-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KkAj7QEFqq/fsAwj3Q2uw1TERISm8oMy2vvoAlVLh4OYz1M2I1NjQH+hl7YJIX4e bg6OHwSx74kTLnYNnqJi5Q== 0000950168-99-001063.txt : 19990413 0000950168-99-001063.hdr.sgml : 19990413 ACCESSION NUMBER: 0000950168-99-001063 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KONOVER PROPERTY TRUST INC CENTRAL INDEX KEY: 0000899757 STANDARD INDUSTRIAL CLASSIFICATION: 6798 IRS NUMBER: 561819372 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11998 FILM NUMBER: 99584306 BUSINESS ADDRESS: STREET 1: 11000 REGENCY PARKWAY 3RD FLOOR STREET 2: EAST TOWER SUITE 300 CITY: CARY STATE: NC ZIP: 27511 BUSINESS PHONE: 9194628787 MAIL ADDRESS: STREET 1: 11000 REGENCY PKWY 3RD FLOOR STREET 2: EAST TOWER SUITE 300 CITY: CARY STATE: NC ZIP: 27511 FORMER COMPANY: FORMER CONFORMED NAME: FAC REALTY TRUST INC DATE OF NAME CHANGE: 19980217 FORMER COMPANY: FORMER CONFORMED NAME: FAC REALTY INC DATE OF NAME CHANGE: 19970618 FORMER COMPANY: FORMER CONFORMED NAME: FACTORY STORES OF AMERICA INC DATE OF NAME CHANGE: 19930403 10-K 1 KONOVER PROPERTY TRUST, INC. 10-K FORM 10-K Securities and Exchange Commission Washington, D.C. 20549 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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 Commission File Number 1-11998 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 INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 11000 Regency Parkway Suite 300 Cary, North Carolina (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 27511 (ZIP CODE) (919) 462-8787 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common Stock, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of March 19, 1999, was approximately $55.5 million. As of March 19, 1999, there were 31,888,640 shares of the Registrant's Common Stock, $.01 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's definitive Proxy Statement relating to its 1999 Annual Meeting is incorporated by reference into Part III of this report. 1 KONOVER PROPERTY TRUST, INC. INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 Page PART I Item 1-Business..............................................................3 Item 2 - Properties..........................................................12 Item 3 - Legal Proceedings...................................................19 Item 4 - Submission of Matters to a Vote of Security Holders.............................................................19 Item X - Executive Officers of the Registrant................................21 PART II Item 5-Market for the Registrant's Common Equity and Related Stockholder Matters..............................................22 Item 6-Selected Financial Data...............................................23 Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operation.................................26 Item 7A - Quantitative and Qualitative Disclosures About Market .............37 Item 8-Financial Statements and Supplementary Data.........................................................................38 Item 9-Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................38 PART III Item 10-Directors and Executive Officers of the Registrant...............................................................38 Item 11-Executive Compensation...............................................38 Item 12-Security Ownership of Certain Beneficial Owners and Management........................................................38 Item 13-Certain Relationships and Related Transactions.................................................................38 PART IV Item 14-Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................38 2 PART I ITEM 1 - BUSINESS GENERAL DEVELOPMENT OF BUSINESS Konover Property Trust, Inc. (the "Company"), formerly FAC Realty Trust, Inc., was incorporated on March 31, 1993 as a self-administrated and self-managed real estate investment trust (REIT). The Company is principally engaged in the acquisition, development, operation, and ownership of retail shopping centers. The Company's revenues are primarily derived under real estate leases with national, regional and local retailing companies. Over the past five years, the Company has grown from an owner of retail outlet shopping centers with an aggregate square footage of 4.2 million to an owner of approximately 8.1 million square feet of diversified retail space consisting of: 1. 47 community shopping centers in 17 states aggregating approximately 5,871,000 square feet; 2. 10 outlet centers in 9 states aggregating approximately 2,110,000 square feet; 3. two centers aggregating approximately 167,000 square feet that are held for sale; and 4. approximately 124 acres of outparcel land located near or adjacent to certain of the Company's centers and which are being marketed for lease or sale. SIGNIFICANT TRANSACTIONS AND ACQUISITIONS UPREIT CONVERSION 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. 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 many other potential buyers of property. NORTH HILLS PORTFOLIO In March 1997 the Company purchased five community shopping centers located in the Raleigh, North Carolina area for $32.4 million from an unrelated third party. The centers total approximately 606,000 square feet and feature anchor tenants such as Winn-Dixie, Food Lion, Inc., K-Mart Corporation and Eckerd Drug. The acquisition was funded from the Company's line of credit facility. As a result of the acquisition, the Company ended 1997 with 41 shopping centers containing an aggregate of approximately 5.5 million square feet of GLA. More importantly, the transaction marked the beginning of the Company's diversification strategy. See "--Business Strategy--Acquisition and Portfolio Diversification." 3 RODWELL/KANE TRANSACTION On March 30, March 31, and May 14, 1998, the Company concluded the acquisition of eight community shopping centers located in North Carolina and Virginia from Roy O. Rodwell, Chairman and co-founder of Atlantic Real Estate Corporation ("ARC"), Mr. John N. Kane, Chairman of Kane Realty Corporation, and their affiliates. The acquired centers encompass approximately 950,000 square feet and are, in the aggregate, 94% leased. The aggregate purchase price for the acquired shopping centers was $57.1 million, consisting of the assumption of $44.3 million of fixed-rate indebtedness, the payment of $3.5 million in cash and the issuance of 974,347 limited partnership Units of the Operating Partnership. Of the purchase price, 292,447 Units and $0.8 million in cash will be issued or paid on a delayed or contingent basis. The contingencies include the attainment of certain property performance thresholds and the sale, lease or development of certain outparcels. The purchase price for the acquisition was determined as a result of arms-length negotiation between the Company and the sellers, with the Units being valued at $9.50 per share. The ninth and final center covered by the Rodwell/Kane acquisition agreement will be managed by the Company and is expected to be acquired in the year 2000. Its acquisition prior to the year 2000 would trigger an onerous loan assumption fee. KONOVER & ASSOCIATES SOUTH TRANSACTION On February 24, 1998, the Company entered into definitive agreements with affiliates of Konover & Associates South, a privately held real estate development firm based in Boca Raton, Florida, to acquire eleven community shopping centers. The Company acquired nine of the Konover & Associates South community shopping centers for a total purchase price of $85.4 million consisting of $55.2 million in debt assumption, $26.8 million in cash and 369,000 of Operating Partnership Units, valued at $9.50 per share. Of the original eleven community centers, the remaining two will continue to be managed by the Company, but will not be acquired. For financial reporting purposes, the nine Konover properties were recorded effective April 1, 1998, since the risks and rewards of ownership had passed to the Company and there were no significant conditions outstanding. All of the acquired properties are held directly or indirectly, by KPT Properties, L.P. In December 1997, the Company issued a note receivable of $8.5 million to Davie Plaza Limited Partnership, a Florida limited partnership of which Simon Konover, Chairman of the Company, is a 49% owner. The loan is secured by a first mortgage position on a 299,778-square foot retail shopping center located in Davie, Florida. In January, 1999, the Company received a $2 million paydown. The outstanding balance is now $6.5 million and carries interest at LIBOR plus 2.50% payable monthly and matures on June 30, 1999. The initial loan was made in anticipation of the Company's acquisition of the center as part of the Konover & Associates South transaction and to take advantage of the ability to repay the previous debt instrument at a discount. The center was ultimately not acquired by the Company. On August 10, 1998, following stockholder approval, the Company began operating under the name "Konover Property Trust." The Company remains listed on the New York Stock Exchange and changed its ticker symbol from FAC to KPT. The Company will continue to operate an office in Boca Raton, Florida due to its strategic location in the Southeast. Simon Konover, founder of both Konover & Associates South and Konover & Associates, Inc., a $500 million plus real estate company headquartered in West Hartford, Connecticut, was elected as a non-executive Chairman of the Board of the Company in connection with the acquisition. LAZARD FRERES TRANSACTION On August 5, 1998, the stockholders approved a Stock Purchase Agreement between Prometheus Southeast Retail, LLC (including its assignee, "PSR"), a real estate investment affiliate of Lazard Freres Real Estate Investors, LLC, ("Lazard") and the Company pursuant to which PSR made a $200 million purchase of shares of Common Stock of the Company at a purchase price of $9.50 per share (the "Lazard Transaction"). The investment was made in stages, at the Company's option, through September 29, 1998, allowing the Company to obtain capital to fund its 4 future acquisition and development plans as well as retire debt. Upon completion of funding, PSR owned an equity interest in the Company of approximately 58%, on a diluted basis. As a result of subsequent stock repurchases by the Company, PSR's ownership interest in the Company is 61%, assuming conversion of outstanding preferred stock and units into shares. Under the terms of the Lazard transaction agreements, for as long as PSR's investment in the Company is $50 million or more, PSR has the right to participate in future equity issuances to preserve its ownership interest. As part of the Lazard Transaction, and as approved by the stockholders, three representatives of Lazard were elected to the Company's Board of Directors, which currently has a total of nine directors. With three members of the Board, PSR is able to prevent any action requiring super-majority board approval, such as: (i) significant acquisitions and sales, (ii) the incurrence of additional indebtedness beyond a stated level, (iii) significant issuances of capital stock and other securities, (iv) amendments to the character of bylaws of the Company in a manner that would be materially adverse to PSR, and (v) transactions that would result in any person, other than PSR, holding more than 15% of the voting power of the Company. Pursuant to the Contingent Value Rights Agreement, if PSR has not doubled its investment (through stock appreciation and dividends) by January 1, 2004, the Company will pay PSR, in cash or stock, an amount necessary to achieve such a return, subject to a maximum payment of 4,500,000 shares or the cash value thereof. JOINT VENTURES ATLANTIC REAL ESTATE CORPORATION (ARC). As a result of the Company's relationship with Roy Rodwell, on September 22, 1997, the Company and ARC formed a limited liability company known as Atlantic Realty, LLC to develop and manage retail community and neighborhood shopping centers in North Carolina. The venture plans to develop nearly one million square feet. WAKEFIELD. Much like the Company's alliance with ARC, this strategic alliance known as Wakefield Investment, Inc., was formed primarily to develop community shopping centers. The retail centers will be located within a 500-acre parcel of land zoned for commercial use known as Wakefield in Wake Forest, North Carolina. The Company will perform all leasing, property management and marketing functions for the venture. The Company will hold a 50% interest in the venture. The Wakefield development is an exclusive community expected to include a Wake County public school campus, public library, city park and an 18-hole TPC golf course. Wakefield's residential community is a 2,200-acre upscale, mixed-use development of 3,400 homes priced from $225,000 to $1 million; 75% of the community has been pre-sold to nationally recognized builders. MOUNT Pleasant. The Company has entered into a strategic venture, known as Mount Pleasant, LLC, with a local Charleston, South Carolina developer, AJS Group. The venture will develop a 425,000-square foot retail/entertainment shopping center in Mt. Pleasant, South Carolina. Construction on the center, to be named Mt. Pleasant Towne Centre, began in May 1998, with opening targeted for Summer 1999. Belk Department Store; Barnes and Noble; Bed, Bath and Beyond and The Gap will be the primary anchors for the center. A summary of the Company's investment in venture companies at December 31, 1998 and 1997, is as follows (all investments are accounted for under the equity method, in thousands):
Amounts Invested (in thousands) -------------------------- December 31, Location Ownership % 1998 1997 -------- -------------- -------------------------- Atlantic Realty North Carolina 50% $ 7,442 $ 2,803 Mount Pleasant KPT Mount Pleasant, SC 50% 18,759 1,480 Wakefield Investment Wake Forest, NC 95% 570 - Falls KPT Raleigh, NC 50% 5,472 - ------------- ------------ $32,243 $ 4,283 ============= ============
At December 31, 1998, a majority of the properties owned by the ventures were under development and had no operations with the exception of a center in Pembroke, North Carolina, which is a project with Atlantic Realty. The 5 operations of the Pembroke center were immaterial during 1998. The acquisition and development of the above properties are 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 all of the above transactions will be consummated. All debt incurred by the ventures is non-recourse to the Company and is secured by their respective properties and guaranteed by the Company's respective venture partners. During 1998, the Company made advances in the form of notes receivable to a venture totaling $10.6 million, which includes the Company's interest in the Lake Carmel, New York development site. Of this amount, $7.2 million carries interest at 11% per annum plus participation in profits and matures August 2001. The remaining $3.4 million carries interest at 15% and matures March 28, 1999. ACQUISITION SUMMARY (IN THOUSANDS)
OP UNITS STATE PURCHASE ($9.50 LOCATION DATE SQUARE FEET PRICE DEBT ASSUMED CASH PER SHARE) -------------- --------- ---------- ----------- ------------ ------------ ---------- 1999 TO DATE Roberson Corners SC 1/6/99 48 $ 3,900 $ - $ 3,900 - Dukes Plaza VA 3/1/99 140 6,500 4,100 2,400 - --------- ---------- ----------- ------------ ------------ ---------- TOTAL 188 10,400 4,100 6,300 - 1998 Waverly Place NC 12/14/98 181 12,800 10,700 2,100 - University Shoppes SC 8/31/98 54 4,700 3,200 1,500 - Konover (portfolio) FL, NC, VA, AL 4/1/98 1,518 85,400 55,200 26,700 369 Kane (portfolio) NC, VA 3/31/98 955 57,100 44,300 3,500 974 (1) Market Square VA 1/7/98 56 3,100 2,300 800 - -------------- --------- ---------- ----------- ------------ ------------ ---------- TOTAL 2,764 163,100 115,700 34,600 1,343 1997 North Hills NC 3/31/97 606 32,300 - 32,300 - (portfolio) 1996 N/A - - - - - ========== =========== ============ ============ ========== TOTAL 3,558 $ 205,800 $119,800 $ 73,200 1,343 ========== =========== ============ ============ ==========
(1) Includes 292 units to be issued upon the completion of certain contingencies contained in the acquisition agreement. RECENT DEVELOPMENTS RMC REALTY COMPANIES, LTD. The Company entered into an agreement on March 18, 1999 to acquire the operations of RMC Realty Companies, Inc., in Tampa, Florida. The acquisition is part of the Company's growth strategy in the Southeast and involves the acquisition of management and leasing contracts in excess of 7.2 million square feet in the state of Florida. The operation will carry the name RMC/Konover Property Trust, LLC and will operate as a separate business unit. The transaction is proposed to be effective April 1, 1999. STOCK REPURCHASES Subsequent to December 31, 1998 and through March 19, 1999, the Company repurchased an additional 413,200 shares of its common stock at an average share price of $5.96 for a total of $2.5 million. To date, the Company has repurchased 2,161,800 shares at an average price of $6.93 under its stock repurchase program. The Company is currently authorized to purchase an additional 1,838,200 shares. BUSINESS STRATEGY The Company's business strategy is to increase overall shareholder value through acquiring and selectively developing new properties, expanding its existing centers and by increasing the value of its assets in the portfolio through proactive asset management, leasing, marketing and financial controls. The following is a brief description of the Company's current business strategy and philosophy. 6 ACQUISITION AND PORTFOLIO DIVERSIFICATION. The Company believes that retail concepts within the retail shopping center industry are merging, and that a diversified shopping center portfolio will provide the best opportunities for growth and overall return to shareholders. This strategy involves a focus on selective acquisitions and development of retail centers. Retail centers may include, but are not limited to, community shopping centers, retail/entertainment centers and "power strip" centers. The Company believes that many opportunities for the acquisition of retail centers exist, particularly in the southeastern United States. In such acquisitions, the Company looks for strong demographics and traffic counts, good visibility and access, and the potential for enhancing cash flows through increasing rents, re-tenanting, remerchandising or future expansions. The Company intends to use its existing tenant relationships to assist in accomplishing its objectives. The 1997 acquisition of five community shopping centers from North Hills, Inc. was the beginning of the implementation of the Company's diversification strategy. This diversification strategy and focus has added, since 1997, 3.6 million square feet of shopping centers to its portfolio along with new tenants to offer a wider range of merchandise and amenities to consumers. These tenants include full-service restaurants, theaters, and entertainment. EXPANSION AND IMPROVEMENTS TO EXISTING CENTERS. The Company intends to continue selective expansion and redevelopment of its existing centers. The Company's philosophy is to expand or redevelop its existing centers in response to tenant demand. Prior to commencement of any type of development, the Company conducts a complete analysis to determine the overall shareholder benefit and requires significant tenant commitment as well. The Company intends to fund future expansions and redevelopments primarily through internally generated cash flow and its revolving credit facility. The Company's asset management team, which includes development, leasing, marketing, finance and property management personnel, continually evaluates potential opportunities at its existing centers for further expansion, remerchandising, capital improvements and renovation, all in an effort to increase property value. The Company also monitors each center's sales, occupancy and overall performance. Properties that may be underperforming are considered for re-tenanting, change of use or in some cases sale. In addition, the Company has an ongoing program of regular maintenance, periodic renovation and capital improvement of existing facilities in an effort to increase property values and tenants' sales. DEVELOPMENT OF NEW PROPERTIES. The Company believes that opportunities continue to exist to attract tenants to newly developed retail centers. The Company intends to selectively develop centers on new sites in high growth areas with easy access, good visibility and strong demographics, where a substantial percentage of lease commitments have been obtained from tenants. The Company looks for sites where it believes there is potential to expand. Accordingly, the Company generally acquires a minimum site area sufficient to develop the initial and at least one additional phase of a project, plus sufficient contiguous property to be sold or otherwise developed for complementary uses. The Company is currently in the pre-development stage of several retail community centers in the North Carolina area. The centers are proposed to be anchored primarily by well-known grocery chains. If appropriate tenant interest and necessary approvals are obtained, the Company intends to pursue development. No assurance can be given, however, that the projects will be developed. STRATEGIC ALLIANCES. The Company has entered into several strategic alliances with well-known and experienced developers, primarily in the Carolinas. The philosophy is to align itself with large developers whose reputation and/or knowledge in certain markets enhances the ability to complete development projects. These alliances may also lead to new tenant relationships and/or larger portfolio acquisitions. See "--Significant Transactions and Acquisitions -- Joint Ventures." FINANCING. The Company's policy is to finance its acquisitions, expansions and developments 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. The Company's decision to use its cash flow in this fashion results in a decrease in dividend distributions (See "Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters"). 7 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 secured by 18 properties. The substitution was the first step in an effort by the Company to gain greater flexibility in the purchase of assets and the sale of assets that may no longer meet the Company's ongoing strategy. The REMIC balance as of December 31, 1998 was $89.9 million and is now secured by 24 properties. The Company is currently in the process of obtaining bondholder approval for ongoing substitution rights based upon predetermined criteria. An acquisition line of credit was put in place in early 1997 for $150 million. The availability under this line is based upon a predetermined formula on the Net Operating Income of the properties that secure the facility. The line originally was secured by 21 properties plus an assignment of the excess cashflow of the REMIC facility referenced above. During 1998, the security on the portfolio was reduced to only five properties plus the excess cash flow of the REMIC in conjunction with both a permanent facility transaction, as described below, and a paydown. The paydown of $31 million was funded from the issuance of shares to PSR. The line was renewed for $150 million during the first quarter of 1999 through February 2000. The primary use of the line will be to fund future acquisitions and developments. The addition of newly acquired properties to the line would result in increased availability. 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 previously securing the $150 million revolving credit facility secure this new facility. The proceeds were used to pay down borrowings outstanding on the $150 million credit facility. During 1998 the Company issued 21,052,632 shares of its common stock to PSR as part of the Lazard transaction previously discussed. The total consideration was $200 million, of which $31 million was used to pay down the line of credit facility. Other equity sources have also been used in the past and may be part of a future strategy if market conditions and company needs warrant. These activities have assisted the company in reducing its interest rate risk so that only 10% of its total debt is at a floating rate. The Company may enter into additional mortgage indebtedness related to certain joint venture development projects. The Company's policy is to extend loans to joint ventures 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. MARKETING. Management believes that the major goal of marketing is to maximize sales and increase the net asset value of the Properties. The Company has analyzed the Properties based on net operating income (NOI) and created a marketing strategy to prioritize the marketing and leasing needs of each center to better utilize marketing dollars. The marketing efforts are primarily focused on the larger centers located in markets with regional customer draw. Marketing plans for each center are prepared by the marketing manager for use by the merchants, as well as for internal use by the Company's leasing department. Each marketing plan details goals, strategies and tactics to create awareness, generate traffic and maximize sales at the Properties. Marketing efforts also include utilizing an advertising agency specializing in shopping center marketing, television, radio and print advertising, billboards, special events, promotions and a public relations program. On a corporate level, information packages and the Company's internet web site are continually updated in an effort to communicate more effectively with the investment community. The web site includes a guest book to monitor investment community interest. OPERATING PRACTICES. The Company is vertically integrated, providing acquisition, development, construction, leasing, marketing and asset management services. The Company believes it can increase value to its 8 shareholders by conducting the vast majority of these services in-house. Each area has been set up along functional lines, with the Company's property management, marketing and leasing areas being staffed by individuals with industry accreditations such as CSM (Certified Shopping Center Manager), CMD (Certified Marketing Director), and CLS (Certified Leasing Specialist). The Company's leasing department has also been staffed to address the Company's philosophy regarding the changing retail environment and the Company's diversification strategy. The staff has individuals experienced in all areas of retail leasing, such as key anchors, power centers, community centers, regional malls, outlets, and specialty centers. This breadth of experience has brought to the Company a broader range of tenant relationships to position the Company for growth. The Company believes that increased focus on financial controls and information systems (IS) will be critical over the next several years to enhance the analysis and communication of financial data. In order to accomplish this, the Company has staffed its finance area with professionals with specialized knowledge in real estate finance and acquisition analysis. The IS department is continually focused on processes that will enhance the Company's systems to allow all personnel easy access to all financial and lease data in a concise format. POLICIES WITH RESPECT TO INVESTMENTS AND CERTAIN OTHER ACTIVITIES The Company's policies with respect to the activities and matters discussed in this section have been determined by the Company's Board of Directors and may be amended or revised from time to time at the discretion of the Board of Directors without a vote of the Company's shareholders. INVESTMENT POLICIES At all times, it is the policy of the Company to make investments in such a manner as to be consistent with the requirements of the Code to qualify as a REIT unless, because of changed circumstances, the Board of Directors determines that it is no longer in the best interests of the Company to qualify as a REIT. Other than the limitations provided in the Code, the Company has no stated policy that (i) limits a certain percentage of Company assets from being invested in any one type of investment or in any one property or (ii) limits the percentage of securities of any one issuer which the Company may acquire. The Company may develop new properties, purchase or lease income-producing properties for long-term investment, expand and improve the properties it owns or sell such properties, in whole or in part, when circumstances warrant. Equity investments may be subject to existing mortgage financing and other indebtedness which have priority over the Company's equity interest. These properties include outlet centers and community shopping centers across the United States. See "Business Strategy -- Acquisition and Portfolio Diversification," "-- Expansion and Improvements to Existing Centers," and "-- Development of New Properties." The Company invests in real estate and interests in real estate primarily for the purpose of producing income in the long-term, but the Company also considers the potential for long-term appreciation when making investment decisions. While the Company has emphasized, and intends to continue its emphasis, in equity real estate investments, it may, at its discretion, invest in mortgages. The Company has not previously invested in mortgages and the Company does not presently intend to invest to a significant extent in mortgages or deeds of trust, but it may invest in participating or convertible mortgages if it concludes that it may benefit from the cash flow or any appreciation in the value of the subject property. Such investments would be consistent with the Company's investment policies. The Company may also participate with other entities in property ownership through joint ventures or other types of co-ownership. The Company has invested in real estate interests through joint ventures that intend to develop community shopping centers or retail/entertainment shopping centers. See "Business Strategy -- Strategic Alliances" above for more detail. Subject to the percentage of ownership limitations and gross income tests which must be satisfied to qualify as a REIT, the Company may also invest in securities of concerns engaged in real estate activities, such as land improvement or investments consistent with the Company's investment policies, or in securities of other issuers. As disclosed above, the Company has not over the last three years invested, and does not intend to invest, in the 9 securities of any other issuer for the purpose of exercising control. In any event, the Company does not intend that its investments in securities would require the Company to register as an investment company under the Investment Company Act of 1940, and the Company would divest securities before any such registration would be required. 10 POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES The Company may, but does not presently intend to, make investments other than as described above. The Company's policies regarding certain activities (and the extent to which it has engaged in such activities during the last three years) follow: (i) The Company has authority to issue senior securities. The Company issued $19.2 million of convertible preferred (Series A) stock in 1996, but it has not otherwise issued senior securities. (ii) The Company is authorized and will continue to borrow funds to fuel its growth. See "Business Strategy -- Financing" above. See "Notes to Consolidated Financial Statements" for a summary of borrowings at December 31, 1998 and 1997. (iii) The Company has authority to make loans to others and has done so on a limited basis (see Note 5 to the Consolidated Financial Statements). The Company has no immediate plans to lend money to other entities or persons, except for loans to officers secured by their ownership of the Company's vested stock. The Board has approved loans to officers to enable them to raise funds without selling their Company stock. (iv) The Company does not invest in the securities of any other issuer for the purpose of exercising control, however, the Company may in the future acquire all or substantially all of the securities or assets of other REITs, management companies or similar entities where such investments would be consistent with the Company's investment policies. (v) The Company has not engaged in trading, underwriting or agency distribution or resale of securities of other issuers and does not intend to do so. (vi) The Company engages in the purchase and sale of investment properties, as described in more detail throughout this section and the "Business Strategy" section. (vii) The Company has authority to offer shares of its capital stock or other senior securities in exchange for property, but it has not issued Common Stock or any senior securities in exchange for property. However, the Company has acquired property in exchange for Units in the Operating Partnership. (viii) The Company has the authority to repurchase or otherwise reacquire its Common Stock or any other securities, and as of March 19, 1999 the Company had repurchased 2,161,800 shares at an average price of $6.93 under its stock repurchase program and had board approval to purchase up to another 1,838,200 shares. (ix) The Company has issued and intends to continue issuing annual reports to shareholders, with audited financial statements attached to the report. MAJOR TENANT VF Corporation ("VF"), which is one of the world's largest publicly owned apparel manufacturers, has the largest number of stores and square footage in the Company's property portfolio with 26 stores (25 of which anchor the Company's centers) and approximately 1,153,000 square feet representing 15% of the Company's total square footage. VF, through its operating subsidiaries and divisions, designs, manufactures and markets clothing apparel. Rental revenues from VF represented approximately 9.5% of the Company's 1998 rental revenues compared to 11% in 1997. The Company could be adversely affected in the event of the bankruptcy or insolvency of, or a downturn in the business of, VF or in the event that VF does not renew its leases as they expire. Since VF is the anchor tenant in 25 of the Company's 59 centers, the failure of VF to renew its leases or otherwise to continue to operate in one or more of the centers could have a material adverse impact on the performance of other tenants in the affected center (and may permit some tenants to terminate their leases) and on the Company. No other tenant accounted for more than 4% of the Company's base rental revenues or aggregate leased GLA during 1998. MAJOR TENANT LEASE EXPIRATION The following table sets forth the expiration of each of the 26 leases in place by VF at December 31, 1998: Leases to Annual Base Percentage Average Base Year Expire Leased GLA Rent of Total Rent PSF - - ---------- ------------ -------------- ------------- ------------- ------------- 1999 2 10,570 $ 40,498 0.7% $ 3.83 2000 - - - 0.0% - 2001 - - - 0.0% - 2002 - - - 0.0% - 2003 17 832,255 3,809,255 69.6% 4.58 11 2004 3 156,345 625,380 11.4% 4.00 2005 4 154,072 1,000,203 18.3% 6.49 ------------ -------------- ------------- ------------- ------------- 26 1,153,242 $5,475,336 100.0% $ 4.75 COMPETITION In seeking new investment opportunities, the Company competes with other real estate investors, including pension funds, foreign investors, real estate partnerships, other real estate investment trusts and other domestic real estate companies. On properties presently owned by the Company or in which it has investments, the Company competes with other owners of like properties for tenants. Management believes that the Company is well positioned to compete effectively for new investments and tenants. ENVIRONMENTAL MATTERS Phase I environmental site assessments and when applicable, Phase II assessments (which generally did not include environmental sampling, monitoring or laboratory analysis) have been completed by the Company with respect to all of its properties either as required by a lender or upon acquisition/development. No studies are dated prior to 1995. The Company's policy going forward is to obtain new environmental site assessments on all acquisition or development properties prior to purchase. None of these environmental assessments or subsequent updates revealed any environmental liability that management believes would have a material adverse effect on the Company. No assurances can be given that (i) the environmental assessments detected all environmental hazards, (ii) future laws, ordinances or regulations will not impose any material environmental liability, or (iii) current environmental conditions of the Properties will not be affected by tenants, by properties in the vicinity of the Properties, or by third persons unrelated to the Company. INSURANCE Management believes that each of the Properties is covered by adequate fire, flood, property and, in the case of the Vacaville center, earthquake insurance provided by reputable companies and with commercially reasonable deductibles and limits. EMPLOYEES As of March 31, 1999, the Company employed 258 persons, 118 of whom are located primarily at the Company's headquarters in Cary, North Carolina. The remaining 140 employees are property management, marketing and maintenance personnel located at the Properties including seven employees located in the Company's Boca Raton, Florida office. The Company believes that its relations with its employees are good. 12 ITEM 2 - PROPERTIES On December 31, 1998, the Company-owned properties consisted of: 1. 47 community shopping centers in 17 states aggregating approximately 5,871,000 square feet; 2. 10 outlet centers in nine states aggregating approximately 2,110,000 square feet; 3. two centers aggregating approximately 167,000 square feet that are held for sale; and 4. approximately 124 acres of outparcel land located near or adjacent to certain of the Company's centers and which are being marketed for lease or sale. The following tables set forth the location of, and certain information relating to, the Properties as of December 31, 1998:
TOTAL NUMBER LAND AREA GROSS PERCENTAGE OF ECONOMIC STATE OF CENTERS (ACRES) LEASABLE AREA TOTAL GLA OCCUPANCY - - ------------------------------------------------------------------------------------------------ COMMUNITY CENTERS Alabama 1 53.5 525,351 6.4% 92.6% Arizona 2 39.4 298,594 3.7% 87.6% Florida 5 88.6 672,730 8.3% 91.7% Georgia(5) 2 12.5 219,338 2.7% 81.7% Illinois 1 20.0 91,063 1.1% 79.2% Iowa 1 20.0 112,405 1.4% 96.5% Kentucky 2 38.0 240,506 3.0% 99.3% Louisiana(4) 2 28.7 220,281 2.7% 100.0% Mississippi 1 16.8 129,412 1.6% 100.0% Missouri 1 23.7 83,464 1.0% 100.0% Nebraska 1 21.4 89,646 1.1% 91.1% Nevada 1 25.7 229,958 2.8% 40.5% North Carolina 12 193.4 1,559,005 19.1% 93.3% South Carolina 1 7.3 54,184 0.7% 100.0% Tennessee 2 46.6 193,137 2.4% 94.5% Texas 6 97.8 515,412 6.3% 93.9% Virginia 6 73.0 636,891 7.8% 97.9% ----------------------------------------------------------------------- SUBTOTAL COMMUNITY CENTERS 47 806.4 5,871,377 72.1% 91.5% ----------------------------------------------------------------------- OUTLET CENTERS Alabama(3) 1 Lease 104,630 1.3% 91.1% California 1 52.6 447,725 5.5% 91.8% Maine 1 5.3 24,620 0.3% 94.7% Missouri 1 24.4 287,522 3.5% 85.3% New York 1 4.6 43,650 0.5% 100.0% North Carolina 1 51.6 355,756 4.4% 100.0% Tennessee 2 49.6 437,064 5.4% 93.2% Utah 1 28.9 185,281 2.3% 100.0% Washington 1 16.0 223,383 2.7% 97.8% ----------------------------------------------------------------------- SUBTOTAL OUTLET CENTERS 10 233.0 2,109,631 25.9% 94.1% ----------------------------------------------------------------------- SUBTOTAL OPERATING PROPERTIES 57 1,039.4 7,981,008 98.0% 93.2% ----------------------------------------------------------------------- ASSETS HELD FOR SALE Arizona 1 14.9 141,908 1.7% 50.9% New Hampshire 1 2.1 24,740 0.3% 54.2% ----------------------------------------------------------------------- SUBTOTAL HELD FOR SALE 2 17.0 166,648 2.0% 51.4% -----------------------------------------------------------------------
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TOTAL ALL PROPERTIES 59 1,056.4 8,147,656 100.0% 91.3% ======================================================================= LAND AREA GROSS ECONOMIC STATE CENTER CITY (ACRES) YEAR BUILT LEASABLE AREA KEY TENANTS OCCUPANCY - - ----------------------------------------------------------------------------------------------------------------- Alabama Mobile Festival Mobile 53.5 1986 525,351 Circuit City, Marshall's, Office Max, PharMor, Wal Mart 92.6% Arizona Mesa Mesa 26.9 1987 171,019 Vanity Fair 86.0% Tucson Tucson 12.5 1984 127,575 Vanity Fair 89.7% Florida Graceville Graceville 25.0 1985 83,962 Vanity Fair 95.8% Hollywood Hollywood 14.4 1968 140,751 Winn-Dixie, Festival Eckerd 91.2% Lake Point West Palm 13.6 1997 119,570 Winn-Dixie, Centre Beach Walgreens 85.8% Oakland Park Oakland 14.5 1966 132,226 Winn-Dixie, Eckerd 83.9% Square One Stuart 21.1 1989 196,221 Home Depot. Pets Mart 99.1% Georgia Lake Park Lake Park 12.5 1989 141,587 Carolina Pottery 71.6% South Cobb Smyrna Lease 1967 77,751 Cub Foods 100.0% Festival (5) Illinois West Frankfort West 20.0 1990 91,063 Vanity Fair 79.2% Frankfort Iowa Story City Story City 20.0 1990 112,405 Vanity Fair 96.5% Kentucky Georgetown Georgetown 16.7 1991 176,615 Carolina Pottery 99.0% Hanson Hanson 21.3 1989 63,891 Vanity Fair 100.0% Louisiana Arcadia Arcadia 28.7 1989 89,528 Vanity Fair 100.0% Iowa (4) Iowa Lease 1989 130,753 Vanity Fair 100.0% Mississippi Tupelo Tupelo 16.8 1987 129,412 Vanity Fair, US 100.0% Factory Outlet Missouri Lebanon Lebanon 23.7 1985 83,464 Vanity Fair 100.0% Nebraska Nebraska City Nebraska City 21.4 1985 89,646 Vanity Fair 91.1% Nevada Las Vegas Las Vegas 25.7 1992 229,958 Vanity Fair 40.5% North Bolling Creek Roanoke 5.9 1992 29,000 Food Lion 100.0% Carolina Rapids Celebration at Raleigh 11.1 1979 125,937 Revco 87.2% Six Forks Durham Festival Durham 11.8 1968 131,825 Kroger 100.0% Eastgate Raleigh 6.0 1966 52,575 Books - a - Million 100.0% Gateway (1) Wilson 18.5 1992 163,545 Winn-Dixie, Kmart 94.6% Lenoir Festival Lenoir 16.3 1968 144,239 Kmart, Bi-Lo 100.0% MacGregor Cary 21.1 1986 142,655 Eckerd 92.0% Northridge Raleigh 19.5 1980 165,309 Winn-Dixie 100.0% Shoreside Kitty Hawk 26.4 1993 144,389 Wal-Mart, 100.0% Seamark Grocery Stanton Square Greenville 15.0 1985 125,116 Food Lion, Eckerd 76.8% Tower Raleigh 19.3 1976 153,077 Food Lion, Kerr Drug 96.9% Waverly Place Cary 22.5 1987 181,338 Regal Cinemas, (2) Eckerd 81.2% South University Conway 7.3 1997 54,184 Food Lion, Revco 100.0% Carolina Shoppes Tennessee Tri Cities Tri Cities 23.3 1990 132,908 Carolina Pottery 92.0% Union City Union City 23.3 1988 60,229 Vanity Fair 100.0% Texas Corsicana Corsicana 20.0 1989 63,605 Vanity Fair 100.0% Hempstead Hempstead 14.8 1989 63,605 Vanity Fair 100.0% LaMarque LaMarque 19.2 1990 176,071 Westpoint Pepperell 82.2% Livingston Livingston 15.0 1989 63,605 Vanity Fair 100.0% Mineral Wells Mineral Wells 15.5 1989 63,609 Vanity Fair 100.0% Sulphur Springs Sulphur 13.3 1986 84,917 Vanity Fair 100.0% Springs Virginia Brookneal Brookneal 5.4 1993 25,000 Food Lion 100.0% Food Lion Plaza Petersburg 5.4 1984 50,280 Food Lion 94.0% Keysville Keysville 3.7 1993 36,680 Food Lion, Revco 100.0% Market Square Danville 9.8 1989 55,909 Food Lion, Revco 97.9% Towne Square Roanoke 35.0 1987 301,561 Office Max, MJ Design 97.0% Virginia Tech University Mall Blacksburg 13.7 1973 167,461 Math Emporium 100.0% -------------------------------------------------------------------- SUBTOTAL COMMUNITY CENTERS 806.4 5,871,377 91.5% --------------------------------------------------------------------
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OUTLET CENTERS Alabama Boaz (3) Boaz Lease 1982 104,630 Vanity Fair 91.1% California Vacaville Vacaville 52.6 1988 447,725 GAP, Nike, 91.8% Vanity Fair Maine Kittery Kittery 5.3 1987 24,620 Bugle Boy, 94.7% London Fog Missouri Branson Branson 24.4 1995 287,522 Vanity Fair, 85.3% Spiegel New York Lake George Lake George 4.6 1987 43,650 Levi's 100.0% North Smithfield (1) Smithfield 51.6 1988 355,756 GAP, Nike, Liz 100.0% Carolina Claiborne Tennessee Crossville Crossville 16.5 1988 151,256 Vanity Fair 96.0% Nashville Nashville 33.1 1993 285,808 GAP 91.7% Utah Draper Draper 28.9 1986 185,281 Vanity Fair, Adidas 100.0% Washington North Bend North Bend 16.0 1990 223,383 Vanity Fair, Nike 97.8% --------------------------------------------------------------------- SUBTOTAL OUTLET CENTERS 233.0 2,109,631 94.1% --------------------------------------------------------------------- SUBTOTAL OPERATING PROPERTIES 1039.4 7,981,008 93.2% --------------------------------------------------------------------- ASSETS HELD FOR SALE Arizona Casa Grande Casa Grande 14.9 1991 141,908 Westpoint 50.9% Pepperell New Conway Conway 2.1 1985 24,740 54.2% Hampshire --------------------------------------------------------------------- SUBTOTAL HELD FOR SALE 17.0 166,648 51.4% --------------------------------------------------------------------- TOTAL ALL PROPERTIES 1056.4 8,147,656 91.3% =====================================================================
1. Expansion under development. 2. Redevelopment - adding key anchor tenant. 3. The Company holds this property pursuant to a lease which has renewal options through 2027. The Company has the right to purchase the land and building during any term for a total of $25,000 plus the present value of any future rental payments due during the remaining term. The Company's monthly rental payments during the current term are $500 through and including January 31, 1999; $750 from February 1, 1999 through and including January 31, 2002; and $1,000 throughout the remainder of the term and any renewal terms. The current term expires January 31, 2007. 4. The Company holds a ground lease at its Iowa, Louisiana center which has renewal options through 2087. 5. The Company holds a ground lease at Smyrna, Georgia at an annual payment of approximately $27,000 and matures in 2026. PROPERTIES HELD FOR SALE As part of the Company's ongoing strategic evaluation of its portfolio of assets, management has been authorized to pursue the sale of certain properties that currently are not fully consistent with or essential to the Company's long-term strategies. Management plans to evaluate all properties on a regular basis in accordance with its strategy for growth and in the future may identify other properties for disposition or may decide to defer the pending disposition of those assets now held for sale. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," assets held for sale are valued at the lower of carrying value or fair value less selling costs. Accordingly, in the fourth quarters of 1996 and 1995, the Company recorded a non-cash $5.0 million and $8.5 million adjustment to the carrying values of the properties held for sale. On April 30, 1998, the Company sold a property it was holding for sale for $5.7 million resulting in a loss of $0.4 million. The Company continues to operate the other two properties held for sale as of December 31, 1998 and is actively marketing these properties. After recording the $5.0 million and $8.5 million valuation adjustment in 1996 and 1995, respectively, the net carrying value of assets currently being marketed for sale at December 31, 1998 and 1997 are $6.0 million and $12.5 million, respectively. There was less than $0.1 million of debt associated with these properties held for sale at December 31, 1998. The following summary financial information pertains to the properties held for sale for the year ended December 31: 1998 1997 1996 ---- ---- ---- Revenues $ 409 $ 1,100 $ 2,100 Net loss after operating 15 and interest expenses $ (920) $(1,100) $(1,000) ====== ======= ======= PLANNED EXPANSIONS/REDEVELOPMENTS The Company has one expansion project planned for 1999. The expansion would add another 87,000 gross leasable square feet to the Company's Smithfield, North Carolina center at a cost of $9.5 million. All of such expansion space has been preleased. In undertaking developments and expansions, the Company will incur certain risks, including the expenditure of funds on, and the devotion of management's time to, projects which may not come to fruition. In addition, completion of planned developments and expansions will be subject to the availability of adequate debt or equity financing. Other risks inherent in development and expansion activities include possible cost-overruns, work stoppages and delays beyond the reasonable control of the Company. Accordingly, there can be no assurance if or when any or all of the Company's planned expansions or any other development or expansion project will be completed or, if completed, that the costs of construction will not exceed, by a material amount, estimated costs. ADDITIONAL INFORMATION ABOUT CERTAIN CENTERS As of December 31, 1998, the Company's center at Vacaville, California, had a book value of 14% of the total assets of the Company and generated gross revenue in 1998 that accounted for approximately 13% of the Company's 1998 aggregate gross revenue. No other existing or planned center accounts for greater than 10% of either the Company's 1998 aggregate gross revenue or the Company's total assets at December 31, 1998. The Company holds title to the Vacaville center in fee simple, but the property is one of 24 that secures $89.9 million of Collaterialized Mortgage Notes. The Class B and C Mortgage Notes are payable in monthly payments of interest only at 7.87% and 8.4%, respectively. The Class A Mortgage Note is payable in a monthly principal payment ranging from $135,000 to $173,000 determined using various parameters plus monthly interest at 7.51%. Unpaid principal and accrued interest will be due in June, 2002, with a balloon payment of $46.7 million. The Vacaville, California center is located on 53 acres at the intersection of Interstate 80 and Nut Tree Road, approximately 60 miles east of San Francisco and 30 miles west of Sacramento, the state capital. Phase I of the center, which opened in 1988, contains approximately 206,000 square feet of GLA. Phase II, which opened in 1992, contains approximately 120,000 square feet of GLA. Phase III, which also opened in 1992, contains approximately 122,000 square feet of GLA. The Company has added various tenants over the last several years as part of its overall strategy of remerchandising key centers. Specific tenants which have been added to the roster of over 100, are The Gap and Nike. The center's other major tenants include: Vanity Fair, Levi's, Reebok, 9 West and Carter Children's Wear, but no one tenant represents more than ten percent of the center's total GLA. The Company currently has no plans to further expand or renovate the property. The realty tax rate on the property is $18.40 per $1,000 of assessed value, and in 1998, the annual property taxes on the Vacaville center were $1.4 million. The city of Vacaville developmental plans continue to allow the building of additional retail stores, restaurants, and area services in the properties adjacent to the Company's Center creating a hub of retail activity in this newly built area. Interstate 80 motorists exit off the side of the freeway on which the center is located, however, due to close proximity, the neighboring complexes (which offer some name brand discounters) appear to be monogamous with the Vacaville center. This can cause customer confusion. The Company has countered this perception with an advertising campaign geared toward our shopper. The following table discloses the occupancy rate and average effective annual rental revenue per square foot, with respect to the Vacaville center, for each of the last five years ending December 31, 1998: 16 Annual Rental Revenue Year ended December 31, Occupancy Rate per Sq. Ft.(1) ----------------------- -------------- -------------- 1998 92% $21.75 1997 92% $22.12 1996 89% $22.58 1995 88% $27.94 1994 92% $27.58 (1) Annual Rental Revenue consists of base and percentage rents plus recoveries from tenants, excluding anchors. The following table shows the lease expirations for tenants in occupancy as of December 31, 1998 for the Vacaville center (assuming that none of the tenants exercise renewal options): PRO FORMA AVERAGE ANNUALIZED % OF ANNUAL LEASES TO LEASED GLA BASE RENTAL TOTAL BASE RENT YEAR EXPIRE(1) (SQ. FT.)(2) REVENUE REVENUE PER SQ. FT.(3) - - --------------------------------------------------------------------------- 1999 27 86,183 $1,166,619 17.4% $13.54 2000 20 67,860 1,194,059 17.9% 17.60 2001 28 90,771 1,517,567 22.7% 16.72 2002 7 32,645 585,415 8.8% 17.93 2003 19 106,146 1,738,025 26.0% 16.37 2004 3 15,600 265,200 4.0% 17.00 2005 0 0 0 0.0% 0.00 2006 1 6,000 114,000 1.7% 19.00 2007 0 0 0 0.0% 0.00 2008+ 1 5,600 100,800 1.5% 18.00 -------------------------------------------------------------- TOTALS 106 410,805 $6,681,685 100.0% $16.26 ============================================================== (1) Expirations assume no renewals or releasing for tenants in occupancy as of December 31, 1998. (2) Total leased GLA is not equal to leasable GLA due to vacancies. (3) Annual base rents in place at December 31, 1998. Management believes that all of its properties, including the Vacaville center, are adequately insured. For a description of the Vacaville center's Federal tax basis, rate, method and life claimed with respect to the property, see Schedule III to the Company's Consolidated Financial Statements. UNDEVELOPED PARCELS The Company owns approximately 124 acres of undeveloped parcels located near certain of the Company's shopping centers. The Company has a marketing program to lease, develop or sell the parcels it owns through third- party brokers. During 1998, 11.7 acres were sold at $1.5 million which resulted in a $0.4 million gain. Because property held for sale by a REIT is subject to significant restrictions imposed by the Code, the Company has formed a non-qualified REIT subsidiary under Section 356 of the Code. By using a non-qualified REIT subsidiary, the Company anticipates it will be not be subject to the 100% tax imposed on the gain derived from the sale of certain outparcels of land owned by the Company. 17 TENANTS GENERAL. Management believes the Properties offer tenants a diverse tenant mix, which includes many well-known retailers. A large portion of the Company's tenants are also large, publicly traded companies. The Company's current core tenant mix at its properties and developments feature such well-known retailers as Belk, Food Lion, Winn Dixie, Eckerd, K-Mart, Wal-Mart, Nike, The Gap, Liz Claiborne, Vanity Fair, 9 West, L'eggs/ Hanes/Bali, Levi's and Mikasa. TENANT LEASES. The majority of the leases with the Company's tenants have terms of between five and ten years. While many of these leases are triple-net leases which require tenants to pay their pro rata share of utilities, real estate taxes, insurance and operating expenses, as of December 31, 1998, 14% of the aggregate GLA of its shopping centers was leased to tenants under gross leases, pursuant to which the Company is obligated to pay all utilities and other operating expenses of the applicable center. VF is the Company's largest tenant. See "Item 1 -- Business -- Major Tenant" for a discussion of the Company's leases with VF. LEASE EXPIRATION The following table shows tenant lease expirations for tenants in occupancy as of December 31, 1998 for the next ten years at the Properties (assuming that none of the tenants exercises any renewal option):
AVERAGE (3) LEASED ACTUAL ANNUAL BASE LEASES TO GLA BASE RENTAL % OF RENT PER YEAR EXPIRE(1) (SQ. FT.)(2) REVENUE TOTAL SQ. FT. - - ------------ ---------- ---------------- ----------------- ------------ -------------- 1999 413 1,228,764 $ 9,111,757 15.8% $ 7.42 2000 251 929,748 9,921,542 17.2% 10.67 2001 188 741,901 7,941,287 13.8% 10.70 2002 108 485,819 4,631,849 8.1% 9.53 2003 151 1,578,022 9,815,830 17.1% 6.22 2004 32 322,043 2,208,052 3.8% 6.86 2005 16 344,798 2,296,397 4.0% 6.66 2006 20 412,730 3,163,965 5.5% 7.67 2007 7 151,716 842,203 1.5% 5.55 2008+ 45 1,374,427 7,592,053 13.2% 5.52 ========== ================ =================== ============ ============== TOTAL 1,231 7,569,968 $ 57,524,935 100.0% $ 7.60 ========== ================ =================== ============ ==============
(1) Expirations assume no renewals or releasing for tenants in occupancy as of December 31, 1998. (2) Total leased GLA is not equal to leasable GLA due to vacancies. (3) Annual base rents in place at December 31, 1998. 18 TENANT CONCENTRATIONS The following table provides certain information regarding the ten largest tenants (based upon total GLA leased) and other tenants for the year ended December 31, 1998.
PERCENTAGE OF TOTAL NUMBER ACTUAL TOTAL GLA GLA OF BASE RENTAL % OF TENANT LEASED(1) LEASED STORES REVENUE TOTAL - - ---------------------------------- ------------- ------------ --------- ------------- ----------- VF Factory Outlet, Inc. 1,153,242 15.2% 26 $5,475,336 9.5% Carolina Pottery Retail Group, Inc. 278,458 3.7% 4 1,116,335 1.9% Food Lion, Inc. 247,265 3.3% 8 1,431,747 2.5% Winn-Dixie Stores, Inc.. 242,082 3.2% 5 1,545,700 2.7% Phillips-Van Heusen Corporation 218,776 2.9% 49 1,806,141 3.2% Wal-Mart Stores, Inc.. 203,528 2.7% 2 966,052 1.7% Kmart Corporation 186,107 2.5% 2 988,376 1.7% Phar-Mor, Inc. 139,116 1.8% 2 877,208 1.5% The Dress Barn, Inc. 127,440 1.7% 21 1,689,084 2.9% Bugle Boy Industries 110,285 1.4% 19 744,211 1.3% ------------- ------------ --------- ------------- ----------- 2,906,299 38.4% 138 16,640,190 28.9% Others 4,663,669 61.6% 1,093 40,884,745 71.1% ------------- ------------ --------- ------------- ----------- TOTAL 7,569,968 100.0% 1,231 $57,524,935 100.0% ============= ============ ========= ============= =========== (1) Total leased GLA is not equal to leasable GLA due to vacancies. SUMMARY OF DEBT ON INCOME PROPERTIES Outstanding Balance (in thousands) Description Maturity Interest Rate 12/31/98 12/31/97 Notes - - ------------------------------------------------------------------------------------------------------ FIXED RATE Collateralized Mortgage Notes May-02 7.51% $52,882 $ 54,583 24 Properties Collateralized Mortgage Notes May-02 7.87% 20,000 20,000 24 Properties Collateralized Mortgage Notes May-02 8.40% 17,000 17,000 24 Properties Permanent Debt Facility Mar-13 7.73% 74,754 - 11 Properties Mortgage May-17 10.13% 1,495 - Bolling Creek Mortgage Jul-18 9.75% 2,634 - Shoreside #1 Mortgage Jul-15 8.75% 3,150 - Shoreside #2 Mortgage Jul-15 9.13% 1,097 - Brookneal Mortgage Jul-15 9.13% 1,506 - Keysville Mortgage Nov-07 7.37% 15,063 - Towne Square Mortgage Nov-07 7.37% 7,135 - University Mall Mortgage Dec-02 8.48% 5,743 - Celebration Mortgage Jan-15 8.37% 2,270 - Danville Mortgage Nov-05 7.88% 6,599 - Durham Festival Mortgage May-14 7.63% 3,423 - Lenoir Festival #1 Mortgage Oct-01 8.50% 4,593 - Hollywood Festival Mortgage Nov-07 7.39% 11,097 - Lake Point Mortgage Dec-03 8.37% 9,339 - Square One Mortgage Oct-05 8.55% 10,672 - Waverly Place Mortgage Oct-08 9.22% 19,688 - Mobile Festival Mortgage Oct-17 8.38% 3,204 - University Shoppes ------------- ------------- TOTAL FIXED RATE DEBT AND WEIGHTED AVERAGE 7.96% $273,344 $ 91,583 INTEREST RATE 19
VARIABLE RATE Mortgage - Prime + 2.25% - 5,711 Lathrop Line of Credit - Prime + .50% - 736 Eastgate Revolver Feb-00 LIBOR + 2.25% 31,439 134,545 Secured ------------- ------------- TOTAL VARIABLE RATE DEBT AND WEIGHTED AVERAGE INTEREST RATE 7.37% $31,439 $ 140,992 TOTAL DEBT 7.90% $304,783 $ 232,575 ============= ============= - - ------------------------------------------------------------------------------------------------------ PERCENT OF TOTAL DEBT Fixed 89.7% 39.4% Variable 10.3% 60.6% WEIGHTED AVERAGE INTEREST RATE AT END OF PERIODS: Fixed 7.96% 7.75% Variable 7.37% 8.21% ------------- ------------- Total 7.90% 8.03% - - ------------------------------------------------------------------------------------------------------
SCHEDULE OF MATURITIES BY YEAR Year Balance Percentage - - ---------------------------- --------- 1999 $ 3,504 1.1% 2000 35,210 11.6% 2001 8,500 2.8% 2002 91,734 30.1% 2003 11,074 3.6% Thereafter 154,761 50.8% ------------- --------- Total $304,783 100.0% ============= ========= EXECUTIVE OFFICES The Company currently leases its 31,800-square foot executive offices in Cary, North Carolina and its 3,400-square foot Florida regional office in Boca Raton, Florida. ITEM 3- LEGAL PROCEEDINGS None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders on August 5, 1998 at the Carolina Inn, Chapel Hill, North Carolina. The purpose of the meeting was to obtain the approval from stockholders of record as of June 12, 1998 pertaining to the following: 1. ELECTION OF SIX DIRECTORS TO SERVE UNTIL THE 1999 ANNUAL MEETING.
C. CAMMACK PATRICK M. ROBERT O. AMICK MORTON MINIUTTI ----------------- -------- ------------------ ------- ----------------- --------- Votes % Votes % Votes % ----------------- -------- ------------------ ------- ----------------- --------- For 13,599,077 90.8 13,578,503 90.7 13,599,356 90.8 Against - - - - - Abstain 181,998 1.2 202,572 1.3 101,719 1.2 ----------------- -------- ------------------ ------- ----------------- --------- Total Voted 13,781,075 92.0 13,781,075 92.0 13,781,075 92.0 Total Shares Outstanding 14,283,566 14,283,566 14,283,566
20
WILLIAM D. J. RICHARD JOHN GILDEA EBERLE FUTRELL ----------------- -------- ------------------ ------- ----------------- --------- Votes % Votes % Votes % ----------------- -------- ------------------ ------- ----------------- --------- For 13,599,356 90.8 13,599,557 90.8 13,601,857 90.8 Against - - - - - Abstain 181,719 1.2 181,518 1.2 179,218 1.2 ----------------- -------- ------------------ ------- ----------------- --------- Total Voted 13,781,075 92.0 13,781,075 92.0 13,781,075 92.0 Total Shares Outstanding 14,283,566 14,283,566 14,283,566 2. APPROVAL TO SELL 21,052,631 SHARES OF COMMON STOCK FOR $200 MILLION OR $9.50 PER SHARE TO PROMETHEUS SOUTHEAST RETAIL, LLC ("PSR"), AN AFFILIATE OF LAZARD FRERES REAL ESTATE INVESTORS, LLC. The transaction was approved as follows: For 7,899,146 66.2 Against 777,972 6.5 Abstentions 68,011 0.6 ------------------------ ----------------------- Total Voted 8,745,129 73.3% ------------------------ ----------------------- Total Shares Outstanding (1) 11,933,566 ======================== ======================= (1) Excludes 2,350,000 shares owned by PSR as of the date of the Annual Meeting. 3. APPROVAL TO CHANGE THE COMPANY'S NAME TO "KONOVER PROPERTY TRUST, INC." THE CHANGE WAS APPROVED AS FOLLOWS: For 8,292,518 58.1 Against 270,284 1.9 Abstentions 114,315 0.8 ------------------------ ----------------------- Total Voted 8,677,117 60.8% ------------------------ ----------------------- Total Shares Outstanding 14,283,566 ======================== ======================= 4. APPROVAL TO INCREASE THE NUMBER OF SHARES AUTHORIZED FOR ISSUANCE FROM 75 MILLION TO 130 MILLION. The increase was approved as follows: For 12,049,436 84.3 Against 1,010,414 7.1 Abstentions 85,125 .6 ------------------------ ----------------------- Total Voted 13,144,975 92.0% ------------------------ ----------------------- Total Shares Outstanding 14,283,566 ======================== ======================= 5. APPROVAL TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UNDER THE COMPANY'S 1993 EMPLOYEE STOCK INCENTIVE PLAN FROM 1.1 MILLION TO 2.8 MILLION. For 7,274,051 50.9 Against 1,301,302 9.1 Abstentions 101,765 0.7 ------------------------ ----------------------- Total Voted 8,677,118 60.7% ------------------------ ----------------------- Total Shares Outstanding 14,283,566 ======================== =======================
6. APPROVAL TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UNDER THE COMPANY'S 1995 OUTSIDE DIRECTOR'S 21 The increase was approved as follows: For 7,793,513 54.6 Against 734,043 5.1 Abstentions 149,561 1.0 ------------------------ --------------------- Total Voted 8,677,117 60.7% ------------------------ --------------------- Total Shares Outstanding 14,283,566 ======================== ===================== ITEM X - EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the current executive officers of the Company.
NAME AGE POSITION C. Cammack Morton 47 President and Chief Executive Officer Patrick M. Miniutti 51 Executive Vice President and Chief Financial Officer William H. Neville 54 Executive Vice President and Chief Operating Officer Christopher G. Gavrelis 45 Executive Vice President, Management and Administration Connell L. Radcliff 44 Executive Vice President, Development Fred P. Steinmark 51 Executive Vice President Senior Vice President - General Counsel and Robin Malphrus 38 Secretary Linda M. Swearingen 34 Senior Vice President - Finance/Investor Relations Sona A. Thorburn 33 Vice President and Chief Accounting Officer
C. Cammack Morton joined the Company in December 1995 as Chief Operating Officer and was elected President and a Director in January 1996. Effective January 1, 1997, Mr. Morton became the Company's Chief Executive Officer. Prior to his affiliation with the Company, Mr. Morton served as Managing Director of Rothschild Realty, Inc. ("Rothschild") and President and Chief Executive Officer of the Charter Oak Group, Ltd. (the "Charter Oak Group"), a subsidiary of Rothschild engaged in the development and management of factory outlet centers. He joined Rothschild in 1987 as Vice President, was promoted to Senior Vice President in 1989 and to Managing Director in 1991. Patrick M. Miniutti joined the Company as Executive Vice President, Chief Financial Officer and Director in August 1996. Prior to his affiliation with the Company, Mr. Miniutti served for three years as Executive Vice President, Chief Financial Officer and Trustee of Crown American Realty Trust, a public REIT that owns regional shopping malls. Prior thereto, Mr. Miniutti held senior financial positions for a combined 12 years with New Market Companies, Inc., Western Development Corporation (predecessor to The Mills Corporation) and Cadillac Fairview Corporation Limited, which was preceded by ten years in public accounting, principally with national firms. Mr. Miniutti is a member of the American Institute of Certified Public Accountants and a former member of its Real Estate Accounting Committee, which was responsible for promulgating most of the real estate accounting rules in practice today. William H. Neville, has served as Executive Vice President and Chief Operating Officer since September 1997. Before joining the Company, Mr. Neville was Regional President of Horizon Group Realty, a real estate investment trust specializing in outlet centers, from January 1996 to July 1997. Prior to joining Horizon, Mr. Neville held various positions with Charter Oak Partners, a privately held outlet center developer, from January 1993 to December 1995, at which time he was the President of the company. Christopher G. Gavrelis joined the Company in December 1995. Mr. Gavrelis was named Senior Vice President in January 1996 and promoted to Executive Vice President in January 1998. Prior to his affiliation with 22 the Company, Mr. Gavrelis was Vice President - Property Management of the Charter Oak Group for approximately four years. From 1989 to 1991, Mr. Gavrelis served as regional property manager for McArthur/Glen Realty Corp. (now HGI Realty, Inc.), a company engaged in the development and operation of factory outlet centers. Mr. Gavrelis is responsible for the Company's management and administration activities. Connell L. Radcliff has served as Senior Vice President of Development since its organization in April 1993. Mr. Radcliff joined North-South Management Corporation (a predecessor company) as Vice President - Leasing in 1989. From 1987 to 1989, Mr. Radcliff was a real estate broker for The Shopping Center Group, a real estate brokerage firm specializing in national tenant representation. Mr. Radcliff is responsible for the Company's development activities. Fred P. Steinmark was named Executive Vice President in July 1998 in connection with the Company's acquisition of Konover & Associates South, of which he served, as its president since 1990. The acquisition agreement for Konover & Associates South provided for Mr. Steinmark's appointment as Executive Vice President. Linda M. Swearingen was promoted from Vice President to Senior Vice President of Finance/Investor Relations in January 1998. Prior to being named Vice President in May 1996, Ms. Swearingen was Director of Leasing for the Company, a position she had held since July 1993. From 1990 to 1993, Ms. Swearingen served as Assistant Vice President Commercial Real Estate for Bank One Dayton. Robin W. Malphrus was promoted from Vice President, Secretary and General Counsel to Senior Vice President, Secretary and General Counsel in January 1999. Prior to being named Vice President, Secretary and General Counsel in August, 1998, Ms. Malphrus was Vice President and Secretary, a position she held since June 1996. Ms. Malphrus joined the Company in August 1994 as Corporate Counsel, and prior to joining the Company, Ms. Malphrus was Corporate Counsel for North Hills, Inc. for five years. Sona A. Thorburn has served as Vice President and Chief Accounting Officer since joining the Company in 1997. Prior to joining the Company, Ms. Thorburn was a manager with the accounting firm of Ernst & Young LLP, where she was employed for eight years. At Ernst & Young, Ms. Thorburn supervised audits for a variety of clients, including the Company. PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock began trading on the NYSE, under the symbol "FAC" and subsequently changed its symbol to "KPT" on August 10, 1998 following a shareholder vote approval of the name change on August 5, 1998. As of March 25, 1999, there were approximately 497 stockholders of record. The following table sets forth the quarterly high and low sales prices of the Common Stock and dividends paid per share for 1998 and 1997:
- - ---------------- -------------------------------------- -------------------------------------- 1998 1997 - - ---------------- ------------ ------------ ------------ ------------ ------------ ------------ High Low Dividends High Low Dividends First Quarter $10 $ 7 1/8 $ 0.00 $ 6 7/8 $5 3/8 $ 0.00 Second Quarter $10 7 3/4 0.00 7 5 1/8 0.00 Third Quarter 8 11/16 6 5/8 0.00 8 7/16 6 0.00 Fourth Quarter 7 1/2 6 0.00 8 1/2 6 1/2 0.00 ------------ ------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS In November of 1998, the Company announced its intent to pay an annual dividend of $0.50 per common share, payable at the rate of $0.125 per quarter. The first payment will be made to shareholders of record as of March 15, 1999 and will be paid on March 31, 1999. A portion of the dividend payment will be a return of capital, as the Company expects to utilize its tax net loss carryover in 1999. The dividend will represent a payout ratio of less than 50% of the Company's funds from operations (FFO). 23 The Company will continue to make a determination regarding its dividend distributions annually following review of the Company's year-end financial results. The Company's policy is to declare dividends in amounts at least equal to 95% 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 $11.5 million of net operating loss carry forwards for 1999 which could result in no dividend payment requirement to maintain its REIT status. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity." The Company provides a Dividend Reinvestment Plan for stockholders of record. Information on the Plan can be obtained from the Company's transfer agent and registrar, First Union National Bank at (800) 829-8432. ITEM 6 - SELECTED FINANCIAL DATA The following information should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this report and "Management's Discussion and Analysis of Results of Operations and Financial Condition" included in Item 7 of this report. Industry analysts generally consider Funds from Operations ("FFO") an appropriate measure of performance for an equity REIT. FFO means net income (computed in accordance with generally accepted accounting principles) excluding gains or losses from debt restructuring and sales of property plus depreciation and amortization and adjustments for unusual items. 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 the Properties which have historically been appreciating assets. Beginning in 1996 the Company adopted a change in the definition of FFO as promulgated by the National Association of Real Estate Investment Trusts (NAREIT). Under the new definition, amortization of deferred financing costs and depreciation of non-real estate assets, as defined, are not included in the calculation of FFO. All prior period FFO results have been retroactively restated. "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). The earnings per share amounts prior to 1997, have been restated as required to comply with Statement of Financial Accounting Standards No. 128 "Earnings Per Share." For further discussion of earnings per share and the impact of Statement No. 128, see Note 2 to the consolidated financial statements. 24
------------ ------------- -------------- ------------ ------------ 1998 1997 1996 1995 1994 ------------ ------------- -------------- ------------ ------------ OPERATING DATA: Rental revenues $ 69,542 $ 53,726 $47,170 $47,129 $ 42,077 Property operating costs 20,625 15,671 13,975 13,648 10,454 ------------ ------------- -------------- ------------ ------------ 48,917 38,055 33,195 33,481 31,623 Depreciation and amortization 18,515 15,652 13,802 11,900 8,511 General and administrative 7,004 6,397 6,199 15,279 5,567 Interest 19,772 16,436 14,175 10,903 4,435 Loss (gain) on sale of real 512 - - - - estate Minority interest in Operating 86 - - - - Partnership Adjustment to carrying value of - - (5,000) (8,500) - assets Extraordinary (loss) on early extinguishment of debt - (986) (103) - (884) ------------ ------------- -------------- ------------ ------------ Net income (loss) $ 3,028 $ (1,416) $ (6,084) $(13,101) $ 12,226 ============ ============= ============== ============ ============ Income (loss) before $ 3,028 $ (430) $ (5,981) $(13,101) $ 13,110 extraordinary item Preferred stock dividends - - (368) - - ------------ ------------- -------------- ------------ ------------ Income (loss) before extraordinary item $ 3,028 (430) (6,349) (13,101) 13,110 applicable to common stockholders Extraordinary loss on early extinguishment - (986) (103) - (884) of debt ------------ ------------- -------------- ------------ ------------ Income (loss) applicable to common shareholders $ 3,028 $ (1,416) $ (6,452) $(13,101) $ 12,226 ============ ============= ============== ============ ============ BASIC INCOME (LOSS) PER COMMON SHARE: $ 0.16 $ (0.04) $ (0.54) $ (1.11) $ 1.11 Income (loss) before extraordinary item applicable to common stockholders Extraordinary item - (0.08) (0.01) - (0.07) ------------ ------------- -------------- ------------ ------------ Net income (loss) applicable to $ 0.16 $ (0.12) $ (0.55) $ (1.11) $ 1.04 common stockholders ============ ============= ============== ============ ============ Weighted average common shares 18,693 11,824 11,817 11,814 11,811 outstanding ============ ============= ============== ============ ============ DILUTED INCOME (LOSS) PER COMMON SHARE: Income (loss) before extraordinary item applicable to common $ 0.14 $ (0.04) $ (0.54) $ (1.11) $ 1.11 stockholders Extraordinary item - (0.08) (0.01) - (0.07) ------------ ------------- -------------- ------------ ------------ Net income (loss) applicable to $ 0.14 $ (0.12) $ (0.55) $ (1.11) $ 1.04 common stockholders ============ ============= ============== ============ ============ Weighted average common shares 21,878 11,824 11,817 11,814 11,811 outstanding - diluted (a) ============ ============= ============== ============ ============ 1998 1997 1996 1995 1994 ------------------------------------- ----------- ---------- --------- ---------- --------- OTHER DATA: EBITDA: Net income (loss) $ 3,028 $(1,416) $(6,084) $(13,101) $12,226 Adjustments: Interest 19,772 16,436 14,175 10,903 4,435 Depreciation and amortization 18,515 15,652 13,802 11,900 8,511 Compensation under stock plans 1,419 537 392 - - Loss (gain) on sale of assets 512 - (37) (345) - Non-recurring administrative 519 250 927 6,500 - costs Minority interest 86 - - - - Merger termination costs - 1,250 - - - Adjustment to fair value of - - 5,000 8,500 - assets Extraordinary loss on early extinguishment of debt - 986 103 - 884 =========== ========== ========= ========== ========= $ 43,851 $ 33,695 $ 28,278 $ 24,357 $26,056 =========== ========== ========= ========== =========
25
FUNDS FROM OPERATIONS: Net income (loss) $ 3,028 $ (1,416) $(6,084) $(13,101) $ 12,226 Adjustments: Straight line rent 512 (619) 383 (626) (922) Depreciation and amortization 17,814 15,254 13,513 11,722 8,428 Interest on exchangeable notes - - 553 - - Compensation under restricted 1,419 537 392 - - stock award Loss (gain) on sale of assets 512 - (37) (345) - Minority interest 86 - - - - Unusual items: Non-recurring 519 250 927 6,500 - administrative costs Merger termination costs - 1,250 - - - Adjustment to carrying - - 5,000 8,500 - value of assets Extraordinary loss on early extinguishment of debt - 986 103 - 884 =========== ========== ========= ========== ========= $ 23,890 $ 16,242 $ 14,750 $ 12,650 $20,616 =========== ========== ========= ========== ========= WEIGHTED AVERAGE SHARES OUTSTANDING-DILUTED (A) 21,878 14,158 13,399 11,814 11,811 =========== ========== ========= ========== ========= FUNDS AVAILABLE FOR DISTRIBUTION/REINVESTMENT: Funds from Operations $ 23,890 $ 16,242 $ 14,750 $ 12,650 $20,616 =========== ========== ========= ========== ========= Adjustments: Non-recurring (519) (250) (927) (6,500) - administrative costs Merger termination costs - (1,250) - - - Capitalized tenant (4,259) (1,418) (316) (1,380) (1,340) allowances Capitalized leasing costs (2,258) (1,054) (549) (407) (402) Recurring capital (599) (845) (312) (796) (1,314) expenditures =========== ========== ========= ========== ========= $ 16,255 $ 11,425 $12,646 $ 3,567 $17,560 =========== ========== ========= ========== ========= DIVIDENDS DECLARED ON ANNUAL $ 0.00 $ 0.00 $10,142 $ 24,101 $22,681 EARNINGS =========== ========== ========= ========== ========= DIVIDENDS DECLARED ON ANNUAL EARNINGS PER SHARE $ 0.00 $ 0.00 $ 0.75 $ 2.04 $ 1.92 =========== ========== ========= ========== ========= CASH FLOWS: Cash flows from operating activities $ 18,235 $ 12,962 $ 7,649 $ 22,078 $20,674 Cash flows from investing (69,867) (62,185) (17,288) (50,854) (84,719) activities Cash flows from financing 121,749 47,061 15,018 29,134 59,750 activities =========== ========== ========= ========== ========= Net (decrease) increase in cash and cash equivalents $ 70,117 $ (2,162) $ 5,379 $ 358 $(4,295) =========== ========== ========= ========== ========= BALANCE SHEET DATA: Income-producing properties (before depreciation and amortization) $ 579,533 $ 395,325 $354,029 $357,034 $321,088 Total assets 682,449 403,626 358,612 355,095 326,270 Debt on income properties 304,783 232,575 173,695 170,067 101,193 Total liabilities 320,862 240,699 194,020 194,609 122,930 Minority interest 12,246 - - - - Total stockholders' equity 349,341 162,927 164,592 160,486 203,340 PORTFOLIO PROPERTY DATA: Total GLA (at end of period) 8,148 5,503 4,865 4,626 4,234 Weighted average GLA 7,179 5,341 4,674 4,336 3,768 Number of properties (at end of period) 59 41 36 36 35 Occupancy (at end of year): Operating 92% 93.4% 91.4% 92.3% 92.9% Development 0.0% 0.0% 69.1% 52.1% - Held for sale 51.4% 50.4% 42.9% 66.3% -
(a) The following table sets forth the computation of the denominator to be used in calculating the weighted-average shares outstanding based on Statement of Financial Accounting Standard No. 128, "Earnings Per Share":
DENOMINATOR: Denominator- weighted average shares 18,693 11,824 11,817 11,814 11,811 Effect of dilutive securities: Preferred stock 2,222 2,222 1,582 - - Employee stock options 33 69 - - - Restricted stock 328 43 - - - Operating Partnership 602 - - - - Units ----------- ----------- --------- --------- --------- Dilutive potential common shares 3,185 2,334 1,582 - - ----------- ----------- --------- --------- --------- Denominator- adjusted weighted average shares and assumed 21,878 14,158 13,399 11,814 11,811 conversions =========== =========== ========= ========= =========
26 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion should be read in conjunction with the selected financial data included in Item 6 of this report, and the consolidated financial statements and notes thereto included in Item 8 of this report. Certain comparisons between the periods have been made on a percentage basis and on a weighted average square foot basis, which adjusts for square footage added at different times during the year. Certain statements under this caption, "Management's Discussion and Analysis of Financial Condition and Results of Operations," constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). See "Forward-Looking Statements" included under this section. GENERAL DEVELOPMENT OF BUSINESS Konover Property Trust, Inc. (the "Company"), formerly FAC Realty Trust, Inc., was incorporated on March 31, 1993 as a self-administrated and self-managed real estate investment trust (REIT). The Company is principally engaged in the acquisition, development, operation, and ownership of retail shopping centers. The Company's revenues are primarily derived under real estate leases with national, regional and local retailing companies. Over the past five years, the Company has grown from an owner of retail outlet shopping centers with an aggregate square footage of 4.2 million to an owner of approximately 8.1 million square feet of diversified retail space consisting of: 1. 47 community shopping centers in 17 states aggregating approximately 5,871,000 square feet; 2. 10 outlet centers in 9 states aggregating approximately 2,110,000 square feet; 3. two centers aggregating approximately 167,000 square feet that are held for sale; and 4. approximately 124 acres of outparcel land located near or adjacent to certain of the Company's centers and which are being marketed for lease or sale. SIGNIFICANT TRANSACTIONS AND ACQUISITIONS UPREIT CONVERSION 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. 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 many other potential buyers of property. 27 NORTH HILLS PORTFOLIO In March 1997 the Company purchased five community shopping centers located in the Raleigh, North Carolina area for $32.4 million from an unrelated third party. The centers total approximately 606,000 square feet and feature anchor tenants such as Winn-Dixie, Food Lion, Inc., K-Mart Corporation and Eckerd Drug. The acquisition was funded from the Company's line of credit facility. As a result of the acquisition, the Company ended 1997 with 41 shopping centers containing an aggregate of approximately 5.5 million square feet of GLA. More importantly, the transaction marked the beginning of the Company's diversification strategy. See - "Business Strategy - Acquisition and Portfolio Diversification." RODWELL/KANE TRANSACTION On March 30, March 31, and May 14, 1998, the Company concluded the acquisition of eight community shopping centers located in North Carolina and Virginia from Roy O. Rodwell, Chairman and co-founder of Atlantic Real Estate Corporation ("ARC"), Mr. John N. Kane, Chairman of Kane Realty Corporation, and their affiliates. The acquired centers encompass approximately 950,000 square feet and are, in the aggregate, 94% leased. The aggregate purchase price for the acquired shopping centers was $57.1 million, consisting of the assumption of $44.3 million of fixed-rate indebtedness, the payment of $3.5 million in cash and the issuance of 974,347 limited partnership Units of the Operating Partnership. Of the purchase price, 292,447 Units and $0.8 million in cash will be issued or paid on a delayed or contingent basis. The contingencies include the attainment of certain property performance thresholds and the sale, lease or development of certain outparcels. The purchase price for the acquisition was determined as a result of arms-length negotiation between the Company and the sellers, with the Units being valued at $9.50 per share. The ninth and final center covered by the Rodwell/Kane acquisition agreement will be managed by the Company and is expected to be acquired in the year 2000. Its acquisition prior to the year 2000 would trigger an onerous loan assumption fee. KONOVER & ASSOCIATES SOUTH TRANSACTION On February 24, 1998, the Company entered into definitive agreements with affiliates of Konover & Associates South, a privately held real estate development firm based in Boca Raton, Florida, to acquire eleven community shopping centers. The Company acquired nine of the Konover & Associates South community shopping centers for a total purchase price of $85.4 million consisting of $55.2 million in debt assumption, $26.8 million in cash and 369,000 of Operating Partnership Units, valued at $9.50 per share. Of the original eleven community centers, the remaining two will continue to be managed by the Company, but will not be acquired. For financial reporting purposes, the nine Konover properties were recorded effective April 1, 1998, since the risks and rewards of ownership had passed to the Company and there were no significant conditions outstanding. All of the acquired properties are held directly or indirectly, by KPT Properties, L.P. In December 1997, the Company issued a note receivable of $8.5 million to Davie Plaza Limited Partnership, a Florida limited partnership of which Simon Konover, Chairman of the Company, is a 49% owner. The loan is secured by a first mortgage position on a 299,778-square foot retail shopping center located in Davie, Florida. In January, 1999, the Company received a $2 million paydown. The outstanding balance is now $6.5 million and carries interest at 8.0% payable monthly and matures on June 30, 1999. The initial loan was made in anticipation of the Company's acquisition of the center as part of the Konover & Associates South transaction and to take advantage of the ability to repay the previous debt instrument at a discount. The center was ultimately not acquired by the Company. On August 10, 1998, following stockholder approval, the Company began operating under the name "Konover Property Trust." The Company remains listed on the New York Stock Exchange and changed its ticker symbol from FAC to KPT. The Company will continue to operate an office in Boca Raton, Florida due to its strategic location in the Southeast. 28 Simon Konover, founder of both Konover & Associates South and Konover & Associates, Inc., a $500 million plus real estate company headquartered in West Hartford, Connecticut, was elected as a non-executive Chairman of the Board of the Company in connection with the acquisition. LAZARD FRERES TRANSACTION On August 5, 1998, the stockholders approved a Stock Purchase Agreement between Prometheus Southeast Retail, LLC (including its assignee, "PSR"), a real estate investment affiliate of Lazard Freres Real Estate Investors, LLC, ("Lazard") and the Company pursuant to which PSR made a $200 million purchase of shares of Common Stock of the Company at a purchase price of $9.50 per share (the "Lazard transaction"). The investment was made in stages, at the Company's option, through September 29, 1998, allowing the Company to obtain capital to fund its future acquisition and development plans as well as retire debt. Upon completion of funding, PSR owned an equity interest in the Company of approximately 58%, on a diluted basis. As a result of subsequent stock repurchases by the Company, PSR's ownership interest in the Company is 61%, assuming conversion of outstanding preferred stock and units into shares. Under the terms of the Lazard transaction agreements, for as long as PSR's investment in the Company is $50 million or more, PSR has the right to participate in future equity issuances to preserve its ownership interest. As part of the Lazard transaction, and as approved by the stockholders, three representatives of Lazard were elected to the Company's Board of Directors, which currently has a total of nine directors. With three members of the Board, PSR is able to prevent any action requiring super-majority board approval, such as: (i) significant acquisitions and sales, (ii) the incurrence of additional indebtedness beyond a stated level, (iii) significant issuances of capital stock and other securities, (iv) amendments to the character of bylaws of the Company in a manner that would be materially adverse to PSR, and (v) transactions that would result in any person, other than PSR, holding more than 15% of the voting power of the Company. Pursuant to the Contingent Value Rights Agreement, if PSR has not doubled its investment (through stock appreciation and dividends) by January 1, 2004, the Company will pay PSR, in cash or stock, an amount necessary to achieve such a return, subject to a maximum payment of 4,500,000 shares or the cash value thereof. JOINT VENTURES ATLANTIC REAL ESTATE CORPORATION (ARC). As a result of the Company's relationship with Roy Rodwell, on September 22, 1997, the Company and ARC formed a limited liability company known as Atlantic Realty, LLC to develop and manage retail community and neighborhood shopping centers in North Carolina. The joint venture plans to develop one million square feet. WAKEFIELD. Much like the Company's alliance with ARC, this strategic alliance known as Wakefield Investment, Inc., was formed primarily to develop community shopping centers. The retail centers will be located on 65 acres within a 500-acre parcel of land zoned for commercial use known as Wakefield in Wake Forest, North Carolina. The Company will perform all leasing, property management and marketing functions for the venture. The Company will hold a 50% interest in the venture. The Wakefield development is an exclusive community expected to include a Wake County public school campus, public library, city park and an 18-hole TPC golf course. Wakefield's residential community is a 2,200-acre upscale, mixed-use development of 3,400 homes priced from $225,000 to $1 million; 75% of the community has been pre-sold to nationally recognized builders. MOUNT PLEASANT. The Company has entered into a strategic venture, known as Mount Pleasant, LLC, with a local Charleston, South Carolina developer, AJS Group. The venture will develop a 425,000 square foot retail/entertainment shopping center in Mt. Pleasant, South Carolina. Construction on the center, to be named Mt. Pleasant Towne Centre, began in May 1998, with opening targeted for Summer 1999. Belk Department Store, Barnes and Noble, Bed, Bath and Beyond and The Gap will be the primary anchors for the center. 29 A summary of the Company's investment in venture companies at December 31, 1998 and 1997, is as follows (all investments are accounted for under the equity method, in thousands):
Amounts Invested (in thousands) -------------------------- December 31, Location Ownership % 1998 1997 -------- -------------- -------------------------- Atlantic Realty North Carolina 50% $ 7,442 $ 2,803 Mount Pleasant KPT Mount Pleasant, SC 50% 18,759 1,480 Wakefield Investment Wake Forest, NC 95% 570 - Falls KPT Raleigh, NC 50% 5,472 - ------------- ------------ $32,243 $ 4,283 ============= ============
At December 31, 1998, a majority of the properties owned by the ventures were under development and had no operations with the exception of a center in Pembroke, North Carolina which is a project with Atlantic Realty. The operations of the Pembroke center were immaterial during 1998. The acquisition and development of the above properties are 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 all of the above transactions will be consummated. All debt incurred by the ventures is non-recourse to the Company and is secured by their respective properties and guaranteed by the Company's respective venture partners. During 1998, the Company made advances in the form of notes receivable to a venture totaling $10.6 million, which includes the Company's interest in the Lake Carmel, New York development site. Of this amount, $7.2 million carries interest at 11% per annum plus participation in profits and matures August 2001. The remaining $3.4 million carries interest at 15% and matures March 28, 1999. ACQUISITION SUMMARY (IN THOUSANDS)
OP UNITS STATE SQUARE PURCHASE ($9.50 LOCATION DATE FEET PRICE DEBT ASSUMED CASH PER SHARE) -------------- --------- ---------- ----------- ------------ ------------ ---------- 1999 TO DATE Roberson Corners SC 1/6/99 48 $ 3,900 $ - $ 3,900 - Dukes Plaza VA 3/1/99 140 6,500 4,100 2,400 - --------- ---------- ----------- ------------ ------------ ---------- TOTAL 188 10,400 4,100 6,300 - 1998 Waverly Place NC 12/14/98 181 12,800 10,700 2,100 - University Shoppes SC 8/31/98 54 4,700 3,200 1,500 - Konover (portfolio) FL, NC, VA, AL 4/1/98 1,518 85,400 55,200 26,700 369 Kane (portfolio) NC, VA 3/31/98 955 57,100 44,300 3,500 974 (1) Market Square VA 1/7/98 56 3,100 2,300 800 - -------------- --------- ---------- ----------- ------------ ------------ ---------- TOTAL 2,764 163,100 115,700 34,600 1,343 1997 North Hills NC 3/31/97 606 32,300 - 32,300 - (portfolio) 1996 N/A - - - - - ========== =========== ============ ============ ========== TOTAL 3,558 $ 205,800 $119,800 $ 73,200 1,343 ========== =========== ============ ============ ==========
(1) Includes 292 units to be issued upon the completion of certain contingencies contained in the acquisition agreement. RECENT DEVELOPMENTS RMC REALTY COMPANIES, LTD. The Company entered into an agreement on March 18, 1999 to acquire the operations of RMC Realty Companies, Inc., in Tampa, Florida. The acquisition is part of the Company's growth 30 strategy in the Southeast and involves the acquisition of management and leasing contracts in excess of 7.2 million square feet in the state of Florida. The operation will carry the name RMC/Konover Property Trust, LLC and will operate as a separate business unit. The transaction is proposed to be effective April 1, 1999. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997. NET INCOME (LOSS) The Company reported a net income of $3.0 million, or $0.16 per common share, for the year ended December 31, 1998. The same period in 1997 saw a net loss of $1.4 million, or ($0.12) per common share. The elements having a material impact on the change are discussed below: > The Company's net operating income (NOI), exclusive of straight-line rent, increased by $12.0 million, or 32%, to $49.4 million from $37.4 million for the same period in 1997. This increase was partly attributable to the 1998 acquisitions below: Impact on NOI for the Year Ended December 31, 1998 (in millions) ------------------------------- Konover & Associates South $ 7.6 Rodwell/Kane Properties 5.4 ------------- $ 13.0 ============= > Including the effect of straight-line rent adjustment, ($1.1 million) NOI increased by $10.9 million. The Company's' acquisition activity required higher borrowing levels resulting in increased interest expenses of $3.3 million, increased depreciation and amortization of $2.9 million and increased general and administrative expenses of $0.6 million. The sale of a California property in April 1998, an outparcel and a Kentucky property in December 1998 resulted in a loss of approximately $0.5 million, while a $1.0 million extraordinary loss on extinguishment of debt was incurred in 1997. During 1998, minority interest in the Operating Partnership totaled $0.1 million. The combination of the above items provide a $4.5 million increase in net income for the year ended December 31, 1998 over the same period in 1997. EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION AND FUNDS FROM OPERATIONS EBITDA was $43.9 million for the year ended December 31, 1998, an increase of $10.2 million or 30%, from $33.7 million for the same period in 1997. The increase was due to increased NOI of $10.9 million over 1997, including adjustment for straight line rent (as described above) offset by an increase in general and administrative expenses of $0.7 million exclusive of compensation under stock plan award and non-recurring administrative as well as merger costs incurred in 1997. Funds from Operations ("FFO") for the year ended December 31, 1998 increased $7.7 million or 47% to $23.9 million. The Company's FFO for the same period in 1997 was $16.2 million. FFO increased primarily as a result of the $12.0 million increase in NOI, exclusive of straight-line rent, as described above. This increase in NOI is offset by: (1) increase in general and administrative expenses (exclusive of compensation under stock awards and non-recurring administrative expenses) of $0.7 million; (2) the increase in interest expense of $3.3 million and (3) a slight increase in non-real estate depreciation of $0.3 million. TENANT AND OTHER INCOME Base rent increased to $49.7 million for the year ended December 31, 1998 from $38.5 million for the same period in 1997. Base rent before the adjustment for straight line rent increased $12.3 million, or 32%, to $50.2 million for the year ended December 31, 1998 when compared to 1997. Base rent for the year ended December 31, 1998 attributable to the Konover and Rodwell/Kane properties was $7.4 million and $4.6 million, respectively. 31 During this same period, the Company's weighted-average square feet of gross leasable area in operation increased 34%. Gross leasable area in operation increased by 2.6 million square feet, primarily because of the acquisition of the Konover properties with 1.6 million in gross leasable area and Rodwell/Kane properties with 1.0 million in gross leasable area. These described increases were partially offset by the sales of the California and Kentucky properties of 0.2 million in gross leasable area. Recoveries from tenants increased for the year ended December 31, 1998 to $15.8 million compared to $12.7 million in the same period of 1997. 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 5% to $2.20 for the year ended December 31, 1998 when compared to $2.31 for the same period in 1997. But the average recovery of property operating expenses, exclusive of marketing and other non-recoverable operating costs, increased to 90% in 1998 from 89% in 1997. With respect to approximately 15% of the leased gross leasable area, the Company is obligated to pay all utilities and operating expenses. Other income increased $1.4 million to $3.2 million in 1998 compared to $1.7 million in 1997 primarily as a result of increased third-party management fee income of $1.6 million. As of December 31, 1998, the Company manages nine centers versus one center for the same period in 1997. In addition, prior to the closing on the eight Rodwell/Kane properties, the Company managed the community centers and will continue to manage the one remaining Rodwell/Kane community center. PROPERTY OPERATING EXPENSES Property operating costs increased $5.0 million, or 32%, to $20.6 million in 1998 from $15.7 million in the same period of 1997. The increase in operating costs was principally due to the increase in the weighted-average square feet in operation in 1998, which rose 34% to 7.2 million square feet in 1998 from 5.3 million square feet in 1997. On a weighted-average square-foot basis, operating expenses increased to $2.87 per weighted average square foot, up 3% from the same period in 1997. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the year ended December 31, 1998 increased $0.6 million, or 9%, to $7.0 million in 1998 from $6.4 million in 1997. General and administrative expenses in 1998 include $1.4 million in compensation under stock plan awards and $0.5 million of other non-recurring charges. General and administrative expenses in 1997 include a charge of $1.3 million related to the settlement of the termination of agreements entered into in 1995 to acquire the factory outlet centers owned by Public Employees Retirement System of Ohio (OPERS), $0.3 million in non-recurring administrative charges and $0.5 million in compensation under stock awards. Exclusive of the charges in 1998 and 1997, general and administrative expenses as a percentage of revenues decreased by 1%. DEPRECIATION Depreciation increased to $18.5 million for the year ended December 31, 1998 compared to $15.7 million in the same period of 1997. The increase is due primarily to the Rodwell/Kane and Konover acquisitions. Absent the impact of these acquisitions, depreciation increased $0.3 million due to acquisitions in Danville, Virginia; Conway, South Carolina and the purchase of computer equipment throughout 1998. In 1998, the Company changed its estimated useful life for buildings and improvements from 31.5 years to 39 years. This change in estimate, resulted in a decrease in depreciation of $0.6 million. Amortization of deferred leasing and other charges remained consistent at $2.7 million. On a weighted-average square-foot basis, depreciation and amortization decreased to $2.58 in 1998 from $2.84 in 1997. INTEREST EXPENSE Interest expense for the year ended December 31, 1998, net of interest income of $5.8 million, increased by $3.4 million, or 21%, to $19.8 million compared to $16.4 million, net of interest income of $0.6 million, in 1997. This increase resulted primarily from higher borrowing levels in the first part of 1998 due to the investment in and acquisition of income-producing properties. Upon completion of the Lazard transaction, the Company paid down debt of $57.7 million in September 1998. The remaining proceeds from the Lazard transaction of $62.1 million at year-end is generating interest income at a rate of approximately 5%. On a weighted-average basis, in the first nine 32 months of 1998, debt outstanding was $299.0 million, and the average interest rate was 7.9%. This compares to $218.0 million of outstanding debt and a 7.9% average interest rate in 1997. The Company capitalized $1.0 million of interest costs associated with its development projects in 1998 compared to $1.5 million in the same period of 1997. PROPERTIES HELD FOR SALE For the year ended December 31, 1998, the properties held for sale contributed approximately $0.4 million of revenue. After deducting related interest expense on the debt associated with those properties and the $0.4 million loss on the sale of one property, the properties held for sale incurred a loss of $0.9 million. For the year ended December 31, 1997, the properties held for sale contributed approximately $1.1 million of revenue and incurred a loss of $1.1 million after deducting related interest expenses. On April 30, 1998, the Company sold the California property it was holding for sale for $5.7 million resulting in a loss of $0.4 million. YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996. The Company reported a net loss of $1.4 million, or $0.12 per common share, for the year ended December 31, 1997 compared to a net loss of $6.1 million, or $0.55 per common share, for the comparable period in 1996. The loss for 1997 resulted primarily from the following factors: > An increase in depreciation and amortization of $1.9 million as described below. > Increased interest expense of $2.2 million, as a result of higher borrowing levels. > The Company incurred an extraordinary loss on the early extinguishment of debt of $1.0 million in 1997 compared to $0.1 million in 1996. > Increase in NOI of $4.9 million including adjustment for straight-line rent. The North Hills acquisition accounted for $3.2 million of this NOI increase. > In 1996, the Company recorded a $5 million charge to operations as a result of an adjustment to the carrying value of a certain property as described below. EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION AND FUNDS FROM OPERATIONS Earnings before interest, taxes, depreciation and amortization (EBITDA) was $33.7 million for the year ended December 31, 1997, an increase of $5.4 million or 19%, from $28.3 million for the same period in 1996. The increase was due to the increase in NOI of $4.9 million, including adjustment for straight line rent, $3.2 million of which is attributable to the North Hills acquisition and a decrease of $0.5 million in the general and administrative expenses from 1996 exclusive of compensation under restricted stock awards and non-recurring administrative and merger termination costs, described below. FFO for the year ended December 31, 1997 increased $1.4 million, or 9.5%, to $16.2 million from $14.8 million for the same period in 1996. The factors that had a positive impact on 1997 FFO were an increase in NOI of $3.9 million before the adjustment for straight-line rent (net $1.0 million) and a $0.5 million decrease in general and administrative expenses exclusive of compensation under restricted stock awards and non-recurring administrative and merger termination costs, as described below. The factor that had a negative impact on 1997 FFO was $2.8 million in higher interest expense due to higher average borrowing levels, net of interest on exchangeable notes of $0.6 million in 1996. 33 TENANT AND OTHER INCOME Base rent increased to $38.5 million for the year ended December 31, 1997 from $34.1 million for the same period in 1996. The North Hills acquisition resulted in a base rent increase for 1997 of $3.4 million. Base rent before the adjustment for straight line rent increased $3.4 million to $37.9 million for the year ended December 31, 1997 when compared to 1996 attributable to the North Hills acquisition, while the Company's weighted average square feet of GLA in operation increased 13%. The increase in base rents resulted from increased GLA in operation and from increased occupancy at the operating and development centers and was offset by declining rents on renewals at certain properties. Base rental revenue in each of the years ending December 31, 1997 and 1996 included a charge to the reserve for uncollectible tenant accounts of $0.5 million. Percentage rent increased 33% to $0.8 million in 1997 from $0.6 million in 1996. The increase is due primarily to the percentage rent attributable to the community centers acquired in March 1997 of $0.1 million. Recoveries from tenants, representing contractual reimbursements from tenants of certain common area maintenance, real estate taxes and insurance costs, increased in the year ended December 31, 1997 to $12.7 million from $11.8 million in the same period in 1996. On a weighted average square-foot basis, recoveries from tenants decreased 6% to $2.38 in 1997 from $2.52 in 1996. The average recovery of property operating expenses for the year ended December 31, 1997 decreased to 81% from 84% for the same period in 1996. With respect to approximately 21% of the leased GLA, the Company is obligated to pay all utilities and operating expenses of the applicable center. Total tenant retail sales at the Company's centers increased 4.9% for the year ended December 31, 1997 compared to the same period in 1996. Tenant sales on a comparative store basis increased approximately 1.2% in 1997 compared to 1996. Other income increased $1.0 million to $1.7 million in 1997 compared to 1996 primarily as a result of increased tenant lease buyouts of $0.7 million and third party property management fee income of $0.3 million. PROPERTY OPERATING EXPENSES Operating expenses increased $1.7 million, or 12%, to $15.7 million in 1997 from $14.0 million in 1996. The increase in operating expenses was principally due to the increase in the weighted average square feet in operation in 1997, which rose 13% to 5.3 million square feet in 1997 from 4.7 million square feet in 1996. On a weighted-average square-foot basis, operating expenses decreased 1% to $2.96 in 1997 from $2.98 in 1996. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the year ended December 31, 1997 included a charge of $1.3 million related to the settlement of the termination of agreements entered into in 1995 to acquire the factory outlet centers owned by Public Employees Retirement System of Ohio (OPERS), $0.3 million in other non-recurring charges and $0.5 million in compensation under restricted stock awards. General and administrative expenses in 1996 included $0.9 million in non-recurring administrative expenses and $0.4 million in compensation under restricted stock awards. Exclusive of these charges in 1997 and 1996, general and administrative expense decreased $0.5 million, or 10% to $4.4 million in 1997 from $4.9 million in 1996. DEPRECIATION Depreciation increased $1.7 million in 1997 primarily as a result of the completion in 1996 of the center in Branson, Missouri, the expansions of the Company's properties in Story City, Iowa; Nebraska City, Nebraska; Smithfield, North Carolina and Tupelo, Mississippi, and the acquisition in March 1997 of the five community shopping centers. Amortization of deferred leasing and other charges increased $0.1 million in 1997 primarily as a result of increased tenant improvements. On a weighted average square-foot basis, depreciation and amortization of income-producing properties decreased 1% to $2.86 in 1997 from $2.89 in 1996. 34 INTEREST EXPENSE Interest expense for the year ended December 31, 1997, net of interest income of $0.6 million, increased by $2.2 million or 15%, to $16.4 million compared to $14.2 million, net of interest income of $0.6 million, in 1996. This increase resulted from higher borrowing levels in 1997 compared to 1996. On a weighted average basis, debt outstanding and the average interest cost were approximately $211 million and 8.0%, respectively, in 1997 compared to $180.0 million and 8.2%, respectively, in 1996. Amortization of deferred financing costs amounted to $1.6 million in 1997 and $1.4 million in 1996. The Company capitalized interest cost associated with its development projects of $1.5 million in 1997 and $2.0 million in 1996. In conjunction with the early extinguishment of debt, the Company expensed the related unamortized loan costs of $1.0 million in 1997 as compared to $0.1 million in 1996, which has been classified as an extraordinary item in the Consolidated Statements of Operations. PROPERTIES HELD FOR SALE As part of the Company's ongoing strategic evaluation of its portfolio of assets, the Company determined in 1995 to pursue the sale of certain properties that currently are not fully consistent with or essential to the Company's long-term strategies. Accordingly, in 1995 and 1996 the Company recorded an $8.5 and $5.0 million adjustment to the carrying value of three assets ultimately held for disposition. After recording the $13.5 million total valuation adjustment described above, the net carrying value of such assets at December 31, 1997 is $12.5 million. There is also $12.3 million of debt secured by the properties which is expected to be retired primarily from the sale proceeds. For the year ended December 31, 1997, these properties contributed approximately $1.1 million of revenue and incurred a loss of $1.1 million after deducting related interest expense on the debt associated with the properties. For the year ended December 31, 1996, such properties contributed approximately $2.1 million of revenue and incurred a loss of $1.0 million after deducting related interest expense. The reduction in the performance is principally due to the lower average occupancy level in 1997 as compared to 1996. As of December 31, 1997, two of these properties were under contract. Management periodically evaluates income producing properties for potential impairment when circumstances indicate that the carrying amount of such assets may not be recoverable. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS The Company's cash and cash equivalents balance at December 31, 1998 was $75 million. Restricted cash, as reported in the financial statements, as of such date, was $3.3 million. In connection with the Company's $95 million rated-debt securitization in 1996, the Company was required to escrow a portion of the loan proceeds. The escrow was required to fund certain environmental and engineering work and to make certain lease-related payments that may be required in connection with the renewal or termination of certain leases by a tenant at most of the factory outlet centers. Net cash provided by operating activities was $18.2 million for the year ended December 31,1998. Net cash used in investing activities was $69.9 million in that same period. The primary use of these funds included: (1) $19.8 million of cash to acquire the Rodwell/Kane and Konover portfolios and the properties in Danville, Virginia ,Conway, South Carolina and Cary, North Carolina; (2) $29.1 million invested in ventures; and (3) $14.1 million of advances the Company has made to ventures. Net cash provided by financing activities was $121.8 million for the year ended December 31, 1998. The source of such funds was $82.7 million from new borrowings in March 1998 and the proceeds of the sale of common stock to PSR of $195.4 million, both as described below. Funds generated through financing activities were offset by debt repayments of $142.5 million and stock repurchases totaling $12.3 million. 35 CURRENT AND FUTURE CASH NEEDS The Company's management anticipates that cash generated from operations will provide the necessary funds for operating expenses, interest expense on outstanding indebtedness, dividends and distributions in accordance with REIT federal income tax requirements, and funding re-tenanting and lease renewal tenant improvement costs, as well as capital expenditures to maintain the quality of its existing centers. The Company also believes that it has capital and access to capital resources, including additional borrowings and issuances of debt or equity securities, sufficient to pursue its strategic plans. LAZARD TRANSACTION On August 5, 1998, stockholders approved the Lazard transaction involving PSR's $200 million purchase of the Company's Common Stock at $9.50 per share. The investment was made in stages, as follows: SALE DATE SHARES SOLD PURCHASE PRICE March 23, 1998 2,350,000 $ 22,325,000 August 10, 1998 2,913,157 $ 27,675,000 August 28, 1998 5,263,158 $ 50,000,000 September 29, 1998 10,526,316 $ 100,000,000 ---------- ------------- 21,052,631 $ 200,000,000 ========== ============= As of December 31, 1998, these funds have retired debt of $57.7 million and the remaining capital has been and will be used to fund acquisitions and development projects. As part of the Lazard transaction, the Company signed a Contingent Value Rights Agreement with PSR. Under this the Contingent Value Rights Agreement, if PSR has not essentially doubled its investment (through stock appreciation and dividends) by January 1, 2004, the Company will pay PSR, in cash or stock, an amount necessary to achieve such a return, subject to a maximum payment of 4,500,000 shares or the cash value thereof. FINANCING ACTIVITIES 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 secured by 18 properties. The substitution was the first step in an effort by the Company to gain greater flexibility in the purchase of assets and the sale of assets that may no longer meet the Company's ongoing strategy. The REMIC balance as of December 31, 1998 was $89.9 million and is now secured by 24 properties. The Company is currently in the process of obtaining bondholder approval for ongoing substitution rights based upon predetermined criteria. An acquisition line of credit was put in place in early 1997 for $150 million. The availability under this line is based upon a predetermined formula on the Net Operating Income of the properties which secure the facility. The line originally was secured by 21 properties plus an assignment of the excess cashflow of the REMIC facility referenced above. During 1998, the security on the portfolio was reduced to only 5 properties plus the excess cash flow of the REMIC in conjunction with both a permanent facility transaction, as described below, and a paydown. The paydown of $31 million was funded from the issuance of shares to PSR. The line was renewed for $150 million during the first quarter of 1999 through February 2000. The primary use of the line will be to fund future acquisitions and developments. The addition of newly acquired properties to the line would result in increased availability. 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 previously securing the $150 million revolving credit facility secure this new facility. The proceeds were used to pay down borrowings outstanding on the $150 million credit facility. DIVIDENDS There were no accrued dividends as of December 31, 1998 and 1997. In November of 1998, the Company announced its intent to pay an annual dividend of $0.50 per common share, payable at the rate of $0.125 per quarter. The first payment will be made to shareholders of record as of March 15, 1999 and will be paid on March 31, 1999. A portion of the dividend payment will be a return of capital, as the Company expects to utilize its tax net loss carryover in 1999. The dividend will represent a payout ratio of less 36 than 50% of the Company's funds from operations (FFO). 37 SHARE REPURCHASE Subsequent to December 31, 1998 and through March 19, 1999, the Company repurchased an additional 413,200 shares of its common stock at an average share price of $5.96 for a total of $2.5 million. As of March 19, 1999, the Company had repurchased 2,161,800 shares at an average price of $6.93 under its stock repurchase program. The Company is currently authorized to purchase an additional 1,838,200 shares. IMPACT OF YEAR 2000 ISSUE GENERAL. 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 miscalculation causing disruptions of operations. The Year 2000 issue affects virtually all companies and all organizations. The Year 2000 issue, if not corrected, could result in the failure of the information technology ("IT") systems that the Company uses in its business operations, such as computer programs related to property management, leasing, financial reporting and employee benefits. In addition, computerized systems and microprocessors are embedded in a variety of products used in the Company's operations and properties, such as HVAC controls, thermostats, lights, elevators, alarms, smoke detectors, sprinklers and phones. STATE OF READINESS. The Company has completed an assessment of its computer information technology systems and is now taking the further necessary steps to make such systems Year 2000 compliant. In addition, the Company has completed an evaluation and assessment on its non-IT systems which include embedded technology such as microcontrollers. The Company's primary use of software systems is its corporate accounting system. The Company's corporate accounting system is widely used in the real estate industry; however, it is not fully Year 2000 compliant. The Company is replacing its current corporate accounting system with a new software system, which is Year 2000 compliant. This new software is also widely used in the real estate industry. The implementation of the essential components of the new software system is complete, with planned enhancements to the system proceeding on schedule. The Company had previously planned the system conversion, and such changes would have been undertaken without regard to Year 2000 remediation issues. Accordingly, the Company has not deferred any planned information or software projects due to such Year 2000 projects. With respect to the Company's IT systems, overall, the Company is 75% complete (in terms of labor) with the renovation and validation phases of its remediation plan. Completion of the plan is expected by August 1, 1999. With respect to non-IT systems, the Company has completed all three phases (assessment, renovation and validation) of its remediation plan. As discussed above at "--Recent Developments," the Company has agreed to acquire RMC Realty Companies, a management and leasing company in Tampa, Florida. In connection with its due diligence, the Company has completed its assessment of RMC's Year 2000 issues. Renovation and validation is expected to be completed during the second quarter of 1999. With respect to Year 2000 issues relating to third parties with which we have a material relationship, we have sought representations from all tenants representing more than 2% of our annualized revenue. (No tenant is expected to contribute more than 9% of our annualized revenue in 1999.) Such tenants do not expect to be materially affected by Year 2000 issues. With respect to suppliers and vendors, the Company's material purchases are from those in competitive fields where others will be able to meet any Company needs unmet by suppliers or vendors with Year 2000 difficulties. Because of the Company's lack of dependence on any one tenant, supplier or vendor (and the favorable responses received from our inquires to significant tenants), the Company has not developed a contingency plan for dealing with third-party Year 2000 failures. COSTS. To date, the costs directly associated the Company's Year 2000 efforts have not been material, and we estimate our future costs to be immaterial as well. RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE. We do not expect Year 2000 failures to have a material adverse effect on our results of operations or liquidity because: 38 > We do not rely on a small number of tenants for a significant portion of our rental revenue and our largest tenants do not expect to be materially affected by Year 2000 failures. > We stand ready to switch vendors or suppliers whose Year 2000 failures adversely affect their products or services; and > Our remediation plan is expected to be complete prior to the Year 2000. Nevertheless, this forward-looking statement depends on numerous factors, such as the continued provision of utility services, and the Company remains exposed to the risk of Year 2000 failures. See "Disclosure Regarding Forward-Looking Statements" below. Various of the Company's disclosures and announcements concerning its Year 2000 programs are intended to constitute "Year 2000 Readiness Disclosures" as defined in the recently enacted Year 2000 Information and Readiness Disclosure Act. The Act provides added protection from liability for certain public and private statements concerning an entity's Year 2000 readiness and the Year 2000 readiness of its products and services. The Act also potentially provides added protection from liability for certain types of Year 2000 disclosures made after January 1, 1996, and before the date of enactment of the Act. 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. Additionally, 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 does not affect base rent, aside from renewals. But sales declines could result in reduced revenue from percentage rent tenants, as well as overage rent paid to the Company. Both revenue items are directly impacted by sales volumes and represented 6% of the Company's total revenue for the year ended December, 1998. Continuation of this 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 Annual Report on Form 10-K may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under the headings "Business" and "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, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, intentions 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: > our markets could suffer unexpected 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 unexpected 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. 39 Given these uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to release publicly 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. ITEM 7A - 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 MAY DIFFER MATERIALLY FROM THOSE PRESENTED. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES" AND THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR A DESCRIPTION OF OUR ACCOUNTING POLICIES AND OTHER INFORMATION RELATED TO THESE FINANCIAL INSTRUMENTS. To meet in part our long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. In addition, the Company has assumed fixed rate debt in connection with acquiring properties. 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. We do not enter into interest rate hedge contracts. As of December 31, 1998, we had approximately $31.4 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 1999, out interest expense would be increased or decreased approximately $0.3 million for the year ended December 31, 1999. The Company has no fixed rate debt maturing in 1999. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item is submitted in a separate section of this report. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The section under the heading "Election of Directors" of the Proxy Statement for the Annual Meeting of Stockholders to be held May 12, 1999 is incorporated herein by reference for information on directors of the Company. See ITEM X in Part I hereof for information regarding executive officers of the Company. ITEM 11- EXECUTIVE COMPENSATION The section under the heading "Election of Directors" entitled "Compensation of Directors" of the Proxy Statement and the section titled "Executive Compensation" of the Proxy Statement are incorporated herein by reference. ITEM 12- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section under the heading "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement is incorporated herein by reference. ITEM 13- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section under the heading "Certain Relationships and Related Transactions" of the Proxy Statement is incorporated herein by reference. ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements are filed as part of the report: 40 Page Reports of independent auditors F-2 Consolidated balance sheets as of December 31, 1998 and 1997 F-4 Consolidated statements of operations for the years ended December 31, 1998, 1997 and 1996 F-5 Consolidated statements of stockholders' equity for years ended December 31, 1998, 1997 and 1996 F-6 Consolidated statements of cash flows for the years ended December 31, 1998, 1997 and 1996 F-7 Notes to consolidated financial statements F-8 (a)(2) Included with this report is the following consolidated financial statement schedule: Schedule III - Real Estate and Accumulated Depreciation F-23 All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted. (a)(3) Included with this report are the following exhibits: EXHIBIT LIST Exhibit # Title - - -------------------------------------------------------------------------------- 3.1 Amended and Restated Articles of Incorporation (1) 3.2 Amended and Restated Bylaws of the Company 4.1 Specimen Common Stock Certificate 4.2 Warrant Agreement between the Company and Blackacre (2) 4.3 Warrant Agreement between the Company and Blackacre (2) 4.4 Warrant Agreement between the Company and National Union Fire Insurance Company of Pittsburgh (2) 4.5 Warrant Agreement between the Company and Network Fund III, Ltd. (2) 4.6 Indenture by and between FSA Finance, Inc., as issuer, Bank One, Columbus, National Association, as trustee, and Fleet Management and Recovery Corporation, as master servicer (3) 4.7 Master Servicing Agreement by and between FSA Finance, Inc., as issuer, Bank One, Columbus, National Association, as trustee (4) and Fleet Management and Recovery Corporation, as master servicer (3) 4.8 Specimen copies of the various types of Class A, B, C and R Notes (3) 4.9 Mortgage Note given by FSA Properties, Inc., as maker, in favor of the Travelers Insurance Company, as payee (3) 41 4.10 Deed of Trust, Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Leases and Rents by and between FSA Properties, Inc., as mortgagor, and the Travelers Insurance Company as mortgagee (3) 4.11 First Amendment to Masteer servicing Agreement between FSA Finance, Inc., as Issuer, Mellon Monrtgage Company, as Master Services, and First Union National Bank, as Trustee 4.12 Supplement to the Indenture dated as of December 22, 1998 between FSA Finance, Inc., as issuer, Mellon Mortgage Company, as Master Services, and First Union National Bank, as Trustees 4.13 Gap Note given by FSA Properties, Inc., as maker, in favor of The Travelers Insurance Company, as payee (3) 4.14 Mortgage Loan Purchase Agreement by and between The Travelers Insurance Company, as seller, and FSA Finance, Inc., as purchaser (5) 4.15 Loan Agreement between FAC Mortgage LLC as Borrower and Nomura Asset Capital Corporation as Lender (6) 4.16 Agreement to Furnish Certain Instruments Defining the Rights of Long-Term Debt Holders 4.17 Line of Credit Agreement between FAC Realty, Inc. and Capital America Corporation (fka Nomura Asset Capital Corporation), dated February 19, 1997 (6) 10.1 Employment Agreement between the Company and C. Cammack Morton (6) 10.2 First Amendment to Employment Agreement between the Company and C. Cammuck Morton 10.3 Employment Agreement between the Company and Patrick M. Miniutti (6) 10.4 First Amendment to Employment Agreement between the Company and Patrick M. Miniutti 10.5 Employment Agreement between the Company and William H. Neville (6) 10.6 First Amendment to Employment Agreement between the Company and Willian M. Neville 10.7 Employment Agreement between the Company and Fred P. Steinmark 10.8 First Amendment to Employment Agreement between the Company and Fred P. Steinmark 10.9 Employment Agreement between the Company and Christopher G. Gavrelis (7) 10.10 Second Amendment to Employment Agreement between the Company and Christopher G. Gavrelis 10.11 Amended and Restated 1993 Employee Stock Option Plan (5) 10.12 1996 Restricted Stock Plan (5) 10.13 Amended and Restated 1995 Outside Directors Stock Award Plan 10.14 Amended and Restated Agreement of Limited Partnership of the Operating Partnership (6) 10.15 First Amendment to the Master and Exchange Option Agreement, dated as of March 16, 1998 by and among the Company, FAC Realty, L.P. and the Contributors listed therein (7) 10.16 Assignment of Interest in Master Agreement and Exchange Option Agreement, and Consent of Limited Partners dated December 22, 1997 (7) 10.17 Exchange Option Agreement dated as of October 1, 1997, by and among Carolina FAC, Limited Partnership, FAC Realty, Inc. and the Owners of the Properties and Interests listed therein (7) 10.18 Master Agreement, dated as of October 1, 1997, by and among FAC Realty, Inc., Carolina FAC, Limited Partnership, and the other signatories listed therein (7) 10.19 Amended and Restated Stock Purchase Agreement, dated as of March 23, 1998, between the Company and the Investor (7) 42 10.20 Stockholders Agreement, dated February 24, 1998, among the Company and the Investor (7) 10.21 Registration Rights Agreement, dated February 24, 1998 between the Company and the Investor (7) 10.22 Contingent Value Right Agreement, dated February 24, 1998, among the Company and the Investor (7) 21.1 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP 23.2 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule (electronic filing only) -------------------------------- (1) Incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4 (File No. 333-39491) (2) Incorporated herein by reference to the Company's annual report on Form 10-K for the year ended December 31, 1995 (3) Incorporated herein by reference to the Company's Current Report on Form 8-K dated May 23, 1995 (4) Bank One, Columbus, resigned as trustee effective December 10, 1997, and the issuer has appointed First Union Bank as the successor trustee effective mber 10, 1997. (5) Incorporated herein by reference to the Company's annual report on Form 10-K for the year ended December 31, 1996 (6) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. (7) Incorporated herein by reference to the Company's Current Report on Form 8-K dated March 23, 1998m as amended on June 3, 1998. (b) The following reports on Form 8-K were filed during the last quarter of 1998: 1. A Form 8-K dated September 16, 1998 reported the acquisition of shopping centers under Item 2; 2. A Form 8-K/A dated September 16, 1998 reported further acquisitions of shopping centers under Item 2, and included financial statements; and 3. A Form 8-K/A dated March 23, 1998 reported a change of control of the registrant under Item 1(a). 43 SIGNATURES -------------------------------- Pursuant to the requirements of Section 13 or 15(d) 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. Dated: March 31, 1999 KONOVER PROPERTY TRUST, INC By /s/ C. Cammack Morton ------------------------------------------- C. Cammack Morton President and Chief Executive Officer By /s/ Patrick M. Miniutti ------------------------------------------- Patrick M. Miniutti Director, Exec. Vice President and Chief Financial Officer By /s/ Sona A. Thorburn ------------------------------------------- Sona A. Thorburn Vice President and Chief Accounting Officer By /s/ Simon Konover ------------------------------------------- Simon Konover Chairman of the Board of Directors By /s/ William D. Eberle ------------------------------------------- William D. Eberle Board Member By /s/ J. Richard Futrell, Jr. ------------------------------------------- J. Richard Futrell, Jr. Board Member By /s/ John W. Gildea ------------------------------------------- John W. Gildea Board Member By /s/ Murry N. Gunty ------------------------------------------- Murry N. Gunty Board Member By /s/ Klaus P. Kretschmann ------------------------------------------- Klaus P. Kretschmann Board Member By /s/ Arthur P. Solomon ------------------------------------------- Arthur P. Solomon Board Member 44 INDEX TO FINANCIAL STATEMENTS Konover Property Trust, Inc. Reports of Independent Auditors.......................................2-3 Consolidated Balance Sheets as of December 31, 1998 and 1997............4 Consolidated Statements of Operations for the years ended...............5 December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the years ended ....6 December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended...............7 December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements..............................8 Schedule III - Real Estate and Accumulated Depreciation................21 Konover Property Trust, Inc. Qualified Employee Stock Purchase Plan.... Report of Independent Auditor..........................................24 Statement of Net Assets Available for Plan Benefits....................25 Statement of Changes in Net Assets Available for Plan Benefits.........26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Konover Property Trust, Inc.: We have audited the accompanying consolidated balance sheets of Konover Property Trust, Inc. (a Maryland corporation) as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. 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 consolidated 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 Konover Property Trust, Inc. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Our audit of Konover Property Trust, Inc. was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule III included with consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule as of, and for the year ended December 31, 1998, has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Raleigh, North Carolina, February 19, 1999. REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Konover Property Trust, Inc. We have audited the consolidated statements of operations, cash flows and changes in stockholders' equity of Konover Property Trust, Inc. for the year ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations, cash flows and changes in stockholders' equity of Konover Property Trust, Inc. for the year ended December 31, 1996 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Raleigh, North Carolina, January 31, 1997 KONOVER PROPERTY TRUST, INC CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 1997 ------------------------------ (IN THOUSANDS) ASSETS INCOME PRODUCING PROPERTIES: Land $ 107,338 $ 81,233 Buildings and improvements 443,626 292,726 Deferred leasing and other charges 28,569 21,366 ------------------------------ 579,533 395,325 Accumulated depreciation and amortization (67,039) (50,134) ------------------------------ 512,494 345,191 Properties under development 6,976 6,456 Properties held for sale 5,956 12,490 Investment in ventures 32,243 4,283 OTHER ASSETS: Cash and cash equivalents 74,989 4,872 Restricted cash 3,340 3,858 Tenant and other receivables 12,076 7,167 Notes receivable 24,536 10,458 Deferred charges and other assets 9,839 8,851 ============================== $ 682,449 $ 403,626 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Debt on income properties $ 304,783 $ 232,575 Capital lease obligations 774 1,131 Accounts payable and other liabilities 15,305 6,993 ------------------------------ 320,862 240,699 ------------------------------ COMMITMENTS AND CONTINGENCIES MINORITY INTEREST IN OPERATING PARTNERSHIP 12,246 - STOCKHOLDERS' EQUITY: Convertible preferred stock, Series A, 5,000,000 shares authorized, 792,000 and 800,000 issued and outstanding at 18,962 19,162 December 31, 1998 and 1997, respectively Stock purchase warrants 9 9 Common stock, $0.01 par value, 100,000,000 shares authorized and 31,207,457 and 11,904,182 issued and outstanding at December 313 119 31, 1998 and 1997, respectively Additional paid-in capital 328,705 145,332 Retained earnings (accumulated deficit) 1,612 (1,416) Deferred compensation - Restricted Stock Plan (260) (279) ------------------------------ 349,341 162,927 ============================== $ 682,449 $ 403,626 ==============================
SEE ACCOMPANYING NOTES. KONOVER PROPERTY TRUST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 1997 1996 -------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) RENTAL OPERATIONS: Revenues: Base rents $ 49,680 $ 38,535 $ 34,099 Percentage rents 886 755 633 Property operating cost recoveries 15,808 12,726 11,757 Other income 3,168 1,710 681 -------------------------------------------- 69,542 53,726 47,170 -------------------------------------------- Property operating costs: Common area maintenance 8,050 6,367 5,864 Utilities 1,453 1,173 1,074 Real estate taxes 7,035 5,621 5,098 Insurance 1,001 616 684 Marketing 1,054 1,294 1,001 Other 2,032 600 254 -------------------------------------------- 20,625 15,671 13,975 Depreciation and amortization 18,515 15,652 13,802 -------------------------------------------- 39,140 31,323 27,777 -------------------------------------------- 30,402 22,403 19,393 -------------------------------------------- OTHER EXPENSES: General and administrative 7,004 6,397 6,199 Interest 19,772 16,436 14,175 Loss on sale of real estate 512 - - Adjustment to carrying value of assets - - 5,000 -------------------------------------------- 27,288 22,833 25,374 -------------------------------------------- INCOME (LOSS) BEFORE MINORITY INTEREST AND 3,114 (430) (5,981) EXTRAORDINARY ITEM Minority interest in Operating Partnership 86 - - -------------------------------------------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 3,028 (430) (5,981) Extraordinary loss on early extinguishment of debt - 986 103 -------------------------------------------- NET INCOME (LOSS) $ 3,028 $(1,416) $ (6,084) ============================================ INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $ 3,028 $ (430) $ (5,981) Preferred stock dividends - - (368) -------------------------------------------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM APPLICABLE TO COMMON STOCKHOLDERS $ 3,028 $ (430) $ (6,349) Extraordinary loss on early extinguishment of debt - 986 103 ============================================ NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 3,028 $(1,416) $ (6,452) ============================================ BASIC INCOME (LOSS) PER COMMON SHARE: Income (loss) before extraordinary item applicable $ 0.16 $ (0.04) $ (0.54) to common stockholders Extraordinary item - (0.08) (0.01) -------------------------------------------- NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 0.16 $ (0.12) $ (0.55) ============================================ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 18,693 11,824 11,817 ============================================ DILUTED INCOME PER COMMON SHARE: Income before extraordinary item applicable to $ 0.14 $ (0.04) $ (0.54) common stockholders Extraordinary item - (0.08) (0.01) -------------------------------------------- Net income applicable to common stockholders $ 0.14 $ (0.12) $ (0.55) ============================================ WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 21,878 11,824 11,817 ============================================
SEE ACCOMPANYING NOTES. KONOVER PROPERY TRUST, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS EXCEPT PER SHARE DATA)
RETAINED DEFERRED CONVERTIBLE STOCK ADDITIONAL EARNINGS COMPENSATION PREFERRED PURCHASE PAID IN (ACCUMULATED RESTRICTED STOCK WARRANTS COMMON STOCK CAPITAL DEFICIT) STOCK PLAN ------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1995 $ - $ - $ 118 $ 160,368 $ - $ - Issuance of 800,000 shares of convertible 19,162 - - - - - preferred stock Issuance of 3,152 shares of directors stock - - - 29 - - Issuance of 372,592 shares of restricted stock - - 4 3,334 - (3,338) Issuance of 200,000 stock purchase warrants - 9 - - - - Compensation under stock plans - - - - - 392 Cancellation of 90,000 shares of restricted - - (1) (899) - 900 stock Net loss - - - - (6,084) - Preferred dividends declared ($0.46 per share) - - - (368) - - Common dividends declared ($0.75 per share) - - - (15,118) 6,084 - ------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1996 19,162 9 121 147,346 - (2,046) Issuance of 7,300 shares of directors stock - - - 45 - - Issuance of 384,852 shares of restricted stock - - 3 2,600 - (2,603) Compensation under stock plans - - - - - 493 Cancellation of 180,000 shares of restricted - - (2) (1,641) - 1,643 stock Exchange of 390,884 shares of restricted stock for options to repurchase restricted stock - - (3) (2,641) - 2,234 Repurchase of 17,353 shares common stock - - - (377) - - Net loss - - - - (1,416) - ------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1997 19,162 9 119 145,332 (1,416) (279) Issuance of 17,360 employee stock purchase - - - 83 - - plan shares Issuance of 35,339 shares of restricted stock - - 1 275 - (276) Issuance of 21,052,631 shares of common stock at $9.50 per share, net of expenses - - 211 195,179 - - Repurchase of 1,755,093 shares of common stock - - (18) (12,297) - - Exercise of 7,000 stock options - - - 39 - - Cancellation of 13,184 shares of restricted - - - (106) - 106 stock Compensation under stock plans - - - - - 189 Conversion of 8,000 shares of preferred stock (200) - - 200 - - into 22,222 common shares Net income - - - - 3,028 - ============================================================================== BALANCE AT DECEMBER 31, 1998 $ 18,962 $ 9 $ 313 $ 328,705 $ 1,612 $ (260) ==============================================================================
TOTAL ------------ BALANCE AT DECEMBER 31, 1995 $ 160,486 Issuance of 800,000 shares of convertible 19,162 preferred stock Issuance of 3,152 shares of directors stock 29 Issuance of 372,592 shares of restricted stock - Issuance of 200,000 stock purchase warrants 9 Compensation under stock plans 392 Cancellation of 90,000 shares of restricted - stock Net loss (6,084) Preferred dividends declared ($0.46 per share) (368) Common dividends declared ($0.75 per share) (9,034) ---------- BALANCE AT DECEMBER 31, 1996 164,592 Issuance of 7,300 shares of directors stock 45 Issuance of 384,852 shares of restricted stock - Compensation under stock plans 493 Cancellation of 180,000 shares of restricted - stock Exchange of 390,884 shares of restricted stock for options to repurchase restricted stock (410) Repurchase of 17,353 shares common stock (377) Net loss (1,416) ---------- BALANCE AT DECEMBER 31, 1997 162,927 Issuance of 17,360 employee stock purchase 83 plan shares Issuance of 35,339 shares of restricted stock - Issuance of 21,052,631 shares of common stock at $9.50 per share, net of expenses 195,390 Repurchase of 1,755,093 shares of common stock (12,315) Exercise of 7,000 stock options 39 Cancellation of 13,184 shares of restricted - stock Compensation under stock plans 189 Conversion of 8,000 shares of preferred stock - into 22,222 common shares Net income 3,028 =========== BALANCE AT DECEMBER 31, 1998 $ 349,341 ===========
SEE ACCOMPANYING NOTES. KONOVER PROPERTY TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998 1997 1996 ------------------------------------------ (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 3,028 $ (1,416) $ (6,084) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Adjustment to carrying value of assets - - 5,000 Minority interest in Operating Partnership 86 - - Depreciation and amortization 18,515 15,652 13,802 Loss on sale of real estate 512 - - Extraordinary loss on early extinguishment of debt - 986 103 Amortization of deferred financing costs 820 1,562 1,422 Compensation under stock plans 1,419 493 392 Net changes in: Tenant and other receivables (4,909) (1,303) (619) Deferred charges and other assets (998) 139 122 Accounts payable and other liabilities (238) (3,151) (6,489) ------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 18,235 12,962 7,649 ------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Investment in income-producing properties (15,349) (15,025) (18,234) Proceeds from sale of real estate 7,967 - - Acquisition of income-producing properties, net (19,824) (32,421) - Investment in ventures (29,101) (4,283) - Advances under notes receivable, net (14,078) (10,458) - Change in restricted cash 518 2 946 ------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (69,867) (62,185) (17,288) ------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt on income properties 82,721 135,856 5,061 Repayment of debt on income properties (142,466) - - Proceeds from exchangeable notes - - 20,000 Proceeds from other debt - - 9,580 Deferred financing charges (1,221) (1,947) (2,289) Other debt repayments (482) (86,516) (1,936) Net proceeds from sale of common stock 195,390 - - Exercise of stock options 39 - - Issuances of shares under employee stock purchase plan 83 - - Repurchase of common stock (12,315) (360) - Distributions to stockholders - - (15,427) Other - 28 29 ------------------------------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 121,749 47,061 15,018 ------------------------------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 70,117 (2,162) 5,379 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,872 7,034 1,655 ========================================== CASH AND CASH EQUIVALENTS AT END OF YEAR $74,989 $ 4,872 $ 7,034 ========================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for interest (net of interest capitalized of $987 in 1998, $1,525 in 1997 and $1,974 in 1996) $19,884 $14,505 $15,347 ==========================================
SEE ACCOMPANYING NOTES. 7 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 1. ORGANIZATION AND BASIS OF PRESENTATION ORGANIZATION Konover Property Trust, Inc. (the "Company"), formerly FAC Realty Trust, Inc., was incorporated on March 31, 1993 as a self-administrated 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. Over the past five years, the Company has grown from an owner of retail shopping centers with an aggregate square footage of 4.2 million to an owner of approximately 8.1 million square feet. On December 31, 1998, the Company-owned properties consisted of: 1. 47 community shopping centers in 17 states aggregating approximately 5,871,000 square feet; 2. 10 outlet centers in nine states aggregating approximately 2,110,000 square feet; 3. 2 centers aggregating approximately 167,000 square feet that are held for sale; and 4. approximately 124 acres of outparcel land located near or adjacent to certain of the Company's centers and which are being marketed for lease or sale. The weighted-average square feet of gross leasable area were 7.2 million square feet for the year ended December 31, 1998 and 5.3 million square feet for the same period in 1997. 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 December 31, 1998. 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. On August 10, 1998, following stockholder approval, the Company began operating under the name "Konover Property Trust. " The Company remains listed on the New York Stock Exchange and changed its ticker symbol from FAC to KPT. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of the Company and the Operating Partnership. All significant intercompany balances have been eliminated in consolidation. Properties which are wholly-owned or owned less than 100% and are controlled by the Operating Partnership have been consolidated. Control is demonstrated by the ability of the general partner to manage day-to-day operations, refinance debt and sell the assets of the partnership without the consent of the limited partner and the inability of the limited partner to replace the general partner. 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 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. 8 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. SIGNIFICANT ACCOUNTING POLICIES INCOME-PRODUCING PROPERTIES Income-producing properties are recorded at cost less accumulated depreciation. Included in such costs are acquisition, development, construction and tenant improvement expenditures, interest incurred during construction, certain capitalized improvements and replacements and certain allocated overhead. Allocated overhead is computed primarily on the basis of time spent by certain departments in various operations and represents direct costs of the development department which meet the definition of "indirect costs" in Statement of Financial Accounting Standards (SFAS) No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects." Leasing charges, including tenant construction allowances and direct costs incurred by the Company to obtain a lease, are deferred and amortized over the related leases or terms appropriate to the expenditure. Depreciation is provided utilizing the straight-line method over the estimated useful life of up to 39 years for buildings and improvements, and 5 to 15 years for land improvements. Certain improvements and replacements are capitalized when they extend the useful life, increase capacity, or improve the efficiency of the asset. All other repair and maintenance items are expensed as incurred. Substantially all of the income-producing properties have been pledged to secure the Company's debt. Properties under development include costs related to new development and expansions in process totaling approximately $7.0 million and $6.5 million at December 31, 1998 and 1997, respectively. The pre-construction stage of project development involves certain costs to secure land and zoning and to complete other initial tasks which are essential to the development of the project. These costs are transferred to developments under construction when the pre-construction tasks are completed. The Company charges operations for the costs of unsuccessful development projects. In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of"; which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cashflows estimated to be generated by those assets are less than the assets' carrying amount. The impairment loss recognized shall be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company periodically reviews its income-producing properties for potential impairment when circumstances indicate that the carrying amount of such assets may not be recoverable. PROPERTIES HELD FOR SALE As part of the Company's ongoing strategic evaluation of its portfolio of assets, management has been authorized to pursue the sale of certain properties that currently are not fully consistent with or essential to the Company's long-term strategies. Management plans to evaluate all properties on a regular basis in accordance with its strategy for growth and in the future may identify other properties for disposition or may decide to defer the pending disposition of those assets now held for sale. In accordance with SFAS No. 121, assets held for sale are valued at the lower of carrying value or fair value less selling costs. Accordingly, in 1996 and 1995, the Company recorded a non-cash $5.0 million and $8.5 million adjustments to the carrying values of the properties held for sale. On April 30, 1998, the Company sold a property it was holding for sale for $5.7 million resulting in a loss of $0.4 million. The Company continues to operate the two other properties held for sale as of December 31, 1998 and is actively marketing these properties. After recording the $5.0 million and $8.5 million valuation adjustment in 1996 and 1995, respectively, the net carrying value of assets currently being marketed for sale at December 31, 1998 and 1997 are $6.0 million and $12.5 million, respectively. Debt associated with these properties held for sale was less than $0.1 million and $12.3 million at December 31, 1998 and 1997, respectively. The following summary financial information pertains to the properties held for sale for the year ended December 31 (in thousands): 1998 1997 1996 ---- ---- ---- Revenues $ 409 $ 1,100 $2,100 Net loss after operating and interest expenses $ (920) $ (1,100) $(1,000) ========== =========== ======= INTEREST COSTS Interest costs are capitalized to income-producing properties under construction, to the extent such assets qualify for capitalization. Total interest capitalized was $1.0 million, $1.5 million and $2.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. Interest expense includes amortization of deferred financing costs (see Note 4) and is net of interest income on cash and escrow deposit balances. 9 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. 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. RESTRICTED CASH In connection with the sale of a $95 million securitized debt offering in 1995, the lender required a holdback of a portion of the loan proceeds to fund certain environmental and engineering work and to make certain lease related payments that may be required in connection with the renewal or termination of certain leases. Such holdback amounts were approximately $3.3 and $3.9 million at December 31, 1998 and 1997, respectively. REVENUE RECOGNITION The Company, as a lessor, has retained substantially all of the risks and benefits of ownership and accounts for its leases as operating leases. Minimum rental income is recognized on a straight-line basis over the term of the lease and unpaid rents are included in tenant and other receivables in the accompanying balance sheets. Certain lease agreements contain provisions which provide for rents based on a percentage of sales that are recognized ratably on an estimated basis throughout the year. In addition, certain leases provide for additional rents based on a percentage of sales volume above a specified breakpoint which are recognized as percentage rents. Also, most leases provide for the reimbursement of real estate taxes, insurance, advertising, utilities and certain common area maintenance (CAM) costs which are recognized as property operating cost recoveries. The percentage rents and property operating cost recoveries are reflected on the accrual basis. In lease agreements where the tenant is not required to reimburse the Company for real estate taxes, insurance and CAM costs, the Company has allocated a portion of base rents to property operating cost. Amounts allocated to property operating cost recoveries from base rent were $4.1 million, $3.8 million and $3.3 million in 1998, 1997 and 1996, respectively. For tenants who are not obligated to pay directly or reimburse the Company for utility costs related to their store, the Company has allocated a portion of their base rents to offset the utility expense in the amounts of $1.1 million, $1.3 million and $1.2 million in 1998, 1997 and 1996, respectively. The Company's principal financial instrument subject to potential concentration of credit risk is tenant accounts receivable which are unsecured. Although the tenants are primarily in the retail industry, the properties are geographically diverse. The Company's exposure to credit loss in the event that payment is not received for revenue recognized equals the outstanding accounts receivable balance. The Company provides an allowance for estimated uncollectible amounts. ENVIRONMENTAL MATTERS Substantially all of the Properties have been subjected to Phase I environmental audits. Such audits have not revealed nor is management aware of any environmental liability that management believes would have a material adverse impact on the Company's financial position or results of operations. INCOME/(LOSS) PER COMMON SHARE The Company has adopted the provisions of SFAS No. 128, "Earnings Per Share". Under SFAS No. 128, basic earnings per share ("EPS") and diluted EPS replace primary EPS and fully diluted EPS. Basic EPS is calculated by dividing the income available to common stockholders by the weighted-average number of shares outstanding. Diluted EPS 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"). All prior periods presented have been restated. For the year ended December 31, 1998, the denominator for diluted earnings per share is calculated as follows, (in thousands): Denominator for basic weighted-average shares outstanding 18,693 Effect of dilutive securities: Preferred stock 2,222 Employee stock option 33 Restricted stock 328 Operating partnership units 602 ------ Dilutive potential shares 3,185 ------ Denominator-adjusted-weighted average shares and assumed conversions 21,878 ====== 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) For the years ended December 31, 1997 and 1996, basic and diluted EPS are computed based on a weighted-average number of shares outstanding of 11,824,000 and 11,817,000, respectively. Potential common shares have been excluded from diluted EPS for 1997 and 1996 because their inclusion would be antidilutive. 10 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) INCOME TAXES The Company is taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with the tax year ending December 31, 1993. As a REIT, the Company generally is not subject to federal income tax. To maintain qualification as a REIT, the Company must distribute at least 95% of its REIT taxable income to its stockholders and meet certain other requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on its taxable income at regular corporate rates. The Company may also be subject to certain state and local taxes on its income and property and federal income and excise taxes on its undistributed taxable income. DIVIDENDS During 1996, distributions were paid of $0.75 per share. There were no dividends paid or accrued for the year ended December 31, 1998 and 1997. In November of 1998, the Company announced its intent to pay an annual dividend of $0.50 per common share payable at a rate of $0.125 per common share per quarter. The first quarter 1999 dividend of $0.125 per share is payable on March 31, 1999 to stockholders of record on March 15, 1999. A portion of the dividend payment will be a return of capital, as the Company expects to utilize its tax net loss carryover in 1999. RECLASSIFICATIONS 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. ACCOUNTING CHANGE In 1998, the Company has changed from a 31.5 year to a 39 year life for building depreciation. The change conforms to predominant industry practice and matches book to tax depreciation. The change has been applied to all current buildings using a half-year convention and on a prospective basis to assets acquired after December 31, 1998. The effect of this change for 1998 was to increase net income by $0.6 million and earnings per share by $0.03. RECENT ACCOUNTING PRONOUNCEMENTS Effective for the year ended December 31, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Standard (SFAS) No. 130, "REPORTING COMPREHENSIVE INCOME". Comprehensive income includes net income and all other non-owner changes in equity during a period. All changes in the Company's equity relate to owners. Therefore, comprehensive income equals net income for all periods presented. Effective for 1998 reporting, the Company adopted SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION". Under the provisions of the new standard, the Company has one reporting segment, Retail Shopping Centers. During 1998, the Company adopted Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Development or Obtained for Internal Use". This statement provides guidance on accounting for the costs of computer software developed or obtained for internal use. Implementation of this standard did not have a material impact on the financial results of the Company. 3. INVESTMENT IN VENTURES A summary of the Company's investments in ventures at December 31, 1998 and 1997, is as follows (all investments are accounted for under the equity method, in thousands): December 31, Location Ownership % 1998 1997 ------------------- Atlantic Realty North Carolina 50% $ 7,442 $ 2,803 Mount Pleasant KPT Mount Pleasant, SC 50% 18,759 1,480 Wakefield Investment Wake Forest, NC 95% 570 - Falls KPT Raleigh, NC 50% 5,472 - --------- --------- $ 32,243 $ 4,283 ========= ========= 11 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. INVESTMENT IN VENTURES (CONTINUED) At December 31, 1998, the majority of the properties owned by the ventures are under development and have no operations with the exception of a center in Pembroke, North Carolina, which is a project with Atlantic Realty. The operations of the Pembroke center were immaterial during 1998. The acquisition and development of the venture properties are 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 all of the above transactions will be consummated. All debt incurred by the ventures is non-recourse to the Company and is secured by their respective properties and guaranteed by the Company's respective venture partners. Summary unaudited financial information of ventures accounted for using the equity method is as follows (in thousands): DECEMBER 31, BALANCE SHEETS 1998 1997 ---------------- ------------ ASSETS: Investment properties at cost, net $ 47,672 $4,283 Cash and cash equivalents 112 - Other assets 39 - ================ ============ TOTAL ASSETS $ 47,823 $4,283 ================ ============ LIABILITIES AND VENTURES' EQUITY: Mortgages and other notes payable $ 11,633 $ - Accounts payable and other liabilities 1,883 - ---------------- ------------ Total liabilities 13,516 - Ventures' equity 34,307 4,283 ================ ============ TOTAL LIABILITIES AND VENTURES' EQUITY $ 47,823 $4,283 ================ ============ 4. DEFERRED CHARGES AND OTHER ASSETS Deferred charges and other assets as of December 31, net of accumulated amortization of $5,451 and $4,267 at December 31, 1998 and 1997, are summarized as follows (in thousands): 1998 1997 ----------------------------- Deferred financing costs, net $ 6,312 $ 5,531 Prepaid expenses 676 248 Other assets, net 2,851 3,072 ============================= $ 9,839 $ 8,851 ============================= Deferred financing costs, including fees and costs incurred to obtain financing, are being amortized on a straight line basis over the terms of the respective agreements. Unamortized deferred financing costs are charged to expense when the associated debt is retired before the maturity date. During 1993, as part of the Company's initial public offering, the Company acquired a favorable lease agreement for land and buildings which has been capitalized as an intangible asset. This asset is being amortized over the remaining life of the lease. The carrying value of the intangible asset, approximating $2.5 and $2.8 million at December 31, 1998 and 1997, respectively, is reviewed if the facts and circumstances suggest that it may be impaired. If such a review indicates that the carrying amount of the asset may not be recoverable, the Company will reduce the carrying value by the amount of the impairment. 5. NOTES RECEIVABLE In December 1997, the Company advanced $8.5 million to Davie Plaza Limited Partnership which was used to prepay certain debt on a shopping center at a discount. The Company received a $2.0 million payment on this note in January, 1999. The note receivable is secured by the shopping center and is repayable in June 1999. (See Related-Party Transactions, Note 15) On May 22, 1998, the Company issued a promissory note to evidence a loan made in the amount of $2.5 million to VFP, LLC. The note is secured by a 53.78 acre tract of land near Myrtle Beach, South Carolina. The note accrues interest at 10% and matures November, 1999. 12 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. NOTES RECEIVABLE (CONTINUED) During 1998, the Company made advances to a venture, Wakefield Investment, totaling $10.6. Of this amount $7.2 million accrues interest at 11% per annum plus participation in profits of the venture and matures August, 2001. The remaining $3.4 million accrues interest at 15% and matures March 28, 1999. The carrying values of the Company's notes receivable at December 31, 1998, approximate fair value. 6. DEBT ON INCOME PROPERTIES Debt on income properties consists of the following at December 31 (in thousands):
1998 1997 ------------------------- Mortgage notes secured by 16 properties with monthly payments ranging from $2 to $13, interest rates ranging from 7.37% to 10.13 %. Unpaid principal and accrued interest due from October 2001 to July 2018. $ 108,708 $ - $150,000 revolving credit facility with Capital America, interest at a rate of LIBOR plus 2.25% (7.37% at December 31, 1998) (a) (b) 31,439 134,545 $75,000 credit facility with Capital America, monthly principal payments range from approximately $19 to $146 with entire balance due March, 74,754 - 2013 and effective interest rate of 7.73% (b) ClassA Mortgage Notes - payable in 85 monthly principal payments ranging from approximately $140 to $173 determined using various parameters plus weighted average monthly interest payments at 7.51%. Unpaid 52,882 54,583 principal and accrued interest due June, 2002 (c) Class B Mortgage Notes - monthly interest payments at 7.87% with entire 20,000 20,000 balance due June, 2002 (c) Class C Mortgage Notes - monthly interest payments at 8.40% with entire 17,000 17,000 balance due June, 2002 (c) Note payable to a financial institution with 45 monthly principal and interest payments of approximately $59 with interest of prime rate (8.5% at December 31, 1997) plus 2 1/4%. Balance repaid in August, - 5,711 1998 from proceeds from PSR funding (see Note 12) $2,500 credit facility with a financial institution, interest at prime rate (7.75 at % December 31, 1998) plus 1/2% - 736 ------------------------- $ 304,783 $ 232,575 =========================
(a) The Company obtained a $150 million credit facility with Capital America in February 1997. The credit facility with Capital America is secured by five of the Company's centers plus an assignment of excess cash flow from the properties held by KPT REMIC Loan LLC. The Capital America credit facility was for a term of 2 years with a 1-year renewal option which was exercised in 1999 and now expires in February, 2000. This new credit facility contains financial covenants relating to debt to total asset value and net operating income to debt service coverage. All financial convenants were satisfactorily met for the year ended December 31, 1998. (b) On March 11, 1998, the Company closed on a $75 million, 15 year permanent credit facility secured by 11 properties previously securing the $150 million revolving credit facility. The proceeds from this securitization were used to pay down certain outstanding amounts on the $150 million Capital America facility. (c) In 1995, the Company's wholly owned subsidiary, FSA Finance, Inc. closed a $95 million rated debt securitization (the "Mortgage Notes"). The monthly principal payments for the securitization range from approximately from $19 to $146 with the entire balance due June, 2002. The total offering of $95 million consisted of $58 million of Class A Mortgage Notes rated "AA"; $20 million of Class B Mortgage Notes rated "A"; and $17 million of Class C Mortgage Notes rated "BBB". The Mortgage Notes are secured by a cross-collateralized mortgage which originally covered 18 centers owned by KPT REMIC Loan LLC Mortgage Notes are subject to Optional Redemption (as defined) in whole or in part on any payment date beginning on June 1, 1998. Any Optional Redemption occurring on or prior to December 1, 2001 is subject to the payment of a yield maintenance premium. In December 1998, the Company completed a substitution and recollateralization of its securitization which now is secured by 24 properties. Combined aggregate principal maturities of notes payable are as follows (in thousands): 1999 $ 3,504 2000 35,210 2001 8,500 2002 91,734 2003 11,074 Thereafter 154,761 ---------- $ 304,783 ========== 6. DEBT ON INCOME PROPERTIES (CONTINUED) The Company estimates that the fair value of notes payable approximates the carrying value based upon its effective current borrowing rate for debt with similar terms and remaining maturities. Disclosure about fair value of financial instruments is based upon information available to management as of December 31, 1998. Although management is not aware of any factors that would significantly affect the fair value of amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 1998. 13 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. LEASES The Company leases certain signage and equipment under capital lease agreements which expire beginning in 1999 through 2009. Amortization of assets acquired through capital leases is included with depreciation and amortization expense in the accompanying statements of operations. Rent expense for the year ended December 31, 1998, 1997 and 1996 was $0.7 million, $0.2 million and $0.2 million, respectively. Aggregate future minimum lease payments under capital and operating leases having remaining terms in excess of one year as of December 31, 1998, are as follows (in thousands):
CAPITAL OPERATING LEASES LEASES ------------------------------- 1999 $ 304 $ 690 2000 280 609 2001 248 610 2002 105 447 2003 17 185 Thereafter - 1,031 ------------------------------- 954 $ 3,572 =============== Less amounts representing interest ranging from 8% to 13% 180 ---------------- Present value of minimum lease payments $ 774 ================
8. MINORITY INTEREST Minority interest in the accompanying consolidated financial statements relates to limited partnership interests of the Operating Partnership issued in connection with acquisitions of properties. In connection with the acquisition of properties for the years ended 1998 and 1997, the Company issued 982,593 and 0 units, respectively. The limited partnership interests outstanding as of December 31, 1998 have the same economic characteristics as would 982,593 common shares, inasmuch as they share proportionately in the net income or loss and in any distributions of the Operating Partnership and such interests are exchangeable into the same number of common shares of the Trust. 9. CONVERTIBLE PREFERRED STOCK On April 2, 1996, the Company executed a Note Purchase Agreement and other related documents (collectively the "Agreements") with Gildea Management Company ("Gildea") and Blackacre Bridge Capital, L.L.C. ("Blackacre"), whereby Gildea and Blackacre agreed to purchase in a private placement up to $25.0 million of the Company's Exchangeable Notes (the "Exchangeable Notes"), and $5 million of its Senior Note, both of which were unsecured. On April 3 and 29, 1996, Exchangeable Notes with an aggregate principal amount of $10.0 million each were sold pursuant to the Agreements. Holders of the Exchangeable Notes, subject to certain conditions, were required to exchange them for shares of the Company's Series A Convertible Preferred Stock (the "Series A Preferred") at the rate of one share of Series A Preferred for each $25 in principal amount of Exchangeable Notes, upon stockholder approval of necessary amendments to the Company's Certificate of Incorporation and authorization of the Series A Preferred. Each share of Series A Preferred is convertible into shares of the Company's Common Stock at a conversion price equal to the lower of $9 per share or the 30-day average price of the Company's Common Stock following an announcement by the Company of the initial funding, subject to certain limitations. Dividends on the Series A Preferred will be paid quarterly on each Common Stock dividend payment date in an amount equal to the dividends that would have been paid on the Common Stock then issuable upon conversion of the Series A Preferred. On November 23, 1998, 8,000 shares of the Company's Series A Preferred Stock were exchanged by the holders into 22,222 shares of common stock. 14 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. CONVERTIBLE PREFERRED STOCK (CONTINUED) On August 1, 1996, the Company issued holders of the Exchangeable Notes 800,000 shares of the Company's Series A Preferred Stock in exchange for notes with an aggregate principal amount of $20 million (net of issue cost of $838,000). The 800,000 shares of the Series A Preferred Stock are convertible, at the option of the holders, into an aggregate of 2,222,222 shares of the Company's Common Stock. No dividends were accrued or paid on the Series A Preferred Stock in 1998 or 1997. On April 29, 1996, $5 million of the Senior Notes were placed at 97% of their face amount. On November 12, 1996, $2.5 million of the Senior Notes were placed at 100% of their face amount. In March 1997, the Company repaid the Senior Notes at their face amounts from the proceeds of the Capital America credit facility. In connection with the issuance of the Exchangeable Notes and the initial $5 million of Senior Notes, on April 3, 1996 the Company issued the holder detachable warrants for the purchase of 200,000 shares of Common Stock of the Company. Each warrant entitles the holder, subject to certain conditions, to purchase on or before April 3, 2003 one share of Common Stock of the Company at a price equal to $9.50 per share, subject to adjustment under certain conditions. The warrants were valued using the Black-Scholes pricing model at an aggregate value of $6,000 at the issuance date. The $2.5 million of Senior Notes have detachable warrants for the purchase of 100,000 shares of Common Stock of the Company that were issued with terms and conditions similar to the existing Senior Notes, except that each warrant entitles the holder to purchase one share of Common Stock at a price equal to $8.375 per share. These warrants were valued at an aggregate value of $3,000 at the issuance date. 10. STOCK OPTION AND COMPENSATION PLANS EMPLOYEE STOCK INCENTIVE PLAN The Company has established a stock option plan which provides for the issuance of 2,800,000 shares through the grant of qualified and nonqualified options to officers and employees at exercise prices not less than market value on the date of grant. Generally, options vest proportionately over a period of four to five years from the date of grant and are exercisable for 10 years from the date of grant. A summary of changes in outstanding options is as follows:
1998 1997 1996 --------------------- --------------------- ------------------- AVG. AVG. SHARES PRICE SHARES AVG. PRICE SHARES PRICE ----------- --------- --------- ----------- -------- ---------- Balance, beginning of year 743,250 9.29 1,047,500 $ 15.01 432,500 $ 22.72 Options granted, at market 150,000 7.63 645,000 $ 5.78 615,000 $ 23.00 Converted to restricted (735,000) 6.16 (949,250) $ 13.43 - - stock Exercised (7,000) 5.63 - - - - ----------- --------- --------- ----------- -------- --------- Balance, end of year 151,250 21.67 743,250 $ 9.29 1,047,500 $ 15.01 =========== ========= ========= =========== ======== ========== Exercisable, end of year 147,650 21.68 281,800 $ 13.14 512,820 $ 13.14 =========== ========= ========= =========== ======== ========== Weighted Average Fair Value of Options Granted During the Year $ 2.19 $ 1.66 $ 5.34 =========== ========= ========= =========== ======== ==========
The following table summarizes information about stock options outstanding at December 31, 1998: OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- ------------------- Weighted Average Remaining Exercise Contractual Prices Shares Life in Years Shares - - ------------------- ------------------ ------------------- ------------------- $ 23.00 123,250 4.5 123,250 $ 21.50 18,000 6.0 14,400 $ 5.63 10,000 8.3 10,000 ------------------ ------------------- 151,250 147,650 ================== =================== 15 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. STOCK OPTION AND COMPENSATION PLANS (CONTINUED) The fair value of each option granted in 1998, 1997, and 1996 is estimated using the Black-Scholes option pricing model with the following assumptions: 1998 1997 1996 --------- -------- ---------- Dividend yield 0.00% 0.00% 0.00% Expected volatility 10.40% 10.40% 10.40% Risk-free interest rate 6.80% 6.80% 6.99% Expected life in years 4 5 10 RESTRICTED STOCK PLAN The Company's shareholders' approved a restricted stock plan in 1996 whereby the Company can award up to 2,250,000 shares of common stock to employees. Generally, awards under the plan vest at the end of the restriction period, which is typically three years. The awards are recorded at market value on the date of grant as unearned compensation expense and amortized over the restriction periods. Generally, recipients are eligible to receive dividends on restricted stock issued. Restricted stock and annual expense information is as follows:
1998 1997 1996 ------------ ------------ ------------ Restricted shares outstanding at January 1 79,207 42,592 - Number of restricted shares awarded 35,339 444,852 42,592 Number of restricted shares exchanged for options to repurchase restricted stock - 390,884 - Restricted shares repurchased or cancelled 18,877 17,353 - ============ ============ ============ Restricted shares outstanding at December 31 95,669 79,207 42,592 ============ ============ ============ Annual expense, net $ 189,000 $493,000 $ 392,000 Award date - average fair value per share $ 8.10 $ 6.62 $ 10.73
On November 11, 1997, the Company adopted a plan whereby members of the Company's executive management exchanged a total of 390,884 shares of restricted stock previously awarded to them for the right to repurchase such shares. Holders of these repurchase rights have no voting rights, but are entitled to receive a dividend equivalent, an amount equal to any cash dividends paid to common stockholders. Recipients of the repurchase rights may exercise their rights at any time beginning the date the restricted stock subject to the repurchase right becomes vested and ending 15 years from the date of vesting. The exercise price is generally 10% of the fair market value of the restricted stock subject to the repurchase right determined on the date of grant of the repurchase right. There is no effect on the amount of compensation to be recorded as a result of the exchange as the effective value of the restricted stock granted is the same as the value of the discounted repurchase right. During 1998, the Company converted options to purchase 735,000 shares previously issued under the Company's Employee Stock Incentive Plan to restricted stock subject to repurchase rights at the same exercise price as the options. The Company also issued 302,713 repurchase rights to members of its executive management with a value of $2.3 million. Compensation expenses related to the repurchase rights for the years ended December 31, 1998 and 1997 was $1.2 million and $0.4 million, respectively. At December 31, 1998 and 1997, 144,695 and -0- repurchase rights were exercisable, respectively. During 1997, the Company's Independent Directors, upon the recommendation of the Executive Compensation Committee, which in turn received recommendations from an executive compensation consulting firm, approved a long-term incentive program for two senior executive officers. Pursuant to such program, 270,000 shares of restricted stock with a value of $1,788,750 were awarded to the senior executive officers replacing 180,000 shares previously awarded in 1996 with a value of $1,643,000. In 1996, 90,000 shares of restricted stock previously granted to the former chairman and chief executive officer of the Company, valued at $900,000, were cancelled upon his resignation. EMPLOYEE STOCK PURCHASE PLAN During 1997, the Company adopted an Employee Stock Purchase Plan (ESPP) to provide all full-time employees an opportunity to purchase shares of its common stock through payroll deductions over a six-month subscription period. A total of 50,000 shares are available for award under this plan. The purchase price is equal to 85% of the fair market value on either the first or last day of the subscription period, whichever is lower. Stock issuances in connection with this plan are as follows: 1998 1997 --------------------------- ---------------------- SUBSCRIPTION PERIOD SUBSCRIPTION PERIOD -------------- ------------ ---------- ----------- JANUARY 1 - JULY 1 - JANUARY 1 JULY 1 - JUNE 30 DECEMBER 31 - JUNE 30 DECEMBER 31 (1) -------------- ------------ ---------- ----------- Number shares 7,899 10,830 -0- 6,530 Price per share $6.59 $6.00 -0- $5.21 (1) These shares were issued by the Company in 1999. 10. STOCK OPTION AND COMPENSATION PLANS (CONTINUED) PRO FORMA INFORMATION During 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). In accordance with the provisions of SFAS No. 123, the Company has elected to apply APB Opinion No. 25 and related Interpretations in accounting for its stock 16 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) option, restricted stock, and employee stock purchase plan. Had the Company elected to recognize compensation cost for these plans based on the fair value at the date of grant, as prescribed by SFAS No. 123, net income (loss) and net income (loss) per share would have changed by the pro forma amounts indicated in the table below (in thousands, except per share data):
1998 1997 1996 ----------- ----------- ---------------------- ---------------------- REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA ----------- ----------- ---------- ----------- ---------- ----------- Net income (loss) available to common stockholders $ 3,028 $ 3,077 $(1,416) $(2,481) $(6,349) $(7,481) Net income (loss) per share - basic $ 0.16 $ 0.16 $ (0.12) $ (0.21) $ (0.55) $(0.63) Net income (loss) per share - diluted $ 0.14 $ 0.14 $ (0.12) $ (0.21) $ (0.55) $(0.63)
OTHER PLANS The Company offers the Konover Property Trust, Inc. 401(k) and Profit Sharing Plan (the "Plan"), a tax qualified defined contribution plan to its employees. The Plan covers substantially all employees of the Company who have attained 21 years of age and completed at least one year of service. Eligible employees may elect to contribute 1% to 15% of their compensation to the Plan. The Company may elect to match a certain percentage of each employees contribution and may also elect to make a profit sharing contribution. For the years ended December 31, 1998, 1997 and 1996, the Company contributed $136,530, $102,579 and $64,084, respectively, as a matching contribution and there was no profit sharing contribution made by the Company. 11. TENANT LEASE AGREEMENTS The Company is the lessor of retail stores under operating leases with initial terms that expire from 1999 to 2017. Many leases are renewable for five years at the lessee's option. Expected future minimum rents to be received from tenants, excluding renewal options and contingent rentals, under operating leases in effect at December 31, 1998, are as follows (in thousands): 1999 $ 55,128 2000 46,238 2001 37,264 2002 30,532 2003 22,885 Thereafter 111,901 ----------------- $ 303,948 ================= For the years ended December 31, 1998, 1997 and 1996 rental revenue from a single major tenant, VF Corporation, comprised approximately 9.5%, 11.0% and 14.0%, respectively, of total rental revenue. 12. ACQUISITIONS AND SIGNIFICANT TRANSACTIONS On August 5, 1998, the stockholders approved a Stock Purchase Agreement between Prometheus Southeast Retail, LLC (including its assignee, "PSR"), a real estate investment affiliate of Lazard Freres Real Estate Investors, LLC, ("Lazard") and the Company pursuant to which PSR made a $200 million purchase of shares of Common Stock of the Company at a purchase price of $9.50 per share (the "Transaction"). Upon completion of funding, PSR owned an equity interest in the Company of approximately 58%, on a diluted basis. As a result of subsequent stock repurchases by the Company, PSR's ownership interest in the Company is 61%, assuming conversion of outstanding preferred stock and units into shares. Under the terms of the Transaction agreements, for as long as PSR's investment in the Company is $50 million or more, PSR has the right to participate in future equity issuances to preserve its ownership interest. Pursuant to the Contingent Value Rights Agreement, if PSR has not doubled its investment (through stock appreciation and dividends) by January 1, 2004, the Company will pay PSR, in cash or stock, an amount necessary to achieve such a return, subject to a maximum payment of 4,500,000 shares or the cash value thereof. On February 24, 1998, the Company entered into definitive agreements with affiliates of Konover & Associates South ("Konover"), a privately held 12. ACQUISITIONS AND SIGNIFICANT TRANSACTIONS (CONTINUED) real estate development firm based in Boca Raton, Florida, to acquire eleven community shopping centers. The Company acquired nine of the Konover community shopping centers for a total purchase price of $85.4 million consisting of $55.2 million in debt assumption, $26.8 million in cash and 369,000 of Operating Partnership Units, valued at $9.50 per share. For financial reporting purposes, the nine Konover properties were recorded effective April 1, 1998, since the risks and rewards of ownership had passed to the Company and there were no significant conditions outstanding. All of the acquired properties are held directly or indirectly, by KPT Properties, L.P. Of the original eleven community centers, the remaining two will continue to be managed by the Company, but will not be acquired. On March 30, March 31, and May 14, 1998, the Company concluded the acquisition of eight community shopping centers located in North Carolina and Virginia from Roy O. Rodwell and John N. Kane, ("Rodwell/Kane"). The acquired centers encompass approximately 950,000 square feet and are, in the aggregate, 94% leased. 17 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The aggregate purchase price for the acquired shopping centers was $57.1 million, consisting of the assumption of $44.3 million of fixed-rate indebtedness, the payment of $3.5 million in cash and the issuance of 974,347 limited partnership Units of the Operating Partnership. Of the purchase price, 292,447 Units and $0.8 million in cash will be issued or paid on a delayed or contingent basis. The contingencies include the attainment of certain property performance thresholds and the sale, lease or development of certain outparcels. The purchase price for the acquisition was determined as a result of arms-length negotiation between the Company and the sellers, with the Units being valued at $9.50 per share. The ninth and final center covered by the Rodwell/Kane acquisition agreement will be managed by the Company and is expected to be acquired in the year 2000. Its acquisition prior to the year 2000 would trigger an onerous loan assumption fee. In March, 1997, the Company purchased five community shopping centers ("North Hills") located in the Raleigh, North Carolina area for $32.4 million from an unrelated third party. The centers total approximately 606,000 square feet and feature anchor tenants such as Winn-Dixie, Food Lion, Inc., K-Mart Corporation and Eckerd Drug. The acquisition was funded from the Company's line of credit facility. As a result of the acquisition, the Company ended 1997 with 41 shopping centers containing an aggregate of approximately 5.5 million square feet of GLA. On January 7, 1998, the Company completed the purchase of a 55,909-square foot shopping center located in Danville, VA. This Food Lion anchored center was purchased for $3.1 million. 13. PROFORMA INFORMATION (UNAUDITED) Pro forma results of operations for the year ended December 31, 1998 and 1997 are set forth below and assume the Konover, Rodwell/Kane and North Hills acquisitions discussed above had been completed as of the January 1, 1997. The pro forma condensed statements of operations are not necessarily indicative of actual results of operations of the Company assuming such transactions had been completed as of the beginning of the period, nor do they purport to represent results of operations of future periods (in thousands, except for per share data).
ADJUSTMENT ACTUAL ------------- ------------- PRO FORMA 1998 KONOVER RODWELL/KANE 1998 ---- ------- ------------ ---- Revenues $ 69,542 $ 2,537 $ 1,580 $ 73,659 Property operating costs 20,625 600 302 21,527 Depreciation and amortization 18,515 438 305 19,258 General and administrative 7,004 80 10 7,094 Interest 19,772 1,155 666 21,593 Loss on sale of real estate 512 - - 512 ------------ ------------- ------------- ------------- INCOME BEFORE EXTRAORDINARY ITEM AND MINORITY INTEREST $ 3,114 $ 264 $ 297 $ 3,675 ============ ============= ============= ============= INCOME BEFORE EXTRAORDINARY ITEM PER COMMON SHARE $ 0.16 $ 0.01 $ 0.02 $ 0.20 ============ ============= ============= ============= DILUTED INCOME BEFORE EXTRAORDINARY ITEM PER COMMON SHARE $ 0.14 $ 0.01 $ 0.01 $ 0.17 ============ ============= ============= =============
18 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. PROFORMA INFORMATION (UNAUDITED) (CONTINUED)
ADJUSTMENT ACTUAL ------------------------------------------- PROFORMA 1997 KONOVER RODWELL/KANE NORTH HILLS 1997 ---- ------- ------------ ----------- ---- Revenues $ 53,726 $ 9,833 $ 6,939 $ 1,293 $71,791 Property operating costs 15,671 2,489 1,189 336 19,685 Depreciation and amortization 15,652 1,752 1,465 202 19,071 General and administrative 6,397 320 200 25 6,942 Interest 16,436 4,619 3,500 626 25,181 ------------- -------------- ------------- -------------- ------------- (LOSS) INCOME BEFORE EXTRAORDINARY ITEM $ (430) $ 653 $ 585 $ 104 $ 912 ============= ============== ============= ============== ============= (LOSS) INCOME BEFORE EXTRAORDINARY ITEM PER COMMON SHARE - BASIC $ (0.09) $ 0.06 $ 0.05 $ 0.01 $ 0.07 ============= ============== ============= ============== ============= (LOSS) INCOME BEFORE EXTRAORDINARY ITEM PER COMMON SHARE - DILUTED $ (0.09) $ 0.05 $ 0.04 $ 0.01 $ 0.06 ============= ============== ============= ============== =============
14. COMMITMENTS AND CONTINGENCIES The Company is a party to certain legal proceedings relating to its ownership, management and leasing of the properties, arising in the ordinary course of business. Management does not expect the resolution of these matters to have a significant impact on the Company's financial position or results of operations. 15. RELATED-PARTY TRANSACTIONS During 1993, the Company acquired a 19-acre tract of land in a non-monetary transaction from a partnership whose partners include two former executive officers of the Company. The recorded value of the land was $748,000. In return for the land, the Company assumed certain outstanding debt and the remaining purchase price was settled by reducing amounts owed to the Company by a tenant whose majority owners were also partners in the partnership. A review of this and other transactions resulted in J. Dixon Fleming, Jr., the Company's former Chairman and Chief Executive Officer, agreeing to permit the Company to satisfy certain asset valuation issues by offsetting amounts otherwise owed to Mr. Fleming pursuant to his employment agreement or by the acceptance from Mr. Fleming of some other cash or value equivalent. In 1997, the Company entered into an agreement with Mr. Fleming and sold to him the 19-acre land tract for the sum of $750,000. In 1997, J. Dixon Fleming, Jr. resigned as Chairman and Chief Executive Officer of the Company. Pursuant to his three-year employment agreement entered into on December 15, 1995, he was entitled to a lump sum distribution of the value of the remaining term of the agreement. The Company charged $767,000 to general and administrative expense in 1996 for the remaining value of his contract. In December 1997, the Company issued a note receivable of $8.5 million to Davie Plaza Limited Partnership, a Florida limited partnership of which Simon Konover, Chairman of the Board of the Company is a 49% owner. The loan is secured by a first mortgage position on a 299,778 s.f. retail shopping center located in Davie, Florida. In January, 1999, the Company received a $2 million paydown. The outstanding balance is now $6.5 million and carries interest at LIBOR plus 2.5% payable monthly and matures on June 30, 1999. 16. TERMINATED ACQUISITION On August 25, 1995, the Company executed definitive written agreements ("Agreements") to acquire both the factory outlet centers owned by the Public Employees Retirement System of Ohio ("OPERS") and the management and business operations of the Charter Oak Group Ltd., a subsidiary of Rothschild Realty, Inc., ("RRI"), subject to certain terms and conditions. On December 7, 1995, the Company reported that RRI had terminated the Agreements and thus, the acquisitions did not take place. Subsequent to the termination of the Agreements, RRI for itself and on behalf of OPERS made a demand for payment with respect to a $5 million promissory note (the "Note") issued by the Company in connection with its proposed purchase of the OPERS' centers and the management and business operations of RRI's Charter Oak Group, Ltd. The Note was payable only upon the occurrence of certain conditions relating to the termination of the Agreements and the Company asserted that certain of the required conditions were not met. After an unsuccessful attempt at mediation of the dispute, RRI filed for binding arbitration of the matter to settle the dispute. Following the arbitration hearing held in late April 1997, the Company agreed to pay $2.9 million to RRI on behalf of related entities of OPERS in settlement of all outstanding issues between the Company and OPRES/RRI relating to the terminated merger. The Company recorded a charge of $1.7 million in December 1995 in connection with the termination. The remaining $1.2 million of the $2.9 million settlement, plus an estimate for the Company's legal fees was charged to operations in 1997. All amounts due to OPERS/RRI have been paid. 19 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 17. QUARTERLY INFORMATION (UNAUDITED) Selected quarterly financial data for the four quarters in 1998 and 1997 is as follows (in thousands, except per share data)
QUARTER ENDED -------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------------------------------------------------------- 1998: Total revenue $ 13,929 $18,404 $ 18,350 $ 18,859 ======================================================== Net (loss) income applicable to common shareholders $ (101) $ (778) $ 197 $ 3,710 ======================================================== Basic earnings (loss) per common share: (Loss) income before extraordinary items $(0.01) $ (0.05) $ 0.01 $ 0.12 ======================================================== Net (loss) income $(0.01) $ (0.05) $ 0.01 $ 0.12 ======================================================== Diluted earnings (loss) per common share: (Loss) income before extraordinary item $(0.01) $ (0.05) $ 0.01 $ 0.11 ======================================================== Net (loss) income $(0.01) $ (0.05) $ 0.01 $ 0.11 ======================================================== QUARTER ENDED -------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------------------------------------------------------- 1997: Total revenue $ 11,922 $13,475 $ 13,614 $ 14,715 ======================================================== Net (loss) income applicable to common shareholders $ (2,422) $ 119 $ 329 $ 558 ======================================================== Basic earnings (loss) per common share: (Loss) income before extraordinary items $(0.12) $ 0.01 $ 0.03 $ 0.04 Extraordinary item (0.08) - - - ======================================================== Net (loss) income $(0.20) $ 0.01 $ 0.03 $ 0.04 ======================================================== Diluted earnings (loss) per common share: (Loss) income before extraordinary item $(0.12) $ 0.01 $ 0.02 $ 0.04 Extraordinary item (0.08) - - - ======================================================== Net (loss) income $(0.20) $ 0.01 $ 0.02 $ 0.04 ========================================================
20 KONOVER PROPERTY TRUST, INC. SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION At December 31, 1998
Cost Capitalized Initial Cost to Company Subsequent to Acquisition ------------------------------- ---------------------------- Bldg. and Bldg. and Property Encumbrances Land Impvmts. Land Imprvmts. - - ------------------------ -------------- --------------- --------------- -------------- ------------- Boaz, Al $ 3,284,499 $ 34,998 $ 42,004 $ 4,232 $ 1,490,703 Casa Grande, AZ 54,326 2,220,397 10,557,446 588,713 Mesa, AZ 4,467,023 1,399,858 7,060,705 524,004 3,929,517 Tucson, AZ 1,224,727 772,231 3,572,837 20,215 262,832 Lathrop, CA -- 2,842,636 7,048,844 1,465,246 Vacaville, CA 28,697,605 30,008,142 49,464,506 1,301,833 Graceville, FL 2,313,576 556,765 2,544,654 349,438 Lake Park, GA 2,645,472 1,128,056 4,801,250 107,674 West Frankfort, IL 644,611 471,041 2,130,358 118,776 Story City, IA 2,257,400 601,802 2,737,481 22,653 2,129,742 Carrollton, KY -- 340,190 1,555,641 70,865 Georgetown, KY 7,783,006 937,490 6,510,116 118,599 Hanson, KY 814,869 308,876 1,408,641 77,693 Arcadia, LA 1,925,461 404,864 1,856,173 3,492 1,654,322 Iowa, LA 3,480,871 627,061 2,860,591 2,597,208 Kittery, ME 1,336,716 355,080 2,485,826 113,110 Branson, MO 11,229,609 5,702,365 24,600,479 32,600 860,289 Lebanon, MO 1,945,009 403,915 1,889,710 147,564 Tupelo, MS 1,538,799 430,765 1,956,158 11,484 1,214,117 Nebraska City, NE 1,822,120 400,684 1,813,050 16,225 1,821,029 Las Vegas, NV 5,510,058 7,158,719 18,761,605 465,158 Conway, NH -- 324,652 2,277,122 122,693 Lake George, NY 1,926,723 975,466 4,441,445 337,989 Smithfield, NC 24,140,177 77,667 9,064,651 1,428,124 7,407,577 Crossville, TN 5,092,393 519,239 2,415,619 11,389 4,415,637 Nashville, TN 21,713,971 5,125,939 10,899,810 6,021,700 Tri-Cities, TN -- 353,983 5,648,812 656,818 78,028 Union City, TN 969,014 296,580 1,343,859 2,983 136,815 Corsicana, TX 713,945 336,335 1,533,169 104,926 Hempstead, TX 1,153,189 375,487 1,711,282 (99,997) 71,469 LaMarque, TX 3,661,599 4,066,414 11,864,248 310,620 Livingston, TX 855,856 354,381 1,615,979 114,539 Mineral Wells, TX 875,349 315,944 1,441,675 75,572 Sulphur Springs, TX 2,014,313 512,898 2,326,326 131 443,988 Draper, UT 5,872,997 718,188 4,294,019 56,513 4,798,069 North Bend, WA 12,122,205 8,428,229 12,052,296 41,432 13,931,147 Eastgate, NC -- 688,256 3,153,235 (416,436) 9,376 Tower, NC 2,965,107 659,677 4,459,411 7,087 96,443 Northridge, NC 9,877,639 1,428,493 8,872,975 14,775 187,569 Gateway, NC 4,387,108 816,566 3,246,925 8,628 2,831,507 MacGregor, NC 8,086,910 1,428,513 7,694,110 15,847 204,630 Danville, VA 2,269,715 465,505 2,642,090 6,020 52,033 Celebration, NC 5,743,565 1,436,628 8,140,891 4,442 42,547 Bolling Creek, VA 1,495,461 261,972 1,484,505 5,285 29,946 Shoreside, NC 5,784,119 1,050,654 5,953,703 8,936 50,638 Stanton Square, NC 2,137,469 1,401,330 7,994,574 14,042 56,932 Brookneal, VA 1,096,700 221,968 1,257,819 5,780 33,455 Keysville, VA 1,505,653 321,001 1,819,008 6,550 37,996 University Mall, VA 7,135,096 1,232,027 6,398,674 (99,509) 54,768 Towne Square, VA 15,062,980 2,951,412 15,374,453 (228,226) 64,812 Durham Festival, NC 6,598,779 1,296,071 7,697,319 89,178 180,980 Food Lion Plaza, VA 1,061,600 314,504 1,947,925 22,985 49,045 Lenoir Festival, NC 4,423,485 1,175,381 6,963,471 83,299 169,050 Hollywood Festival, FL 4,592,985 843,578 5,040,436 59,275 120,731 Oakland Park, FL 2,471,402 823,112 4,934,822 58,374 118,264 Lake Point Centre, FL 11,096,793 2,196,485 13,013,873 152,530 297,210 Square One, FL 9,339,110 1,692,011 10,043,077 122,146 237,150 South Cobb, FL -- 74,406 473,390 6,904 19,913 Mobile Festival, AL 19,688,508 4,520,765 27,128,125 317,453 619,759 Conway, SC 3,203,855 708,784 4,030,309 7,581 29,097 Waverly Place, NC 10,671,743 1,944,220 11,017,247 7,039 39,886 $304,783,270 $109,840,656 $399,370,754 $3,012,283 $64,888,934 Adjustments to Net Gross Amount at Which Sale Of Realizable Value Carried at Close of Period ------------------------------- --------------------------------- ------------------------------- Bldg. and Bldg. and Bldg. and Property Land Imprvmts. Land Imprvmts. Land Imprvmts. - - ------------------------ --------------- --------------- --------------- ----------------- --------------- --------------- Boaz, Al $ $ $ $ $ 39,230 $ 1,532,707 Casa Grande, AZ (1,362,190) (6,037,810) 858,207 5,108,349 Mesa, AZ (1,421,115) 1,923,862 9,569,107 Tucson, AZ 792,446 3,835,669 Lathrop, CA (1,694,553) (4,762,173) (1,148,083) (3,751,917) -- -- Vacaville, CA 30,008,142 50,766,339 Graceville, FL 556,765 2,894,092 Lake Park, GA 1,128,056 4,908,924 West Frankfort, IL (137,327) 333,714 2,249,134 Story City, IA 624,455 4,867,223 Carrollton, KY (340,190) (1,626,506) -- -- Georgetown, KY 937,490 6,628,715 Hanson, KY (61,421) 247,455 1,486,334 Arcadia, LA (209,716) 198,640 3,510,495 Iowa, LA (156,119) (34,194) 470,942 5,423,605 Kittery, ME 355,080 2,598,936 Branson, MO 5,734,965 25,460,768 Lebanon, MO 403,915 2,037,274 Tupelo, MS 442,249 3,170,275 Nebraska City, NE 416,909 3,634,079 Las Vegas, NV 7,158,719 19,226,763 Conway, NH (151,997) (1,048,003) 172,655 1,351,812 Lake George, NY 975,466 4,779,434 Smithfield, NC 1,505,791 16,472,228 Crossville, TN (149,542) 381,086 6,831,256 Nashville, TN 5,125,939 16,921,510 Tri-Cities, TN 1,010,801 5,726,840 Union City, TN (157,649) 141,914 1,480,674 Corsicana, TX 336,335 1,638,095 Hempstead, TX 275,490 1,782,751 LaMarque, TX (199,075) 3,867,339 12,174,868 Livingston, TX 354,381 1,730,518 Mineral Wells, TX 315,944 1,517,247 Sulphur Springs, TX 513,029 2,770,314 Draper, UT 774,701 9,092,088 North Bend, WA 8,469,661 25,983,443 Eastgate, NC 271,820 3,162,611 Tower, NC 666,764 4,555,854 Northridge, NC 1,443,268 9,060,544 Gateway, NC 825,194 6,078,432 MacGregor, NC 1,444,360 7,898,740 Danville, VA 471,525 2,694,123 Celebration, NC 1,441,070 8,183,438 Bolling Creek, VA 267,257 1,514,451 Shoreside, NC 1,059,590 6,004,341 Stanton Square, NC 1,415,372 8,051,506 Brookneal, VA 227,748 1,291,274 Keysville, VA 327,551 1,857,004 University Mall, VA 1,132,518 6,453,442 Towne Square, VA 2,723,186 15,439,265 Durham Festival, NC 1,385,249 7,878,299 Food Lion Plaza, VA 337,489 1,996,970 Lenoir Festival, NC 1,258,680 7,132,521 Hollywood Festival, FL 902,853 5,161,167 Oakland Park, FL 881,486 5,053,086 Lake Point Centre, FL 2,349,015 13,311,083 Square One, FL 1,814,157 10,280,227 South Cobb, FL 81,310 493,303 Mobile Festival, AL 4,838,218 27,747,884 Conway, SC 716,365 4,059,406 Waverly Place, NC 1,951,259 11,057,133 -- -- ------------ ------------ $ (3,105,592) $ (7,843,988) $ (2,662,270) $ (10,837,730) $107,085,077 $445,577,970 Life on which Depreciation in latest income Accumulated Date of Date Statement Property Total Depreciation Construction Acquired if Computed - - ------------------------ --------------- -------------- -------------- ---------- ---------------- Boaz, Al $ 1,571,937 $ 426,146 1993 5-39yrs. Casa Grande, AZ 5,966,556 1,737,849 1994 5-39yrs. Mesa, AZ 11,492,969 1,984,590 1993 5-39yrs. Tucson, AZ 4,628,115 691,825 1993 5-39yrs. Lathrop, CA -- 1994 5-39yrs. Vacaville, CA 80,774,481 8,790,108 1993 5-39yrs. Graceville, FL 3,450,857 510,469 1993 5-39yrs. Lake Park, GA 6,036,980 2,187,577 1993 5-39yrs. West Frankfort, IL 2,582,848 407,341 1993 5-39yrs. Story City, IA 5,491,678 815,332 1993 5-39yrs. Carrollton, KY -- 1993 5-39yrs. Georgetown, KY 7,566,205 1,756,782 1993 5-39yrs. Hanson, KY 1,733,789 259,079 1993 5-39yrs. Arcadia, LA 3,709,135 735,153 1993 5-39yrs. Iowa, LA 5,894,547 1,076,422 1993 5-39yrs. Kittery, ME 2,954,016 377,824 1993 5-39yrs. Branson, MO 31,195,733 2,803,557 1995 5-39yrs. Lebanon, MO 2,441,189 364,917 1993 5-39yrs. Tupelo, MS 3,612,524 562,641 1993 5-39yrs. Nebraska City, NE 4,050,988 638,185 1993 5-39yrs. Las Vegas, NV 26,385,482 3,349,426 1993 5-39yrs. Conway, NH 1,524,467 273,566 1993 5-39yrs. Lake George, NY 5,754,900 628,865 1993 5-39yrs. Smithfield, NC 17,978,019 5,047,241 1993 5-39yrs. Crossville, TN 7,212,342 1,128,918 1993 5-39yrs. Nashville, TN 22,047,449 3,071,350 1993 5-39yrs. Tri-Cities, TN 6,737,641 1,732,988 1993 5-39yrs. Union City, TN 1,622,588 257,335 1993 5-39yrs. Corsicana, TX 1,974,430 288,432 1993 5-39yrs. Hempstead, TX 2,058,241 315,005 1993 5-39yrs. LaMarque, TX 16,042,207 2,151,398 1994 5-39yrs. Livingston, TX 2,084,899 317,741 1993 5-39yrs. Mineral Wells, TX 1,833,191 272,536 1993 5-39yrs. Sulphur Springs, TX 3,283,343 483,691 1993 5-39yrs. Draper, UT 9,866,789 1,750,630 1993 5-39yrs. North Bend, WA 34,453,104 4,484,551 1993 5-39yrs. Eastgate, NC 3,434,431 180,051 1997 5-39yrs. Tower, NC 5,222,618 255,184 1997 5-39yrs. Northridge, NC 10,503,812 519,428 1997 5-39yrs. Gateway, NC 6,903,626 246,242 1997 5-39yrs. MacGregor, NC 9,343,100 460,211 1997 5-39yrs. Danville, VA 3,165,648 73,212 1998 5-39yrs. Celebration, NC 9,624,507 141,960 1998 5-39yrs. Bolling Creek, VA 1,781,707 30,100 1998 5-39yrs. Shoreside, NC 7,063,931 120,271 1998 5-39yrs. Stanton Square, NC 9,466,877 160,924 1998 5-39yrs. Brookneal, VA 1,519,022 25,586 1998 5-39yrs. Keysville, VA 2,184,555 36,929 1998 5-39yrs. University Mall, VA 7,585,960 130,886 1998 5-39yrs. Towne Square, VA 18,162,451 312,981 1998 5-39yrs. Durham Festival, NC 9,263,547 151,246 1998 5-39yrs. Food Lion Plaza, VA 2,334,459 37,194 1998 5-39yrs. Lenoir Festival, NC 8,391,201 137,164 1998 5-39yrs. Hollywood Festival, FL 6,064,021 98,516 1998 5-39yrs. Oakland Park, FL 5,934,572 96,361 1998 5-39yrs. Lake Point Centre, FL 15,660,099 255,982 1998 5-39yrs. Square One, FL 12,094,385 197,697 1998 5-39yrs. South Cobb, FL 574,613 9,222 1998 5-39yrs. Mobile Festival, AL 32,586,102 530,160 1998 5-39yrs. Conway, SC 4,775,771 60,010 1998 5-39yrs. Waverly Place, NC 13,008,393 23,625 1998 5-39yrs. -- 1998 5-39yrs. ------------ ----------- ---- ---- $552,663,047 $55,970,612
- - -------------------------------------------------------------------------------- (1)Buildings and improvements are depreciated based on a 15-39 year life. Tenant improvements are depreciated over the estimated terms of the leases, which range from 5 to 10 years. (2)Aggregate cost of the real estate property for federal income tax purposes is approximately $467,253,431 21 KONOVER PROPERTY TRUST, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) The changes in total real estate for years ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996 ------------------------------------------------- Balance, beginning of period $380,798,184 $345,890,739 $ 340,166,756 Developed or acquired properties 168,287,524 30,619,827 10,339,504 Improvements 14,526,918 6,550,712 547,694 Adjustment to net realizable value - - (5,000,000) Sales (10,949,579) (2,263,094) (163,215) ================================================= Balance, end of period $ 522,663,047 $ 380,798,184 $ 345,890,739 =================================================
The changes in accumulated depreciation for years ended December 31, 1997, 1996 and 1995 are as follows:
1998 1997 1996 ------------------------------------------------- Balance, beginning of period $42,099,057 $31,198,623 $ 20,386,741 Developed or acquired properties 2,629,203 7,561,802 8,865,743 Improvements 12,152,989 3,684,308 1,946,139 Sales (910,637) (345,676) - ================================================= Balance, end of period $55,970,612 $42,099,057 $ 31,198,623 =================================================
22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Executive Compensation Committee of the Board of Directors of Konover Property Trust, Inc. We have audited the accompanying statement of net assets available for plan benefits of Konover Property Trust, Inc. Qualified Employee Stock Purchase Plan as of December 31, 1998 and 1997, and the related statement of changes in net assets available for plan benefits for the period from inception (July 1, 1997) to December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for plan benefits of Konover Property Trust, Inc. Qualified Employee Stock Purchase Plan at December 31, 1998 and 1997, and the changes in net assets available for plan benefits for the period from inception (July 1, 1997) to December 31, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP Raleigh, North Carolina, March 30, 1999. 23 KONOVER PROPERTY TRUST, INC. STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS EMPLOYEE STOCK PURCHASE PLAN AT DECEMBER 31, 1998 1997 ---- ---- Receivable from Konover Property Trust, Inc. $ 65,657 $ 34,081 =============== ================ =============== ================ Net assets available for plan benefits $ 65,657 $ 34,081 =============== ================ The accompanying notes to financial statements are an integral part of these statements 24 KONOVER PROPERTY TRUST, INC. STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS EMPLOYEE STOCK PURCHASE PLAN
YEAR ENDED, FROM DECEMBER 31, INCEPTION 1998 1997 ---- ---- Employee contributions $ 117,371 $ 34,081 Deductions: Purchases of Common Stock 86,050 - Withdrawals (255) - --------------- ---------------- 85,795 - --------------- ---------------- New increase 31,576 34,081 New assets available for Plan benefits at beginning of period 34,081 - --------------- ---------------- Net assets available for Plan benefits at end of period $ 65,657 $ 34,081 =============== ================ Shares of Common Stock purchased during year 14,429 -
The accompanying notes to financial statements are an integral part of these statements 25 KONOVER PROPERTY TRUST, INC. QUALIFIED EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 1. BASIS OF PRESENTATION The accompanying financial statements of the Konover Property Trust, Inc. Qualified Employee Stock Purchase Plan (the Plan) have been prepared on the accrual basis. 2. PLAN DESCRIPTION AND SUMMARY OF SIGNIFICANT PLAN PROVISIONS The Board of Directors of Konover Property Trust, Inc. (the "Company") adopted the Plan on May 29, 1997. The Plan became effective as of July 1, 1997. The maximum number of shares available under the Plan is 50,000, subject to certain adjustments, as defined. The purpose of this Plan is to provide the Company's employees with an additional opportunity to share in the ownership of the Company. Under terms of the Plan, all regular full-time employees of the Company may make voluntary payroll contributions thereby enabling them to purchase Common Stock of the Company at 85% of the lower of the fair market value as of the beginning or end of the six-month offering periods, which commence on January 1 and July 1. Contributions to the Plan are maintained in the Company's cash account until such time as the participant exercises the option to purchase shares of Common Stock from his or her available contributions, or withdraws from the account. Employee contributions, which represent all net Plan assets, are considered general assets of the Company and may be subject to the claims of creditors. The Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and is not qualified under Section 401 (a) of the Internal Revenue Code of 1986, as amended which relates to qualification of certain pension, profit-sharing and stock bonus plans. All costs to administer the Plan are paid by the Company. 3. SUBSEQUENT EVENT On February 10, 1999, 10,830 shares of common stock of the Company were purchased by the Plan and such shares were transferred to an independent broker that holds the shares in the name of the respective employees. 26 EX-3.(I) 2 EXHIBIT 3.2 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF KONOVER PROPERTY TRUST, INC. ARTICLE I STOCKHOLDERS SECTION 1. MEETINGS OF STOCKHOLDERS. (A) ANNUAL MEETING. The annual meeting of the stockholders of the Corporation for the election of directors and the receiving of reports shall be held at such date and time as shall be determined by the Board of Directors. Upon due notice, there may also be considered and acted upon at an annual meeting any matter that could properly be considered and acted upon at a special meeting. (B) SPECIAL MEETINGS. (1) Special meetings of the stockholders of the Corporation for any purpose may be held on any day when called at any time by the holders of shares entitling them to exercise a majority of the voting power of the Corporation entitled to vote at such a meeting, the Board of Directors, the Chairman of the Board, the President or by a committee of the Board of Directors that has been duly designated by the Board of Directors and whose powers and authority, as provided in a resolution of the Board of Directors, include the power to call such meetings, but special meetings may not be called by any other person or persons. (2) In order that the Corporation may determine the stockholders entitled to request a special meeting, the Board of Directors may fix a record date to determine the stockholders entitled to make such a request (the "Request Record Date"). The Request Record Date shall not precede the date upon which the resolution fixing the Request Record Date is adopted by the Board of Directors and shall not be more than 10 days after the date upon which the resolution fixing the Request Record Date is adopted by the Board of Directors. Any stockholder of record seeking to have stockholders request a special meeting shall, by sending written notice to the Secretary of the Corporation by certified or registered mail, return receipt requested, request the Board of Directors to fix a Request Record Date. The Board of Directors shall within 10 days after the date on which a valid request to fix a Request Record Date is received, adopt a resolution fixing the Request Record Date and shall make a public announcement of such Request Record Date, the Request Record Date shall be the 10th day after the first date on which a valid written request to set a Request Record Date is received by the Secretary. To be valid, such written request shall set forth the purpose or purposes for which the special meeting is to be held, shall be signed by one or more stockholders of record (or their duly authorized proxies or other representatives), shall bear the date of signature of each such stockholder (or proxy or other representative) and shall set forth all information relating to such stockholder that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-11 thereunder. (3) In order for a stockholder or stockholders to request a special meeting, a written request or requests for a special meeting by the holders of record as of the Request Record Date of at least a majority of the issued and outstanding shares of stock that would be entitled to vote at such a meeting must be delivered to the Corporation. To be valid, each written request by a stockholder for a special meeting shall set forth the specific purpose or purposes for which the special meeting is to be held (which purpose or purposes shall be limited to the purpose or purposes set forth in the written request to set a Request Record Date received by the Corporation pursuant to paragraph (2) of this Section 1(b)), shall be signed by one or more persons who as of the Request Record Date are stockholders of record (or their duly authorized proxies or other representatives), 1 shall bear the date of signature of each such stockholder (or proxy or other representative) and shall set forth the name and address, as they appear in the Corporation's books, of each stockholder signing such request and the class and number of shares of the Corporation which are owned of record and beneficially by each such stockholder, shall be sent to the Secretary by certified or registered mail, return receipt requested, and shall be received by the Secretary within 60 days after the Request Record Date. (4) The Corporation shall not be required to call a special meeting upon stockholder request unless, in addition to the documents required by paragraph (3) of this Section 1(b), the Secretary receives a written agreement signed by each Soliciting Stockholder (as defined below), pursuant to which each Soliciting Stockholder, jointly and severally, agrees to pay the Corporation's costs of holding the special meeting, including the costs of preparing and mailing proxy materials for the Corporation's own solicitation, provided that if each of the resolutions introduced by any Soliciting Stockholder at such meeting is adopted, and each of the individuals nominated by or on behalf of any Soliciting Stockholder for election as a director at such meeting is elected, then the Soliciting Stockholders shall not be required to pay such costs. For purposes of this paragraph (4), the following terms shall have the meanings set forth below: (i) "Affiliate" of any Person (as defined herein) shall mean any Person controlling, controlled by or under common control with such first Person. (ii) "Participant" shall have the meaning assigned to such term in Rule 14a-11 promulgated under the Exchange Act. (iii) "Person" shall mean any individual, firm, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity. (iv) "Proxy" shall have the meaning assigned to such term in Rule 14a-1 promulgated under the Exchange Act. (v) "Solicitation" shall have the meaning assigned to such term in Rule 14a-11 promulgated under the Exchange Act. (vi) "Soliciting Stockholder" shall mean, with respect to any special meeting requested by a stockholder or stockholders, any of the following Persons: (a) if the number of stockholders signing the request or requests of meeting delivered to the Corporation pursuant to paragraph (3) of this Section 1(b) is 10 or fewer, each stockholder signing any such request; (b) if the number of stockholders signing the request or requests of meeting delivered to the Corporation pursuant to paragraph (3) of this Section 1(b) is more than 10, each Person who either (I) was a Participant in any Solicitation of such request or requests or (II) at the time of the delivery to the Corporation of the documents described in paragraph (3) of this Section 1(b) had engaged or intended to engage in any Solicitation of Proxies for use at such special meeting (other than a Solicitation of Proxies on behalf of the Corporation); or (c) any Affiliate of a Soliciting Stockholder, if a majority of the directors then in office determine that such Affiliate should be required to sign the written notice described in paragraph (3) of this Section 1(b) and/or the written agreement described in this paragraph (4) in order to prevent the purposes of this Section 1(b) from being evaded. (5) Except as provided in the following sentence, any special meeting shall be held at such hour and day as may be designated by whichever of the Board of Directors, Chairman, President or committee shall 2 have called such meeting. In the case of any special meeting called by the Chairman or the Secretary upon the request of stockholders (a "Request Special Meeting"), such meeting shall be held at such hour and day as may by designated by the Board of Directors; provided, however, that the date of any Request Special Meeting shall be not more than 60 days after the Meeting Record Date (as defined in Section 2(c)); and provided further that in the event that the directors then in office fail to designate an hour and date for a Request Special Meeting within 10 days after the date that valid written requests for such meeting by the holders of record as of the Request Record Date of at least a majority of the issued and outstanding shares of stock that would be entitled to vote at such meeting are delivered to the Corporation (the "Delivery Date"), then such meeting shall be held at 2:00 p.m. local time on the 90th day after the Delivery Date or, if such 90th day is not a Business Day (as defined below), on the first preceding Business Day. In fixing a meeting date for any special meeting, the Board of Directors, Chairman, President or committee may consider such factors as they deem relevant within the good faith exercise of their business judgment, including, without limitation, the nature of the action proposed to be taken, the facts and circumstances surrounding any request of such meeting, and any plan of the Board of Directors to call an annual meeting or a special meeting for the conduct of related business. (6) The Corporation may engage regionally or nationally recognized independent inspectors of elections to act as an agent of the Corporation for the purpose of promptly performing a ministerial review of the validity of any purported written request or requests for a special meeting received by the Secretary. For the purpose of permitting the inspectors to perform such review, no purported request shall be deemed to have been delivered to the Corporation until the earlier of (i) five Business Days following receipt by the Secretary of such purported request and (ii) such date as the independent inspectors certify to the Corporation that the valid requests received by the Secretary represent at least a majority of the issued and outstanding shares of stock that would be entitled to vote at such meeting. Nothing contained in this paragraph (6) shall in any way be construed to suggest or imply that the Board of Directors or any stockholder shall not be entitled to contest the validity of any request, whether during or after such five-Business Day period, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). (7) For purposes of these by-laws, "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of North Carolina are authorized or obligated by law or executive order to close. (c) PLACE OF MEETINGS. Any meeting of the stockholders may be held at such place within or without the State of Maryland as may be determined by the Board of Directors and stated in the notice of said meeting, provided that if the Board of Directors does not designate a location, such meeting shall be held at the executive office of the Corporation in Cary, North Carolina. (d) NOTICE OF MEETING AND WAIVER OF NOTICE. (1) NOTICE. Written notice of the place, date and hour of every meeting of the stockholders, whether annual or special, shall be given to each stockholder of record entitled to vote at the meeting not less than 10 nor more than 90 days before the date of the meeting. Every notice of a special meeting shall state the purpose or purposes thereof. Such notice shall be given in writing to each stockholder entitled thereto by mail, addressed to the stockholder at his address as it appears on the records of the Corporation. Notice shall be deemed to have been given at the time when it was deposited in the mail. (2) RECORD HOLDER OF SHARES. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claims to or interests in such share or shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as otherwise provided by the laws of Maryland. 3 (3) WAIVER. Whenever any written notice is required to be given under the provisions of the Articles of Incorporation, these Bylaws, or by statute, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting of the stockholders need be specified in any written waiver of notice of such meeting. Attendance of a person, either in person or by proxy, at any meeting, shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. (e) QUORUM, MANNER OF ACTING AND ADJOURNMENT. The holders of record of shares entitled to cast a majority of the votes entitled to vote at any meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business thereat, except as otherwise provided by statute, by the Articles of Incorporation, or by these Bylaws. Whether or not a quorum is present, the holders of shares entitled to cast a majority of the votes present in person or represented by proxy at the meeting shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At any such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. When a quorum is present at any meeting, the vote of a majority of the votes entitled to be cast by the holders of all issued and outstanding shares present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the applicable statute or the Articles of Incorporation or these Bylaws, a different vote is required, in which case such express provision shall govern. Except upon those questions governed by the aforesaid express provisions, the stockholders present in person or by proxy at a meeting at which a quorum is at any time present or represented shall have the power to continue to do business until adjournment, notwithstanding a subsequent reduction in the number of shares present or represented to leave less than would constitute a quorum. (f) ORGANIZATION OF MEETINGS. (1) PRESIDING OFFICER. Any "executive officer" of the Corporation, as that term is defined in section 3(f) of Article III of these Bylaws, may call meetings of the stockholders to order and act as chairman thereof. (2) MINUTES. The Secretary of the Corporation, or, in his absence or by his designation, an Assistant Secretary, or, in the absence of both, a person appointed by the chairman of the meeting, which person need not be an officer of the Corporation, shall act as secretary of the meeting and shall make and keep a record of the proceedings thereat. (3) STOCKHOLDERS' LIST. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting. The list shall be arranged in alphabetical order showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. (4) VOTING PROCEDURES AND INSPECTORS OF ELECTIONS. 4 (A) The Board of Directors shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Board of Directors may designate one or more persons as alternate inspectors to replace any inspector who fails to act at such meeting. If no inspector or alternate is able to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. (B) The inspectors shall (i) determine those stockholders entitled to vote at the meeting, (ii) ascertain the number of shares outstanding and the voting power of each, (iii) determine the shares represented at a meeting and the validity of proxies and ballots, (iv) count all votes and ballots, (v) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (vi) certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. (C) The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless judicially determined otherwise upon application by a stockholder. (D) In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, ballots and the regular books and records of the Corporation, except that the inspector may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification pursuant to clause (B) (vi) of this subsection 1(f) (4) shall specify the precise information considered by them, including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors' belief that such information is accurate and reliable. (E) The provisions of subsections 1(f)(4)(A) through (D) of this Article I shall not apply at any time that the Corporation does not have a class of voting stock that is (i) listed on a national securities exchange, (ii) authorized for quotation on an interdealer quotation system, or (iii) held of record by more than 2,000 stockholders. (5) ORDER OF BUSINESS. Unless otherwise determined by the Board of Directors prior to the meeting, the chairman of any meeting of stockholders shall determine the order of business and shall have the authority in his discretion to regulate the conduct of any such meeting, including, without limitation, by imposing restrictions on the persons (other than stockholders of the Corporation or their duly appointed proxies) who may attend any such meeting of stockholders, whether any stockholder or his proxy may be excluded from any stockholders' meeting based upon any determination by the chairman of the meeting, in his sole discretion, that any such person has unduly disrupted or is likely to disrupt the proceedings thereat, and the circumstances in which any person may make a statement or ask questions at any meeting of stockholders. (g) VOTING. Except as otherwise provided by statute or the Articles of Incorporation, every stockholder entitled to vote shall be entitled to cast the vote per share to which such share is entitled, in person or by proxy, on each proposal submitted to the meeting for each share held of record by him on the record date for the determination of the stockholders entitled to vote at the meeting. At any meeting at which a quorum is present, all questions and business that may come before the meeting shall be determined by a majority of votes cast, except when a greater proportion is required by law, the Articles of Incorporation, or these Bylaws. 5 (h) PROXIES. A person who is entitled to attend a meeting of stockholders, to vote thereat, and execute consents, waivers and releases, may be represented at such meeting or vote thereat, and execute consents, waivers and releases and exercise any of his rights by proxy or proxies appointed by a legally sufficient writing signed by such person, or by his duly authorized attorney, as provided by the laws of the State of Maryland. (i) STOCKHOLDER PROPOSALS. For any stockholder proposal to be presented in connection with an annual meeting of stockholders of the Corporation, including any proposal relating to the nomination of a director to be elected to the Board of Directors of the Corporation, the stockholders must have given timely written notice thereof in writing to the Secretary of the Corporation. In order for such notice to be timely, such notice must be received by the Corporation not less than 90 nor more than 180 days prior to the anniversary of the previous year's annual meeting; PROVIDED, HOWEVER, THAT IN THE EVENT THAT THE DATE OF THE ANNUAL MEETING IS ADVANCED BY MORE THAN 30 DAYS OR DELAYED BY MORE THAN 60 DAYS FROM SUCH ANNIVERSARY DATE OR IF THE CORPORATION HAS NOT PREVIOUSLY HELD AN ANNUAL MEETING, NOTICE BY THE STOCKHOLDER TO BE TIMELY MUST BE SO DELIVERED NOT EARLIER THAN THE CLOSE OF BUSINESS ON THE 180TH DAY PRIOR TO SUCH ANNUAL MEETING AND NOT LATER THAN THE CLOSE OF BUSINESS ON THE LATER OF THE 90TH DAY PRIOR TO SUCH ANNUAL MEETING AND THE TENTH DAY FOLLOWING THE DAY ON WHICH PUBLIC ANNOUNCEMENT OF THE DATE OF SUCH MEETING IS FIRST MADE BY THE CORPORATION. IN NO EVENT SHALL THE PUBLIC ANNOUNCEMENT OF A POSTPONEMENT OR ADJOURNMENT OF AN ANNUAL MEETING TO A LATER DATE OR TIME COMMENCE A NEW TIME PERIOD FOR THE GIVING OF A STOCKHOLDER'S NOTICE AS DESCRIBED ABOVE. SUCH STOCKHOLDER'S NOTICE SHALL SET FORTH (I) AS TO EACH PERSON WHOM THE STOCKHOLDER PROPOSES TO NOMINATE FOR ELECTION OR REELECTION AS A DIRECTOR ALL INFORMATION RELATING TO SUCH PERSON THAT IS REQUIRED TO BE DISCLOSED IN SOLICITATIONS OF PROXIES FOR ELECTION OF DIRECTORS IN AN ELECTION CONTEST, OR IS OTHERWISE REQUIRED, IN EACH CASE PURSUANT TO REGULATION 14A UNDER THE EXCHANGE ACT (INCLUDING SUCH PERSON'S WRITTEN CONSENT TO BEING NAMED IN THE PROXY STATEMENT AS A NOMINEE AND TO SERVING AS A DIRECTOR IF ELECTED); (II) AS TO ANY OTHER BUSINESS THAT THE STOCKHOLDER PROPOSES TO BRING BEFORE THE MEETING, A BRIEF DESCRIPTION OF THE BUSINESS DESIRED TO BE BROUGHT BEFORE THE MEETING, THE REASONS FOR CONDUCTING SUCH BUSINESS AT THE MEETING AND ANY MATERIAL INTEREST IN SUCH BUSINESS OF SUCH STOCKHOLDER AND OF THE BENEFICIAL OWNER, IF ANY, ON WHOSE BEHALF THE PROPOSAL IS MADE; AND (III) AS TO THE STOCKHOLDER GIVING THE NOTICE AND THE BENEFICIAL OWNER, IF ANY, ON WHOSE BEHALF THE NOMINATION OR PROPOSAL IS MADE, (X) THE NAME AND ADDRESS OF SUCH STOCKHOLDER, AS THEY APPEAR ON THE CORPORATION'S BOOKS, AND OF SUCH BENEFICIAL OWNER AND (Y) THE NUMBER OF SHARES OF EACH CLASS OF STOCK OF THE CORPORATION WHICH ARE OWNED BENEFICIALLY AND OF RECORD BY SUCH STOCKHOLDER AND SUCH BENEFICIAL OWNER. SECTION 2. DETERMINATION OF STOCKHOLDERS OF RECORD. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 or less than 10 days before the date of such meeting, or more than 60 days prior to any other action. If no record date is fixed: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action shall be at the close of business on the day next preceding the day on which notice is given. (b) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Notwithstanding anything to the contrary in these Bylaws, in the case of any Request Special Meeting, (i) the record date for such meeting (the "Meeting Record Date") shall be no later than the 30th day after the Delivery Date and 6 (ii) if the Board of Directors fails to fix the Meeting Record Date within 30 days after the Delivery Date, then the close of business on such 30th day shall be the Meeting Record Date. ARTICLE II DIRECTORS SECTION 1. DEFINITIONS. For the purpose of this Article II, capitalized terms not otherwise defined herein shall have the meaning set forth in the Stockholders Agreement by and between Prometheus Southeast Retail, LLC and the Corporation dated February 24, 1998 (the "Stockholders Agreement"). SECTION 2. GENERAL POWERS. The business and affairs, power and authority of the Corporation shall be exercised, conducted and controlled by the Board of Directors, except where the law, the Articles of Incorporation, or these Bylaws require any power or action to be authorized or taken by the stockholders. In addition to the powers and authorities expressly conferred by these Bylaws, the Board of Directors may do all such lawful things and acts as are not by statute, the Articles of Incorporation or these Bylaws directed or required to be done by the stockholders. SECTION 3. NUMBER, NOMINATION AND ELECTION OF DIRECTORS. (a) NUMBER. The Board of Directors shall consist of not more than fifteen members and, until the Final Threshold Date, not less than nine members. Until the Preliminary Threshold Date, at least one-third of the Board of Directors shall be designees (the "Investor Nominees") of Prometheus Southeast Retail, LLC or its successor or assignee (the "Investor"). From and after the Preliminary Threshold Date and until the Second Threshold Date, at least two-ninths of the Board of Directors shall be Investor Nominees. From and after the Second Threshold Date and until the Final Threshold Date, at least one-ninth of the Board of Directors shall be Investor Nominees. The Board of Directors may increase or decrease the number of the members of the Board of Directors within the limitations set forth above. No reduction in the number of directors shall of itself have the effect of shortening the term of any incumbent director. (b) ELECTION. The directors shall be elected at the annual meeting of stockholders, or if not so elected, at a special meeting of stockholders called for that purpose. At any meeting of stockholders at which directors are to be elected (an "Election Meeting"), only persons nominated as candidates shall be eligible for election, and the candidates receiving the greatest number of votes entitled to be cast shall be elected. (c) NOMINATIONS. (1) QUALIFICATION. Directors of the Corporation need not be stockholders or residents of Maryland. No person shall be appointed or elected a director of the Corporation unless: (A) such person is elected to fill a vacancy in the Board of Directors pursuant to Section 4(c) of this Article II; or (B) such person is nominated for election as a director of the Corporation in accordance with this section. (2) ELIGIBILITY TO MAKE NOMINATIONS. Nominations of candidates for election as directors at any Election Meeting may be made by the Board of Directors or a committee thereof. 7 (3) PROCEDURE FOR NOMINATIONS. Nominations shall be made not fewer than 30 days prior to the date of an Election Meeting. At the request of the Secretary or, in his absence, an Assistant Secretary, each proposed nominee shall provide the Corporation with such information concerning himself as is required under the rules of the Securities and Exchange Commission (the "Commission") to be included in the Corporation's proxy statement soliciting proxies for the election of such nominee as a director. (4) SUBSTITUTION OF NOMINEES. In the event that a person is validly designated as a nominee in accordance with these Bylaws and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or a committee thereof may designate a substitute nominee upon delivery, not fewer than five days prior to the date of an Election Meeting, of a written notice to the Secretary setting forth such information regarding such substitute nominee as would have been required to be delivered to the Secretary pursuant to these Bylaws had such substitute nominee been initially proposed as a nominee. Such notice shall include a signed consent to serve as a director of the Corporation, if elected, of each such substitute nominee. (5) INVESTOR NOMINEES. No person shall be named as an Investor Nominee if (i) such person is not reasonably experienced in business, financial or real estate matters, (ii) such person has been convicted of, or pled nolo contendere to, a felony; (iii) the election of such person would violate any law, or (iv) any event required to be disclosed pursuant to Item 401(f) of Regulation S-K of the 1934 Act has occurred with respect to such person. The Board of Directors shall support the nomination of and the election of each Investor Nominee to the Board of Directors, and the Board of Directors shall exercise all authority under applicable law to cause each Investor Nominee to be elected to the Board of Directors. (6) COMPLIANCE WITH PROCEDURES. If the chairman of the Election Meeting determines that a nomination of any candidate for election as a director was not made in accordance with the applicable provisions of these Bylaws, he shall so declare to the meeting and such nomination shall be void. (d) CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman, if any is elected, shall, subject to the to the provisions of these Bylaws, preside at all meetings of the stockholders, of the Board of Directors and of the Executive Committee. SECTION 4. TERM OF OFFICE OF DIRECTORS. (A) TERM. Each director shall hold office until the annual meeting next succeeding his election and until his successor is elected and qualified, or until his earlier resignation, removal from office or death. (B) RESIGNATION. Any director of the Corporation may resign at any time by giving written notice to the Chairman or to the President or the Secretary of the Corporation. A resignation from the Board of Directors shall be deemed to take effect immediately or at such other time as the director may specify. (C) VACANCY. If there shall be any vacancy in the Board of Directors for any reason, including, but not limited to, death, resignation or as provided by law, the Articles of Incorporation or these Bylaws (including any increase in the authorized number of directors), the remaining directors shall constitute the Board of Directors until such vacancy is filled. The remaining directors may fill any vacancy in the Board of Directors for the unexpired term. In the event that any Investor Nominee shall cease to serve as a Director for any reason other than the fact that Investor no longer has a right to nominate a Director, the vacancy resulting thereby shall be filled by an Investor Nominee designated by Investor; provided, however, that any Investor Nominee so designated shall satisfy the qualification requirements set forth in Section 3(c)(5). SECTION 5. MEETINGS OF DIRECTORS. 8 (a) MEETINGS. Meetings of the Board of Directors may be held at any time upon call by the Chairman or by the President or by any two directors. Unless otherwise indicated in the notice thereof, any business may be transacted at any such meeting. (b) PLACE OF MEETING. Any meeting of directors may be held at such place within or without the State of Maryland as may be designated in the notice of such meeting. (C) NOTICE OF MEETING AND WAIVER OF NOTICE. No notice of regular meetings of the Board of Directors need be given. Special meetings of the Board of Directors may be called by the Chairman, or by the President on notice to each director, given either in person or by mail, telephone, telegram, telex or similar medium of communication; special meetings shall be called on like notice by the Chairman, the President or the Secretary, on the written request of two directors. At least 24 hours notice of special meetings shall be given to each director. SECTION 6. QUORUM AND VOTING. Except as otherwise provided in the Articles of Incorporation, at any meeting of directors, not less than one-half (1/2) of the directors then in office (or, in the event that the directors then in office are an uneven number, the nearest full number of directors less than one-half (1/2) of such number) is necessary to constitute a quorum for such meeting, except that any meeting duly called, whether a quorum is present or otherwise, may, by vote of a majority of the directors present, be adjourned from time to time. At any meeting at which a quorum is present, all acts, questions and business which may come before the meeting shall be determined by a majority of votes cast by the directors present at such meeting, unless the vote of a greater number is required by statute, the Articles of Incorporation or these Bylaws. SECTION 7. ACTION OF BOARD OF DIRECTORS WITHOUT A MEETING. Any action that may be authorized or taken at a meeting of the Board of Directors may be authorized or taken without a meeting if approved and authorized by a writing or writings, signed by all of the directors, which are filed with the minutes of proceedings of the Board of Directors. SECTION 8. COMPENSATION. The Board of Directors is authorized to fix a reasonable salary for directors or a reasonable fee for attendance at any meeting of the Board of Directors, the Executive or Audit Committee, or other committees appointed by the Board of Directors, or any combination of salary and attendance fee. In addition, directors may be reimbursed for any expenses incurred by them in traveling to and from such meetings. SECTION 9. COMMITTEES. (a) APPOINTMENT. The Board of Directors, by resolution passed by a majority of the whole Board of Directors, may, from time to time, appoint one or more of its members to act as a committee of the Board of Directors, provided, however, that each of the Executive Committee, the compensation committee, the audit committee, any special committee(s) of the Board of Directors, and any other Key Committees shall (A) until the Preliminary Threshold Date, be comprised of members, at least one-third of whom are Investor Nominees, (B) until the Second Threshold Date, be comprised of members, at least two-ninths of whom are Investor Nominees, and (C) until the Final Threshold Date, be comprised of members, at least one-ninth of whom are Investor Nominees. A committee shall have and exercise the powers of the Board of Directors in the direction of the management of the business and affairs of the Corporation to the extent provided in the resolution appointing such committee. Each committee shall have such name as may be determined by the Board of Directors. A committee shall keep minutes of its proceedings and shall report its proceedings to the Board of Directors when required or when requested by a director to do so. Each such committee and each member thereof shall serve at the pleasure of the Board of Directors. Vacancies occurring in any such committee may be filled by the Board of Directors. 9 Notwithstanding the foregoing, if none of the Directors who are Investor Nominees would be considered "independent" of the Company, "disinterested," "non-employee directors" and "outside directors" (i) for purposes of any applicable rule of the New York Stock Exchange or any other securities exchange or other self-regulating organization (such as the National Association of Securities Dealers) requiring that members of the audit committee of the Board of Directors be independent of the Corporation, (ii) for purposes of any law or regulation that requires in order to obtain or maintain favorable tax, securities, corporate law or other material legal benefits with respect to any plan or arrangement for employee compensation or benefits, that the members of the committee of the Board of Directors charged with responsibility for such plan or arrangement be "independent" of the Corporation, "disinterested," "non-employee directors" or "outside directors," or (iii) for purposes of any special committee formed in connection with any transaction or potential transaction involving the Corporation and any of Investor, its Affiliates or any Group of which Investor is a member or such other transaction or potential transaction which would involve an actual or potential conflict of interest on the part of the Directors who are Investor Nominees, then a Director who is an Investor Nominee shall not be required to be appointed to any such committee; provided, however, that the committees of the Board of Directors shall be organized such that, to the extent practicable, the only items to be considered by a Key Committee on which no Director who is an Investor Nominee may serve will be those items which prevent the Director who is an Investor Nominee from serving on such Key Committee. Any members of any Key Committee who are Investor Nominees shall, in the event of any vacancy in such membership, be replaced by a Director who is an Investor Nominee elected by a majority of the Directors who are Investor Nominees. (b) EXECUTIVE COMMITTEE. Until the Final Threshold Date, there shall be an Executive Committee of the Board of Directors, the members of which shall hold office during the pleasure of the Board of Directors, and may be removed at any time, with or without cause, by action thereof. During the intervals between meetings of the Board of Directors, the Executive Committee shall possess and may exercise all of the powers and authority of the Board of Directors in the management and control of the business and affairs of the Corporation to the maximum extent permitted by law. All action taken by the Executive Committee shall be reported to the Board of Directors. Each of the Chairman and the President shall be a member of the Executive Committee, unless such person is not a director or shall decline in writing. (c) COMMITTEE ACTION. Unless otherwise provided by the Board of Directors, a majority of the members of any committee appointed by the Board of Directors pursuant to this section shall constitute a quorum at any meeting thereof, and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of such committee. Action may also be taken by any such committee without a meeting by a writing or writings, signed by all of its members, which is filed with the minutes of proceedings of the committee. Any such committee shall appoint one of its own number as chairman (provided that the Chairman or the President, if the Chairman declines or is not a member of the Executive Committee, shall be the chairman of any Executive Committee), who shall preside at all meetings and may appoint a Secretary (who need not be a member of the committee) who shall hold office during the pleasure of such committee. Meetings of any such committee may be held without notice of the time, place or purposes thereof and may be held at such times and places within or without the State of Maryland, as the committee may from time to time determine, at the call of the chairman of the committee or any two members thereof. Any such committee may prescribe such other rules as it shall determine for calling and holding meetings and its method of procedure, subject to any rules prescribed by the Board of Directors. SECTION 10. CONFERENCE TELEPHONE MEETINGS. One or more directors may participate in a meeting of the Board, or of a committee of the Board of Directors, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this section shall constitute presence in person at such meeting. SECTION 11. SUPERMAJORITY BOARD APPROVAL. 10 Until the Approval Rights Termination Date, if any, notwithstanding the fact that a vote of the Board of Directors or the Executive Committee may not be required under applicable law, the Corporation shall not, and shall not permit any of its Subsidiaries without the affirmative vote of over sixty-seven percent (67%) of all of the Directors ("Supermajority Board Approval") to: (a) acquire, whether by merger, consolidation, purchase of stock or assets or other business combination, (i) in a single transaction or group of related transactions, any business or assets having an aggregate purchase price in excess of twenty-five percent (25%) of Total Enterprise Value as measured at the beginning of the fiscal year in which such acquisition is consummated, or (ii) during any one fiscal year, businesses or assets having an aggregate purchase price in excess of fifty percent (50%) of Total Enterprise Value as measured at the beginning of such fiscal year; (b) sell or dispose of any assets, whether by merger, consolidation, sale of stock or assets or other business combination, during any one fiscal year, having an aggregate value in excess of twenty-five percent (25%) of Total Enterprise Value as measured at the beginning of such fiscal year; (c) directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to, any indebtedness if, after giving pro forma effect to such indebtedness, the Corporation's ratio of (i) total indebtedness to (ii) Total Enterprise Value, expressed as a percentage, would be greater than 65%; (d) make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any of its Affiliates; (e) issue Stock or options, rights or warrants or other commitments to purchase or securities convertible into (or exchangeable or redeemable for) shares of Stock, including, without limitation, OP Units (such options, rights, warrants, other commitments or securities, "Stock Equivalents"); provided, however, that Supermajority Board Approval shall not be required for any issuance of Stock or Stock Equivalents as long as the sum of (i) all shares of Stock issued by the Corporation during the applicable fiscal year and (ii) shares of Stock into which Stock Equivalents issued by the Corporation and each of its Subsidiaries during the applicable fiscal year are convertible, does not exceed fifty percent (50%) of all shares of Stock outstanding, on a Fully Diluted basis, on the first day of such fiscal year; provided, further, that in connection with any issuance by the Corporation of Stock or issuance by the Corporation or any of its Subsidiaries of any Stock Equivalents, Investor shall be entitled, to the extent so provided in Section 4.1 of the Stock Purchase Agreement, to a participation right on the terms set forth in Section 4.1 of the Stock Purchase Agreement. Notwithstanding the first sentence of this Section 11(e), (i) Stock issued to the Corporation or a wholly owned Subsidiary thereof and (ii) Stock and Stock Equivalents issued to directors or employees of the Corporation or a Subsidiary of the Corporation in connection with any employee benefit plan approved by the stockholders of the Corporation, shall not be subject to Supermajority Board Approval; (f) change or amend any provision of the Corporation's Charter or bylaws in a manner that would be materially adverse to Investor; (g) pursuant to or within the meaning of any bankruptcy law: (i) commence a voluntary case, (ii) consent to the entry of an order for relief against it in an involuntary case, (iii) consent to the appointment of a custodian of it or for all or substantially all of its property; (iv) make a general assignment for the benefit of its creditors; (h) in the case of the Corporation, (1) terminate its eligibility for treatment as a real estate investment trust, as defined in the Code, or (2) take any action or fail to take any action which would reasonably be expected to, alone or in conjunction with any other factors, result in the loss of such eligibility, unless in the case of a failure to take action, such action is initiated within thirty days and such action is completed within the period required under the Code in order to maintain such eligibility; or 11 (i) subject to the right of the Corporation to terminate the Stock Purchase Agreement pursuant of Section 9.1(b)(iii) thereof, allow the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than Investor, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of stock having more than 15% of the voting power of the Company. ARTICLE III OFFICERS SECTION 1. GENERAL PROVISIONS. The Board of Directors at such time as it determines may elect such executive officers, as defined in Section 3(f) of this Article III, as the Board of Directors deems necessary. The Board of Directors may assign such additional titles to one or more of the officers as they shall deem appropriate. Any two or more executive offices may be held by the same person. Other officers may be appointed in the manner provided for in these Bylaws. The election or appointment of an officer for a given term, or a general provision in the Articles of Incorporation or in these Bylaws with respect to term of office, shall not be deemed to create any contract rights. SECTION 2. TERM OF OFFICE, REMOVAL, AND VACANCIES. (a) TERM. Each officer of the Corporation shall hold office during the pleasure of the Board of Directors and until his successor is elected and qualified, unless he sooner dies or resigns or is removed. (b) REMOVAL. Subject to the terms of any agreement relating to the employment or service of any officer of the Corporation, the Board of Directors by a vote of two-thirds of the members present at a meeting at which a quorum is present may remove any executive officer at any time, with or without cause, and the Board of Directors by a vote of a majority of its members present at a meeting at which a quorum is present may remove any other officer at any time, with or without cause. (c) VACANCIES. Any vacancy in any executive office may be filled by the Board of Directors. SECTION 3. POWERS AND DUTIES. (a) IN GENERAL. Subject to the specific provisions of these Bylaws, all officers, as between themselves and the Corporation, shall respectively have such authority and perform such duties as are customarily incident to their respective offices, and as may be specified from time to time by the Board of Directors, regardless of whether such authority and duties are customarily incident to such office. In the absence of any officer of the Corporation, or for any other reason the Board of Directors may deem sufficient, the Board of Directors may delegate from time to time the powers or duties of such officer, or any of them, to any other officer or to any Director. (b) PRESIDENT. The President shall, in the absence of the Chairman or upon the determination of the Board of Directors, preside at all meetings of the stockholders. The President shall be the chief executive officer of the Corporation and shall have general supervision over its property, business and affairs, and shall perform all the duties usually incident to such office, subject to the direction of the Board of Directors. He may execute all authorized deeds, mortgages, bonds, contracts and other obligations in the name of the Corporation and, subject to the provisions of these Bylaws, shall have such other powers and duties as may be prescribed by the Board of Directors. (c) VICE PRESIDENTS. The Vice Presidents shall have such powers, duties and titles as may be prescribed by the Board of Directors or as may be delegated by the President. 12 (d) SECRETARY. The Secretary shall attend and shall keep the minutes of all meetings of the stockholders and the Board of Directors (and perform similar duties for the committees of the Board of Directors when required). He shall keep such books as may be required by the Board of Directors, shall have charge of the seal, if any, of the Corporation and shall be permitted, subject to the provisions of these Bylaws, to give notices of stockholders' and directors' meetings required by law or by these Bylaws, or otherwise, and have such other powers and duties as may be prescribed by the Board of Directors. (e) TREASURER. The Treasurer shall receive and have charge of all money, bills, notes, bonds, stock in other corporations and similar property belonging to the Corporation, and shall do with the same as shall be ordered by the Board of Directors. He shall disburse the funds and pledge the credit of the Corporation as may be directed by the Board of Directors. He shall keep accurate financial accounts and hold the same open for inspection and examination by the directors. On the expiration of his term of office, he shall turn over to his successors, or the Board of Directors, all property, books, papers and money of the Corporation in his hands, and shall possess such other powers and duties as may be prescribed by the Board of Directors. (f) EXECUTIVE OFFICERS. The officers referred to in subparagraphs (b), (c), (d) and (e) of this section, and such other officers as the Board of Directors may by resolution identify as such shall be executive officers of the Corporation and may be referred to as such. (g) OTHER OFFICERS. The Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers, if any, and any other subordinate officers shall be appointed and removed by the President or the Board of Directors at whose pleasure each shall serve and shall have such powers and duties as they may prescribe. SECTION 4. COMPENSATION. The Board of Directors is authorized to determine or to provide the method of determining the compensation of all officers. SECTION 5. BONDS. If required by the Board of Directors, any and every officer or agent shall give the Corporation a bond in a sum and with one or more sureties satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. ARTICLE IV SECURITIES HELD BY CORPORATION SECTION 1. TRANSFER OF SECURITIES OWNED BY THE CORPORATION. All endorsements, assignments, transfers, share powers or other instruments of transfer of securities standing in the name of the Corporation shall be executed for and in the name of the Corporation by the President or by any Vice President, or by the Secretary or Treasurer or by any additional person or Persons as may be thereunto authorized by the Board of Directors. SECTION 2. VOTING SECURITIES HELD BY THE CORPORATION. The President, any Vice President, or the Secretary or Treasurer, in person or by another person thereunto authorized by the Board of Directors, in person or by proxy or proxies appointed by him, shall have full power and 13 authority on behalf of the Corporation to vote, act and execute consents, waivers and releases with respect to any securities issued by other corporations which the Corporation may own. ARTICLE V SHARE CERTIFICATES SECTION 1. TRANSFER AND REGISTRATION OF CERTIFICATES. The Board of Directors shall have authority to make such rules and regulations, not inconsistent with law, the Articles of Incorporation or these Bylaws, as it deems expedient concerning the issuance, transfer and registration of certificates for shares and the shares represented thereby. SECTION 2. CERTIFICATES FOR SHARES. Each holder of shares is entitled to one or more certificates for shares of the Corporation in such form not inconsistent with law and the Articles of Incorporation as shall be approved by the Board of Directors. Each such certificate shall be signed by the President or any Vice President, and by the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer of the Corporation, which certificate shall certify the number and class of shares held by such stockholder in the Corporation, but no certificates for shares shall be executed or delivered until such shares are fully paid. Any or all of the signatures upon such certificate may be a facsimile, engraved or printed. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer, transfer agent or registrar, before the certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent or registrar at the date of its issue. SECTION 3. TRANSFER AGENTS, REGISTRARS AND DIVIDEND DISBURSING AGENTS. The Board of Directors may from time to time by resolution appoint one or more incorporated transfer agents and registrars (which may or may not be the same corporation) for the shares of the Corporation, and the Board of Directors from time to time by resolutions may appoint a dividend disbursing agent to disburse any and all dividends authorized by the Board of Directors payable upon the shares of the Corporation. SECTION 4. TRANSFERS. Subject to restrictions on the transfer of stock, upon surrender to the Corporation or the duly appointed transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. No transfer shall be made which would be inconsistent with the applicable provisions of the Uniform Commercial Code. SECTION 5. LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may issue a new certificate for shares in place of any certificate or certificates heretofore issued by the Corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate of stock to have been lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors or any duly authorized executive officer may, in its or his discretion, and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representatives, to attest the same in such manner as it shall require and to indemnify the Corporation, its directors, officers, employees, agents and representatives, and in connection therewith to give the Corporation a bond in such sum and containing such terms as the Board of Directors or such executive officer may direct, against any claim that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost, stolen or destroyed or the issuance of the new certificate. 14 SECTION 6. PROTECTION OF THE CORPORATION. The Corporation may treat a fiduciary as having capacity and authority to exercise all rights of ownership in respect of shares of record in the name of the decedent holder, person, firm or corporation in conservation, receivership or bankruptcy, minor, incompetent person, or person under disability, as the case may be, for whom he is acting, or a fiduciary acting as such, and the Corporation, its transfer agent and registrar, upon presentation of evidence of appointment of such fiduciary shall be under no duty to inquire as to the powers of such fiduciary and shall not be liable to any firm, person or corporation for loss caused by any act done or omitted to be done by the Corporation or its transfer agent or registrar in reliance thereon. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER AUTHORIZED REPRESENTATIVES SECTION 1. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN THIRD-PARTY PROCEEDINGS. The Corporation shall indemnify any person who was or is an "authorized representative" of the Corporation (which shall mean for purposes of this Article a director or officer of the Corporation, or a person serving at the request of the Corporation as a director, officer, employee, agent or trustee, of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans) and who was or is a "party" (which shall include, for purposes of this Article, the giving of testimony or similar involvement) or is threatened to be made a party to any "third-party proceeding" (which shall mean for purposes of this Article any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the Corporation) by reason of the fact that such person was or is an authorized representative of the Corporation, from and against expenses (which shall include, for purposes of this Article, attorneys' fees), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such third-party proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal third-party proceedings (which could or does lead to a criminal third-party proceeding) had no reasonable cause to believe such conduct was unlawful. The termination of any third-party proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the authorized representative did not act in good faith and in a manner which such person reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal third-party proceeding, had reasonable cause to believe that such conduct was unlawful. SECTION 2. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN CORPORATE PROCEEDINGS. The Corporation shall indemnify any person who was or is an authorized representative of the Corporation and who was or is a party or is threatened to be made a party to any "corporate proceeding" (which shall mean, for purposes of this Article, any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor or investigative proceeding by the Corporation) by reason of the fact that such person was or is an authorized representative of the Corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such corporate proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the court in which such corporate proceeding was pending shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such authorized representative is fairly and reasonably entitled to indemnity for such expenses that such court shall deem proper. 15 SECTION 3. MANDATORY INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES. To the extent that an authorized representative of the Corporation has been successful on the merits or otherwise in defense of any third-party or corporate proceedings or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses actually and reasonably incurred by such person in connection therewith. SECTION 4. DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. Any indemnification under Section 1, 2 or 3 of this Article VI (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the authorized representative is proper in the circumstances because such person has either met the applicable standard of conduct set forth in Section 1 or 2 or has been successful on the merits or otherwise as set forth in Section 3 and that the amount requested has been actually and reasonably incurred. Such determination shall be made: (1) by the Board of Directors by a majority of a quorum consisting of directors who were not parties to such third-party or corporate proceedings; or (2) if such a quorum is not obtainable, or, even if obtainable, a majority vote of such a quorum so directs, by independent legal counsel in a written opinion; or (3) by the stockholders. SECTION 5. ADVANCING EXPENSES. Expenses actually and reasonably incurred in defending a third-party or corporate proceeding shall be paid on behalf of an authorized representative by the Corporation in advance of the final disposition of such third-party or corporate proceeding upon receipt of an undertaking by or on behalf of the authorized representative to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article VI. SECTION 6. EMPLOYEE BENEFIT PLANS. For purposes of this Article, the Corporation shall be deemed to have requested an authorized representative to serve an employee benefit plan where the performance by such person of duties to the Corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on an authorized representative with respect to an employee benefit plan pursuant to applicable law shall be deemed "fines"; and action taken or omitted by such person with respect to an employee benefit plan in the performance of duties for a purpose reasonably believed to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose that is not opposed to the best interests of the Corporation. SECTION 7. SCOPE OF ARTICLE. The indemnification of and the advancement of expenses to authorized representatives, provided by, or granted pursuant to, this Article, shall (i) not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any statute, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in other capacities, (ii) continue as to a person who has ceased to be an authorized representative, and (iii) inure to the benefit of the heirs, personal representatives, executors, and administrators of such person. 16 SECTION 8. RELIANCE ON PROVISIONS. Each person who shall act as an authorized representative of the Corporation shall be deemed to be doing so in reliance upon rights of indemnification provided by this Article VI. SECTION 9. INSURANCE. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, trustee or agent of or for the Corporation, or is or was serving at the request or with the prior approval of the Corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise (including employee benefit plans), against any liability asserted against him and incurred by him in any capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of these Bylaws. ARTICLE VII GENERAL SECTION 1. CONTRACTS, CHECKS, ETC. All contracts, agreements, checks, drafts, notes, bonds, bills of exchange and orders for the payment of money shall be signed or endorsed by the persons whom the Board of Directors prescribes therefor. SECTION 2. FISCAL YEAR. The fiscal year of the Corporation shall commence on January 1 of each year and end on December 31 of the following year, unless otherwise determined by the Board of Directors. SECTION 3. FORM OF NOTICES. Whenever notice is required to be given to any director or officer or stockholder, such notice may be given either in person or by mail, telephone or telegram, facsimile transmission, telex or similar medium of communication, except as expressly provided otherwise in these Bylaws. Except as provided in Article II, Section 4(c), if mailed, the notice will be deemed given when deposited in the United States mail, postage prepaid, addressed to the stockholder, officer or director at such address as appears on the books of the Corporation. If given in person or by telephone, notice will be deemed given when communicated. If given by telegram, facsimile transmission, telex or similar medium of communication, notice will be deemed given when properly dispatched. SECTION 4. SEAL. The Corporation may, but shall not be required to, have a corporate seal, which shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Incorporated Maryland." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. The Secretary shall have custody of the corporate seal of the Corporation and shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the Secretary's signature. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. Whenever the Corporation is permitted or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Corporation. 17 SECTION 5. CONSISTENCY WITH ARTICLES OF INCORPORATION. If any provision of these Bylaws shall be inconsistent with the Corporation's Articles of Incorporation (and as it may be amended from time to time), the Articles of Incorporation (as so amended at the time) shall govern. ARTICLE VIII AMENDMENTS Except as otherwise provided in the Articles of Incorporation, these Bylaws may be altered, amended, or repealed or new bylaws may be adopted by the affirmative vote of the directors of the Corporation or by the affirmative vote of the holders of a majority of the shares of the Corporation entitled to vote in the election of directors, voting as one class at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained in the notice of such special meeting. ARTICLE IX APPLICABILITY OF THE MARYLAND CONTROL SHARES ACQUISITION STATUTE The Maryland Control Shares Acquisition Statute shall not apply to the voting rights of stock acquired pursuant to the Stock Purchase Agreement by and between the Corporation and Prometheus Southeast Retail LLC dated as of February 24, 1998, and any amendment thereto. 18 EX-4 3 EXHIBIT 4.1 [EXAMPLE OF KONOVER PROPERTY TRUST, INC. CERTIFICATE OF STOCK APPEARS HERE] EX-4 4 EXHIBIT 4.11 FSA FINANCE, INC., as Issuer, MELLON MORTGAGE COMPANY, as Master Servicer and FIRST UNION NATIONAL BANK, as Trustee ------------------------ AMENDMENT dated as of December 22, 1998 To MASTER SERVICING AGREEMENT dated as of May 22, 1995 ---------------------- Collateralized Commercial Mortgage Notes, Classes A, B and C THIS AMENDMENT, dated as of December 22, 1998 (the "Amendment"), is executed by and among FSA FINANCE, INC., as Issuer (the "Issuer"), MELLON MORTGAGE COMPANY, as Successor Master Servicer (the "Master Servicer"), and FIRST UNION NATIONAL BANK, as Successor Trustee (the "Trustee") under a Master Servicing Agreement dated as of May 22, 1995 (the "Master Servicing Agreement"), by and among the Issuer, Fleet Management and Recovery Corporation, as Master Servicer, and Bank One, Columbus, NA, as Trustee (capitalized terms used but not defined herein shall have the respective meanings set forth in the Master Servicing Agreement). WHEREAS, the parties entered into the Master Servicing Agreement to provide for the servicing of a certain Mortgage Loan, which secures Notes issued pursuant to an Indenture (the "Indenture"), dated as of May 22, 1995, by and among the Issuer, the Master Servicer and the Trustee; WHEREAS, the Mortgage Loan is evidenced by a Mortgage Note made by FSA Properties, Inc. (the "Original Borrower"), which Mortgage Note is, in turn, secured by certain Mortgaged Properties pursuant to one or more Mortgages under which the Original Borrower is the mortgagor, grantor and trustor; WHEREAS, pursuant to deeds and a Bill of Sale, dated as of December 22, 1998, the Original Borrower transferred, sold and conveyed all of its right, title and interest in and to the Mortgaged Properties (other than two Mortgaged Properties that, at the request of the Original Borrower and the New Borrower (as defined herein), are being released from the lien of the Mortgages (the "Released Properties")) to KPT REMIC Loan LLC (the "New Borrower"), and pursuant to a Loan Assumption Agreement, dated as of December 22, 1998, all of the obligations of the Original Borrower under the Mortgage Note and the Mortgages have been assumed by the New Borrower; WHEREAS, the New Borrower has entered into a Deed of Trust, Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Leases and Rents, dated as of December 22, 1998 (the "Additional Mortgage"), whereby the New Borrower granted to the Trustee, for the benefit of the Noteholders, a lien on and security interest in certain additional Mortgaged Properties (the "Additional Mortgaged Properties") to secure further the New Borrower's obligations under the Mortgage Note and the Mortgage Loan; WHEREAS, the New Borrower also has entered into a Pledge Agreement, dated as of December 22, 1998 (the "Pledge Agreement"), whereby the New Borrower pledged to the Trustee, for the benefit of the Noteholders, cash in the amount of $2,400,000 (the "Cash Collateral") to secure further the New Borrower's obligations under the Mortgage Note and the Mortgage Loan; WHEREAS, in consideration for its consent to the release of the Released Properties from the lien of the Mortgages, the Issuer, as the beneficial owner of the Mortgage Note and the collateral security therefor, has agreed that the Additional Mortgaged Properties and the Cash Collateral should be transferred, pledged and collaterally assigned to the Trustee, as legal holder of the Mortgage Note and the collateral security therefor, for the benefit of the Noteholders; WHEREAS, the parties have entered into a Supplement of even date herewith to the Indenture, pursuant to Section 901 of the Indenture, reflecting the transfer of the Mortgaged Properties to the New Borrower and the Additional Mortgage, the Pledge Agreement and the collateral pledged thereby to secure the Mortgage Loan, and the parties desire to make corresponding changes to the Master Servicing Agreement; WHEREAS, Section 6.3 of the Master Servicing Agreement provides that the Issuer, the Master Servicer and the Trustee may at any time enter into an amendment thereto, provided that, among other things, the amendment does not (i) materially adversely affect the interests of any Holder, (ii) reduce the percentage in principal amount of the Outstanding Notes the consent of the Holders of which is required for any reason under this Agreement (including, without limitation, any action under Section 4.29 of the Master Servicing Agreement), or (iii) defer the date or reduce the amount of any payment required to be made under the Mortgage Loan, without the consent of each Holder affected thereby; WHEREAS, the Trustee has determined that such amendment may be properly entered into pursuant to Section 6.3 of the Master Servicing Agreement. NOW, THEREFORE, the Issuer, the Master Servicer (at the request of the Trustee and in reliance upon the consent so given by the Trustee) and the Trustee hereby agree as follows: Section 1. Amendments to Master Servicing Agreement. 1.1 Definitions. Article I of the Master Servicing Agreement is hereby amended and supplemented as follows: (a) The following new definition shall be inserted immediately following the definition of "Act:" "Additional Mortgage" means the Deed of Trust, Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Leases and Rents, dated as of December 22, 1998, between the Borrower and the Trustee, covering Mortgaged Properties, as may be amended, modified or supplemented from time to time as permitted hereby and thereby. (b) The definition of "Allocated Loan Amount" is hereby deleted in its entirety and the following is substituted in lieu thereof: "Allocated Loan Amount" has the meaning set forth in the Loan Assumption Agreement. (c) The definition of "Borrower" is hereby deleted in its entirety and the following is substituted in lieu thereof: "Borrower" means KPT REMIC Loan LLC, a limited liability company organized under the laws of the State of Delaware, and its permitted successors and assigns under the Mortgage. 2 (d) The definition of "Central Account" is hereby amended by deleting the words "Bank One, Columbus, NA" and inserting in their place the following words: "First Union National Bank." (e) The definition of "Collateral" is hereby amended by deleting the reference to "(C)" in the eleventh line thereof and inserting a reference to "(D)" in its place and by adding the following new clause (C): (C) the cash collateral pledged to and retained by the Trustee pursuant to the Pledge Agreement, (f) The following new definition shall be inserted immediately following the definition of "Liquidation Proceeds:" "Loan Assumption Agreement" means the Loan Assumption Agreement, dated as of December 22, 1998, by and among FSA Properties, Inc., the Borrower and the Trustee. (g) The definition of "Master Servicer" is hereby amended by deleting the words, "Fleet Management and Recovery Corporation, a Rhode Island corporation" and inserting in their place the words "Mellon Mortgage Company." (h) The definition of "Mortgage" is hereby deleted in its entirety and the following is substituted in lieu thereof: "Mortgage" means, collectively, (i) the Modified and Consolidated Deed of Trust, Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Leases and Rents, dated as of May 22, 1995, between FSA Properties, Inc. and the Originator, covering 17 Mortgaged Properties, as the same may be rerecorded in the County of Salt Lake, Utah, pursuant to the letter of instructions dated May 22, 1995 by and among FSA Properties, Inc., the Originator, the Company and the Trustee for the purpose of subjecting to the lien thereof the Draper Outparcels (as defined in the Mortgage), the obligations of FSA Properties, Inc. thereunder having been assumed by the Borrower pursuant to the Loan Assumption Agreement, (ii) the Modified and Consolidated Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Leases and Rents, dated as May 22, 1995, between FSA Properties, Inc. and the Originator, covering the Mortgaged Property located at Lake George, New York, the obligations of FSA Properties, Inc. thereunder having been assumed by the Borrower pursuant to the Loan Assumption Agreement, and (iii) the Additional Mortgage, in each case as amended, modified or supplemented from time to time as permitted hereby and thereby. 3 (i) The definition of "Mortgage Note" is hereby deleted it in its entirety and the following is substituted in lieu thereof: "Mortgage Note" means the Consolidated, Amended and Restated Promissory Note dated as of May 22, 1995 by FSA Properties, Inc. to the Originator in the actual principal amount of $95,000,000 consisting of the Class A Component, the Class B Component and the Class C Component, and all amendments or supplements to such Mortgage Note in accordance with the terms of the Mortgage, the obligations of FSA Properties, Inc. thereunder having been assumed by the Borrower pursuant to the Loan Assumption Agreement. (j) The following new definition shall be inserted immediately following the definition of "Person": "Pledge Agreement" means the Pledge Agreement, dated as of December 22, 1998, by and between the Borrower and the Trustee. (k) The definition of "Security Documents" is hereby amended by adding the following language immediately following the end of such definition: "Security Documents" shall also include the Additional Mortgage, the Pledge Agreement, the Loan Assumption Agreement, each other Loan Document executed in connection therewith, and each additional document, instrument, certificate or agreement related thereto or delivered in connection therewith to establish, create or maintain the security interest of the Trustee in the Mortgaged Property or other collateral described therein to secure payment of the Mortgage Note, including all accounts established pursuant to the Additional Mortgage and all insurance policies required under the Additional Mortgage. (l) The definition of "Special Servicing Period" is hereby amended by inserting in the sixth line thereof immediately following the word "Property" the following additional language: "or with respect to the collateral pledged pursuant to the Pledge Agreement." 1.2. Enforcement of Rights of Trustee and Issuer. The following new Section 6.13 is hereby inserted immediately following Section 6.12: Section 6.13. Enforcement of Rights of Trustee and Issuer. The parties acknowledge that the Trustee, as Trustee under the Indenture and legal holder of the Mortgage Loan, is the mortgagee, grantee, beneficiary and secured party under the Additional Mortgage and the pledgee and secured party under the Pledge Agreement. The parties hereby agree that, notwithstanding any provision of this Agreement to the contrary, whenever this Agreement refers to the enforcement or exercise of the rights of the Issuer under any one or more of the Security Documents, or the taking of any action or the exercise of any remedy under any 4 one or more of the Security Documents (including, but not limited to, the right to foreclose upon or take any other action or exercise any remedy available under the Mortgage or the Mortgage Note), such rights, action or remedy shall be deemed to include the rights, actions or remedies available to the Trustee under the Additional Mortgage and the Pledge Agreement. Section 2. Ratification of Master Servicing Agreement. As supplemented and amended by this Amendment, the Master Servicing Agreement is in all respects ratified and confirmed, and the Master Servicing Agreement as so supplemented and amended by this Amendment shall be read, taken and construed as one and the same instrument. Section 3. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. Section 4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York without reference to the conflict of laws provisions thereof. 5 IN WITNESS WHEREOF, the Issuer, the Master Servicer and the Trustee have caused this Amendment to be duly executed by their respective duly authorized officers all as of the day and year first above written. FSA FINANCE, INC. By: -------------------------- Title: -------------------------- MELLON MORTGAGE COMPANY, as Master Servicer By: -------------------------- Title: -------------------------- FIRST UNION NATIONAL BANK, as Trustee By: -------------------------- Title: -------------------------- 6 EX-4 5 EXHIBIT 4.12 FSA FINANCE, INC., as Issuer, MELLON MORTGAGE COMPANY, as Master Servicer and FIRST UNION NATIONAL BANK, as Trustee ------------------------ SUPPLEMENT dated as of December 22, 1998 To INDENTURE dated as of May 22, 1995 ---------------------- Collateralized Commercial Mortgage Notes, Classes A, B and C THIS SUPPLEMENT, dated as of December 22, 1998 (the "Supplement"), is executed by and among FSA FINANCE, INC., as Issuer (the "Issuer"), MELLON MORTGAGE COMPANY, as Successor Master Servicer (the "Master Servicer"), and FIRST UNION NATIONAL BANK, as Successor Trustee (the "Trustee") under an Indenture dated as of May 22, 1995 (the "Indenture"), by and among the Issuer, Fleet Management and Recovery Corporation, as Master Servicer, and Bank One, Columbus, NA, as Trustee (capitalized terms used but not defined herein shall have the respective meanings set forth in the Indenture). WHEREAS, pursuant to the Indenture, the Notes issued thereunder are secured by a grant, pledge, assignment and conveyance of all of the Issuer's right, title and interest in the Trust Estate, which includes the Mortgage Note made by FSA Properties, Inc. (the "Original Borrower"), which Mortgage Note is, in turn, secured by certain Mortgaged Properties pursuant to one or more Mortgages under which the Original Borrower is the mortgagor, grantor and trustor; WHEREAS, pursuant to deeds and a Bill of Sale, dated as of December 22, 1998, the Original Borrower transferred, sold and conveyed all of its right, title and interest in and to the Mortgaged Properties (other than two Mortgaged Properties that, at the request of the Original Borrower and the New Borrower (as defined herein), are being released from the lien of the Mortgages (the "Released Properties")) to KPT REMIC Loan LLC (the "New Borrower"), and pursuant to a Loan Assumption Agreement, dated as of December 22, 1998, all of the obligations of the Original Borrower under the Mortgage Note and the Mortgages have been assumed by the New Borrower; WHEREAS, the New Borrower has entered into a Deed of Trust, Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Leases and Rents, dated as of December 22, 1998 (the "Additional Mortgage"), whereby the New Borrower granted to the Trustee, for the benefit of the Noteholders, a lien on and security interest in certain additional Mortgaged Properties (the "Additional Mortgaged Properties") to secure further the New Borrower's obligations under the Mortgage Note and the loan evidenced thereby; WHEREAS, the New Borrower also has entered into a Pledge Agreement, dated as of December 22, 1998 (the "Pledge Agreement"), whereby the New Borrower pledged to the Trustee, for the benefit of the Noteholders, cash in the amount of $2,400,000 (the "Cash Collateral") to secure further the New Borrower's obligations under the Mortgage Note and the loan evidenced thereby; WHEREAS, in consideration for its consent to the release of the Released Properties from the lien of the Mortgages, the Issuer, as the beneficial owner of the Mortgage Note and the collateral security therefor, has agreed that the Additional Mortgaged Properties and the Cash Collateral should be transferred, pledged and collaterally assigned to the Trustee, as legal holder of the Mortgage Note and the collateral security therefor, for the benefit of the Noteholders; WHEREAS, Section 901 of the Indenture provides that the Issuer, the Master Servicer and the Trustee may at any time enter into a supplemental indenture, without the consent of the Holders, to (1) convey, transfer, assign, mortgage or pledge any property to the Trustee and (2) correct or amplify the description of any property subject to the lien of the Indenture; WHEREAS, the Issuer desires to pledge and grant to the Trustee, for the benefit of the Noteholders, all of the Issuer's right, title and interest in, to and under the Additional Mortgage and the Pledge Agreement, to further secure the Issuer's obligations under Notes, as follows: GRANTING CLAUSE NOW, THEREFORE, THIS SUPPLEMENT WITNESSETH that, to secure the payment of the principal of and interest on the Notes and the performance of the covenants therein and in the Indenture and this Supplement, and in consideration of the premises and of the release of the Released Properties, the Company, by these presents, does grant, assign, pledge, set over and confirm to the Trustee, and grant to the Trustee a security interest in, all of the Company's estate, right, title and interest in, to and under the Additional Mortgage and the Pledge Agreement (including any and all extensions and modifications thereof), any and all rights to make claims for, collect and receive any and all rents, income, revenues, issues, proceeds, profits, security and other monies payable or receivable thereunder or with respect thereto, to bring proceedings thereunder or for the specific or other enforcement thereof or with respect thereto, in the name of the Company or otherwise, and the right to make all waivers and agreements, to grant or refuse requests, to give or withhold notices, and to execute and deliver, in the name and on behalf of the Company, as agent and attorney-in-fact, any and all instruments in connection therewith and to do any and all things which the Company is or may be entitled to do thereunder all as may be limited by and more fully described in the Additional Mortgage and the Pledge Agreement, but no obligation of the Company or the Borrower under the provisions of either of the Additional Mortgage or the Pledge Agreement or with respect thereto shall be impaired or diminished by virtue thereof, nor shall any such obligation be imposed upon the Trustee; HABENDUM TO HAVE AND TO HOLD all and singular the Additional Mortgage and the Pledge Agreement unto the Trustee and its successors and assigns forever, for the benefit of the Holders of the Notes; GRANT IN TRUST IN TRUST for the equal and proportionate benefit and security of the Holders from time to time of all the Notes issued and to be issued under the Indenture (equally and ratably among the Notes of a class without any priority or preference of any Note over any other Note of its class), and for enforcement of the payment of the Notes in accordance with their terms and of all other sums payable under the Indenture or on the Notes, and for the performance and observance of and compliance with the provisions of the Indenture and the Security Documents, all in accordance with the Indenture. NOW, THEREFORE, the Issuer, the Master Servicer (at the request of the Trustee and in reliance upon the consent so given by the Trustee) and the Trustee hereby agree as follows: 2 Section 1. Amendments to Indenture. 1.1 Definitions. Article I of the Indenture is hereby amended and supplemented as follows: (a) The following new definition shall be inserted immediately following the definition of "Act:" "Additional Mortgage" means the Deed of Trust, Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Leases and Rents, dated as of December 22, 1998, between the Borrower and the Trustee, covering Mortgaged Properties, as may be amended, modified or supplemented from time to time as permitted hereby and thereby. (b) The definition of "Assignment of Leases and Rents" is hereby deleted in its entirety and the following is substituted in lieu thereof: "Assignment of Leases and Rents" means, collectively, the two separate Assignments of Leases and Rents and the New York Assignment of Leases and Rents, as such terms are defined in the Mortgage." (c) The definition of "Borrower" is hereby deleted in its entirety and the following is substituted in lieu thereof: "Borrower" means KPT REMIC Loan LLC, a limited liability company organized under the laws of the State of Delaware, and its permitted successors and assigns under the Mortgage. (d) The following new definition shall be inserted immediately following the definition of "Liquidation Proceeds:" "Loan Assumption Agreement" means the Loan Assumption Agreement, dated as of December 22, 1998, by and among FSA Properties, Inc., the Borrower and the Trustee. (e) The definition of "Manager's Consent and Subordination Agreement" is hereby deleted in its entirety and the following is substituted in lieu thereof: "Manager's Consent and Subordination Agreement" means the Manager's Consent and Subordination of Management Agreement dated as of December 22, 1998 among the Borrower, Konover Property Trust, Inc. and the Trustee. (f) The definition of "Master Servicer" is hereby amended by deleting the words, "Fleet Management and Recovery Corporation, a Rhode Island corporation" and inserting in their place the words "Mellon Mortgage Company." 3 (g) The definition of "Mortgage" is hereby deleted in its entirety and the following is substituted in lieu thereof: "Mortgage" means, collectively, (i) the Modified and Consolidated Deed of Trust, Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Leases and Rents, dated as of May 22, 1995, between FSA Properties, Inc. and the Originator, covering 17 Mortgaged Properties, as the same may be rerecorded in the County of Salt Lake, Utah, pursuant to the letter of instructions dated May 22, 1995 by and among FSA Properties, Inc., the Originator, the Company and the Trustee for the purpose of subjecting to the lien thereof the Draper Outparcels (as defined in the Mortgage), the obligations of FSA Properties, Inc. thereunder having been assumed by the Borrower pursuant to the Loan Assumption Agreement, (ii) the Modified and Consolidated Mortgage, Security Agreement, Fixture Filing, Financing Statement and Assignment of Leases and Rents, dated as May 22, 1995, between FSA Properties, Inc. and the Originator, covering the Mortgaged Property located at Lake George, New York, the obligations of FSA Properties, Inc. thereunder having been assumed by the Borrower pursuant to the Loan Assumption Agreement, and (iii) the Additional Mortgage, in each case as amended, modified or supplemented from time to time as permitted hereby and thereby. (h) The definition of "Mortgage Note" is hereby deleted it in its entirety and the following is substituted in lieu thereof: "Mortgage Note" means the Consolidated, Amended and Restated Promissory Note dated as of May 22, 1995 by FSA Properties, Inc. to the Originator in the actual principal amount of $95,000,000 consisting of the Class A Component, the Class B Component and the Class C Component, and all amendments or supplements to such Mortgage Note in accordance with the terms of the Mortgage, the obligations of FSA Properties, Inc. thereunder having been assumed by the Borrower pursuant to the Loan Assumption Agreement. (i) The definitions of "Paying Agent" and "Principal Paying Agent" are hereby amended by deleting the words "Bank One, Columbus, NA" in each such definition and inserting in their place the words "First Union National Bank." (j) The following new definition shall be inserted immediately following the definition of "Person": "Pledge Agreement" means the Pledge Agreement, dated as of December 22, 1998, by and between the Borrower and the Trustee. 4 (k) The definition of "Security Documents" is hereby amended by adding the following language immediately following the end of such definition: "Security Documents" shall also include the Additional Mortgage, the Pledge Agreement, the Loan Assumption Agreement, each other Loan Document executed in connection therewith, and each additional document, instrument, certificate or agreement related thereto or delivered in connection therewith to establish, create or maintain the security interest of the Trustee in the Mortgaged Property or other collateral described therein to secure payment of the Mortgage Note, including all accounts established pursuant to the Additional Mortgage and all insurance policies required under the Additional Mortgage." 1.2 Enforcement of Rights of Trustee and Issuer. The following new paragraph is hereby inserted in Section 404 of the Indenture immediately following the existing paragraph: The parties acknowledge that the Trustee, as Trustee under this Indenture and legal holder of the Mortgage Loan, is the mortgagee, grantee, beneficiary and secured party under the Additional Mortgage and the pledgee and secured party under the Pledge Agreement. The parties hereby agree that, notwithstanding any provision of this Indenture to the contrary, whenever this Indenture refers to the enforcement or exercise of the rights of the Issuer under any one or more of the Security Documents, or the taking of any action or the exercise of any remedy under any one or more of the Security Documents (including, but not limited to, the right to foreclose upon or take any other action or exercise any remedy available under the Mortgage or the Mortgage Note), such rights, action or remedy shall be deemed to include the rights, actions or remedies available to the Trustee under the Additional Mortgage and the Pledge Agreement. Section 2. Ratification of Indenture. As supplemented and amended by this Supplement, the Indenture is in all respects ratified and confirmed, and the Indenture as so supplemented and amended by this Supplement shall be read, taken and construed as one and the same instrument. Section 3. Counterparts. This Supplement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. 5 Section 4. Governing Law. This Supplement shall be governed by and construed in accordance with the laws of the State of New York without reference to the conflict of laws provisions thereof. 6 IN WITNESS WHEREOF, the Issuer, the Master Servicer and the Trustee have caused this Supplement to be duly executed by their respective duly authorized officers all as of the day and year first above written. FSA FINANCE, INC. By:______________________________ Title:___________________________ MELLON MORTGAGE COMPANY, as Master Servicer By:______________________________ Title:___________________________ FIRST UNION NATIONAL BANK, as Trustee By:______________________________ Title:___________________________ 7 EX-4.16 6 EXHIBIT 4.16 EXHIBIT 4.16 Pursuant to item 601(4)(ii)(A) of Regulation S-K, the Company has not set forth as exhibits instruments with respect to long-term debt where the total amount of securities authorized thereunder by each instrument individually do not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis, and the Company hereby agrees to furnish a copy of such instruments to the Commission upon request. EX-10 7 EXHIBIT 10.2 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated this ____ day of March 1999, effective as of March 1, 1999, by and between KONOVER PROPERTY TRUST, INC. (formerly FAC Realty Trust, Inc.) (the "Company") and PATRICK M. MINIUTTI (the "Executive"). RECITALS A. The Company and the Executive entered into that certain Employment Agreement with an Effective Date of March 1, 1997 (the "Agreement"). B. The Company and the Executive desire to amend the Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows. AGREEMENT 1. All capitalized terms shall be deemed to have the meaning ascribed to them in the Agreement. 2. Section 2(e)(ii) and Section 2(e)(iii) of the Agreement shall be amended by deleting, in each section "twenty percent (20%)" and substituting fifty percent (50%) in its place and stead. 3. Except as otherwise noted herein, all other provisions of the Agreement are hereby ratified and affirmed. IN WITNESS WHEREOF, the parties hereto set their hand and seal as of the effective date hereof. KONOVER PROPERTY TRUST, INC. By: /s/ C. Cammack Morton -------------------------------------- C. Cammack Morton President and Chief Executive Officer /s/ Patrick M. Miniutti (SEAL) ----------------------------------------- PATRICK M. MINIUTTI EX-10 8 EXHIBIT 10.4 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated this ____ day of March 1999, effective as of March 1, 1999, by and between KONOVER PROPERTY TRUST, INC. (formerly FAC Realty Trust, Inc.) (the "Company") and C. CAMMACK MORTON (the "Executive"). RECITALS A. The Company and the Executive entered into that certain Employment Agreement with an Effective Date of March 1, 1997 (the "Agreement"). B. The Company and the Executive desire to amend the Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows. AGREEMENT 1. All capitalized terms shall be deemed to have the meaning ascribed to them in the Agreement. 2. Section 2(e)(ii) and Section 2(e)(iii) of the Agreement shall be amended by deleting, in each section "twenty percent (20%)" and substituting fifty percent (50%) in its place and stead. 3. Except as otherwise noted herein, all other provisions of the Agreement are hereby ratified and affirmed. IN WITNESS WHEREOF, the parties hereto set their hand and seal as of the effective date hereof. KONOVER PROPERTY TRUST, INC. By: /s/ Patrick M. Miniutti ------------------------------------- Patrick M. Miniutti Executive Vice President and Chief Financial Officer /s/ C. Cammack Morton (SEAL) ---------------------------------------- C. CAMMACK MORTON EX-10 9 EXHIBIT 10.6 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated this ____ day of March 1999, effective as of March 1, 1999, by and between KONOVER PROPERTY TRUST, INC. (formerly FAC Realty Trust, Inc.) (the "Company") and WILLIAM H. NEVILLE (the "Executive"). RECITALS A. The Company and the Executive entered into that certain Employment Agreement with an Effective Date of September 8, 1997 (the "Agreement"). B. The Company and the Executive desire to amend the Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows. AGREEMENT 1. All capitalized terms shall be deemed to have the meaning ascribed to them in the Agreement. 2. Section 2(e)(ii) and Section 2(e)(iii) of the Agreement shall be amended by deleting, in each section "twenty percent (20%)" and substituting fifty percent (50%) in its place and stead. 3. Except as otherwise noted herein, all other provisions of the Agreement are hereby ratified and affirmed. IN WITNESS WHEREOF, the parties hereto set their hand and seal as of the effective date hereof. KONOVER PROPERTY TRUST, INC. By: /c/ C. Cammack Morton -------------------------------------- C. Cammack Morton President and Chief Executive Officer /s/ William H. Neville (SEAL) ----------------------------------------- WILLIAM H. NEVILLE EX-10 10 EXHIBIT 10.7 EXHIBIT 10.7 EMPLOYMENT AGREEMENT BETWEEN FAC REALTY TRUST, INC. AND FRED P. STEINMARK EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is entered into as of the 1st day of July, 1998 between FAC REALTY TRUST, INC., a Maryland corporation (the "Company"), and FRED P. STEINMARK (the "Executive") for employment commencing on the Effective Date (as hereinafter defined). W I T N E S S E T H: WHEREAS, the Company seeks to employ the Executive as its Executive Vice President of the Company and the Executive agrees to be so employed: NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties agree as follows: 1. Employment. (a) The Company hereby employs the Executive as Executive Vice President of the Company and the Executive hereby accepts such employment, on the terms and subject to the conditions hereinafter set forth. (b) During the term of his employment under this Employment Agreement and any extension hereof (all references herein to the term of this Employment Agreement shall include any extension hereof), the Executive shall be and have the title of Executive Vice President of the Company and shall devote his entire business time and all reasonable efforts to his employment and perform diligently such duties as are customarily performed by executive vice-presidents of companies similar in size to the Company, together with such other duties as may be reasonably requested from time to time by the Board of Directors of the Company, which duties shall be consistent with his position as set forth above and as provided in Paragraph 2; provided, however, that business activities by the Executive with respect to passive investments, so long as such activities do not, alone or in the aggregate, materially interfere with the Executive's performance of his duties as described in this Paragraph l(b), will not be deemed inconsistent with the requirements of this Paragraph l(b). (c) As the Company is headquartered in North Carolina and Executive will work from the Company's Boca Raton, Florida office for the Company, the parties agree to work together to mutually accommodate both Executive and the Company. 2. Term and Positions. (a) Subject to the provisions for extension or termination hereinafter stated, the term of this Employment Agreement shall begin as of the first closing of that transaction described in that document entitled Master Agreement by and among FAC Realty Trust, Inc., FAC Properties L.P. and the other signatories to the Master Agreement thereafter contained dated as of February 24, 1998 which is expected to be July 1, 1998 (the "Effective Date") and shall continue through June 30, 2001 (the "Expiration Date"). As of July 1, 1999 and each 2 successive anniversary thereof, such term automatically shall be extended for one (1) additional year, unless; (i) this Employment agreement is terminated as provided in Paragraph 5 or (ii) either the Company or the Executive shall give written notice to the other at least thirty (30) days before the first anniversary of the Effective Date or any subsequent annual anniversary thereof, that this Employment Agreement shall not be so extended but shall terminate upon the expiration of the then-existing term (for example, unless such written notice of non-extension is given on or prior to May 31, 1999, the term of this Employment Agreement automatically will be extended, effective July 1, 1999, until June 30, 2002). In the event of a "change of control" (as hereinafter defined) the term of this Employment Agreement shall automatically be extended for a term of two (2) years from the then existing termination date. (b) The Executive shall be entitled to serve as Executive Vice President of the Company. For service as an officer and employee of the Company, the Executive shall be entitled to the full protection of the applicable indemnification provisions of the Restated Certificate of Incorporation and Bylaws of the Company, as the same may be amended from time to time, which indemnifications shall remain effective after termination of this Employment Agreement with respect to Executive's actions and inactions during the term hereof. (c) If: (i) the Company materially changes the Executive's duties and responsibilities as set forth in Paragraphs l(b) and 2(b) without his consent; (ii) the Executive's place of employment is located more than thirty (30) miles from the geographical center of Boca Raton, Florida; (iii) there occurs a material breach by the Company of any of its obligations under this Employment Agreement, which breach has not been cured in all material respects within ten (10) days after the Executive gives notice thereof to the Company; (iv) there occurs a "change in control" (as hereinafter defined) of the Company during the term of this Employment Agreement; then in any such event the Executive shall have the right to terminate his employment with the Company, but such termination shall not be considered a voluntary resignation or termination of such employment or of this Employment Agreement by the Executive but rather a discharge of the Executive by the Company "without cause" (as defined in Paragraph 5 (a)). The Executive may exercise such right of termination at any time within three (3) months following the occurrence of the applicable event described in (i) and (iii) of this Paragraph 2(c), and within six (6) months following the occurrence of the applicable event described in (ii) and (iv) of this Paragraph 2(c). (d) The Executive shall be deemed not to have consented to any written proposal calling for a material change in his duties and responsibilities unless he shall give written notice of his consent thereto to the Board of the Company within fifteen (15) days after 3 receipt of such written proposal. If the Executive shall not have given such consent, the Company shall have the opportunity to withdraw such proposed material change by written notice to the Executive given within ten (10) days after the end of said fifteen (15) day period. (e) The term "change in control" means the first to occur of the following events but shall specifically exclude any change in control associated with that Stock Purchase Agreement by and between FAC Realty Trust, Inc. and Prometheus Southeast Retail, LLC dated as of February 24, 1998 as amended: (i) any person or group of commonly controlled persons owns or controls, directly or indirectly, fifty percent (50%) or more (directly or indirectly, including convertible shares or convertible partnership units) of the voting control or value of the capital stock of the Company following the Effective Date; (ii) any person or group of commonly controlled persons owning less than five percent (5%) of the voting control or value of the capital stock of the Company within 30 days following the Effective Date owns or controls, directly or indirectly, more than twenty percent (20%) (directly or indirectly, including convertible shares or convertible partnership units) of the voting control or value of the capital stock of the Company; or (iii) following the Effective Date, the stockholders of the Company approve an agreement to merge or consolidate with another corporation or other entity resulting (whether separately or in connection with a series of transactions) in a change in ownership of twenty percent (20%) or more (directly or indirectly, including convertible shares or convertible partnership units) of the voting control or value of the capital stock of the Company, or an agreement to sell or otherwise dispose of all or substantially all of the Company's assets (including without limitation, a plan of liquidation or dissolution), or otherwise approve of a fundamental alteration in the nature of the Company's business; provided, however, a pledge, hypothecation or other similar disposition for the purpose of providing collateral security made at the time the Company enters into a bona fide financing transaction with a party which at the time of such transaction is not an affiliate of the Company would not constitute a change in control. Notwithstanding the foregoing provisions of this Paragraph 2, the ownership or acquisition of capital stock by the Executive, C. Cammack Morton, Patrick M. Miniutti, William H. Neville, and/or their respective affiliates, shall not be deemed to result in a "change in control" of the Company. 3. Compensation. During the term of his employment under this Employment Agreement the Company shall pay or provide, as the case may be, to the Executive the compensation and other benefits and rights set forth in this Paragraph 3. All restricted stock given as compensation shall be subject to the Company's 1996 Restricted Stock Plan. 4 (a) The Company shall pay to the Executive a base salary payable in accordance with the Company's usual pay practices (and in any event no less frequently than monthly) of (i) cash payments of Two Hundred Twenty-Five Thousand and No/100 Dollars ($225,000.00) per annum and (ii) such increases (but not decreases) from time to time (based upon the performance of the Company and the Executive) as determined by the Board or the Company's Executive Compensation Committee payable in the form of Common Stock of the Company similar to (b) below commencing March 1, 1999. (b) The Company may pay to the Executive bonus compensation on a calendar year basis pursuant to the terms of the incentive compensation plan established by the Board from time to time, not later than March 1 following each calendar year. Such bonus compensation may be payable in the form of cash or Common Stock of the Company. In the event such bonus is paid in the form of Common Stock, the determination of shares issued may be based on the cash equivalent divided by the market price of the Common Stock on or about the date of determination of the bonus compensation by the Board. Such shares will be increased by 50% and shall automatically vest on the third anniversary of the date of issuance (for example, March 1, 2002 for shares issued March 1, 1999) unless the Executive voluntarily terminates his employment prior to such anniversary date or his employment is terminated for "cause" (see Paragraph 5 (a) (iii)). (c) The Company shall provide to the Executive such medical, hospitalization and dental insurance for himself, his spouse and eligible family members, as may be available to other officers of the Company and term life insurance in the amount of not less than $325,000. (d) The Executive shall participate in all retirement and other benefit plans of the Company generally available from time to time to officers of the Company and for which the Executive qualifies under the terms thereof (and nothing in this Employment Agreement shall or shall be deemed to in any way affect the Executive's rights and benefits thereunder except as expressly provided herein). (e) The Executive shall be entitled to such periods of vacation and sick leave allowance each year as are determined by the Company's Executive Compensation Committee for officers generally; provided that Executive shall be entitled to not less than four weeks (twenty days) of vacation each year. (f) The Executive shall be entitled to participate in any equity or other employee benefit plan that is generally available to senior executive officers, as distinguished from general management, of the Company. The Executive's participation in and benefits under any such plan shall be on the terms and subject to the conditions specified in the governing document of the particular plan. (g) The Company shall reimburse the Executive or provide him with an expense allowance during the term of this Employment Agreement for travel, entertainment and other expenses reasonably and necessarily incurred by the Executive in connection with the Company's business. The Executive shall furnish such documentation with respect to reimbursement to be paid hereunder as the Company shall reasonably request. 5 (h) The Company shall pay to the Executive an annual automobile allowance of $8,000 payable on a pro rata monthly basis. 4. Payment in the Event of Death or Permanent Disability. (a) In the event of the Executive's death or "permanent disability" (as hereinafter defined) during the term of his employment under this Employment Agreement, the Company shall pay to the Executive (or his personal representatives, heirs, successors and assigns in the event of his death) an amount equal to two (2) times the Executive's then effective annual base salary, as determined under Paragraph 3(a), plus a pro rata portion of the bonus applicable to the calendar year in which such death or permanent disability occurs, as such bonus is determined under Paragraph 3(b). (b) The pro rata portion of the bonus described in Paragraph 4(a) shall be paid when and as provided in Paragraph 3(b). The remainder of the benefit to be paid pursuant to Paragraph 4(a) shall be paid within ninety (90) days after the date of death or permanent disability, as the case may be. (c) Except as otherwise provided in Paragraphs 2(b), 3(d), 4(a), 4(b) and 8, in the event of the Executive's death or permanent disability, the Executive's employment hereunder shall terminate and the Executive shall be entitled to no further compensation or other benefits under this Employment Agreement, except as to that portion of any unpaid salary and other benefits accrued and earned by him hereunder up to and including the date of such death or permanent disability, as the case may be, or pursuant to any agreement between the Company and the Executive related to any Restricted Shares or Stock Options held by the Executive. (d) For purposes of this Employment Agreement, the Executive's "permanent disability" shall be deemed to have occurred after one hundred twenty (120) days in the aggregate during any consecutive twelve (12) month period, or after ninety (90) consecutive days, during which one hundred twenty (120) or ninety (90) days, as the case may be, the Executive, by reason of his physical or mental disability or illness, shall have been unable to discharge his duties under this Employment Agreement. The date of permanent disability shall be such one hundred twentieth (120th) or ninetieth (90th) day, as the case may be. In the event either the Company or the Executive, after receipt of notice of the Executive's permanent disability from the other, dispute that the Executive's permanent disability shall have occurred, the Executive shall promptly submit to a physical examination by the chief of medicine of any major accredited hospital in the Palm Beach County, Florida, area and, unless such physician shall issue his written statement to the effect that in his opinion, based on his diagnosis, the Executive is capable of resuming his employment and devoting his full time and energy to discharging his duties within thirty (30) days after the date of such statement, such permanent disability shall be deemed to have occurred. 6 5. Termination. (a) The Employment of the Executive under this Employment Agreement, and the term hereof, may be terminated by the Company: (i) on the death or permanent disability (as defined above) of the Executive; (ii) for "cause" at any time by action of the Board; or (iii) "without cause" at any time by action of the Board. For purposes hereof, the term "cause" shall mean: (A) The Executive's fraud, commission of a felony, commission of an act or series of repeated acts of dishonesty which fraud, felony or dishonesty is materially inimical to the best interests of the Company, or which results in material injury to the business reputation of the Company, or the Executive's willful and repeated failure to perform his duties under this Employment Agreement, which failure has not been cured within fifteen (15) days after the Company gives notice thereof to the Executive; or (B) The Executive's material breach of any material provision of this Employment Agreement, which breach has not been cured in all substantial respects within ten (10) days after the Company gives notice thereof to the Executive. For purposes hereof, the term "without cause" shall mean any reason other than those set forth in subparagraphs (a)(i) and (a)(ii) of this Paragraph 5. The exercise by the Company of its rights of termination under this Paragraph 5 shall be the Company's sole remedy in the event of the Executive's termination, whether for "cause" or "without cause" the occurrence of the event as a result of which such right to terminate arises. Upon any termination of this Employment Agreement, the Executive shall be deemed to have resigned from all offices and directorships held by the Executive in the Company. (b) In the event of a termination claimed by the Company to be for "cause" pursuant to Paragraph 5(a)(ii), the Executive shall have the right to have the justification for said termination determined by arbitration in Raleigh, North Carolina. In order to exercise such right, the Executive shall serve on the Company within thirty (30) days after termination a written request for arbitration. The Company immediately shall request the appointment of a single arbitrator by the American Arbitration Association and thereafter the question of "cause" shall be determined under the rules of the American Arbitration Association applicable to employment disputes, and the decision of the arbitrator shall be final and binding on both parties except as otherwise provided by the arbitrator. The parties shall use all reasonable efforts to facilitate and expedite the arbitration and shall act to cause the arbitration to be completed as promptly as 7 possible. During the pendency of the arbitration, the Executive shall continue to receive all compensation and benefits to which he is entitled hereunder, and if at any time during the pendency of such arbitration the Company fails to pay and provide all compensation and benefits to the Executive in a timely manner the Company shall be deemed to have automatically waived whatever rights it then may have had to terminate the Executive's employment for cause. Expenses of the arbitration shall be borne equally by the parties. (c) In the event of termination pursuant to subparagraph (a)(i) or (a)(ii) of this Paragraph 5, except as otherwise provided in Paragraphs 2(b), 3(d), 4(a) and 4(b), as applicable, the Executive shall be entitled to no further compensation or other benefits under this Employment Agreement, except as to that portion of any unpaid salary and other benefits accrued and earned by him hereunder up to and including the effective date of such termination. (d) In the event of termination pursuant to Paragraph 2(c), or subparagraph (a)(iii) of this paragraph 5, the Executive (in addition to any rights of the Executive to any restricted shares or stock options pursuant to the terms of other agreements between the Executive and the Company) shall be entitled to (i) severance pay payable within five (5) days of such termination in a lump sum equal to the sum of (A) the greater of (x) the total amount of unpaid base salary for the then-unexpired portion of the term of this Employment Agreement, including any extended term as provided by Section 2(a) hereof at the then-effective annual rate of salary, as determined under Paragraph 3(a) and (y) the amount of one year's base salary at the then-effective annual rate of salary, and (B) the product of the number of years (including fractions) representing the unexpired term of this Employment Agreement (but not less than one) times an amount equal to the average of the annual bonuses payable to the Executive under Paragraph 3(b) for the three (3) full calendar years immediately prior to termination of this Employment Agreement in which a bonus was payable or such lesser number of full calendar years during which the Executive was employed hereunder for which a bonus was payable provided, however, for purposes of this provision for any period prior for which a bonus is first payable there shall be an imputed bonus amount equal to the bonus last determined for the Company's COO, William H. Neville, except as to the Executive, the same shall be prorated as applicable, (ii) during a period equal to the greater of one (1) year or the unexpired term of this Employment Agreement, all other benefits to which the Executive would have been entitled during the term of this Employment Agreement had the Executive's employment not been terminated, (iii) during a period equal to the greater of one (1) year or the unexpired term of this Employment Agreement, the continuing use of a secretary and office space to be provided by the Company, in Boca Raton, Florida and (iv) any other benefits accrued and earned by him hereunder up to and 8 including the effective date of such termination. (e) In the event of the termination of his employment pursuant to Paragraph 2(c) or Paragraph 5(a)(iii), the Executive shall have the option to be released from his obligations under Paragraph 6(a)(i) for the one (1) year period following the termination of his employment, by releasing the Company from its obligations under Paragraph 5(d) hereof (other than those provided in Paragraph 5(d)(iv)). Such option may be exercised by the Executive giving the Company notice thereof within five (5) days of such termination. (f) In no event shall the Executive have or be deemed to have any duty to seek employment or otherwise mitigate damages with respect to any amounts or benefits due to him upon termination of this Employment Agreement as provided in this Paragraph 5, nor shall any such amount or benefits be reduced by reason of any other compensation or benefits which the Executive may earn following termination of this Employment Agreement. 6. Covenants and Confidential Information. (a) The Executive acknowledges the Company's reliance and expectation of the Executive's continued commitment to performance of his duties and responsibilities during the time when he is employed under this Employment Agreement. In light of such reliance and expectation on the part of the Company (but subject to Paragraph 5(d), 5(e) and 5(f) above), during the time when he is employed under this Employment Agreement and for a period of one (1) year after the termination of such employment for any reason other than the expiration of the term hereof in accordance with Paragraph 2(a)(ii) hereof (and, as to clause (ii) of this subparagraph (a), at any time during and after the term of this Employment Agreement), the Executive shall not, directly or indirectly, do either of the following: (i) Own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as a consultant, independent contractor or otherwise with, any other corporation, partnership, proprietorship, firm, association or other business entity primarily engaged in the business of, or otherwise engage in the business of, acquiring, owning, developing or managing factory outlet shopping centers in the United States; provided, however, that the ownership of not more than one percent (1%) of any class of publicly traded securities of any entity shall not be deemed a violation of this covenant; or (ii) Disclose, divulge, discuss, copy or otherwise use or suffer to be used in any manner, in competition with, or contrary to the interests of, the Company, any confidential information relating to the Company's operations, properties or otherwise to its particular business or other trade secrets of the Company, it being acknowledged by the Executive that all such information regarding the business of the Company compiled or obtained by, or furnished to, the Executive while the Executive shall have been employed by or associated with the Company is confidential information and the Company's exclusive property; provided, however, that the foregoing restrictions 9 shall not apply to the extent that such information (A) is obtainable in the public domain or known in the industry generally, (B) becomes obtainable in the public domain or known in the industry generally, except by reason of the breach by the Executive of the terms hereof, (c) was not acquired by the Executive in connection with his employment or affiliation with the Company, (D) was not acquired by the Executive from the Company or its representatives, or (E) is required to be disclosed by rule of law or by order of a court or governmental body or agency. (b) The Executive agrees and understands that the remedy at law for any breach by him of this Paragraph 6 may be inadequate and that the damages following such breach are not readily susceptible to being measured in monetary terms. Accordingly, it is acknowledged that, upon adequate proof of the Executive's violation of any legally enforceable provision of this Paragraph 6, the Company may be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach. Nothing in this Paragraph 6 shall be deemed to limit the Company's remedies at law or in equity for any breach by the Executive of any of the provisions of this Paragraph 6 which may be pursued or availed of by the Company. (c) The Executive has carefully considered the nature and extent of the restrictions upon him and the rights and remedies conferred upon the Company under this Paragraph 6, and hereby acknowledges and agrees that the same are reasonable in time and territory, are designed to eliminate competition which otherwise would be unfair to the Company, do not stifle the inherent skill and experience of the Executive, would not operate as a bar to the Executive's sole means of support, are fully required to protect the legitimate interests of the Company and do not confer a benefit upon the Company disproportionate to the detriment to the Executive. 7. Stock Options. The Executive shall receive stock options under the Company's Amended and Restated 1993 Employee Stock Incentive Plan as more fully described in that certain Non-Qualified Stock Option Agreement dated July 1, 1998 the terms and conditions of which are incorporated herein by reference. 8. Restricted Stock. The Executive shall receive grants of 20,000 shares and 7,000 shares (the "Restricted Shares") of restricted common stock of the Company ("Common Stock") granted under the Company's 1996 Restricted Stock Plan. Prior to vesting, the Restricted Shares will be registered under the Securities Act on Form S-8, will be listed on the NYSE and following vesting thereof will be freely tradable subject to applicable provisions of Rule 144 promulgated under the Securities Act. With respect to each of said grants, the Company and the Executive shall enter into Restricted Stock Agreements in a form mutually agreed upon by the Company and the Executive providing: as to (a) the 20,000 Restricted Shares (i) the 20,000 Restricted Shares shall vest in three (3) equal installments of thirty three and one-third percent (33.33%) on March 1, 1999 and each successive anniversary thereof (provided as to each installment that the Executive continues to be employed by the Company) and as to the 7,000 Restricted Shares the same shall automatically vest on January 1, 2001 unless the Executive voluntarily terminates his employment prior to such vesting date or his employment is terminated for "cause" as defined in paragraph 5(a) hereof and (b) all unvested Restricted Shares 10 shall immediately vest upon the Executive's death or permanent disability (as defined in Paragraph 4(d)) during his employment by the Company; or termination of the Executive's employment by the Company pursuant to Paragraph 2(c) or Paragraph 5(a)(iii); or pursuant to Paragraph 5(a)(iii) if such termination occurs within three (3) months prior to, at the time of, or within one (1) year following a "change of control" (as defined in Section 2(e) hereof) or provided that such change is effected, the execution of a definitive agreement therefor (notwithstanding the requirement of continued employment in subparagraph (a) above, upon such termination of employment). 9. Tax Adjustment Payments. If all or any portion of the amounts payable to the Executive under this Employment Agreement (together with all other payments of cash or property, whether pursuant to this Employment Agreement or otherwise, including, without limitation, the issuance of common stock of the Company, or the granting, exercise or termination of options therefor) constitutes "excess parachute payments" within the meaning of Section 280G of the Code that are subject to the excise tax imposed by Section 4999 of the Code (or any similar tax or assessment), the amounts payable hereunder shall be increased (in the same manner, to the extent applicable, without duplication, as provided in (i), (ii) and (iii) below) to the extent necessary to place the Executive in the same after-tax position as he would have been in had no such tax assessment been imposed on any such payment paid or payable to the Executive under this Employment Agreement or any other payment that the Executive may receive in connection therewith. The determination of the amount of any such tax or assessment and the incremental payment required hereby in connection therewith shall be made by the accounting firm employed by the Executive within thirty (30) calendar days after such payment and said incremental payment shall be made within five (5) calendar days after such determination has been made. If, after the date upon which the payment required by this Paragraph 9 has been made, it is determined (pursuant to final regulations or published rulings of the Internal Revenue Service, final judgment of a court of competent jurisdiction, Internal Revenue Service audit assessment, or otherwise) that the amount of excise or other similar taxes or assessments payable by the Executive is greater than the amount initially so determined, then the Company shall pay the Executive an amount equal to the sum of: (i) such additional excise or other taxes, plus (ii) any interest, fines and penalties resulting from such underpayment, plus (iii) an amount necessary to reimburse the Executive for any income, excise or other tax assessment payable by the Executive with respect to the amounts specified in (i) and (ii) above, and the reimbursement provided by this clause (iii), in the manner described above in this Paragraph 9. Payment thereof shall be made within five (5) calendar days after the date upon which such subsequent determination is made. 10. Representations and Warranties of the Company. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland and has all requisite corporate power and authority to enter into, execute and deliver this Employment Agreement, fulfill its obligations hereunder and consummate the transactions contemplated hereby. (b) The execution and delivery of, performance of obligations under, and consummation of the transactions contemplated by, this Employment Agreement have been duly 11 authorized and approved by all requisite corporate action by or in respect of the Company, and this Employment Agreement constitutes the legally valid and binding obligation of the Company, enforceable by the Executive in accordance with its terms. (c) No provision of the Company's governing documents or any agreement to which it is a party or by which it is bound or of any material law or regulation of the kind usually applicable and binding upon the Company prohibits or limits its ability to enter into, execute and deliver this Employment Agreement, fulfill its respective obligations hereunder and consummate the transactions contemplated hereby. 11. Miscellaneous. (a) The Executive represents and warrants that he is not a party to any agreement, contract or understanding, whether employment or otherwise, which would restrict or prohibit him from undertaking or performing employment in accordance with the terms and conditions of this Employment Agreement. (b) The provisions of this Employment Agreement are severable and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions and any partially unenforceable provision to the extent enforceable nevertheless shall be binding and enforceable. (c) The rights and obligations of the Company under this Employment Agreement shall inure to the benefit of, and shall be binding on, the Company and its successors and assigns, and the rights and obligations of the Executive under this Employment Agreement shall inure to the benefit of, and shall be binding upon, the Executive (other than obligations to perform services and to refrain from competition and disclosure of confidential information) and his heirs, personal representatives and assigns. (d) Any controversy or claim arising out of or relating to this Employment Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Rules of the American Arbitration Association applicable to employment disputes then pertaining in the City of Raleigh, North Carolina, and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof. The arbitrator or arbitrators shall be deemed to possess the powers to issue mandatory orders and restraining orders in connection with such arbitration; provided, however, that nothing in this Paragraph 11(d) shall be construed so as to deny the Company the right and power to seek and obtain injunctive relief in a court of equity for any breach or threatened breach by the Executive of any of his covenants contained in Paragraph 6 hereof. (e) Any notice to be given under this Employment Agreement shall be personally delivered in writing or shall have been deemed duly given when received after it is posted in the United States mail, postage prepaid, registered or certified return receipt requested, and if mailed to the Company, shall be addressed to its principal place of business, attention: President, and if mailed to the Executive, shall be addressed to him at his home address last known on the records of the Company, or at such other address or addresses as either the 12 Company or the Executive may hereafter designate in writing to the other. All notices provided for hereunder to the parties shall be accompanied by simultaneous copy of such notice sent to the attorneys for such parties, as follows: If to the Executive: Fred P. Steinmark 3757 N.W. 52nd Street Boca Raton, Florida 33496 If to the Company: FAC Realty, Inc. 11000 Regency Parkway, Third Floor East Tower Cary, North Carolina 27511 Attention: President Notices sent by Federal Express or similar overnight delivery service or by facsimile transmissions shall also constitute due notice under this paragraph 11(e), effective upon receipt thereof. (f) The failure of either party to enforce any provision or provisions of this Employment Agreement shall not in any way be construed as a waiver of any such provision or provisions as to any future violations thereof, nor prevent that party thereafter from enforcing each and every other provision of this Employment Agreement. The rights granted the parties herein are cumulative and the waiver of any single remedy shall not constitute a waiver of such party's right to assert all other legal remedies available to it under the circumstances. (g) This Employment Agreement supersedes all prior agreements and understandings between the parties made prior to the date hereof and may not be modified or terminated orally. No modification, termination or attempted waiver shall be valid unless in writing and signed by the party against whom the same is sought to be enforced. (h) This Employment Agreement shall be governed by and construed according to the laws of the State of North Carolina. (i) Captions and paragraph headings used herein are for convenience and are not a part of this Employment Agreement and shall not be used in construing it. (j) Where necessary or appropriate to the mean hereof, the singular and plural shall be deemed to include each other, and the masculine, feminine and neuter shall be deemed to include each other. (k) This Employment Agreement may be executed in multiple counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. This Employment Agreement may be executed by facsimile signature. 13 IN WITNESS WHEREOF, the parties have executed this Employment Agreement on the day and year first set forth above. FAC REALTY TRUST, INC. a Maryland corporation Attest:______________________ (Corporate Seal) By:____________________________________ C. Cammack Morton President Chief Executive Officer _________________________________(SEAL) FRED P. STEINMARK EX-10 11 EXHIBIT 10.8 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated this ____ day of March 1999, effective as of March 1, 1999, by and between KONOVER PROPERTY TRUST, INC. (formerly FAC Realty Trust, Inc.) (the "Company") and FRED P. STEINMARK (the "Executive"). RECITALS A. The Company and the Executive entered into that certain Employment Agreement dated as of July 1, 1998 (the "Agreement"). B. The Company and the Executive desire to amend the Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows. AGREEMENT 1. All capitalized terms shall be deemed to have the meaning ascribed to them in the Agreement. 2. Section 2(e)(ii) and Section 2(e)(iii) of the Agreement shall be amended by deleting, in each section "twenty percent (20%)" and substituting fifty percent (50%) in its place and stead. 3. Except as otherwise noted herein, all other provisions of the Agreement are hereby ratified and affirmed. IN WITNESS WHEREOF, the parties hereto set their hand and seal as of the effective date hereof. KONOVER PROPERTY TRUST, INC. By: /s/ C. Cammack Morton -------------------------------------- C. Cammack Morton President and Chief Executive Officer /s/ Fred P. Steinmark (SEAL) ----------------------------------------- FRED P. STEINMARK EX-10 12 EXHIBIT 10.10 EXHIBIT 10.10 SECOND AMENDMENT TO EMPLOYMENT AGREEMENT THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT dated this ____ day of March 1999, effective as of March 1, 1999, by and between KONOVER PROPERTY TRUST, INC. (formerly FAC Realty Trust, Inc.) (the "Company") and CHRISTOPHER G. GAVRELIS (the "Executive"). RECITALS A. The Company and the Executive entered into that certain Employment Agreement with an Effective Date of December 15, 1995 (the "Agreement") which was amended by a First Amendment to Employment Agreement dated as of May 30, 1997. B. The Company and the Executive desire to amend the Agreement, to, among other things, extend the term thereof. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows. AGREEMENT 1. All capitalized terms shall be deemed to have the meaning ascribed to them in the Agreement. 2. Section 2(a) of the Agreement is hereby deleted and is replaced by the following: "Subject to the provisions for extension or termination hereinafter stated, the term of this Employment Agreement shall begin on December 15, 1995 (the "Effective Date") and shall continue through February 28, 2002 (the "Expiration Date"). As of March 1, 2000 and each successive anniversary thereof, such term automatically shall be extended for one (1) additional year unless this Employment Agreement is terminated as provided in Paragraph 5(ii) either the Company or the Executive shall give written notice to the other at least thirty (30) days before the first anniversary thereof, that this Employment Agreement shall not be so extended but shall terminate upon the expiration of the then existing term (for example, unless such written notice of non-extension is given on or prior to January 28, 2000, the term of this Employment Agreement automatically will be extended, effective March 1, 2000, until February 28, 2003). In the event of a "change of control" (as hereinafter defined) the term of this Employment Agreement shall automatically be extended for a term of two (2) years from the then existing Termination Date". 3. Section 2(e)(ii) and Section 2(e)(iii) of the Agreement shall be amended by deleting, in each section "twenty percent (20%)" and substituting fifty percent (50%) in its place and stead. 4. Except as otherwise noted herein, all other provisions of the Agreement are hereby ratified and affirmed. IN WITNESS WHEREOF, the parties hereto set their hand and seal as of the effective date hereof. KONOVER PROPERTY TRUST, INC. By: ----------------------------- C. Cammack Morton President and Chief Executive Officer --------------------------------- CHRISTOPHER G. GAVRELIS EX-10 13 EXHIBIT 10.13 - - -------------------------------------------------------------------------------- THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. - - -------------------------------------------------------------------------------- KONOVER PROPERTY TRUST, INC. AMENDED AND RESTATED 1995 OUTSIDE DIRECTORS' STOCK AWARD PLAN Konover Property Trust, Inc. hereby amends and restates, as of March 23, 1999, its 1995 Outside Directors' Stock Award Plan for the benefit of certain members of the Board of Directors of the Company, subject to the following provisions: SECTION 1. PURPOSES. The purposes of the Plan are to secure for the Company and its stockholders the benefits of the incentive inherent in increased Common Stock ownership by the Outside Directors and to provide the Outside Directors with the opportunity to increase their proprietary interest in the Company. SECTION 2. DEFINITIONS. For the purposes of this Plan and any Award, the following words shall have the meanings indicated, unless the context clearly requires otherwise: "AWARD" means an Option or a grant of shares of Common Stock, in either case pursuant to the terms and conditions of the Plan. "AWARDEE" means an Outside Director granted an Award under the Plan. "BOARD" means the Board of Directors of the Company. "COMMITTEE" means the Executive Compensation Committee of the Board. "COMMON STOCK" means the common stock of the Company, par value $0.01 per share, subject to the right of the Company to change the authorized number of shares of such class and to provide no par or a change in par value for such stock. "COMPANY" means Konover Property Trust, Inc., a Maryland corporation. "DIRECTOR" means a member of the Board. "EFFECTIVE DATE" means the date on which the Plan is adopted by the Company, subject to approval by the stockholders of the Company. "FAIR MARKET VALUE" means, with respect to shares of Common Stock, the closing price of the Common Stock on the New York Stock Exchange or such other securities exchange which the Common Stock is listed on the relevant date. "OPTION" means a stock option that is not qualified under Section 422 of the Internal Revenue Code of 1986, as amended. "OUTSIDE DIRECTOR" means any Director who is not an officer or employee of the Company or any Subsidiary. "PLAN" means the Konover Property Trust, Inc. Amended and Restated 1995 Outside Directors' Stock Award Plan, as amended from time to time in accordance herewith. "PURCHASE PERIOD" shall mean either the period of six (6) months commencing on January 1st and concluding on June 30th of each year, or the period of six (6) months commencing on July 1st and concluding on December 31st of each year. "RETAINER FEE" means the annual retainer fee earned by each Outside Director. "SUBSIDIARY" means any corporation (other than the Company), partnership, joint venture, organization or other entity of which 50 percent or more of the total combined voting power of all classes of equity of such entity or 50 percent or more of the capital account or profit interest of such entity is owned, directly or indirectly, by the Company or a Subsidiary, whether or not such entity now exists or is hereafter organized or acquired by the Company or a Subsidiary. SECTION 3. ADMINISTRATION. The Plan shall be administered by the Committee. The Committee shall have the powers vested in it by the terms of the Plan, such powers to include authority (within the limitations described herein) to establish the form, terms and conditions of Awards and of Award agreements, if any, embodying Awards made under the Plan. Subject to the provisions of the Plan, the Committee shall have the power to construe the Plan, to determine all questions arising thereunder and to adopt and amend such rules and regulations for the administration of the plan as it may deem desirable. Any decision of the Committee in the administration of the Plan, as described herein, shall be final and conclusive. The Committee may act only by a majority of its members in office, except that the members thereof may authorize any one or more of their number or the Secretary or any other officer of the Company to execute and deliver documents on behalf of the Committee. No member of the Committee shall be liable for anything done or omitted to be done by such member or by any other member of the Board in connection with the Plan except for such member's own willful misconduct or as expressly provided by statute. The members of the Committee serve for one-year terms, and they may be removed by majority vote of the Board. However, pursuant to the Stockholders Agreement (the "Agreement") entered into with Prometheus Southeast Retail, LLC (the "Investor"), dated February 24, 1998, one member of the Committee shall be an Investor Nominee (as defined in the Agreement). SECTION 4. AMOUNT OF STOCK. The stock which may be issued and sold under the Plan will be the Common Stock, of a total number not exceeding one hundred fifty thousand (150,000) shares, subject to adjustment as provided in Section 8. The stock to be issued may be either authorized and unissued shares or issued shares acquired by the Company. All or any shares of Common Stock subject to an Award which for any reason are not issued or are reacquired under the Award may again be made subject to an Award under the Plan. SECTION 5. ELIGIBILITY. Each Outside Director shall receive Awards in accordance with Section 6. SECTION 6. AWARDS. The Committee may provide for Awards to Outside Directors in consideration for their service to the Company. The Committee shall determine to which Outside Directors any such Awards shall be granted hereunder. The Committee shall specify the number of shares of Common Stock subject to each Award provided for under this Section 6, or the formula pursuant to which such number shall be determined, the Outside Director(s) to receive any such Award, the date or triggering event of any such Award and the vesting and expiration terms applicable to such Award. Awards shall be issued on the first day of January and the first day of July for the preceding six months. SECTION 7. TERMS AND CONDITIONS OF AWARDS. Awards granted pursuant to the Plan need not be identical, but each Award shall be subject to the following general terms and conditions: (a) Terms and Restrictions Upon Shares: The Committee may provide that the shares of Common Stock issued upon exercise of an Option or receipt of a stock grant shall be subject to such further conditions, restrictions or agreements as the Committee in its discretion may specify prior to the exercise of such Option or receipt of such stock grant, including without limitation, deferrals on issuance, conditions on vesting or transferability, and forfeiture or repurchase provisions. The Committee may waive conditions to and/or accelerate exercisability of an Option or stock grant, either automatically upon the occurrence of specified events (including in connection with a change of control of the Company) or otherwise in its discretion. (b) Transferability of Option: Unless otherwise provided by the Committee, each Option shall be transferable only by will or the laws of descent and distribution. (c) Option Price: The exercise price for each Option shall be established by the Committee or under a formula established by the Committee. The exercise price shall not be less than 85% of the lower of the Fair Market Value of the stock on the first or last day of the applicable Purchase Period, except that in the event that receipt of Options is conditioned on the Outside Director electing before the period for which the retainer is earned to forego his or her right to all or any part of his or her cash retainer or other fees, the aggregate exercise price of such Options shall not be less than 85% of the lower of the Fair Market Value of the number of shares of Common Stock subject to such options on first or last day of the applicable Purchase Period, with that amount then further reduced by the amount of retainer or other fees such Outside Director has elected to forego. (d) Stock Grant Terms: Stock grants under the Plan may, in the sole discretion of the Committee, but need not, be conditioned upon the Outside Director paying cash or cash-equivalent consideration or agreeing to forego other compensation for the Common Stock covered by the stock grant. Stock grants under the Plan may be subject to such conditions, restrictions or other vesting terms as are established in the sole discretion of the Committee. The conditions, restrictions or vesting terms may be contingent upon the passage of time, continued service or achievement of Company or individual performance goals, as specified by the Committee. If a stock grant is conditioned upon the Outside Director paying cash or cash-equivalent consideration or agreeing to forego other compensation for the Common Stock covered by such grant, the price of such shares shall not be less than 85% of the lower of the Fair Market Value of the number of shares subject to such grant on the first or last day of the applicable Purchase Period, with that amount further reduced by the amount of retainer or other fees the Outside Director has elected to forego. (e) Award Agreements: The Committee may require any Awardee to enter into an Award agreement with the Company in a form specified by the Committee agreeing to the terms and conditions of the Award and such other matters consistent with the Plan as the Committee in its sole discretion shall determine. Certificates representing Award shares granted subject to restriction shall bear a legend in such form as may be prescribed by the Committee. SECTION 8. EFFECT OF CERTAIN TRANSACTIONS. The number of shares of Common Stock reserved for issuance under the Plan shall be appropriately adjusted by the Committee, whose determination shall be conclusive, to reflect any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, a consolidation of shares, the payment of a stock dividend, or any other capital adjustment affecting the number of issued shares of Common Stock. In the event that the outstanding shares of Common Stock shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or another corporation, whether through reorganization, recapitalization, merger, consolidation, or otherwise, then there shall be substituted for each share of Common Stock reserved for issuance under the Plan, but not yet awarded under the Plan, the number and kind of shares of stock or other securities into which each outstanding share of Common Stock shall be so changed or for which each such share shall be exchanged. SECTION 9. AMENDMENT OR DISCONTINUANCE. The Plan may be amended at any time and from time to time by the Board as the Board shall deem advisable including, but not limited to, amendments necessary to qualify for any exemption or to comply with applicable law or regulations; provided, however, that any such amendment shall be subject to further approval by the stockholders of the company to the extent required by law, the New York Stock Exchange or as deemed advisable by the Board. No amendment of the Plan shall materially and adversely affect any right of any Awardee with respect to any Award theretofore granted, without such Awardee's written consent. Any such action to amend or discontinue the Plan shall be adopted by formal action of the Board and executed by an officer or persons authorized to act on behalf of the Company. SECTION 10. TERMINATION. This Plan shall terminate upon the earlier of the following dates or events to occur: (a) upon the adoption of a resolution of the Board terminating the Plan; or (b) May 14, 2005 (which date is ten years from the date the Plan was initially approved and adopted by the stockholders of the Company). Any action under Section 10(a) to terminate the Plan shall be adopted by formal action of the Board and executed by an officer or person authorized to act on behalf of the Company. SECTION 11. MISCELLANEOUS PROVISIONS. (a) Except as expressly provided for in the Plan, no Outside Director or other person shall have any claim or right to be granted an Award under the Plan. Neither the Plan nor any action taken thereunder shall be construed as giving any Outside Director any right to be retained in the service of the Company. (b) An Awardee's right and interest under the Plan may not be assigned or transferred in whole or in part either directly or by operation of law or otherwise (except in the event of an Awardee's death, by will or the laws of descent and distribution), including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy, or in any other manner, and no such right or interest of any participant in the Plan shall be subject to any obligation or liability of such participant. (c) No shares of Common Stock shall be issued hereunder unless counsel for the Company shall be satisfied that (i) such issuance will be in compliance with applicable federal and state securities laws, including, but not limited to, listing requirements and New York Stock Exchange requirements, and any other laws or regulations applicable to the delivery of such shares, and (ii) the certificates representing shares of Common Stock awarded bear any and all legends necessary in order to comply with such laws and regulations. (d) It shall be a condition to the obligation of the Company to issue an Award, that the Awardee pay to the Company, upon its demand, such amount as may be requested by the Company for the purpose of satisfying any liability to withhold federal, state, or local income or other taxes. If the amount requested is not paid, the Company may refuse to issue an Award. (e) The expenses of the Plan shall be borne by the Company. (f) The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the issuance of Awards under the Plan and the issuance of Awards shall be subordinate to the claims of the Company's general creditors. (g) By accepting any Award or other benefit under the Plan, each Awardee and each person claiming under or through such person shall be conclusively deemed to have indicated his or her acceptance and ratification of, and consent to, any action taken under the Plan by the Company or the Board. (h) All section references herein refer to sections of this Plan unless specifically noted otherwise. (i) Any notice or other communication provided for herein shall be given in writing by registered or certified mail, return receipt requested, or by facsimile, telecopy, or other means of electronic communication, reasonably calculated in any instance to be received by the receiving party or his, her or its authorized agent at the receiving party's last-known address. The notice or communication shall be deemed as delivered when it arrives at such address. EX-21 14 EXHIBIT 21.1 Name State of Formation KPT Outparcels, Inc. DE KPT Properties Holding Corp. MD FSA Finance, Inc. DE Factory Stores Management, Inc. DE KPT Properties, L.P. DE KPT REMIC Loan, Inc. DE FAC Mortgage Formation, Inc. DE FAC Tampa Formation, Inc. DE Mobile KPT Formation, Inc. DE RVA One Formation, Inc. NC RVA Two Formation, Inc. NC Square One KPT Formation, Inc. DE Atlantic Realty LLc DE Celebration KPT LLC DE DPKPT LLC DE Falls KPT LLC DE KPT Mortgage LLC DE KPT NON-REMIC Loan LLC DE KPT REMIC Loan LLC DE Mobile KPT LLC DE Mount Pleasant KPT LLC DE Park Place KPT LLC DE RVA One, LLC VA RVA Two, LLC VA Square One KPT LLC DE WPKPTLLC DE Wakefield Investment, Inc. DE RMC/Konover Property Trust, Inc. MD Carolina FAC LP DE Lenoir FAC LLC DE Lenoir FAC II LLC DE Tampa KPT LLC DE Tampa Formation, Inc. DE Dukes KPT LLC DE Waverly Place KPT, LLC DE Wakefield Commercial, LLC NC EX-23 15 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-03240 and Form S-8 No. 33-29491 both amended on March 11, 1998) pertaining to the Konover Property Trust, Inc. Amended and Restated 1993 Employee Stock Incentive Plan, the Konover Property Trust, Inc. 1995 Outside Directors' Stock Award Plan, the Konover Property Trust, Inc. 1996 Restricted Stock Plan and the Konover Property Trust, Inc. 1997 Qualified Employee Stock Purchase Plan of our report dated January 31, 1997, with respect to the consolidated statements of operations, cash flows, and changes in stockholders' equity of Konover Property Trust, Inc. for the year ended December 31, 1996, included in this Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ ERNST & YOUNG LLP Raleigh, North Carolina March 25, 1999 EX-23 16 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements (Form S-8, Nos. 333-3240 and 333-29491) and related Prospectuses of Konover Properties Trust, Inc. of our report dated February 19, 1999, with respect to the consolidated financial statements and schedule of Konover Properties Trust, Inc. included in the Annual Report of Form 10-K for the year ended December 31, 1998. /s/ Arthur Andersen LLP Raleigh, North Carolina March 31, 1999 EX-27 17 FDS -- KONOVER
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 78,329 0 12,076 0 0 34,375 551,669 0 682,449 15,305 305,557 0 18,962 313 650,928 670,203 0 69,542 0 39,140 7,602 0 19,772 3,028 0 3,028 0 0 0 3,028 0.16 0.14
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