-----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, ViIyRVZ7gC9F1a/XsqAtduFdIS1sLv2lpLHOX3eSrFHmHBswI0yFbFRkGEvdAWFy +qMr0aiX/07J2qhttHkbfQ== 0000950168-99-002241.txt : 19990817 0000950168-99-002241.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950168-99-002241 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KONOVER PROPERTY TRUST INC CENTRAL INDEX KEY: 0000899757 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 561819372 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11998 FILM NUMBER: 99690754 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-Q 1 KONOVER PROPERTY TRUST, INC. 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ________. Commission File Number 1-11998 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 IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 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) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 30,838,711 shares of Common Stock, $0.01 par value, as of August 10, 1999. KONOVER PROPERTY TRUST, INC. INDEX PART I. FINANCIAL INFORMATION PAGE NO. ITEM 1. Financial Statements (Unaudited)................................. 3 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 14 ITEM 3. Quantitative and Qualitative Disclosures of Market Risk.......... 27 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings................................................ 28 ITEM 2. Changes in Securities and Use of Proceeds........................ 28 ITEM 3. Defaults Upon Senior Securities.................................. 28 ITEM 4. Submission of Matters to a Vote of Security Holders.............. 28 ITEM 5. Other Information................................................ 28 ITEM 6. Exhibits and Reports on Form 8-K................................. 28 Signatures ............................................................. 29 2 PART I ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) INDEX TO UNAUDITED FINANCIAL STATEMENTS
PAGE NO. Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.................................. 4 Consolidated Statements of Operations for the three months ended June 30, 1999 and 1998................ 5 Consolidated Statements of Operations for the six months ended June 30, 1999 and 1998.................. 6 Consolidated Statements of Stockholders' Equity for the six months ended June 30, 1999................. 7 Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998.................. 8 Notes to Consolidated Financial Statements............................................................. 9
3 KONOVER PROPERTY TRUST, INC. CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 DECEMBER 31, 1998 (UNAUDITED) (AUDITED) --------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA)) ASSETS INCOME PRODUCING PROPERTIES: Land $ 115,431 $ 108,978 Buildings and improvements 473,128 437,932 Deferred leasing and other charges 31,691 28,561 --------------------------------------------- 620,250 575,471 Accumulated depreciation and amortization (76,027) (66,108) --------------------------------------------- 544,223 509,363 Properties under development 20,352 7,414 Properties held for sale 5,837 5,946 Investment in joint ventures 38,496 32,138 --------------------------------------------- 608,908 554,861 OTHER ASSETS: Cash and cash equivalents 17,887 72,302 Restricted cash 5,662 6,052 Tenant and other receivables 14,139 12,076 Deferred charges and other assets 17,178 12,622 Notes receivable 16,706 24,536 --------------------------------------------- $ 680,480 $ 682,449 ============================================= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Debt on income properties $ 307,084 $ 304,783 Capital lease obligations 755 774 Accounts payable and other liabilities 17,181 15,305 --------------------------------------------- 325,020 320,862 COMMITMENTS AND CONTINGENCIES - - MINORITY INTEREST IN OPERATING PARTNERSHIP 12,796 12,246 STOCKHOLDERS' EQUITY: Convertible preferred stock, Series A, 5,000,000 shares authorized, 792,000 issued and outstanding at June 30, 1999 and December 31, 1998 18,962 18,962 Stock purchase warrants 9 9 Commonstock, $0.01 par value, 100,000,000 shares authorized, 30,838,711 and 31,207,457 issued and outstanding at June 30, 1999 and December 31, 1998, respectively 308 313 Additional paid-in capital 323,867 328,705 Retained Earnings - 1,612 Deferred compensation - Restricted Stock Plan (482) (260) --------------------------------------------- 342,664 349,341 ============================================= $ 680,480 $ 682,449 =============================================
SEE ACCOMPANYING NOTES. 4 KONOVER PROPERTY TRUST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1999 1998 --------------------------------------------- RENTAL OPERATIONS: (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Base rents $ 15,922 $ 14,048 Percentage rents 408 151 Property operating cost recoveries 4,232 3,962 Other income 524 504 --------------------------------------------- 21,086 18,665 --------------------------------------------- Property operating costs: Common area maintenance 2,399 2,044 Utilities 624 627 Real estate taxes 2,002 1,882 Insurance 238 243 Marketing 162 156 Other 996 582 --------------------------------------------- 6,421 5,534 Depreciation and amortization 5,896 5,585 --------------------------------------------- 12,317 11,119 --------------------------------------------- 8,769 7,546 --------------------------------------------- OTHER EXPENSES: General and administrative 2,115 1,870 Interest 3,862 6,101 --------------------------------------------- INCOME (LOSS) FROM OPERATIONS 2,792 (425) Loss on sale of real estate 158 353 Equity in earnings of unconsolidated ventures 3 - Minority interest in operating partnership 79 - --------------------------------------------- NET INCOME (LOSS) 2,552 (778) Preferred dividends 275 - --------------------------------------------- NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 2,277 $ (778) ============================================= BASIC INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS PER SHARE $ 0.07 $ (0.05) ============================================= WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 30,756 14,186 ============================================= DILUTED INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS PER SHARE $ 0.07 $ (0.05) ============================================= WEIGHTED-AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 34,341 14,186 =============================================
SEE ACCOMPANYING NOTES. 5 KONOVER PROPERTY TRUST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 1998 --------------------------------------------- RENTAL OPERATIONS: (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Base rents $ 30,482 $ 23,776 Percentage rents 569 302 Property operating cost recoveries 7,991 7,062 Other income 1,207 1,731 --------------------------------------------- 40,249 32,871 --------------------------------------------- Property operating costs: Common area maintenance 4,487 3,653 Utilities 1,246 1,209 Real estate taxes 3,930 3,273 Insurance 479 405 Marketing 316 315 Other 1,875 1,105 --------------------------------------------- 12,333 9,960 Depreciation and amortization 11,066 9,558 --------------------------------------------- 23,399 19,518 --------------------------------------------- 16,850 13,353 --------------------------------------------- OTHER EXPENSES: General and administrative 4,050 3,397 Interest 7,170 10,482 --------------------------------------------- INCOME (LOSS) FROM OPERATIONS 5,630 (526) Loss on sale of real estate 350 353 Equity in earnings of unconsolidated ventures 6 - Minority interest in operating partnership 166 - --------------------------------------------- NET INCOME (LOSS) 5,108 (879) Preferred dividends 550 - --------------------------------------------- NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 4,558 $ (879) ============================================= BASIC INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS PER SHARE $ 0.15 $ (0.07) ============================================= WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 30,936 13,076 ============================================= DILUTED INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS PER SHARE $ 0.15 $ (0.07) ============================================= WEIGHTED-AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 34,492 13,076 =============================================
SEE ACCOMPANYING NOTES. 6 KONOVER PROPERTY TRUST, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) (IN THOUSANDS)
CONVERTIBLE STOCK PURCHASE ADDITIONAL PAID PREFERRED STOCK WARRANTS COMMON STOCK IN CAPITAL --------------------------------------------------------------------- BALANCE AT JANUARY 1, 1999 $ 18,962 $ 9 $ 313 $ 328,705 Expenses related to sale of common stock - - - (213) Issuance of 10,830 employee stock purchase plan shares - - - 58 Issuance of 55,871 restricted shares - - - 325 Repurchase of 493,200 shares of common stock - - (5) (2,962) Compensation under stock plans - - - - Preferred stock dividends ($0.25 per share) - - - - Common stock dividends ($0.25 per share) - - - (2,046) Net income - - - - ==================================================================== BALANCE AT JUNE 30, 1999 $ 18,962 $ 9 $ 308 $ 323,867 ====================================================================
DEFERRED COMPENSATION RETAINED RESTRICTED STOCK EARNINGS PLAN TOTAL ------------------------------------------------ BALANCE AT JANUARY 1, 1999 $ 1,612 $ (260) $ 349,341 Expenses related to sale of common stock - - (213) Issuance of 10,830 employee stock purchase plan shares - - 58 Issuance of 55,871 restricted shares - (325) - Repurchase of 493,200 shares of common stock - - (2,967) Compensation under stock plans - 103 103 Preferred stock dividends ($0.25 per share) (550) - (550) Common stock dividends ($0.25 per share) (6,170) - (8,216) Net income 5,108 - 5,108 ===================================================== BALANCE AT JUNE 30, 1999 $ - $ (482) $ 342,664 =====================================================
SEE ACCOMPANYING NOTES. 7 KONOVER PROPERTY TRUST, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 1998 ----------------------------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 5,108 $ (879) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 11,066 9,558 Loss on sale of real estate 350 353 Minority interest in operating partnership 166 - Amortization of deferred financing costs 848 173 Compensation under stock plans 948 664 Amortization of debt premium (652) - Net changes in: Tenant and other receivables (2,063) (1,223) Deferred charges and other assets (5,211) (1,882) Accounts payable and other liabilities 1,683 3,464 ----------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 12,243 10,228 ----------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in income-producing properties (17,879) (7,098) Proceeds from sale of real estate - 5,717 Acquisition of income-producing properties, net (36,382) (5,528) Payments received (advances) on notes receivable, net 7,830 (6,973) Investment in joint ventures (6,358) (9,464) Change in restricted cash 390 975 ----------------------------- NET CASH USED IN INVESTING ACTIVITIES (52,399) (22,371) ----------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt on income properties 646 82,721 Repayment of debt on income properties (1,786) (86,288) Expenses related to sale of common stock (213) 20,210 Deferred financing charges (842) (1,221) Repayments of capital lease obligation (123) (258) Repurchase of restricted stock - (30) Exercise of stock options - 39 Issuance of shares under employee stock purchase plan 58 - Distribution to operating partnership unit holders (266) - Distribution to common and preferred stockholders (8,766) - Repurchase of common stock (2,967) - ----------------------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (14,259) 15,173 ----------------------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (54,415) 3,030 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 72,302 4,872 ============================= CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,887 $ 7,902 ============================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest (net of interest capitalized of $360 and $546) $ 8,823 $ 9,427 =============================
SEE ACCOMPANYING NOTES. 8 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1999 1. INTERIM FINANCIAL STATEMENTS ORGANIZATION Konover Property Trust, Inc. (the "Company"), formerly FAC Realty Trust, Inc., was incorporated on March 31, 1993 as a self-advised and self-managed real estate investment trust (REIT). The Company is principally engaged in the acquisition, development, ownership, and operation of retail shopping centers. The Company's revenues are primarily derived under real estate leases with national, regional and local retailing companies. 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 8.9 million square feet. On June 30, 1999, the Company-owned properties consisted of: 1. 54 community shopping centers in 17 states aggregating approximately 6,580,000 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, which are being marketed for lease or sale. In addition, square footage of properties managed by the Company increased to 8.9 million at June 30, 1999 from 1.8 million at June 30, 1998. On December 17, 1997, following shareholder approval, the Company changed its domicile from the State of Delaware to the State of Maryland. The reincorporation was accomplished through the merger of FAC Realty, Inc. into its Maryland subsidiary, Konover Property Trust, Inc. (formerly FAC Realty Trust, Inc.). Following the reincorporation on December 18, 1997, the Company reorganized as an umbrella partnership real estate investment trust (an "UPREIT"). The Company then contributed to KPT Properties, L.P. (formerly FAC Properties, L.P.), a Delaware limited partnership (the "Operating Partnership") all of its assets and liabilities. In exchange for the Company's assets, the Company received limited partnership interests ("Units") in the Operating Partnership in an amount and designation that corresponded to the number and designation of outstanding shares of capital stock of the Company at the time. The Company is the sole general partner of the Operating Partnership and owns a 97% interest as of June 30, 1999. 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. 9 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of the Company and the Operating Partnership and all of its subsidiaries. All significant inter-company balances have been eliminated in consolidation. Properties owned (at least in part) and controlled by the Operating Partnership have been consolidated. Control is demonstrated by the ability of the Operating Partnership to manage, directly or indirectly, day-to-day operations, refinance debt and sell the assets of the entity that owns the property without the consent of the other owners and the inability of the other owners to replace the general partner or manager. Investments in ventures which represent noncontrolling ownership interests or where control is deemed temporary are accounted for using the equity method of accounting. These investments are recorded initially at cost and subsequently adjusted for net equity in income (loss) and cash contributions and distributions. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (primarily consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 1999 are not necessarily indicative of results that may be expected for the year ended December 31, 1999. For further information, refer to the audited financial statements and accompanying footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATION Certain amounts from prior years were reclassified to conform with current-year presentation. These reclassifications had no effect on net income (loss) or stockholders' equity as previously reported. 2. SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. BASIC AND DILUTED INCOME PER SHARE For the three months and six months ended June 30, 1999, the denominator for diluted earnings per share is calculated as follows (in thousands): 10 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE SIX MONTHS MONTHS ENDED ENDED JUNE 30, JUNE 30, 1999 1999 ---------------- ---------------- DENOMINATOR: Denominator- weighted average shares 30,756 30,936 Effect of dilutive securities: Preferred stock 2,200 2,200 Employee stock options 33 33 Restricted stock 301 272 Operating Partnership Units 1,051 1,051 ---------------- ---------------- Dilutive potential common shares 3,585 3,556 ---------------- ---------------- Denominator- adjusted weighted average shares and assumed conversions 34,341 34,492 ================ ================ All potential common shares have been excluded from dilutive potential shares for the three and six months ended June 30, 1998 because the effect would be antidilutive. DIVIDENDS In June, 1999, the Company declared a $0.125 per share quarterly dividend to shareholders of record as of June 15, 1999. The dividend of $4.5 million was paid on June 30, 1999. As of June 30, 1999, the Company has paid dividends totaling $9.0 million to its shareholders including $0.3 million to operating partnership unit holders. COMPREHENSIVE INCOME The Company had no items of other comprehensive income for three and six months ended June 30, 1999 and 1998. 3. SIGNIFICANT TRANSACTIONS 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 "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 62%, 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 may be required to 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. 11 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of the Company's acquisition activity since 1996 follows (in thousands):
OP UNITS STATE SQUARE PURCHASE DEBT ($9.50 LOCATION DATE FEET PRICE ASSUMED CASH PER SHARE) ----------------- ----------- ----------- -------------- ------------- ------------- ---------- 1999 TO DATE Grove Park SC 5/13/99 95 $ 5,700 - $ 5,700 - Crossroads at Mandarin FL 4/14/99 72 4,500 - 4,500 - Dare Center NC 3/31/99 113 5,000 - 5,000 - Braves Village SC 3/31/99 60 4,500 - 4,500 - Eastgate Plaza FL 3/30/99 182 10,400 - 10,400 - Dukes Plaza VA 3/1/99 140 6,500 4,100 2,400 - Robertson Corners SC 1/6/99 48 3,900 - 3,900 - ----------- ----------- -------------- ------------- ------------- ---------- TOTAL 710 40,500 4,100 36,400 - 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 1,519 85,400 55,200 26,700 369 Rodwell/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 2,765 163,100 115,700 34,600 1,343 1997 North Hills (portfolio) NC 3/31/97 606 32,300 - 32,300 - 1996 N/A - - - - - =========== ============== ============= ============= ========== TOTAL 4,081 $ 235,900 $ 119,800 $ 103,300 1,343 =========== ============== ============= ============= ==========
(1) Includes 292 units to be issued upon the completion of certain contingencies contained in the agreement. JOINT VENTURES A summary of the Company's investments in venture companies at June 30, 1999 and December 31, 1998, is as follows (all investments are accounted for under the equity method, in thousands):
Amounts invested ---------------- -------------- June 30, December 31, Location Ownership 1999 1998 -------- --------- ---------------- -------------- Atlantic Realty North Carolina 50% $ 7,780 $ 7,442 Mount Pleasant KPT Mount Pleasant, SC 50% 24,429 18,759 Wakefield Investment Wake Forest, NC 95% 570 570 Falls KPT Raleigh, NC 50% 5,717 5,367 ---------------- -------------- $ 38,496 $ 32,138 ================ ==============
12 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The majority of the properties owned by the venture companies are under development and have no material operations with the exception of two projects with Atlantic Realty as of June 30, 1999. The development project at Mount Pleasant was 38% occupied at June 30, 1999. Its grand opening will be on August 13, 1999 at which time 50% of the center will be open and a total of 64% of the center's gross leasable area under executed leases. 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. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION This discussion should be read with the selected financial data in this section and the consolidated financial statements and notes in this report. Certain comparisons between the periods have been made on a percentage basis and on a weighted-average square-foot basis. Comparisons on a weighted-average square-foot basis adjust for square-footage added at different times during the year. GENERAL OVERVIEW Konover Property Trust, Inc. (the "Company"), formerly FAC Realty Trust, Inc., was incorporated on March 31, 1993 as a self-advised and self-managed real estate investment trust (REIT). The Company is principally engaged in the acquisition, development, 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. On June 30, 1999, the Company-owned properties consisted of: (1) 54 community shopping centers in 17 states aggregating approximately 6,580,000 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, which are being marketed for lease or sale. The weighted-average square feet of gross leasable area is as follows (in millions): Three months ended Six months ended June 30, June 30, --------------------- ------------------- 1999 1998 1999 1998 ---------- ---------- --------- --------- Weighted average gross leasable area 8.8 8.1 8.5 6.8 SELECTED FINANCIAL DATA The following information should be read in conjunction with the consolidated financial statements and notes thereto included in this report. Industry analysts generally consider Funds from Operations ("FFO") an appropriate measure of performance for an equity REIT. FFO means net income (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 its 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. "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. 14 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 income per share amounts comply with Statement of Financial Accounting Standards No. 128 "Earnings Per Share". 15
KONOVER PROPERTY TRUST, INC. (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 ----------------- ---------------- ---------------- ---------------- OPERATING DATA: Rental revenues $ 21,086 $ 18,665 $ 40,249 $ 32,871 Property operating costs 6,421 5,534 12,333 9,960 ----------------- ---------------- ---------------- ---------------- 14,665 13,131 27,916 22,911 Depreciation and amortization 5,896 5,585 11,066 9,558 General and administrative 2,115 1,870 4,050 3,397 Interest 3,862 6,101 7,170 10,482 Loss on sale of real estate 158 353 350 353 Equity in earnings of unconsolidated ventures 3 - 6 - Minority interest in Operating Partnership 79 - 166 - ----------------- ---------------- ---------------- ---------------- NET INCOME (LOSS) $ 2,552 $ (778) $ 5,108 $ (879) Preferred stock dividends 275 - 550 - ================= ================ ================ ================ INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 2,277 $ (778) $ 4,558 $ (879) ================= ================ ================ ================ BASIC INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS PER SHARE $ 0.07 $ (0.05) $ 0.15 $ (0.07) ================= ================ ================ ================ Weighted-average common shares outstanding 30,756 14,186 30,936 13,076 ================= ================ ================ ================ DILUTED INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS PER SHARE $ 0.07 $ (0.05) $ 0.15 $ (0.07) ================= ================ ================ ================ Weighted-average shares outstanding - diluted (a) 34,341 14,186 34,492 13,076 ================= ================ ================ ================ OTHER DATA: EBITDA Net income (loss) $ 2,552 $ (778) $ 5,108 $ (879) Adjustments: Interest 3,862 6,101 7,170 10,482 Depreciation and amortization 5,896 5,585 11,066 9,558 Compensation under stock awards 548 367 948 664 Loss on sale of real estate 158 353 350 353 Minority interest 79 - 166 - Share of depreciation in unconsolidated ventures 24 - 48 - ------------------ ----------------- --------------- ---------------- $ 13,119 $ 11,628 $ 24,856 $ 20,178 ================== ================= =============== ================ Weighted-average shares outstanding - diluted (a) 34,341 17,472 34,492 15,983 ================== ================= =============== ================ FUNDS FROM OPERATIONS: Net income (loss) $ 2,552 $ (778) $ 5,108 $ (879) Adjustments: Straight line rent 142 (12) 285 448 Real estate depreciation and amortization 5,822 5,427 10,953 9,260 Compensation under stock awards 548 367 948 664 Loss on sale of real estate 158 353 350 353 Minority interest 79 - 166 - Share of depreciation in unconsolidated ventures 24 - 48 - ================== ================= =============== ================ $ 9,325 $ 5,357 $ 17,858 $ 9,846 ================== ================= =============== ================ Weighted-average shares outstanding - diluted (a) 34,341 17,472 34,492 15,983 ================== ================= =============== ================
16
KONOVER PROPERTY TRUST, INC. THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 --------------- ----------------- --------------- ---------------- FUNDS AVAILABLE FOR DISTRIBUTION / REINVESTMENT: Funds from Operations $ 9,325 $ 5,357 $ 17,858 $ 9,846 Adjustments: Capitalized tenant allowances (747) (1,405) (1,049) (1,653) Capitalized leasing costs (282) (580) (563) (1,092) Recurring capital expenditures (67) (154) (131) (217) =============== ================= =============== ================ $ 8,229 $ 3,218 $ 16,115 $ 6,884 =============== ================= =============== ================ DIVIDENDS DECLARED ON QUARTERLY EARNINGS $ 4,517 $ - $ 9,032 $ - =============== ================= =============== ================ DIVIDENDS DECLARED ON QUARTERLY EARNINGS PER SHARE $ 0.125 $ - $ 0.250 $ - =============== ================= =============== ================ CASH FLOWS: Cash flows from operating activities $ 6,156 $ 3,163 $ 12,243 $ 10,228 Cash flows from investing activities (11,591) (14,861) (52,399) (22,371) Cash flows from financing activities (6,186) 7,676 (14,259) 15,173 =============== ================= =============== ================ Net (decrease) increase in cash and cash equivalents $ (11,621) $ (4,022) $ (54,415) $ 3,030 =============== ================= =============== ================
JUNE 30, 1999 1998 --------------- ----------------- BALANCE SHEET DATA: Income-producing properties (before depreciation and amortization) $ 620,250 $ 546,509 Total assets 680,480 564,472 Debt on income properties 307,084 339,081 Total liabilities 325,020 371,827 Minority interest 12,796 9,304 Total stockholders' equity 342,664 183,341 PORTFOLIO PROPERTY DATA: Total GLA (at end of period) 8,857 8,084 Weighted-average GLA 8,527 6,829 Number of properties (at end of period) 66 59 Occupancy (at end of period): Operating 92.8% 93.6% Held for sale/redevelopment 46.6% 57.5%
(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":
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 ------------- ------------- -------------- ------------- DENOMINATOR: Denominator- weighted average shares 30,756 14,186 30,936 13,076 Effect of dilutive securities: Preferred stock 2,200 2,222 2,200 2,222 Employee stock options 33 33 33 33 Restricted stock 301 368 272 321 Operating Partnership Units 1,051 663 1,051 331 ------------- ------------- -------------- ------------- Dilutive potential common shares 3,585 3,286 3,556 2,907 ------------- ------------- -------------- ------------- Denominator- adjusted weighted average shares and assumed conversions 34,341 17,472 34,492 15,983 ============= ============= ============== =============
17 RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1998. NET INCOME The Company reported a net income available to common shareholders of $2.3 million, or $0.07 per common share, for the three months ended June 30, 1999. The same period in 1998 reported a net loss available to common shareholders of ($0.8) million, or ($0.05) per common share. The elements having a material impact on the change are discussed below: >> The Company's NOI, exclusive of straight-line rent, increased by $1.7 million, or 13%, to $14.8 million from $13.1 million for the same period in 1998. Including the effect of straight-line rent adjustment, ($0.2 million) NOI increased by $1.5 million. This increase was partly attributable to the following: Acquisition impact on NOI for the three months ended June 30, 1999 (in thousands). 1999 Acquisitions $ 1,100 University Shoppes 100 Waverly Place 340 ---------------- $ 1,540 ================ >> The Company's acquisition activity was funded primarily with the use of proceeds generated from the 1998 sale of common stock. These proceeds also enabled the Company to reduce interest expense by $0.3 million to $6.5 million in 1999 from $6.8 million in 1998 and resulted in increased interest income of $1.9 million over 1998. >> Through acquisitions, the Company had increased depreciation and amortization of $0.3 million and increased general and administrative expenses of $0.2 million. >> The disposition of certain development projects resulted in a loss of approximately $0.2 million compared to $0.4 million for the same period in 1998. >> The Company paid a $0.3 million dividend in 1999 to its preferred shareholders. EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION AND FUNDS FROM OPERATIONS EBITDA was $13.1 million for the three months ended June 30, 1999, an increase of $1.5 million or 13%, from $11.6 million for the same period in 1998. The increase was primarily due to increased NOI of $1.5 million over 1998, including adjustment for straight-line rent, as described above, offset by an increase in general and administrative expenses of $0.1 million exclusive of compensation under stock plan awards. Funds from Operations ("FFO") for the three months ended June 30, 1999 increased $3.9 million or 72% to $9.3 million. The Company's FFO for the same period in 1998 was $5.4 million. FFO increased primarily as a result of the $1.7 million increase in NOI, exclusive of straight-line rent, as described above. This increase in NOI is combined with: >> an increase in general and administrative expenses, exclusive of compensation under stock awards, of $0.1 million and >> the decrease in net interest expense of $2.2 million. TENANT INCOME Base rent, including straight-line rent, increased 14% to $15.9 million for the three months ended June 30, 1999 from $14.0 million for the same period in 1998. Base rent before the adjustment for straight-line rent increased $2.1 million, or 15%, to $16.1 million for the three months ended June 30, 1999 when compared to 18 $14.0 million in 1998. The increase in base rent for the three months ended June 30, 1999, is attributable primarily to the following acquisitions: Base Rent ** Three Months ended June 30, 1999 (IN THOUSANDS) ----------------------- 1999 Acquisitions $ 1,130 University Shoppes 125 Waverly Place 410 ----------------------- $ 1,665 ======================= ** BASE RENT EXCLUDES STRAIGHT-LINE RENT During this same period, the Company's weighted-average square feet of gross leasable area in operation increased 9%. Gross leasable area in operation increased by 0.7 million square feet, primarily because of the acquisition of the seven properties in 1999. Recoveries from tenants increased 5% for the three months ended June 30, 1999 to $4.2 million compared to $4.0 million in the same period of 1998. 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 2% to $0.48 for the three months ended June 30, 1999 when compared to $0.49 for the same period in 1998. The average recovery of property operating expenses, exclusive of marketing and other non-recoverable operating costs, decreased to 80% in 1999 as compared to 83% in 1998. PROPERTY OPERATING EXPENSES Property operating costs increased $0.9 million, or 16%, to $6.4 million in 1999 from $5.5 million in the same period of 1998. The increase in operating costs was principally due to the increase in the weighted-average square feet in operation in 1999, which rose 9% to 8.8 million square feet in 1999 from 8.1 million square feet in 1998. On a weighted-average square-foot basis, operating expenses increased 7% to $0.73 from $0.68 per weighted average square foot. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the three months ended June 30, 1999 increased $0.2 million, or 11%, to $2.1 million in 1999 from $1.9 million in 1998. General and administrative expenses in 1999 include $0.5 million in compensation under stock plan awards. General and administrative expenses in 1998 include compensation under stock awards of $0.4 million. Exclusive of these charges in 1999 and 1998, general and administrative expenses increased $0.1 million, but decreased as a percentage of revenues to 7.6% in 1999 from 8.0% in 1998. DEPRECIATION Depreciation decreased to $4.5 million for the three months ended June 30, 1999 compared to $4.6 million in the same period of 1998. The decrease is due primarily to the 1999 acquisitions. Absent the impact of these acquisitions, depreciation decreased $0.5 million which represents the impact on depreciation of the change in estimate of the useful life of buildings from 31 to 39 years recorded in fourth quarter of 1998. Amortization of deferred leasing and other charges increased $0.4 million to $1.4 million. On a weighted-average square-foot basis, depreciation and amortization decreased to $0.67 in 1999 from $0.69 in 1998. INTEREST EXPENSE Interest expense for the three months ended June 30, 1999, net of interest income of $2.7 million, 19 decreased by $2.2 million, or 36%, to $3.9 million compared to $6.1 million, net of interest income of $0.7 million, for the three months ended June 30, 1998. This decrease resulted primarily from the increase in interest income generated from the proceeds from the sale of common stock in 1998. On a weighted-average basis, the three months ended June 30, 1999, debt outstanding was $305.8 million, and the average interest rate was 7.92%. This compares to $342.1 million of outstanding debt and a 7.93% average interest rate in 1998. The Company capitalized $0.2 million of interest costs associated with its development projects for the three months ended June 30, 1999 and 1998. PROPERTIES HELD FOR SALE For the three months ended June 30, 1999, the properties held for sale contributed approximately $0.1 million of revenue. After deducting related interest expense on the debt associated with those properties, the properties held for sale incurred a loss of $0.1 million. For the three months ended June 30, 1998, the properties held for sale contributed approximately $0.2 million of revenue and incurred a loss of $0.8 million after deducting related interest expense. The decrease in revenue and decrease in net loss is principally due to the sale of one property in April 1998 which resulted in a loss of $0.4 million. SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998. NET INCOME The Company reported a net income available to common shareholders of $4.6 million, or $0.15 per common share, for the six months ended June 30, 1999. The same period in 1998 reported a net loss available to common shareholders of $0.9 million, or ($0.07) per common share. The elements having a material impact on the change are discussed below: >> The Company's NOI, exclusive of straight-line rent, increased by $4.9 million, or 21%, to $28.2 million from $23.3 million for the same period in 1998. Including the effect of straight-line rent adjustment, ($0.2 million) NOI increased by $5.0 million. This increase was partly attributable to the following: Acquisition impact on NOI for the six months ended June 30, 1999 (in thousands). 1999 Acquisitions $ 1,220 University Shoppes 230 Waverly Place 700 Konover (portfolio) 2,100 -------------------- $ 4,250 ==================== >> The Company's acquisition activity required higher borrowing levels resulting in increased interest expense by $0.9 million. Investments made with funds from the proceeds from the sale of common stock in 1998 resulted in increased interest income of $4.2 million. >> Through acquisitions, the Company had increased depreciation and amortization of $1.5 million and increased general and administrative expenses of $0.7 million. >> The Company paid a $0.6 million dividend in 1999 to its preferred shareholders. 20 EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION AND FUNDS FROM OPERATIONS EBITDA was $24.9 million for the six months ended June 30, 1999, an increase of $4.7 million or 23%, from $20.2 million for the same period in 1998. The increase was due to increased NOI of $5.0 million over 1998, including adjustment for straight-line rent (as described above) offset by an increase in general and administrative expenses of $0.5 million exclusive of compensation under stock plan awards. Funds from Operations ("FFO") for the six months ended June 30, 1999 increased $8.1 million or 81% to $17.9 million. The Company's FFO for the same period in 1998 was $9.8 million. FFO increased primarily as a result of the $4.9 million increase in NOI, exclusive of straight-line rent, as described above combined with: >> an increase in general and administrative expenses (exclusive of compensation under stock awards) of $0.5 million and >> the decrease in net interest expense of $3.3 million. TENANT INCOME Base rent, including straight-line rent, increased 28% to $30.5 million for the six months ended June 30, 1999 from $23.8 million for the same period in 1998. Base rent before the adjustment for straight-line rent increased $6.6 million, or 27%, to $30.8 million for the six months ended June 30, 1999 when compared to $24.2 million in 1998. The increase in base rent for the six months ended June 30, 1999, is attributable primarily to the following acquisitions (in millions): Base Rent (*) Six Months ended June 30, 1999 (IN THOUSANDS) ------------------ 1999 Acquisitions $1,300 University Shoppes 245 Waverly Place 800 Konover (portfolio) 2,300 ------------------ $4,645 ================== (*) Base rent excludes straight-line rent During this same period, the Company's weighted-average square feet of gross leasable area in operation increased 25%. In addition, gross leasable area in operation at period end increased by 0.8 million square feet, primarily because of the seven properties acquired in 1999 totaling 0.7 million in gross leasable area and two properties acquired in the second half of 1998 totaling 0.2 million in gross leasable area. These described increases were partially offset by the sales of properties in California and Kentucky totaling 0.2 million in gross leasable area. Recoveries from tenants increased 13% for the six months ended June 30, 1999 to $8.0 million compared to $7.1 million in the same period of 1998. 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 10% to $0.94 for the six months ended June 30, 1999 when compared to $1.04 for the same period in 1998. The average recovery of property operating expenses, exclusive of marketing and other non-recoverable operating costs, decreased to 79% in 1999 as compared to 83% in 1998. OTHER INCOME Other income decreased $0.5 million to $1.2 million in 1999 compared to $1.7 million in 1998 primarily as a result of decreased third-party management fee income of $0.7 million offset by increased leasing fee income of $0.2 million primarily from development projects. The decrease is directly attributable to the fact that prior 21 to the closing on the eight Rodwell/Kane properties, the Company managed these community centers, which generated $0.6 million in management fees. The Company will continue to manage the one remaining Rodwell/Kane community center. PROPERTY OPERATING EXPENSES Property operating costs increased $2.3 million, or 23%, to $12.3 million in 1999 from $10.0 million in the same period of 1998. The increase in operating costs was principally due to the increase in the weighted-average square feet in operation in 1999, which rose 25% to 8.5 million square feet in 1999 from 6.8 million square feet in 1998. On a weighted-average square-foot basis, operating expenses decreased 1% to $1.45 from $1.47 per weighted average square foot. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the six months ended June 30, 1999 increased $0.7 million, or 21%, to $4.1 million in 1999 from $3.4 million in 1998. General and administrative expenses in 1999 include $0.9 million in compensation under stock plan awards. General and administrative expenses in 1998 include compensation under stock awards of $0.7 million. Exclusive of these charges in 1999 and 1998, general and administrative expenses increased $0.5 million, but decreased as a percentage of revenues to 8.0% from 8.2% in 1998. DEPRECIATION Depreciation increased to $8.7 million for the six months ended June 30, 1999 compared to $7.6 million in the same period of 1998. The increase is due primarily to the 1999 and 1998 acquisitions including the Rodwell/Kane and Konover portfolio acquisitions. Absent the impact of these acquisitions, depreciation decreased $0.5 million for the six months ended June 30, 1999, which represents the impact on depreciation of the change in estimate of the useful life of buildings from 31 to 39 recorded in the fourth quarter of 1998. Amortization of deferred leasing and other charges increased $0.4 million to $2.4 million. On a weighted-average square-foot basis, depreciation and amortization decreased to $1.31 in 1999 from $1.41 in 1998. INTEREST EXPENSE Interest expense for the six months ended June 30, 1999, net of interest income of $5.3 million, decreased by $3.3 million, or 31%, to $7.2 million compared to $10.5 million, net of interest income of $1.1 million, in the first six months of 1998. This decrease resulted primarily from higher borrowing levels in 1999 due to the investment in and acquisition of income-producing properties offset by the interest income generated from the proceeds from the sale of common stock in 1998. On a weighted-average basis, in the first six months of 1999, debt outstanding was $306.5 million, and the average interest rate was 7.92%. This compares to $273.2 million of outstanding debt and a 7.94% average interest rate in 1998. The Company capitalized $0.4 million of interest costs associated with its development projects in the first six months of 1999 compared to $0.5 million in the same period of 1998. PROPERTIES HELD FOR SALE For the six months ended June 30, 1999, the properties held for sale contributed approximately $0.1 million of revenue. After deducting related interest expense on the debt associated with those properties, the properties held for sale incurred a loss of $0.2 million. For the six months ended June 30, 1998, the properties held for sale contributed approximately $0.5 million of revenue and incurred a loss of $1.2 million after deducting related interest expense. The decrease in revenue and decrease in net loss is principally due to the sale of one property in April 1998 which resulted in a loss of $0.4 million. 22 LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS The Company's cash and cash equivalents balance at June 30, 1999 was $17.9 million. Restricted cash, as reported in the financial statements, as of such date, was $5.7 million. The restricted cash is an amount the Company was required to escrow in connection with various loans. The escrows are required to fund taxes, environmental and engineering work, recurring replacement costs and insurance. Net cash provided by operating activities was $12.2 million for the six months ended June 30, 1999. Net cash used in investing activities was $52.4 million in that same period. The primary use of these funds included: >> $36.4 million of cash to acquire seven centers aggregating 0.7 million square feet located in Florida, North Carolina, South Carolina and Virginia >> $6.4 million invested in ventures. >> $17.9 million invested in the Company's income-producing properties. >> These cash uses were offset by repayments received on certain notes receivables of $7.8 million. Net cash used in financing activities was $14.3 million for the six months ended June 30, 1999. The primary use of these funds included: >> $9.0 million for dividends paid, >> $3.0 million for the repurchase of 493,200 shares of the Company's common stock, and >> $1.8 million for debt repayments. 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, 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 June 30, 1999, the majority of these funds have been used to fund acquisitions, debt retirement, investments in ventures, common stock repurchases and development. 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 be required to 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. 23 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 was 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 June 30, 1999 was $89.1 million and is secured by 24 properties. The Company is currently seeking 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 securing the facility. The line originally was secured by 21 properties plus an assignment of the excess cash flow 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. In 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 360-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. The credit facility balance as of June 30, 1999 was $73.9 million, including a $7.2 million unamortized interest rate premium. DIVIDENDS In June, 1999, the Company declared a $0.125 per share quarterly dividend to shareholders of record as of June 15, 1999. The dividend of $4.5 million was paid on June 30, 1999. As of June 30, 1999, the Company has paid dividends totaling $9.0 million to its shareholders including $0.3 million to operating partnership unit holders. SHARE REPURCHASE For the six months ended June 30, 1999, the Company has repurchased 493,200 shares of its common stock at an average share price of $6.02 for a total of approximately $3.0 million. As of June 30, 1999, the Company had repurchased a total of 2,241,800 shares at an average price of $6.91 under its stock repurchase program. The Company is currently authorized to purchase an additional 1,758,200 shares. IMPACT OF YEAR 2000 ISSUE GENERAL The Year 2000 compliance issue concerns the inability of computer systems to calculate accurately, 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. 24 STATE OF READINESS The Company's remediation plan has three phases: >> Assessment (inventory and testing of computer systems and inquiry of Y2K readiness of material third parties) >> Renovation (repairing or replacing non-compliant systems) and >> Validation (testing of repaired or replaced systems). The following chart shows our progress with respect to our remediation plan:
Assessment Phase Renovation Phase Validation Phase ---------------- ---------------- ---------------- Expected Expected Completion Completion Completion % Complete * Date % Complete * Date % Complete * Date --------------- --------------- --------------- --------------- ---------------- --------------- IT 100% 1Q 99 75% 3Q 99 75% 3Q 99 Non-IT 100% 1Q 99 90% 3Q 99 90% 3Q 99
* BASED ON LABOR UNDERTAKEN With respect to Year 2000 issues relating to third parties with whom 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 generally from those in competitive fields where others will be able to meet any Company needs unmet by suppliers or vendors with Year 2000 difficulties. Although we have no reason to expect a significant interruption of utility services for our properties, we have not received written assurances from all utility providers that Y2K issues will not cause an interruption in service. 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: >> 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. As a result, we do not expect to develop a contingency plan for Y2K failures. Our assessment of the likely impact of Y2K issues on the Company, which is a forward-looking statement, depends on numerous factors, such as the continued provision of utility services and the accuracy of responses from material third parties as to their Y2K readiness. The Company remains exposed to the risk of Year 2000 failures. See "Disclosure Regarding Forward-Looking Statements" below. 25 This disclosure concerning our Year 2000 issues are intended to constitute "Year 2000 Readiness Disclosures" as defined in the 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; however, 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 4% of the Company's total revenue for the six months ended June 30, 1999 compared to 6% for the same period in 1998. Continuation of this economic trend may affect the Company's operating centers' occupancy rate, rental rates, and concessions, if any, granted on new leases or re-leases of space. This in turn may cause fluctuations in the cash flow from the operation and performance of the operating centers. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Such statements include, in particular, statements about our plans, strategies and prospects under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations." You can identify forward-looking statements by our use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "continue," or other similar words. Although we believe that our plans, projections and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans, projections or expectations will be achieved. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement: >> 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. 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. 26 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK THE EFFECTS OF POTENTIAL CHANGES IN INTEREST RATES ARE DISCUSSED BELOW. OUR MARKET RISK DISCUSSION INCLUDES "FORWARD-LOOKING STATEMENTS" AND REPRESENTS AN ESTIMATE OF POSSIBLE CHANGES IN FUTURE EARNINGS THAT WOULD OCCUR ASSUMING HYPOTHETICAL FUTURE MOVEMENTS IN INTEREST RATES. THESE DISCLOSURES ARE NOT PRECISE INDICATORS OF EXPECTED FUTURE RESULTS, BUT ONLY INDICATORS OF REASONABLY POSSIBLE RESULTS. AS A RESULT, ACTUAL FUTURE MAY DIFFER MATERIALLY FROM THOSE PRESENTED. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES," WHICH PROVIDES INFORMATION RELATED TO THESE FINANCIAL INSTRUMENTS. To meet in part 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. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. Currently, the Company is not party to any interest rate hedge contracts. As of June 30, 1999, we had approximately $32.1 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, our 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. 27 PART II ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held our annual meeting of shareholders on June 3, 1999. At that meeting, our board of directors was elected. Information about the votes casts for each nominee is set forth below: Nominee Votes Cast For Withheld Abstentions - ------------------------------------------------------------------------------ Simon Konover 30,635,637 11,257 - Cammack Morton 30,625,529 21,365 - Patrick M. Miniutti 30,624,916 21,978 - William D. Eberle 30,628,037 18,857 - Richard Futrell, Jr. 30,628,037 18,857 - John W. Gildea 30,628,037 18,857 - Klaus P. Kretschmann 30,635,327 11,567 - Jonathan O'Herron 30,635,327 11,567 - Mark S. Ticotin 30,635,327 11,567 - - ------------------------------------------------------------------------------ ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the three months ended June 30, 1999. 28 SIGNATURES ================================================================================ Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KONOVER PROPERTY TRUST, INC. Date: August 13, 1999 By: /S/Patrick M. Miniutti ---------------------------------------------- Patrick M. Miniutti, Executive Vice President, Chief Financial Officer and Director By: /S/Sona A. Thorburn ---------------------------------------------- Sona A. Thorburn, Vice President, Chief Accounting Officer 29 EX-27 2 EXHIBIT 27
5 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 23,549 0 14,139 0 0 71,572 646,439 (76,027) 680,480 17,181 307,084 0 18,962 308 323,394 680,480 0 40,249 0 23,399 4,572 0 7,170 5,108 0 5,108 0 0 0 5,108 0.15 0.15
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