FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2001
or
[_] Transition Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
Commission File Number 1-11998
For the transition period from _______ to ________
KONOVER PROPERTY TRUST, INC.
(Exact name of registrant as specified in its charter)
Maryland 56-1819372
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3434 Kildaire Farm Road
Suite 200
Raleigh, North Carolina (919) 372-3000 27606
(Address of principal executive offices) (Registrant's telephone (Zip Code)
number, including area
code)
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 31,392,017 shares of Common
Stock, $0.01 par value, as of August 8, 2001.
KONOVER PROPERTY TRUST, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Consolidated Financial Statements (Unaudited).............................................. 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 27
Item 2. Changes in Securities and Use of Proceeds.................................................. 27
Item 3. Defaults Upon Senior Securities............................................................ 27
Item 4. Submission of Matters to a Vote of Security Holders........................................ 27
Item 5. Other Information.......................................................................... 27
Item 6. Exhibits and Reports on Form 8-K........................................................... 27
2
PART I
Item 1. Consolidated Financial Statements (Unaudited)
Index to Unaudited Consolidated Financial Statements
Page No.
-------
Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000.................................. 4
Consolidated Statements of Operations for the three months ended June 30, 2001 and 2000................ 5
Consolidated Statements of Operations for the six months ended June 30, 2001 and 2000.................. 6
Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2001.................. 7
Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000.................. 8
Notes to Consolidated Financial Statements............................................................. 9
3
KONOVER PROPERTY TRUST, INC.
Consolidated Balance Sheets
June 30, 2001 December 31, 2000
(Unaudited) (Audited)
------------------------------------
(in thousands)
Assets
Income producing properties:
Land $ 45,019 $ 122,165
Buildings and improvements 221,757 525,699
Deferred leasing and other charges 15,852 43,304
------------------------------------
282,628 691,168
Accumulated depreciation and amortization (28,751) (97,957)
------------------------------------
253,877 593,211
Properties under development 25,196 22,576
Properties held for sale 245,732 18,900
Other assets:
Cash and cash equivalents 1,083 10,660
Restricted cash 14,283 11,540
Tenant and other receivables, net allowance of $2,316 and $2,069 at June 30,
2001 and December 31, 2000, respectively 8,165 6,980
Notes receivable 519 663
Investment in and advances to unconsolidated entities 21,647 25,120
Deferred charges and other assets 11,945 13,621
------------------------------------
$ 582,447 $ 703,271
====================================
Liabilities and Stockholders' Equity
Liabilities:
Debt on income properties $ 405,686 $ 399,812
Capital lease obligations 331 437
Accounts payable and other liabilities 22,378 26,451
------------------------------------
428,395 426,700
Commitments and contingencies
Minority interests 4,111 8,356
------------------------------------
Stockholders' equity:
Convertible preferred stock, Series A, 5,000,000 shares authorized, 780,680
issued and outstanding at June 30, 2001 and December 31, 2000 18,679 18,679
Stock purchase warrants 9 9
Common stock, $0.01 par value, 100,000,000 shares authorized, 31,364,996 and
31,274,845 issued and outstanding at June 30, 2001 and December 31,
2000, respectively 314 313
Additional paid-in capital 286,745 290,059
Accumulated deficit (155,580) (40,481)
Deferred compensation - Restricted stock plan (226) (364)
------------------------------------
149,941 268,215
------------------------------------
$ 582,447 $ 703,271
====================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
4
KONOVER PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months ended June 30,
2001 2000
---------------------------------------------
(in thousands, except per share data)
Rental operations:
Revenues:
Base rents $ 17,137 $ 17,889
Percentage rents 395 92
Property operating cost recoveries 3,813 4,304
Other income 326 811
---------------------------------------------
21,671 23,096
---------------------------------------------
Property operating costs:
Common area maintenance 2,885 2,403
Utilities 649 662
Real estate taxes 2,154 2,121
Insurance 291 267
Marketing 59 44
Other 1,023 1,470
---------------------------------------------
7,061 6,967
Depreciation and amortization 6,420 6,514
---------------------------------------------
13,481 13,481
---------------------------------------------
8,190 9,615
---------------------------------------------
Other expenses:
General and administrative 1,676 1,727
Stock compensation amortization 183 899
Severance and other related costs 918 -
Interest, net 7,802 6,791
---------------------------------------------
(Loss) income from operations (2,389) 198
Loss on sale of real estate - 315
Adjustment to carrying value of property 105,110 -
Abandoned transaction costs 8 5
Equity in losses of unconsolidated entities:
Technology venture operations - 1,207
Real estate operations 4,800 525
---------------------------------------------
Loss before minority interest (112,307) (1,854)
Minority interest 3,133 49
---------------------------------------------
Net loss (109,174) (1,805)
Preferred dividends - (271)
---------------------------------------------
Net loss applicable to common stockholders $ (109,174) $ (2,076)
=============================================
Basic loss applicable to common stockholders per share $ (3.50) $ (0.07)
=============================================
Weighted-average number of common shares outstanding 31,234 31,025
=============================================
Diluted loss applicable to common stockholders per share $ (3.50) $ (0.07)
=============================================
Weighted-average number of diluted shares outstanding 31,234 31,025
=============================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
KONOVER PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
Six Months ended June 30,
2001 2000
---------------------------------------------
Rental operations: (in thousands, except per share data)
Revenues:
Base rents $ 34,260 $ 34,921
Percentage rents 530 231
Property operating cost recoveries 7,590 8,800
Other income 1,771 1,276
---------------------------------------------
44,151 45,228
---------------------------------------------
Property operating costs:
Common area maintenance 5,439 5,061
Utilities 1,397 1,360
Real estate taxes 4,391 4,360
Insurance 626 518
Marketing 120 81
Other 2,068 2,654
---------------------------------------------
14,041 14,034
Depreciation and amortization 12,533 12,737
---------------------------------------------
26,574 26,771
---------------------------------------------
17,577 18,457
---------------------------------------------
Other expenses:
General and administrative 3,664 3,325
Stock compensation amortization 563 1,650
Severance and other related costs 5,931 -
Interest 15,578 13,122
---------------------------------------------
(Loss) income from operations (8,159) 360
Loss on sale of real estate - 874
Adjustment to carrying value of property 105,110 -
Abandoned transaction costs 46 18
Equity in losses of unconsolidated ventures:
Technology venture - 3,639
Real estate operations 5,081 818
---------------------------------------------
Loss before minority interest (118,396) (4,989)
Minority interest 3,297 335
---------------------------------------------
Net loss (115,099) (4,654)
Preferred dividends (271) (542)
---------------------------------------------
Net loss applicable to common stockholders $ (115,370) $ (5,196)
=============================================
Basic loss applicable to common stockholders per share $ (3.70) $ (0.17)
=============================================
Weighted-average number of common shares outstanding 31,204 30,770
=============================================
Diluted loss applicable to common shareholders per share $ (3.70) $ (0.17)
=============================================
Weighted-average number of diluted shares outstanding 31,204 30,770
=============================================
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
6
KONOVER PROPERTY TRUST, INC.
Consolidated Statement of Stockholders' Equity
Six months ended June 30, 2001
(Unaudited)
(in thousands except per share data)
Convertible Stock Purchase Additional Paid
Preferred Stock Warrants Common Stock in Capital
-----------------------------------------------------------------------------
Balance at December 31, 2000 $ 18,679 $ 9 $ 313 $ 290,059
Issuance of 7,573 employee stock purchase plan
shares - - - 28
Issuance of 11,892 restricted shares - - - 60
Repurchase of 13,395 restricted shares - - - (57)
Cancellation of 8,253 restricted shares - - - (46)
Exercise of stock purchase rights for 5,436 shares
of restricted stock - - - 42
Stock options issued for services - - - 18
OP units converted into 86,898 shares of common
stock - - 1 825
Compensation under stock plans - - - -
Preferred stock dividends ($0.125 per share) - - - (271)
Common stock dividends ($0.125 per share) - - - (3,913)
Net loss - - - -
-----------------------------------------------------------------------------
Balance at June 30, 2001 $ 18,679 $ 9 $ 314 $ 286,745
=============================================================================
Accumulated Restricted Stock
Deficit Plan Total
-------------------------------------------------------------
Balance at December 31, 2000 $ (40,481) $ (364) $ 268,215
Issuance of 7,573 employee stock purchase plan
shares - - 28
Issuance of 11,892 restricted shares - (60) -
Repurchase of 13,395 restricted shares - - (57)
Cancellation of 8,253 restricted shares - 46 -
Exercise of stock purchase rights for 5,436 shares
of restricted stock - - 42
Stock options issued for services - - 18
OP units converted into 86,898 shares of common
stock - - 826
Compensation under stock plans - 152 152
Preferred stock dividends ($0.125 per share) - - (271)
Common stock dividends ($0.125 per share) - - (3,913)
Net loss (115,099) - (115,099)
-------------------------------------------------------------
Balance at June 30, 2001 $ (155,580) $ (226) $ 149,941
=============================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
7
KONOVER PROPERTY TRUST, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
2001 2000
--------------------------------
(in thousands)
Cash flows from operating activities:
Net loss $ (115,099) $ (4,654)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of debt premium (261) (261)
Minority interest (3,297) (335)
Depreciation and amortization 12,533 12,737
Stock compensation amortization 563 1,650
Loss on sale of real estate - 874
Adjustments to carrying value of property 105,110 -
Adjustments to carrying value of other assets held for sale 4,256 -
Abandoned transaction costs 46 18
Amortization of deferred financing costs 1,180 1,207
Technology venture operations - 3,639
Net changes in:
Tenant and other receivables (1,185) 2,334
Deferred charges and other assets (169) (1,061)
Accounts payable and other liabilities 168 (3,786)
--------------------------------
Net cash provided by operating activities 3,845 12,362
--------------------------------
Cash flows from investing activities:
Investment in income-producing properties (7,108) (17,144)
Net proceeds from sale of real estate - 603
Payments received on notes receivable, net 143 4,614
Investment in and advances to unconsolidated entities (783) (5,961)
Change in restricted cash (2,742) (1,331)
--------------------------------
Net cash used in investing activities (10,490) (19,219)
--------------------------------
Cash flows from financing activities:
Proceeds from debt on income properties 10,461 21,754
Repayment of debt on income properties (4,325) (1,754)
Expenses related to sale of common stock - (172)
Deferred financing charges (35) (2,870)
Other debt repayments (107) (136)
Issuance of shares under employee stock purchase plan 28 49
Dividends paid (8,963) (4,636)
Exercise of stock purchase rights 66 -
Repurchase of common stock (57) (43)
--------------------------------
Net cash (used in) provided by financing activities (2,932) 12,192
--------------------------------
Net decrease in cash and cash equivalents (9,577) 5,335
Cash and cash equivalents at beginning of period 10,660 5,366
--------------------------------
Cash and cash equivalents at end of period $ 1,083 $ 10,701
================================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 16,373 $ 14,975
================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
8
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
1. Interim Financial Statements
Organization
Konover Property Trust, Inc. (the "Company"), formerly FAC Realty Trust,
Inc., was incorporated on March 31, 1993 as a self-advised and self-managed real
estate investment trust (REIT). The Company is principally engaged in the
acquisition, development, ownership and operation of retail shopping centers.
The Company's revenues are primarily derived under real estate leases with
national, regional and local retailing companies.
On June 30, 2001, the Company's owned properties consisted of:
1. 31 community shopping centers in six states aggregating approximately
4,003,000 square feet;
2. 35 centers with approximately 5,397,000 square feet that are held for sale;
and
3. One center under development which is scheduled for completion in Fall
2001.
In addition, the Company had investments in:
. four joint-venture community centers/developments which will consist of
344,000 square feet;
. a land-development joint venture consisting of approximately 2,700
acres; and
. third-party management company with 6.9 million square feet under
management or leasing contracts.
The weighted-average square feet of gross leasable area was 9.4 million
square feet for the six months ended June 30, 2001 and 9.5 million square feet
for the same period in 2000.
On December 17, 1997, following shareholder approval, the Company changed
its domicile from the State of Delaware to the State of Maryland. The
reincorporation was accomplished through the merger of FAC Realty, Inc. into its
Maryland subsidiary, Konover Property Trust, Inc. (formerly FAC Realty Trust,
Inc.). Following the reincorporation on December 18, 1997, the Company
reorganized as an umbrella partnership real estate investment trust (an
"UPREIT"). The Company then contributed to KPT Properties, L.P. (formerly FAC
Properties, L.P.), a Delaware limited partnership (the "Operating Partnership"),
all of its assets and liabilities. In exchange for the Company's assets, the
Company received limited partnership interests ("Units") in the Operating
Partnership in an amount and designation that corresponded to the number and
designation of outstanding shares of capital stock of the Company at the time.
The Company is the sole general partner of the Operating Partnership and owns a
97% interest as of June 30, 2001. As additional limited partners are admitted to
the Operating Partnership in exchange for the contribution of properties, the
Company's percentage ownership in the Operating Partnership will decline. As the
Company issues additional shares of capital stock, it will contribute the
proceeds for that capital stock to the Operating Partnership in exchange for a
number of Units equal to the number of shares that the Company issues. The
Company conducts all of its business and owns all of its assets through the
Operating Partnership (either directly or through subsidiaries) such that a Unit
is economically equivalent to a share of the Company's common stock.
An UPREIT may allow the Company to offer Units in the Operating
Partnership in exchange for ownership interests from tax-motivated sellers.
Under certain circumstances, the exchange of Units for a seller's ownership
interest will enable the Operating Partnership to acquire assets while allowing
the seller to defer the tax liability associated with the sale of such assets.
Effectively, this allows the Company to use Units instead of stock to acquire
properties, which provides an advantage over non-UPREIT entities.
The Company has a majority interest in two taxable subsidiaries, Sunset
KPT Investment, Inc. and truefinds.com, Inc., both organized under the laws of
Delaware. Sunset KPT Investment, Inc. has the ability to develop properties, buy
and sell properties, provide equity to developers and perform third-party
management, leasing and brokerage services. truefinds.com, Inc. attempted to
commercialize an apparel-sizing technology. The operations of truefinds.com,
Inc. have been suspended. The Company holds substantially all of the non-voting
common stock of these taxable subsidiaries.
9
Substantially all of the voting common stock is held by an officer of the
Company and other related parties. Accordingly, these entities are accounted for
under the equity method for investments. Additionally, these taxable
subsidiaries are taxed as regular corporations.
Basis of Presentation
The accompanying consolidated financial statements include the accounts
of the Company, its subsidiaries and the Operating Partnership. All significant
intercompany balances have been eliminated in consolidation.
Entities that are owned by or that are owned less than 100% and are
controlled by the Operating Partnership have been consolidated. Control is
demonstrated by the ability of the Operating Partnership to manage, directly or
indirectly, day-to-day operations, refinance debt and sell the assets of the
entity that owns the property without the consent of the other owners and the
inability of the other owners to replace the general partner or manager.
Investments in ventures which represent noncontrolling ownership interests or
where control is deemed temporary are accounted for using the equity method of
accounting. These investments are recorded initially at cost and subsequently
adjusted for net equity in income (loss) and cash contributions and
distributions.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
the information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(primarily consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and six-
month period ended June 30, 2001 are not necessarily indicative of results that
may be expected for a full fiscal year. For further information, refer to the
audited financial statements and accompanying footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Certain amounts from prior years were reclassified to conform with
current-year presentation. These reclassifications had no effect on net loss or
stockholders' equity as previously reported.
2. Significant Accounting Policies
Cash and cash equivalents
The Company considers highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Basic and diluted income per share
Basic earnings per share is calculated by dividing the income
applicable to common stockholders by the weighted-average number of shares
outstanding. Diluted earnings per share reflects the potential dilution that
could occur if options or warrants to purchase common shares were exercised and
preferred stock was converted into common shares ("potential common shares").
For the three months ended June 30, 2001 and June 30, 2000, basic and
dilutive earnings per share are computed based on a weighted average number of
shares of 31,234,397 and 31,024,746, respectively. For the six months ended June
30, 2001 and June 30, 2000, basic and dilutive earnings per share are computed
based on a weighted average number of shares of 31,204,118 and 30,770,340,
respectively. Potential dilutive common shares have been excluded from diluted
earnings per share for the three and six months ended June 30, 2001 and June 30,
2000 because their inclusion would be antidilutive.
10
Dividends
No dividends were declared during the three months ended June 30, 2001.
Comprehensive Income
Comprehensive income equals net income for all periods presented.
3. Investment in and Advances to Unconsolidated Entities
A summary of the Company's investments in and advances to
unconsolidated entities at June 30, 2001 and December 31, 2000 is as follows
(all investments in unconsolidated entities are accounted for under the equity
method):
June 30, December 31,
Entity Location Ownership 2001 2000
-------------------------------------------------------------------------------------------------------------
Community Center Ventures:
Atlantic Realty LLC (2 community centers) Apex and Pembroke, NC 50% $ 2,722 $ 2,571
Park Place KPT LLC Morrisville, NC 50% 6,425 6,594
Falls Pointe KPT LLC Raleigh, NC 50% 5,720 5,991
Taxable Subsidiaries (see Note 1):
Sunset KPT Investment, Inc. 85% 6,773 9,981
truefinds.com, Inc. 95% 7 (17)
------------------------
$ 21,647 $ 25,120
========================
During the three months ended June 30, 2001, Sunset KPT Investments,
Inc. determined it will sell certain assets resulting in a $4.3 million charge
to adjust the assets to their net realizable value. This charge is included in
equity in losses of unconsolidated entities in the accompanying consolidated
statement of operations for the three months ended June 30, 2001.
The development of the properties in the entities listed above is
subject to, among other things, completion of due diligence and various
contingencies, including those inherent in development projects, such as zoning,
leasing and financing. There can be no assurance that such development will be
completed. All debt incurred by unconsolidated ventures is secured by their
respective properties as well as various guarantees of the Company and by the
Company's respective venture partners.
4. Reportable Segments
Management has determined under Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information", that it has four reportable segments: community centers,
outlet centers, Vanity Fair ("VF") anchored centers, and centers held for sale.
The outlet segment includes properties which generate a majority of their
revenue from traditional outlet manufacturers and are destination oriented. The
VF anchored segment includes properties that have less than $1.5 million in
total revenue, generate at least 20% of their revenue from VF and have less than
150,000 square feet. Due to the significance of certain planned transactions
involving held-for-sale properties, the Company has included properties under
development or redevelopment in the other segment column. The prior year segment
presentation has been restated to reflect this change. The Company evaluates
performance and allocates resources based on the net operating income (NOI) of
the Company's investment portfolio. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. The Company's reportable segments are business units that
offer retail space to varied tenants and in varied geographical areas.
11
(All data in thousands)
Community Outlet VF Held All
Centers /(1)/ Centers /(1)/ Centers /(1)/ for Sale /(1)/ others /(2)/ Total
Six months ended June 30, 2001:
NOI $ 12,488 $ - $ - $ 17,372 $ 250 $ 30,110
Total Assets $ 244,351 $ - $ - $ 257,837 $ 80,259 $ 582,447
Six months ended June 30, 2000:
NOI $ 18,397 $ 9,689 $ 2,062 $ 722 $ 324 $ 31,194
Total Assets $ 373,271 $ 188,778 $ 44,292 $ 38,750 $ 82,042 $ 727,133
(1) See Footnote 6 for detail on properties moved to held-for-sale segment
during the quarter ended June 30, 2001.
(2) Includes investment in and advances to unconsolidated entities,
properties under development, cash and other corporate assets.
5. Severance and Other Related Costs
C. Cammack Morton resigned as an officer and director of the Company on
March 6, 2001. In connection with his resignation, the Company and Mr. Morton
entered into a Separation Agreement and General Release. Under the separation
agreement, which was a complete settlement of Mr. Morton's rights under his
former employment agreement, the Company paid Mr. Morton $2.5 million in cash
and released him from the non-compete restrictions in his employment agreement.
In addition, the parties agreed upon Mr. Morton's rights under various equity
awards.
Mr. Morton agreed that his 225,851 vested in-the-money Repurchase
Rights and 300,000 vested out-of-the-money Repurchase Rights would remain
outstanding (and entitled to dividend equivalent rights) until April 1, 2002. He
also agreed to the immediate cancellation of his remaining 391,299 in-the-money
Repurchase Rights in exchange for an additional cash payment of $900,000, of
which the Company has already paid $400,000 and will pay the remaining $500,000
in January 2002. Mr. Morton also forfeited his interest in 140,000
out-of-the-money Repurchase Rights and 210,000 out-of-the-money stock options in
exchange for $35,000 in cash.
Patrick M. Miniutti's employment with the Company terminated on March
6, 2001, and he resigned from the Board of Directors on March 30, 2001. In
complete settlement of all rights under his former employment agreement, Mr.
Miniutti entered into a Separation and Settlement Agreement and General Release
with the Company on March 30, 2001. Pursuant to the agreement, the Company paid
a severance benefit to Mr. Miniutti consisting of $1.5 million in cash (payable
in five equal monthly installments) and the forgiveness of a $125,000 loan. The
Company also released Mr. Miniutti from the non-compete restrictions imposed by
his employment agreement.
In addition, in exchange for the issuance of 259,545 shares of common
stock (the "Settlement Shares"), Mr. Miniutti agreed to the immediate
cancellation of all rights (including dividend equivalent rights) with respect
to all equity awards granted by the Company. The shares are issuable upon the
earlier of April 1, 2002, the sale of 50% or more of the Company's voting
securities, the liquidation or winding-up of the Company or the payment by Mr.
Miniutti of an amount equal to the Company's tax withholding obligations on the
Settlement Shares. Under the agreement, Mr. Miniutti is entitled to dividend
equivalent payments with respect to the Settlement Shares for any record date
occurring after March 30, 2001 but before the issuance of the Settlement Shares.
In addition to the $5.1 million of severance noted above, the Company
recorded a charge of $0.8 million for additional severance and legal fees for
Mr. Morton, Mr. Miniutti and eight other Company employees in the quarter ended
March 31, 2001. The total severance and other related costs of $5.9 million is
partially offset by a $0.9 million reduction in previously amortized stock
compensation for Mr. Morton and Mr. Miniutti.
During the quarter ended June 30, 2001, the Company continued its cost-
savings efforts including the elimination of certain positions resulting in
additional terminations of employees. The total severance including cash and
accelerated stock vesting totaled $0.9 million during the quarter ended June 30,
2001.
12
6. Properties Held for Sale
As part of the Company's ongoing strategic evaluation of its portfolio
of assets, the Company has classified the following properties as held for sale
as of June 30, 2001:
a) The Company's centers in Las Vegas and Nashville are presented
as held for sale consistent with prior periods. These centers
are currently being marketed.
b) During the second quarter, the Company received unsolicited
offers on two community centers totaling 571,000 square feet.
In July 2001, the Company entered into a contract to sell one
of the centers for $7.5 million. Both of these community
centers are classified as held for sale as of June 30, 2001.
c) On July 12, 2001, the Company entered into a contract to sell
a 31-property portfolio for approximately $180 million. The
portfolio consists of nine outlet properties, 16 VF-anchored
properties and six community center properties. Three of the
six community centers in the portfolio have outlet tenants but
meet the definition, as discussed above, of community centers
due to their proximity to the local market and other property
characteristics. The community centers included in the
portfolio being sold because they are collateral under certain
common debt facilities with certain of the outlet and VF-
anchored properties. All additional references to the
portfolio include a description of 28 outlet centers and three
community centers. The contract has an anticipated closing
date in the third quarter of 2001. In addition, the Company
expects to recognize an extraordinary gain of approximately
$1.0 million upon closing this transaction due to the early
extinguishment of certain debt facilities.
The Company has reported a second quarter charge of $105.1 million
related to the adjustment of the above held-for-sale properties to their net
realizable value.
The following summary financial information pertains to the properties
held for sale at June 30, 2001 and for the six months ended June 30 (in
thousands):
2001 2000
---- ----
Revenues $ 26,902 $ 27,435
NOI $ 17,372 $ 18,376
Net income before adjustments to
carrying value of property $ 1,788 $ 2,152
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion should be read with the selected financial data in this
section and the consolidated financial statements and notes in this report.
Certain comparisons between the periods have been made on a percentage basis and
on a weighted-average square-foot basis. Comparisons on a weighted-average
square-foot basis adjust for square-footage added at different times during the
year.
Selected Financial Data
The following information should be read with the consolidated
financial statements and notes thereto included in this report.
Industry analysts generally consider Funds From Operations ("FFO") an
appropriate measure of performance for an equity REIT. FFO means net income
before extraordinary items (computed in accordance with accounting principles
generally accepted in the United States) excluding gains or losses on the sale
of real estate plus real estate depreciation and amortization. Management
believes that FFO, as defined herein, is an appropriate measure of the Company's
operating performance because reductions for depreciation and amortization
charges are not meaningful in evaluating the operating results of its
properties, which have historically been appreciating assets.
"EBITDA" is defined as revenues less operating costs, including general
and administrative expenses, before interest, depreciation and amortization and
unusual items. As a REIT, the Company is generally not subject to Federal income
taxes. Management believes that EBITDA provides a meaningful indicator of
operating performance for the following reasons: (i) it is industry practice to
evaluate the performance of real estate properties based on net operating income
("NOI"), which is generally equivalent to EBITDA; and (ii) both NOI and EBITDA
are unaffected by the debt and equity structure of the property owner.
FFO and EBITDA (i) do not represent cash flow from operations as
defined by generally accepted accounting principles, (ii) are not necessarily
indicative of cash available to fund all cash flow needs and (iii) should not be
considered as an alternative to net income for purposes of evaluating the
Company's operating performance or as an alternative to cash flow as a measure
of liquidity.
Other data that management believes is important in understanding
trends in its business and properties are also included in the following table
(in thousands, except per share data).
14
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------------
----------------------------------------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ----------------
Operating Data:
Rental revenues $ 21,671 $ 23,096 $ 44,151 $ 45,228
Property operating costs 7,061 6,967 14,041 14,034
--------------- --------------- --------------- ----------------
Net operating income 14,610 16,129 30,110 31,194
Depreciation and amortization 6,420 6,514 12,533 12,737
General and administrative 1,676 1,727 3,664 3,325
Stock compensation amortization 183 899 563 1,650
Severance and other related costs 918 - 5,931 -
Interest, net 7,802 6,791 15,578 13,122
Loss on sale of real estate - 315 - 874
Adjustment to carrying value of property 105,110 - 105,110 -
Abandoned transaction costs 8 5 46 18
Equity in losses of unconsolidated entities:
Technology venture operations - 1,207 - 3,639
Real estate operations 4,800 525 5,081 818
--------------- --------------- --------------- ----------------
Loss before minority interest (112,307) (1,854) (118,396) (4,989)
Minority interest 3,133 49 3,297 335
--------------- --------------- --------------- ----------------
Net loss (109,174) (1,805) (115,099) (4,654)
Preferred dividends - (271) (271) (542)
--------------- --------------- --------------- ----------------
Loss applicable to common stockholders $ (109,174) $ (2,076) $ (115,370) $ (5,196)
=============== =============== =============== ================
Basic loss per common share:
Net loss applicable to common
stockholders per share $ (3.50) $ (0.07) $ (3.70) $ (0.17)
=============== =============== =============== ==============
Weighted-average common shares outstanding 31,234 31,025 31,204 30,770
=============== =============== =============== ==============
Diluted loss per common share:
Net loss applicable to common
stockholders per share $ (3.50) $ (0.07) $ (3.70) $ (0.17)
=============== =============== =============== ==============
Weighted-average common shares outstanding
diluted 31,234 31,025 31,204 30,770
================================================================
15
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------------------------
2001 2000 2001 2000
-------------------------------------------------------------------
Other Data:
EBITDA:
Net loss $ (109,174) $ (1,805) $ (115,099) $ (4,654)
Adjustments:
Interest, net 7,802 6,791 15,578 13,122
Depreciation and amortization 6,420 6,514 12,533 12,737
Stock compensation amortization 183 899 563 1,650
Loss on sale of real estate - 315 - 874
Adjustment to carrying value of property 105,110 - 105,110 -
Abandoned transaction costs 8 5 46 18
Equity in losses of unconsolidated ventures 4,800 1,732 5,081 4,457
Minority interest (3,133) (49) (3,297) (335)
-------------------------------------------------------------------
$ 12,016 $ 14,402 $ 20,515 $ 27,869
===================================================================
Funds from Operations (a):
Net loss $ (109,174) $ (1,805) $ (115,099) $ (4,654)
Adjustments:
Real estate depreciation and amortization 6,142 6,236 11,954 12,190
Loss on sale of real estate - 315 - 874
Technology venture operations - 1,207 - 3,639
Adjustment to carrying value of property 105,110 - 105,110 -
Share of depreciation in unconsolidated ventures 72 181 143 391
Minority interest in Operating Partnership (3,133) (49) (3,297) (131)
-------------------------------------------------------------------
Funds From Operations (983) 6,085 (1,189) 12,309
Severance and other related costs 918 - 5,931 -
Adjustment to carrying value of other assets
held for sale 4,256 - 4,256 -
-------------------------------------------------------------------
Funds from operations, excluding severance and
held for sale charges $ 4,191 $ 6,085 $ 8,998 $ 12,309
===================================================================
Weighted-average shares outstanding diluted (b): 34,744 34,713 34,771 34,508
===================================================================
Funds Available for Distribution/Reinvestment:
Funds from Operations $ (983) $ 6,085 $ (1,189) $ 12,309
Adjustments:
Stock compensation amortization 183 899 563 1,650
Capitalized tenant allowances (509) (900) (589) (1,130)
Capitalized leasing costs (589) (525) (1,044) (979)
Recurring capital expenditures (195) (48) (592) (49)
-------------------------------------------------------------------
Funds Available for Distribution/Reinvestment (2,093) 5,511 (2,851) 11,801
Severance and other related costs 918 - 5,931 -
Adjustment to carrying value of other assets
held for sale 4,256 - 4,256 -
-------------------------------------------------------------------
Funds Available for Distribution/ Reinvestment,
excluding severance and held for sale charges $ 3,081 $ 5,511 $ 7,336 $ 11,801
===================================================================
Dividends declared on quarterly earnings $ - $ 4,635 $ 4,306 $ 9,267
===================================================================
Dividends declared on quarterly earnings per share $ - $ 0.125 $ 0.125 $ 0.250
===================================================================
Cash Flows:
Cash flows provided by operating activities $ 3,497 $ 8,028 $ 3,845 $ 12,362
Cash flows used in investing activities (4,616) (8,875) (10,490) (18,163)
Cash flows (used in) provided by financing activities (2,043) 9,798 (2,932) 12,192
-------------------------------------------------------------------
Net decrease in cash and cash equivalents $ (3,162) $ 8,951 $ (9,577) $ 6,391
===================================================================
(a) FFO is presented in accordance with National Association of Real Estate
Investment Trusts (NAREIT) Best Practices. Prior year FFO has been restated
to conform with current year presentation.
(b) The table below sets forth the computation of the denominator to be used in
calculating the weighted-average shares outstanding based on SFAS No. 128,
"Earnings Per Share."
16
Balance at June 30,
2001 2000
--------------------------
Balance Sheet Data:
Income-producing properties, including net
realizable value of properties held for sale
(before depreciation and amortization) $ 528,360 $ 734,221
Total assets $ 582,447 $ 727,133
Debt on income properties $ 405,686 $ 381,780
Total liabilities $ 428,395 $ 407,152
Minority interest $ 4,111 $ 9,423
Total stockholders' equity $ 149,941 $ 310,558
Portfolio Property Data:
Total GLA (at end of period) 9,400 9,494
Weighted average GLA 9,400 9,511
Number of properties (at end of period) 66 67
Occupancy (at end of period):
Operating 90.6% 92.3%
Held for sale/redevelopment/development 82.1% 56.0%
Three months ended Six months ended
June 30, June 30,
--------------------------------------------------------------------
2001 2000 2001 2000
--------------------------------------------------------------------
Denominator:
Denominator- weighted average common shares 31,234 31,025 31,204 30,770
Effect of dilutive securities:
Preferred stock 2,169 2,169 2,169 2,169
Operating Partnership units 932 1,020 956 1,091
Other dilutive securities 409 499 442 478
--------------------------------------------------------------------
Dilutive potential common shares 3,510 3,688 3,567 3,738
--------------------------------------------------------------------
Denominator- adjusted weighted average shares
and assumed conversions 34,744 34,713 34,771 34,508
====================================================================
17
Results Of Operations
Three Months Ended June 30, 2001 Compared to the Three Months Ended June 30,
2000
Net Income
The Company reported a net loss applicable to common stockholders of
$109.2 million, or $(3.50) per common share, for the three months ended June 30,
2001. The same period in 2000 reflected a net loss applicable to common
stockholders of $2.1 million, or $(0.07) per common share. The elements having a
material impact on the change are discussed below:
. The Company's NOI decreased by $1.5 million, or 9%, to $14.6 million from
$16.1 million for the same period in 2000. This decrease was partly
attributable to a $0.4 million decrease in NOI for the Company's Nashville
center, a $0.7 million decrease in NOI for the additional 34 properties
held for sale and a $0.4 million decrease in third-party management and
leasing fee income.
. The Company recognized a charge of $105.1 million as an adjustment to the
carrying value of certain held-for-sale properties during the three months
ended June 30, 2001.
. The Company recognized a charge of $4.3 million through equity in losses of
unconsolidated real estate ventures related to the impairment of certain
assets held by Sunset KPT Investments, Inc.
. The Company recognized losses from its unconsolidated technology venture of
$1.2 million during the three months ended June 30, 2000. The operations of
this venture ceased in December 2000.
. Net interest expense increased by $1.0 million, or 15%, to $7.8 million
from $6.8 million for the same period in 2000.
. The Company incurred severance and other related costs of $0.9 million
during the three months ended June 30, 2001.
. General and administrative expenses decreased $0.1 million and stock
compensation amortization decreased $0.7 million.
Earnings Before Interest, Taxes, Depreciation and Amortization and Funds from
Operations
EBITDA was $12.0 million for the three months ended June 30, 2001, a
decrease of $2.4 million or 17%, from $14.4 million for the same period in 2000.
The decrease was primarily due to the decrease in NOI, as discussed above, as
well as severance and other related costs incurred in 2001.
Funds from Operations ("FFO") for the three months ended June 30, 2001
decreased $6.5 million, or 106%, to $(1.0) million. The Company's FFO for the
same period in 2000 was $6.1 million. FFO decreased primarily as a result of:
. $1.5 million decrease in NOI,
. an increase in net interest expense of $1.0 million,
. an increase in losses related to unconsolidated real estate venture
investments of $4.3 million and
. $0.9 million in severance and other related costs incurred in 2001,
. offset by a $0.7 million reduction of stock compensation amortization.
Tenant Income
Base rent decreased to $17.1 million for the three months ended June
30, 2001 from $17.9 million for the same period in 2000. This decrease is
primarily due to a decrease in base rent of $0.5 million at the company's
Nashville center and decreases related to the two properties sold in May and
September 2000.
During this same period, the Company's weighted-average square feet of
gross leasable area in operation decreased 1%. Gross leasable area in operation
decreased by 0.1 million square feet primarily related to the sale of a property
in September 2000.
Recoveries from tenants decreased for the three months ended June 30,
2001 to $3.8 million compared to $4.3 million in the same period of 2000. These
recoveries represent contractual reimbursements from tenants of certain common
area maintenance, real estate taxes and insurance costs. On a weighted-average
square-foot basis, recoveries decreased 11% to $0.40 for the three months ended
June 30, 2001 when compared to $0.45 for the same period in 2000. With respect
to approximately 10% of the leased gross leasable area, the Company is obligated
to pay all utilities and operating expenses.
18
Other Income
Other income decreased $0.5 million to $0.3 million in 2001 compared to
$0.8 million in 2000 primarily as a result of a decrease in third-party
management fees and due to the timing of the recognition of leasing fee income.
Property Operating Expenses
Property operating costs increased $0.1 million, or 1%, to $7.1 million
in 2001 from $7.0 million in the same period of 2000. On a weighted-average
square-foot basis, operating expenses for the three months ended June 30, 2001
were $0.75 versus $0.74 for the same period in 2000.
General and Administrative Expenses and Stock Compensation
General and administrative expenses including stock compensation for
the three months ended June 30, 2001 decreased $0.8 million, or 3%, to $1.8
million in 2001 from $2.6 million in 2000. General and administrative expense
including stock compensation decreased as a percentage of revenues to 8% from
11% in 2000. The decrease is primarily related to the Company's down-sizing and
cost-saving efforts.
Severance and Other Related Costs
During the quarter ended June 30, 2001, the Company continued its
cost-savings efforts including the elimination of certain positions resulting in
additional terminations of employees. The total severance including cash and
accelerated stock vesting totaled $0.9 million during the quarter ended June 30,
2001.
Depreciation
Depreciation decreased to $6.4 million for the three months ended June
30, 2001 compared to $6.5 million in the same period of 2000. On a
weighted-average square-foot basis, depreciation and amortization remained
constant at $0.68.
Interest Expense
Interest expense for the three months ended June 30, 2001, net of
interest income of $0.4 million, increased by $1.0 million, or 15%, to $7.8
million compared to $6.8 million, net of interest income of $1.7 million, in the
same period of 2000. On a weighted-average basis, in the three months ended June
30, 2001, debt outstanding was $405.5 million and the average interest rate was
7.9%. This compares to $374.6 million of outstanding debt and a 7.9% average
interest rate for the same period of 2000. The Company capitalized $0.5 million
of interest costs associated with its development projects during the three
months ended June 30, 2001 compared to $0.3 million in the same period of 2000.
Additionally, the decrease in interest income is related to income on the
Company's equity investment in real estate venture projects primarily Towne
Centre in Mt. Pleasant, South Carolina, which is now wholly owned by the
Company.
Properties Held for Sale
As part of the Company's ongoing strategic evaluation of its portfolio
of assets, the Company has classified the following properties as held for sale
as of June 30, 2001:
a) The Company's centers in Las Vegas and Nashville are presented as
held for sale consistent with prior periods. These centers are
currently being marketed.
b) During the second quarter, the Company received unsolicited
offers on two community centers totaling 571,000 once the Company
entered into a contract to sell one of the centers for $7.5
million. Both of these community centers are classified as held
for sale as of June 30, 2001.
19
c) On July 12, 2001, the Company entered into a contract with an
Chelsea Property Group to sell a 31-property portfolio (the
"Outlet Portfolio Sale Agreement") for approximately
$180 million. The portfolio consists of 28 outlet properties and
three community center properties. The community centers included
in the portfolio are collateral under certain common debt
facilities. The contract has an anticipated closing date in the
third quarter of 2001. In addition, the Company expects to
recognize an extraordinary gain of approximately $1.0 million
upon closing this transaction due to the early extinguishment of
certain debt facilities.
The Company has recorded a second quarter charge of $105.1 million
related the adjustment of the above held-for-sale properties to their net
realizable value.
Results of Operations
Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000
Net Income
The Company reported a net loss applicable to common stockholders of
$115.1 million, or $(3.70) per common share, for the six months ended June 30,
2001. The same period in 2000 reflected net income applicable to common
stockholders of $5.2 million, or $(0.17) per common share. The elements having a
material impact on the change are discussed below:
. The Company's NOI decreased by $1.1 million, or 4%, to $30.1 million from
$31.2 million for the same period in 2000. This decrease is primarily due to
a reduction of third-party management fee and leasing fee income of $0.7
million, a decrease in NOI from the 35 properties held for sale of $0.3
million and a decrease of $0.1 million related to a property sold in 2000.
. The Company recognized a charge of $105.1 million as an adjustment to the
carrying value of certain held-for-sale properties in 2001.
. Net interest expense increased by $2.5 million, or 19%, to $15.6 million
from $13.1 million for the same period in 2000.
. The Company incurred severance and other related costs of $5.9 million
during the six months ended June 30, 2001.
Earnings Before Interest, Taxes, Depreciation, and Amortization and Funds from
Operations
EBITDA was $20.5 million for the six months ended June 30, 2001, a
decrease of $7.4 million or 27%, from $27.9 million for the same period in 2000.
The decrease was primarily due to decreased NOI of $1.1 million over 2000, (as
described above), $5.9 million of severance and other related costs incurred in
2001, and increased general and administrative expenses of $0.3 million.
Funds from Operations ("FFO") for the six months ended June 30, 2001
decreased $12.9 million, or 105%, to $(1.2) million. The Company's FFO for the
same period in 2000 was $12.3 million. FFO decreased primarily as a result of:
. $1.1 million decrease in NOI,
. $5.9 million in severance and other related costs incurred in 2001,
. an increase in equity in loss in unconsolidated ventures of $4.3 million,
exclusive of losses from the technology venture operations, and
. an increase in net interest expense of $2.5 million.
Tenant Income
Base rent decreased to $34.3 million for the six months ended June 30,
2001 from $34.9 million for the same period in 2000. The decrease in base rent
for the six months ended June 30, 2001 is attributable primarily to a $0.9
million decrease in base rent at the Company's Nashville center.
During this same period, the Company's weighted-average square feet of
gross leasable area in operation decreased 1%. Gross leasable area in operation
decreased by 0.1 million square feet due to the sale of a property in September
2000.
20
Recoveries from tenants decreased for the six months ended June 30,
2001 to $7.6 million compared to $8.8 million in the same period of 2000. These
recoveries represent contractual reimbursements from tenants of certain common
area maintenance, real estate taxes and insurance costs. On a weighted-average
square-foot basis, recoveries decreased to $0.81 for the six months ended June
30, 2001 compared to $0.93 for the same period in 2000. With respect to
approximately 10% of the leased gross leasable area, the Company is obligated to
pay all utilities and operating expenses.
Other Income
Other income increased $0.5 million to $1.8 million in 2001 compared to
$1.3 million in 2000 primarily as a result of a $1.2 million lease buyout in
March 2001 offset by decreased third-party management fee and leasing fee income
of $0.7 million.
Property Operating Expenses
Property operating costs remained stable at $14.0 million for the six
months ended June 30, 2001 and 2000. On a weighted-average square-foot basis,
operating expenses increased 0.7% to $1.49 from $1.48.
General and Administrative Expenses and Stock Compensation
General and administrative expenses including stock compensation for
the six months ended June 30, 2001 decreased $0.8 million, or 16%, to $4.2
million in 2001 from $5.0 million in 2000. General and administrative expense
including stock compensation decreased as a percentage of revenues to 10% from
11% in 2000. The decrease is primarily related to the Company's down-sizing and
cost-savings efforts.
Severance and Other Related Costs
C. Cammack Morton resigned as an officer and director of the Company on
March 6, 2001. In connection with his resignation, the Company and Mr. Morton
entered into a Separation Agreement and General Release. Under the separation
agreement, which was a complete settlement of Mr. Morton's rights under his
former employment agreement, the Company paid Mr. Morton $2.5 million in cash
and released him from the non-compete restrictions in his employment agreement.
In addition, the parties agreed upon Mr. Morton's rights under various equity
awards.
Mr. Morton agreed that his 225,851 vested in-the-money Repurchase
Rights and 300,000 vested out-of-the-money Repurchase Rights would remain
outstanding (and entitled to dividend equivalent rights) only until April 1,
2002. He also agreed to the immediate cancellation of his remaining 391,299
in-the-money Repurchase Rights in exchange for an additional cash payment of
$900,000, of which the Company has already paid $400,000 and will pay the
remaining $500,000 in January 2002. Mr. Morton also forfeited his interest in
140,000 out-of-the-money Repurchase Rights and 210,000 out-of-the-money stock
options in exchange for $35,000 in cash.
Patrick M. Miniutti's employment with the Company terminated on March
6, 2001, and he resigned from the Board of Directors on March 30, 2001. In
complete settlement of all rights under his former employment agreement, Mr.
Miniutti entered into a Separation and Settlement Agreement and General Release
with the Company on March 30, 2001. Pursuant to the agreement, the Company paid
a severance benefit to Mr. Miniutti consisting of $1.5 million in cash (payable
in five equal monthly installments) and the forgiveness of a $125,000 loan. The
Company also released Mr. Miniutti from the non-compete restrictions imposed by
his employment agreement.
In addition, in exchange for the issuance of 259,545 shares of common
stock (the "Settlement Shares"), Mr. Miniutti agreed to the immediate
cancellation of all rights (including dividend equivalent rights) with respect
to all equity awards granted by the Company. The shares are issuable upon the
earlier of April 1, 2002, the sale of 50% or more of the Company's voting
securities, the liquidation or winding-up of the Company or the payment by Mr.
Miniutti of an amount equal to the Company's tax withholding obligations on the
Settlement Shares. Under the agreement, Mr. Miniutti is entitled to dividend
equivalent payments with respect to the Settlement Shares for any record date
occurring after March 30, 2001 but before the issuance of the Settlement Shares.
21
In addition to the $5.1 million of severance noted above, the Company
recorded a charge of $0.8 million for additional severance and legal fees for
Mr. Morton, Mr. Miniutti and eight other Company employees in the quarter ended
March 31, 2001. The total severance and other related costs of $5.9 million is
partially offset by a $0.9 million reduction in previously amortized stock
compensation for Mr. Morton and Mr. Miniutti.
During the quarter ended June 30, 2001, the Company continued its
cost-savings efforts including the elimination of additional employees. The
total severance including cash and accelerated stock vesting totaled $0.9
million during the quarter ended June 30, 2001.
Depreciation
Depreciation decreased to $12.5 million for the six months ended June
30, 2001 compared to $12.7 million in the same period of 2000. On a
weighted-average square-foot basis, depreciation and amortization remained
constant at $1.33 in 2001 and 2000.
Interest Expense
Interest expense for the six months ended June 30, 2001, net of
interest income of $1.0 million, increased by $2.5 million, or 19%, to $15.6
million compared to $13.1 million, net of interest income of $3.8 million, in
the first six months of 2000. On a weighted-average basis, in the first six
months of 2001, debt outstanding was $403.4 million, and the average interest
rate was 8.0%. This compares to $370.3 million of outstanding debt and a 8.1%
average interest rate in 2000. The Company capitalized $1.0 million of interest
costs associated with its development projects in the first six months of 2001
compared to $1.2 million in the same period of 2000. Additionally, the decrease
in interest income is related to income on the Company's equity investment in
real estate venture projects primarily Towne Centre in Mount Pleasant, South
Carolina, which is now wholly owned by the Company.
Liquidity and Capital Resources
Cash Flows
The Company's cash and cash equivalents balance at June 30, 2001 was
$1.1 million. Restricted cash, as reported in the financial statements, as of
such date, was $14.3 million. The restricted cash is an amount the Company was
required to escrow in connection with various loans. The escrows are required to
provide additional collateral and to fund taxes, environmental and engineering
work, recurring replacement costs and insurance.
Net cash provided by operating activities was $3.8 million for the six
months ended June 30, 2001. Net cash used in investing activities was $10.5
million in that same period. The primary use of these funds included:
. $7.1 million invested in income-producing properties,
. $2.7 million placed in restricted escrows, and
. $0.8 million advanced to unconsolidated entities, offset by
. $0.1 million collected on the repayment of a note receivable.
Net cash used in financing activities was $2.9 million for the six
months ended June 30, 2001. The primary transactions included:
. $9.0 million for dividends paid,
. $4.3 million for debt repayments, offset by
. $10.5 million of net proceeds from debt on income-producing
properties.
Financing Activities
The Company's policy is to finance its activities with the source of
capital believed by management to be most appropriate and provide the proper
balance of equity and fixed and floating rate debt. Sources may include
undistributed cash flow, borrowings from institutional lenders, equity
issuances, and the issuance of debt securities on a secured or unsecured basis.
The Company's philosophy is to use its Funds Available for Distribution as a key
source of financing.
22
In December 1998, the Company completed a substitution and
recollateralization of its REMIC facility. This $95 million facility was
originally issued in May 1995 and was secured by 18 properties. The substitution
was the first step in an effort by the Company to gain greater flexibility in
the sale of assets that may no longer meet the Company's ongoing strategy. The
REMIC balance as of June 30, 2001 was $85.4 million, which was secured by 23
properties, and matures in June 2002 with the ability to prepay in December
2001. Under the terms of the Outlet Portfolio Sale Agreement, the buyer of the
outlet portfolio is to assume the REMIC Facility. See "--Outlet Portfolio Sale"
below.
An acquisition line of credit was put in place in early 1997 for $150
million. The availability under this line was based upon a predetermined formula
on the Net Operating Income of the properties that secure the facility. The $150
million line was converted into a $60 million term loan in June 2000 and is
currently secured by nine properties plus an assignment of the excess cash flow
of the REMIC facility referenced above. The loan expires the earlier of December
2002 or the termination of the REMIC facility. Concurrent with the sale of the
outlet portfolio, this loan is expected to be refinanced with a new $60 million
facility. See "--Outlet Portfolio Sale" below.
On March 11, 1998, the Company closed on a $75 million, 15-year
permanent credit facility. The loan has an effective rate of 7.73% and is
amortized on a 338-month basis. Eleven properties secure this facility. The
proceeds were used to pay down borrowings outstanding on the $150 million credit
facility. The credit facility balance as of June 30, 2001, was $65.9 million
excluding a $6.1 million unamoritized interest premium.
The Company closed on a $46.4 million 10-year mortgage loan on Mt.
Pleasant's Towne Centre in conjunction with its purchase of its partner's
interest in December 2000. The 30-year amortized loan bears interest at 7.58%.
Certain escrows totaling approximately $2.1 million are in place for leasing,
earnout or tenant allowance. $1.0 million of the cash held in escrow may be
replaced with a letter of credit. The balance on this loan as of June 30, 2001
was $46.2 million.
On January 11, 2000, the Company closed on a $5 million credit facility
with a bank. In March 2000, the available borrowings were increased by $5
million to $10 million. The credit facility has an interest rate of LIBOR plus
2%. The balance as of June 30, 2001 was $10 million and matures on August 31,
2001. The credit facility is secured by a community center. The Company is
currently in discussions with the lender to secure an extension to this credit
facility.
The Company has a $2.5 million line of credit with a financial
institution which expires on September 30, 2001. The line of credit is secured
by one of the Company's income-producing community center properties and has an
interest rate of prime plus 1/2%. The balance as of June 30, 2001 was $0.4
million.
The Company may enter into additional mortgage indebtedness related to
certain development projects. Generally, the Company's policy is to extend loans
to unconsolidated entities only upon terms similar to those that would be made
by third parties.
Any additional debt financing, including additional lines of credit,
may be secured by mortgages on the properties. Such mortgages may be recourse or
non-recourse or cross-collateralized or may contain cross-default provisions.
The Company does not have a policy limiting the number of mortgages that may be
placed on, or the amount of indebtedness that may be secured by, any particular
property; however, current mortgage financing instruments do limit additional
indebtedness on such properties.
Outlet Portfolio Sale
On July 12, 2001, the Company entered into an agreement with an
affiliate of Chelsea Property Group Inc. to sell a portfolio of 28 outlet
shopping centers and three community centers in 17 states totaling 4.3 million
square feet for $180 million. The agreement is subject generally only to third-
party deliverables, including but not limited to final title and survey due
diligence as well as lender consents. The sale is expected to close prior to
September 30, 2001.
Concurrent with the sale of the outlet assets, the Company will
refinance certain existing debt with a new credit facility of approximately $60
million to be secured by 14 community centers. The term of the debt is for three
years at a rate of 320 basis points over one month LIBOR.
The consummation of the transaction with Chelsea will include the
assumption and/or paydown of approximately $165 million in current indebtedness
secured by the sold properties. Net proceeds from the sale of the outlets and
the $60 million financing is expected to be approximately $15 million after all
transaction costs and repayment of other debt.
23
Lazard Transaction
On August 5, 1998, stockholders approved the sale of common stock to
Prometheus Southeast Retail, LLC ("PSR"), an affiliate of Lazard Freres & Co.,
LLC, for $200 million. As part of the Lazard transaction, the Company signed a
Contingent Value Rights Agreement with PSR. Under this agreement, if PSR has not
essentially doubled its investment (through stock appreciation and dividends) by
January 1, 2004, the Company will be required to pay PSR, in cash or stock at
its discretion, an amount necessary to achieve such a return, subject to a
maximum payment of 4,500,000 shares or the cash value thereof.
Current and Future Cash Needs
The Company's management anticipates that cash generated from
operations as well as planned property dispositions and access to capital
resources, including additional borrowings and issuances of debt or equity
securities, will provide the necessary funds for operating expenses, interest
expense and repayment of principal on outstanding indebtedness, current and
future severance payments, dividends and distributions in accordance with REIT
federal income tax requirements, re-tenanting and lease renewal tenant
improvement costs, capital expenditures to maintain the quality of its existing
centers as well as development projects.
Dividends
The Company's policy is to make a determination regarding its dividend
distributions quarterly following review of the Company's financial results,
capital availability, capital expenditure and improvement needs, strategic
objectives and REIT requirements. The Company's policy is to declare dividends
in amounts at least equal to 90% of the Company's taxable income, which is the
minimum dividend required to maintain REIT status. Based upon previous losses,
the Company will have approximately $10.6 million of net operating loss carry
forwards for income tax reporting purposes, which could result in no dividend
payment requirement to maintain its REIT status in 2001. Due to the uncertainty
and significant costs of the pending outlet sale and refinancing transactions,
the Company determined not to make a dividend payment during the three months
ended June 30, 2001. Pursuant to its policy stated above and with the
consummation of the outlet and financing transactions, the Company will announce
future dividend plans following the end of the third quarter of 2001.
Economic Conditions
Inflation has remained relatively low during the past three years with
certain segments of the economy experiencing disinflation, such as apparel
sales. Disinflation in this market segment has slowed the growth of tenant
sales, which adversely affects the Company's revenue due to lower percentage and
overage rents on some properties. Any weakness in the overall retail environment
as it relates to tenant sales volumes may have an impact on the Company's
ability to renew leases at current rental rates or to re-lease space to other
tenants. A decline in sales can effect renewal of tenant leases as well as the
viability of the tenant, which could result in reduced revenue. Percentage and
overage rent are directly impacted by sales volumes and represented 2% and 4% of
the Company's total revenue for the six months ended June 30, 2001 and 2000,
respectively. Continuation of this economic trend may affect the Company's
operating centers' occupancy rate, rental rates, and concessions, if any,
granted on new leases or re-leases of space. This in turn may cause fluctuations
in the cash flow from the operation and performance of the operating centers.
Disclosure Regarding Forward-Looking Statements
Some of the information in this Quarterly Report on Form 10-Q may
contain forward-looking statements. Such statements include, in particular,
statements about our plans, strategies and prospects under the headings
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." You can identify forward-looking statements by our use of forward-
looking terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue," or other similar words. Although we believe that our plans,
projections and expectations reflected in or suggested by such forward-looking
statements are reasonable, we cannot assure you that our plans, projections or
expectations will be achieved. When considering such forward-looking statements,
you should keep in mind the following important factors that could cause our
actual results to differ materially from those contained in any forward-looking
statement:
. The sale of the outlet portfolio under the terms of the Outlet
Portfolio Sale Agreement may not close or may close on different terms
than agreed upon;
24
. our markets could experience significant increases in development of retail
properties;
. the financial condition of our tenants could deteriorate;
. the costs of our development projects could exceed our original estimates;
. we may not be able to complete development, acquisition or joint venture
projects as quickly or on as favorable terms as anticipated;
. we may not be able to lease or release space quickly or on as favorable
terms as old leases;
. we may have incorrectly assessed the environmental condition
of our properties;
. an increase in interest rates would increase our debt service costs;
. we could lose key executive officers; and
. our markets may suffer decline in economic growth or increase in
unemployment rates.
Given these uncertainties, we caution you not to place undue reliance on
forward-looking statements. We undertake no obligation to disclose the results
of any revisions to these forward-looking statements that may be made to reflect
any future events or circumstances or to reflect the occurrence of unanticipated
events.
25
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The effects of potential changes in interest rates are discussed below.
Our market risk discussion includes "forward-looking statements" and represents
an estimate of possible changes in future earnings that would occur assuming
hypothetical future movements in interest rates. These disclosures are not
precise indicators of expected future results, but only indicators of reasonably
possible results. As a result, actual future results may differ materially from
those presented. See "Management's Discussion and Analysis of Results of
Operations - Liquidity and Capital Resources," which provides information
related to these financial instruments.
To meet in part long-term liquidity requirements, the Company borrows
funds at a combination of fixed and variable rates. In addition, the Company has
assumed fixed rate debt in connection with acquiring properties. The Company's
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower our overall borrowing costs.
Currently, the Company is party to an interest rate agreement which limits the
interest to a maximum of 10.66% on $58.9 million of variable rate debt. As of
June 30, 2001, the Company had approximately $93.3 million of variable rate debt
outstanding. If the weighted-average interest rate on this variable rate debt is
100 basis points higher or lower in 2001, our interest expense would be
increased or decreased approximately $0.2 million for the three months ended
June 30, 2001. The Company has $4.4 million of fixed rate debt maturing in 2001.
26
PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3. Amended and Restated Bylaws
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended June 30, 2001.
27
Signatures
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KONOVER PROPERTY TRUST, INC.
Date: August 14, 2001
By: /S/Daniel J. Kelly
-------------------------------------
Daniel J. Kelly, Executive Vice President,
Chief Financial Officer
28