Industrial/Warehouse............ May 1998 1968 & 1998 40 Office.......................... May 1998 1996 40 Warehouse/Distribution.......... Jun. 1998 1998 40 Office.......................... Jul. 1998 1998 40 Industrial...................... Jul. 1998 1989 & 1998 40 Warehouse/Distribution.......... Aug. 1998 1982 40 Warehouse/Distribution.......... Oct. 1998 1998 40 Retail.......................... Dec. 1998 1983 40 Total </TABLE> - --------------- (A) The initial cost includes the purchase price paid by the Company and acquisition fees and expenses. The total cost basis of the Company's Properties at December 31, 1998 for Federal income tax purposes was $458 million. Reconciliation of real estate owned <TABLE> <CAPTION> 1998 1997 1996 -------- -------- -------- <S> <C> <C> <C> Balance at the beginning of the year.................... $467,606 $340,669 $244,223 Additions during year................................... 208,187 179,257 96,446 Properties sold during year............................. -- (21,476) -- Property reclassed to held for sale..................... -- (30,844) -- -------- -------- -------- Balance at end of year.................................. $675,793 $467,606 340,669 ======== ======== ======== </TABLE> Reconciliation of accumulated depreciation and amortization: <TABLE> <S> <C> <C> <C> Balance at beginning of year............................ $ 50,993 $ 51,343 $ 43,716 Depreciation and amortization expense................... 15,083 10,608 7,627 Accumulated depreciation of properties sold during year................................................. -- (3,631) -- Accumulated depreciation of property reclassed to held for sale............................................. -- (7,327) -- -------- -------- -------- Balance at end of year.................................. $ 66,076 $ 50,993 $ 51,343 ======== ======== ======== </TABLE> 41
43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III. ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding trustees and executive officers of the Company required to be furnished pursuant to this item is set forth in Item 4A of this report. ITEM 11. EXECUTIVE COMPENSATION The information required to be furnished pursuant to this item will be set forth under the caption "Compensation of Executive Officers" in the Proxy Statement, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required to be furnished pursuant to this item will be set forth under the captions "Principal Security Holders" and "Share Ownership of Trustees and Executive Officers" in the Proxy Statement, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required to be furnished pursuant to this item will be set forth under the caption "Election of Trustees -- Certain Relationships and Related Transactions" in the Proxy Statement, and is incorporated herein by reference. Note, the Definitive Proxy Statement will be filed with the Securities and Exchange Commission on or about April 16, 1999. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. <TABLE> <CAPTION> PAGE ---- <C> <S> <C> (a)(1) Financial Statements........................................ 25-39 (2) Financial Statement Schedule................................ 40-41 (3) Exhibits </TABLE> <TABLE> <CAPTION> EXHIBIT NO. EXHIBIT - ----------- ------- <C> <S> <C> 2.1 -- Form of Agreement and Plan of Merger by and among Lexington Corporate Properties, Inc. (the "Company"), Lepercq Corporate Income Fund L.P. ("LCIF I") and Lex M-1, L.P. (filed as Appendix C-I to the Company's Registration Statement of Form S-4 (File No. 33-66858) (the "Form S-4"))* 2.2 -- Form of Agreement and Plan of Merger by and among the Company, Lepercq Corporate Income Fund II L.P. ("LCIF II"), and Lex M-2, L.P. (filed as Appendix C-II to the Form S-4)* 2.3 -- Form of Agreement and Articles of Merger between the Company and Lexington Corporate Properties -- Maryland, Inc. (filed as Exhibit 2.3 to Report on 10-K for year ended December 31, 1993 (the "1993 10-K"))* 2.4 -- Agreement and Plan of Merger between the Company and Lexington Corporate Properties Trust (filed as Exhibit 2.1 to Form 8-K filed 1-16-98.)* 3.1 -- Declaration of Trust of the Company, dated December 31, 1997 (filed as Exhibit 3.1 to Form 8K filed 1-16-98)* </TABLE> 42
44 <TABLE> <CAPTION> EXHIBIT NO. EXHIBIT - ----------- ------- <C> <S> <C> 3.2 -- By-Laws of the Company (filed as Exhibit 3.2 to Form 10-K filed 3-31-98)* 4.1 -- Specimen of Common Shares Certificate of the Trust (filed as Exhibit 3.2 to Form 10-K filed 3-31-98)* 4.2 -- Form of Indenture between the Company and The Bank of New York, as Trustee, including the form of 7.75% Subordinated Note due 2000 (filed as Exhibit 4.2 to the Form S-4)* 10.8 -- Form of 1994 Outside Director Shares Plan of the Company (filed as Exhibit 10.8 to 1993 10-K)* 10.24 -- Class A Mortgage Note to Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 in the amount of $34,000,000 (filed as Exhibit 10.24 to Report on 10-K for year ended December 31, 1995 (the "1995 10-K"))* 10.25 -- Class B Mortgage Note to Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 in the amount of $18,500,000 (filed as Exhibit 10.25 to the 1995 10-K)* 10.26 -- Class C Mortgage Note to Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 in the amount of $17,500,000 (filed as Exhibit 10.26 to the 1995 10-K)* 10.28 -- Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Leases, Rents and Security Deposits to First American Title Insurance Company and Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 (filed as Exhibit 10.28 to the 1995 10-K)* 10.29 -- Assignment of Leases, Rents, and Security Deposits to Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 (filed as Exhibit 10.29 to the 1995 10-K)* 10.30 -- Cash Collateral Account, Security, Pledge and Assignment Agreement with the Bank of New York, as agent and Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 (filed as Exhibit 10.30 to the 1995 10-K)* 10.31 -- Trust and Servicing Agreement with Pacific Mutual Life Insurance Company, LaSalle National Bank and ABN AMRO Bank N.V. dated May 19, 1995 (filed as Exhibit 10.31 to the 1995 10-K)* 10.33 -- Investment Agreement dated as of December 31, 1996 with Five Arrows Realty Securities L.L.C. * 10.34 -- Operating Agreement dated as of January 21, 1997 with Five Arrows Realty Securities L.L.C.* 10.35 -- Articles Supplementary Classifying 2,000,000 shares of Preferred Shares as Class A Senior Cumulative Convertible Preferred Shares and 2,000,000 shares of Excess Shares as Excess Class A Preferred Shares of the Company* 10.37 -- Unsecured Revolving Credit Agreement with Fleet National Bank as administrative agent for itself and lenders dated July 22, 1998 in the amount of $100,000,000. 12 -- Statement of Computation of Ratio of Earnings to Fixed Charges (filed as Exhibit 12 to the Form S-4)* 21 -- List of Subsidiaries of the Company (filed as Exhibit 21 to Form 10-K filed 3-31-98)* 23 -- Consent of KPMG LLP 27 -- Financial Data Schedule as of and for the year ended December 31, 1998 </TABLE> - --------------- * Incorporated by reference. (b) Reports on Form 8-K and Form 8-K/A None. 43
45 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. LEXINGTON CORPORATE PROPERTIES TRUST BY: /s/ E. ROBERT ROSKIND ------------------------------------ E. Robert Roskind Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated. <TABLE> <CAPTION> SIGNATURE TITLE --------- ----- <C> <S> /s/ E. ROBERT ROSKIND Chairman of the Board of Trustees and Co-Chief - --------------------------------------------------- Executive Officer E. Robert Roskind /s/ RICHARD J. ROUSE Vice Chairman of the Board of Trustees and - --------------------------------------------------- Co-Chief Executive Officer Richard J. Rouse /s/ T. WILSON EGLIN President and Chief Operating Officer and - --------------------------------------------------- Trustee T. Wilson Eglin /s/ PATRICK CARROLL Chief Financial Officer and Treasurer - --------------------------------------------------- Patrick Carroll /s/ PAUL R. WOOD Vice President, Chief Accounting Officer and - --------------------------------------------------- Secretary Paul R. Wood /s/ CARL D. GLICKMAN Trustee - --------------------------------------------------- Carl D. Glickman /s/ KEVIN W. LYNCH Trustee - --------------------------------------------------- Kevin W. Lynch /s/ JOHN D. MCGURK Trustee - --------------------------------------------------- John D. McGurk /s/ SETH M. ZACHARY Trustee - --------------------------------------------------- Seth M. Zachary </TABLE> DATE: March 5, 1999 44