-----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, RSGJqSEwdgYsPP6kIgjfxG+KLaN9tETxtB/wnZig6gukPL8wjpVQ3gPQFVPv7TtB vB1p+4jbO9MB6OJrqm7yVQ== 0000950168-99-002839.txt : 19991111 0000950168-99-002839.hdr.sgml : 19991111 ACCESSION NUMBER: 0000950168-99-002839 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991110 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: 99746127 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 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 SEPTEMBER 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: 30,869,112 shares of Common Stock, $0.01 par value, as of November 5, 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 September 30, 1999 and December 31, 1998............................. 4 Consolidated Statements of Operations for the three months ended September 30, 1999 and 1998........... 5 Consolidated Statements of Operations for the nine months ended September 30, 1999 and 1998............ 6 Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 1999............ 7 Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998............ 8 Notes to Consolidated Financial Statements............................................................. 9
3 KONOVER PROPERTY TRUST, INC. CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 DECEMBER 31, 1998 (UNAUDITED) (AUDITED) --------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA)) ASSETS INCOME PRODUCING PROPERTIES: Land $ 117,770 $ 108,978 Buildings and improvements 492,471 437,932 Deferred leasing and other charges 32,753 28,561 --------------------------------------------- 642,994 575,471 Accumulated depreciation and amortization (81,139) (66,108) --------------------------------------------- 561,855 509,363 Properties under development 20,620 7,414 Properties held for sale 5,785 5,946 Investment in joint ventures 39,479 32,138 --------------------------------------------- 627,739 554,861 OTHER ASSETS: Cash and cash equivalents 9,031 72,302 Restricted cash 5,618 6,052 Tenant and other receivables 14,735 12,076 Deferred charges and other assets 19,557 12,622 Notes receivable 11,588 24,536 --------------------------------------------- $ 688,268 $ 682,449 ============================================= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Debt on income properties $ 315,888 $ 304,783 Capital lease obligations 701 774 Accounts payable and other liabilities 18,098 15,305 --------------------------------------------- 334,687 320,862 COMMITMENTS AND CONTINGENCIES - - MINORITY INTEREST IN OPERATING PARTNERSHIP 12,729 12,246 STOCKHOLDERS' EQUITY: Convertible preferred stock, Series A, 5,000,000 shares authorized, 786,340 and 792,000 issued and outstanding at September 30, 1999 and December 31, 1998, respectively 18,820 18,962 Stock purchase warrants 9 9 Common stock, $0.01 par value, 100,000,000 shares authorized, 30,860,153 and 31,207,457 issued and outstanding at September 30, 1999 and December 31, 1998, respectively 309 313 Additional paid-in capital 322,140 328,705 Retained Earnings - 1,612 Deferred compensation - Restricted Stock Plan (426) (260) --------------------------------------------- 340,852 349,341 --------------------------------------------- $ 688,268 $ 682,449 =============================================
SEE ACCOMPANYING NOTES. 4 KONOVER PROPERTY TRUST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1999 1998 --------------------------------------------- RENTAL OPERATIONS: (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Base rents $ 15,312 $ 14,137 Percentage rents 250 151 Property operating cost recoveries 3,665 3,861 Other income 927 493 --------------------------------------------- 20,154 18,642 --------------------------------------------- Property operating costs: Common area maintenance 2,330 2,198 Utilities 784 716 Real estate taxes 2,076 1,873 Insurance 276 247 Marketing 147 153 Other 985 635 --------------------------------------------- 6,598 5,822 Depreciation and amortization 6,574 5,382 --------------------------------------------- 13,172 11,204 --------------------------------------------- 6,982 7,438 --------------------------------------------- OTHER EXPENSES: General and administrative 2,298 1,463 Interest 3,686 5,778 --------------------------------------------- INCOME FROM OPERATIONS 998 197 Loss on sale of real estate 44 - Equity in earnings of unconsolidated ventures (1,621) - Minority interest in operating partnership 67 - --------------------------------------------- NET INCOME 2,508 197 Preferred dividends 268 - --------------------------------------------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 2,240 $ 197 ============================================= BASIC INCOME AVAILABLE TO COMMON STOCKHOLDERS PER SHARE $ 0.07 $ 0.01 ============================================= WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 30,750 17,229 ============================================= DILUTED INCOME AVAILABLE TO COMMON SHAREHOLDERS PER SHARE $ 0.07 $ 0.01 ============================================= WEIGHTED-AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 34,394 20,621 =============================================
SEE ACCOMPANYING NOTES. 5 KONOVER PROPERTY TRUST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 --------------------------------------------- RENTAL OPERATIONS: (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Base rents $ 45,794 $ 37,913 Percentage rents 819 453 Property operating cost recoveries 11,656 10,923 Other income 2,134 2,224 --------------------------------------------- 60,403 51,513 --------------------------------------------- Property operating costs: Common area maintenance 6,817 5,851 Utilities 2,030 1,925 Real estate taxes 6,006 5,146 Insurance 755 652 Marketing 463 468 Other 2,860 1,740 --------------------------------------------- 18,931 15,782 Depreciation and amortization 18,588 15,604 --------------------------------------------- 37,519 31,386 --------------------------------------------- 22,884 20,127 --------------------------------------------- OTHER EXPENSES: General and administrative 5,400 4,196 Interest 10,856 16,260 --------------------------------------------- INCOME (LOSS) FROM OPERATIONS 6,628 (329) Loss on sale of real estate 394 353 Equity in earnings of unconsolidated ventures (1,615) - Minority interest in operating partnership 233 - --------------------------------------------- NET INCOME (LOSS) 7,616 (682) Preferred dividends 818 - --------------------------------------------- NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 6,798 $ (682) ============================================= BASIC INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS PER SHARE $ 0.22 $ (0.05) ============================================= WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 30,873 14,475 ============================================= DILUTED INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS PER SHARE $ 0.22 $ (0.05) ============================================= WEIGHTED-AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 34,459 14,475 =============================================
SEE ACCOMPANYING NOTES. 6 KONOVER PROPERTY TRUST, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 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 - - - (259) Issuance of 15,968 employee stock purchase plan shares - - - 88 Issuance of 61,989 restricted shares - - - 370 Conversion of 5,660 shares of preferred stock into 15,722 shares of common stock (142) - 1 141 Cancellation of restricted stock (38) Repurchase of 493,200 shares of common stock - - (5) (2,962) Compensation under stock plans - - - - Preferred stock dividends ($0.375 per share) - - - - Common stock dividends ($0.375 per share) - - - (3,905) Net income - - - - --------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1999 $ 18,820 $ 9 $ 309 $ 322,140 ===================================================================== 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 - - (259) Issuance of 15,968 employee stock purchase plan shares - - 88 Issuance of 61,989 restricted shares - (370) - Conversion of 5,660 shares of preferred stock into 15,722 shares of common stock - - - Cancellation of restricted stock - 38 - Repurchase of 493,200 shares of common stock - - (2,967) Compensation under stock plans - 166 166 Preferred stock dividends ($0.375 per share) (818) - (818) Common stock dividends ($0.375 per share) (8,410) - (12,315) Net income 7,616 - 7,616 ------------------------------------------------------ BALANCE AT SEPTEMBER 30, 1999 $ - $ (426) $ 340,852 ======================================================
SEE ACCOMPANYING NOTES. 7 KONOVER PROPERTY TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 -------------------------------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 7,616 $ (682) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 17,121 14,470 Loss on sale of real estate 394 353 Minority interest in operating partnership 233 - Amortization of deferred financing costs 1,496 488 Compensation under stock plans 1,467 1,020 Amortization of debt premium (783) - Net changes in: Tenant and other receivables (2,659) (2,006) Deferred charges and other assets (7,061) (6,540) Accounts payable and other liabilities 2,142 4,328 -------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 19,966 11,431 -------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in income-producing properties (23,509) (12,232) Proceeds from sale of real estate - 5,717 Acquisition of income-producing properties, net (54,782) (17,826) Payments received (advances) on notes receivable, net 11,887 (7,961) Investment in joint ventures (7,341) (22,903) Change in restricted cash 434 2,231 -------------------------------- NET CASH USED IN INVESTING ACTIVITIES (73,311) (52,974) -------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt on income properties 10,856 82,721 Repayment of debt on income properties (3,060) (133,256) (Expenses) proceeds related to sale of common stock (259) 197,563 Deferred financing charges (875) (1,221) Repayments of capital lease obligation (176) (374) Repurchase of restricted stock - (43) Exercise of stock options - 39 Issuance of shares under employee stock purchase plan 88 34 Distribution to operating partnership unit holders (400) - Distribution to common and preferred stockholders (13,133) - Repurchase of common stock (2,967) (10,608) -------------------------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (9,926) 134,855 -------------------------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (63,271) 93,312 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 72,302 4,872 -------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,031 $ 98,184 ================================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest (net of interest capitalized of $895 and $912) $ 18,469 $ 16,006 ================================ SEE ACCOMPANYING NOTES.
8 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. INTERIM FINANCIAL STATEMENTS ORGANIZATION Konover Property Trust, Inc. (the "Company"), formerly FAC Realty Trust, Inc., was incorporated on March 31, 1993 as a self-advised and self-managed real estate investment trust (REIT). The Company is principally engaged in the acquisition, development, ownership, and operation of retail shopping centers. The Company's revenues are primarily derived under real estate leases with national, regional and local retailing companies. 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 9.1 million square feet. On September 30, 1999, the Company-owned properties consisted of: 1. 56 community shopping centers in 17 states aggregating approximately 6,830,000 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 5.6 million at September 30, 1999 from 1.9 million at September 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 September 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. 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. 9 KONOVER PROPERTY TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 nine-month periods ended September 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 nine months ended September 30, 1999 and the three months ended September 30, 1998, 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 MONTHS NINE MONTHS THREE MONTHS ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1999 1999 1998 ---------------- -------------------- ---------------- DENOMINATOR: Denominator- weighted average shares 30,751 30,873 17,229 Effect of dilutive securities: Preferred stock 2,211 2,213 2,222 Employee stock options 33 33 147 Restricted stock 334 274 228 Operating Partnership Units 1,065 1,066 795 ---------------- -------------------- ---------------- Dilutive potential common shares 3,643 3,586 3,392 ---------------- -------------------- ---------------- Denominator- adjusted weighted average shares and assumed conversions 34,394 34,459 20,621 ================ ==================== ================
All potential common shares have been excluded from dilutive potential shares for the nine months ended September 30, 1998 because the effect would be antidilutive. DIVIDENDS In September, 1999, the Company declared a $0.125 per share quarterly dividend to shareholders of record as of September 15, 1999. The quarterly dividend of $4.5 million was paid on September 30, 1999. As of September 30, 1999, the Company has paid dividends totaling $13.5 million to its shareholders including $0.4 million to operating partnership unit holders. COMPREHENSIVE INCOME The Company had no items of other comprehensive income for three and nine months ended September 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 operating partnership 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) ACQUISITIONS 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 Lake Washington FL 9/17/99 119 $ 9,700 - $ 9,700 - Patriots Plaza SC 9/1/99 115 8,700 - 8,700 - Grove Park SC 5/13/99 107 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 956 58,900 4,100 54,800 - 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 4,327 $ 254,300 $ 119,800 $ 121,700 1,343 =========== ============== ============= ============= ==========
(1) Includes 296 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 September 30, 1999 and December 31, 1998, is as follows (all investments are accounted for under the equity method, in thousands):
Amounts invested September 30, December 31, Location Ownership 1999 1998 -------- --------- ---- ---- Atlantic Realty North Carolina 50% $ 8,053 $ 7,442 Mount Pleasant KPT Mount Pleasant, SC 50% 24,914 18,759 Wakefield Investment Wake Forest, NC 95% 570 570 Falls KPT Raleigh, NC 50% 5,942 5,367 ---------------- -------------- $ 39,479 $ 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 with the exception of two projects with Atlantic Realty as of September 30, 1999. The development project at Mount Pleasant was 74% occupied at September 30, 1999. 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 except for the debt associated with the Mount Pleasant development. During the third quarter of 1999, Wakefield Investments, Inc. sold its interest in Wakefield Commercial LLC for approximately $9 million. The Company has reported $1.4 million in equity in earnings of unconsolidated ventures for the three months ended September 30, 1999 for its portion of the gain recognized by Wakefield Investments, Inc. TRUEFINDS.COM The Company's online shopping site will be launched in the fourth quarter of 1999. Web-based software and other capitalizable costs of $1.8 million are reported in deferred charges and other assets at September 30, 1999. 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 September 30, 1999, the Company-owned properties consisted of: (1) 56 community shopping centers in 17 states aggregating approximately 6,830,000 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 Nine months ended September 30, September 30, --------------------------- --------------------------- 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Weighted average gross leasable area 8.9 8.0 8.7 7.2
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. 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. 14 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ----------------- ---------------- ---------------- ---------------- OPERATING DATA: Rental revenues $ 20,154 $ 18,642 $ 60,403 $ 51,513 Property operating costs 6,598 5,822 18,931 15,782 ----------------- ---------------- ---------------- ---------------- Net operating income 13,556 12,820 41,472 35,731 Depreciation and amortization 6,574 5,382 18,588 15,604 General and administrative 2,298 1,463 5,400 4,196 Interest 3,686 5,778 10,856 16,260 Loss on sale of real estate 44 - 394 353 Equity in earnings of unconsolidated ventures (1,621) - (1,615) - Minority interest in Operating Partnership 67 - 233 - ----------------- ---------------- ---------------- ---------------- NET INCOME (LOSS) 2,508 197 7,616 (682) Preferred stock dividends 268 - 818 - ----------------- ---------------- ---------------- ---------------- NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 2,240 $ 197 $ 6,798 $ (682) ================= ================ ================ ================ BASIC INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS PER SHARE $ 0.07 $ 0.01 $ 0.22 $ (0.05) ================= ================ ================ ================ Weighted-average common shares outstanding 30,750 17,229 30,873 14,475 ================= ================ ================ ================ DILUTED INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS PER SHARE $ 0.07 $ 0.01 $ 0.22 $ ( 0.05) ================= ================ ================ ================ Weighted-average shares outstanding - diluted (a) 34,394 20,621 34,459 14,475 ================= ================ ================ ================ OTHER DATA: EBITDA Net income (loss) $ 2,508 $ 197 $ 7,616 $ (682) Adjustments: Interest 3,686 5,778 10,856 16,260 Depreciation and amortization 6,574 5,382 18,588 15,604 Loss on sale of real estate 44 - 394 353 Minority interest 67 - 233 - Share of depreciation in unconsolidated ventures 24 - 72 - ------------------ ----------------- --------------- ---------------- $ 12,903 $ 11,357 $ 37,759 $ 31,535 ================== ================= =============== ================ Weighted-average shares outstanding - diluted (a) 34,394 20,621 34,459 17,546 ================== ================= =============== ================ FUNDS FROM OPERATIONS: Net income (loss) $ 2,508 $ 197 $ 7,616 $ (682) Adjustments: Straight line rent 140 106 425 554 Real estate depreciation and amortization 6,359 5,198 18,260 15,122 Loss on sale of real estate 44 - 394 353 Minority interest 67 - 233 - Share of depreciation in unconsolidated ventures 24 - 72 - ----------------- ---------------- ---------------- ---------------- $ 9,142 $ 5,501 $ 27,000 $ 15,347 ================== ================= =============== ================ Weighted-average shares outstanding - diluted (a) 34,394 20,621 34,459 17,546 ================== ================= =============== ================
16
KONOVER PROPERTY TRUST, INC. THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 --------------- ----------------- --------------- ---------------- FUNDS AVAILABLE FOR DISTRIBUTION / REINVESTMENT: Funds from Operations $ 9,142 $ 5,501 $ 27,000 $ 15,347 Adjustments: Capitalized leasing costs (435) (1,244) (1,484) (2,897) Capitalized tenant allowances (533) (550) (1,096) (1,642) Recurring capital expenditures (422) (199) (553) (416) --------------- ----------------- --------------- ---------------- $ 7,752 $ 3,508 $ 23,867 $ 10,392 =============== ================= =============== ================ DIVIDENDS DECLARED ON QUARTERLY EARNINGS $ 4,501 $ - $ 13,533 $ - =============== ================= =============== ================ DIVIDENDS DECLARED ON QUARTERLY EARNINGS PER SHARE $ 0.125 $ - $ 0.375 $ - =============== ================= =============== ================ CASH FLOWS: Cash flows from operating activities $ 7,723 $ 1,203 $ 19,966 $ 11,431 Cash flows from investing activities (20,912) (30,603) (73,311) (52,974) Cash flows from financing activities 4,333 119,682 (9,926) 134,855 --------------- ----------------- --------------- ---------------- Net (decrease) increase in cash and cash equivalents $ (8,856) $ 90,282 $ (63,271) $ 93,312 =============== ================= =============== ================ SEPTEMBER 30, 1999 1998 --------------- ----------------- BALANCE SHEET DATA: Income-producing properties (before depreciation and amortization) $ 642,994 $ 554,892 Total assets 688,268 676,816 Debt on income properties 315,888 295,348 Total liabilities 334,687 314,352 Minority interest 12,729 11,804 Total stockholders' equity 340,852 350,660 PORTFOLIO PROPERTY DATA: Total GLA (at end of period) 9,107 8,138 Weighted-average GLA 8,662 7,170 Number of properties (at end of period) 68 60 Occupancy (at end of period): Operating 92.6% 94.8% Held for sale/redevelopment 44.6% 53.6%
(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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ------------- ------------- -------------- ------------- DENOMINATOR: Denominator- weighted average shares 30,751 17,229 30,873 14,475 Effect of dilutive securities: Preferred stock 2,211 2,222 2,213 2,222 Employee stock options 33 147 33 145 Restricted stock 334 228 274 240 Operating Partnership Units 1,065 795 1,066 464 ------------- ------------- -------------- ------------- Dilutive potential common shares 3,643 3,392 3,586 3,071 ------------- ------------- -------------- ------------- Denominator- adjusted weighted average shares and assumed conversions 34,394 20,621 34,459 17,546 ============= ============= ============== =============
17 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998. NET INCOME The Company reported a net income available to common shareholders of $2.2 million, or $0.07 per common share, for the three months ended September 30, 1999. The same period in 1998 reported net income available to common shareholders of $0.2 million, or $0.01 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 $0.8 million, or 6%, to $13.7 million from $12.9 million for the same period in 1998. Including the effect of straight-line rent adjustment, NOI increased by $0.7 million. This increase was partly attributable to property acquisitions as follows: NOI for the three months ended September 30, 1999 (IN THOUSANDS) ------------------------- 1999 Acquisitions $ 1,130 University Shoppes (8/98) 95 Waverly Place (12/98) 345 ------------------------- $ 1,570 ========================= The above acquisition impact on NOI is offset by a $0.5 million decrease in NOI related to two properties under redevelopment. >> The Company recognized earnings from unconsolidated ventures of $1.6 million. There were no earnings from unconsolidated ventures in 1998. >> 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 $1 million to $6.3 million in 1999 from $7.3 million in 1998 and resulted in increased interest income of $1.1 million over 1998. >> Through acquisitions, the Company had increased depreciation and amortization of $1.2 million and increased general and administrative expenses of $0.8 million. >> The Company paid a $0.3 million dividend in 1999 to its convertible preferred shareholders, who receive dividends equal to that of common shareholders on an as-converted basis. EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION AND FUNDS FROM OPERATIONS EBITDA was $12.9 million for the three months ended September 30, 1999, an increase of $1.5 million or 13%, from $11.4 million for the same period in 1998. The increase was primarily due to increased NOI of $0.7 million over 1998, including adjustment for straight-line rent, as described above. The Company recognized earnings from unconsolidated ventures of $1.6 million. These increases were offset by an increase in general and administrative expenses of $0.8 million. Funds from Operations ("FFO") for the three months ended September 30, 1999 increased $3.6 million or 66% to $9.1 million. The Company's FFO for the same period in 1998 was $5.5 million. FFO increased primarily as a result of: >> the $0.8 million increase in NOI, exclusive of straight-line rent, >> the Company's earnings from unconsolidated ventures of $1.6 million in 1999, >> a decrease in net interest expense of $2.1 million, and >> an increase in general and administrative expenses of $0.8 million. TENANT INCOME Base rent, including straight-line rent, increased 8.5% to $15.3 million for the three months ended September 30, 1999 from $14.1 million for the same period in 1998. Base rent before the adjustment for straight-line rent increased 18 $1.3 million, or 9.2%, to $15.5 million for the three months ended September 30, 1999 when compared to $14.2 million in 1998. The increase in base rent for the three months ended September 30, 1999, is attributable primarily to the following acquisitions: Base Rent ** Three Months ended September 30, 1999 (IN THOUSANDS) ------------------------- 1999 Acquisitions $ 1,323 University Shoppes (8/98) 125 Waverly Place (12/98) 420 ------------------------- $ 1,868 ========================= ** BASE RENT EXCLUDES STRAIGHT-LINE RENT The above acquisition impact on base rent is offset by a $0.3 million decrease in base rent related to two properties under redevelopment. During this same period, the Company's weighted-average square feet of gross leasable area in operation increased 9.9%. Gross leasable area in operation increased by 1.0 million square feet, primarily because of the acquisition of nine properties in 1999. Recoveries from tenants decreased 1% for the three months ended September 30, 1999 to $3.7 million compared to $3.9 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 1% to $0.42 for the three months ended September 30, 1999 when compared to $0.48 for the same period in 1998. The average recovery of property operating expenses, exclusive of marketing and other non-recoverable operating costs, decreased to 67% in 1999 as compared to 77% in 1998. OTHER INCOME Other income increased $0.4 million to $0.9 million for the three months ended September 30, 1999 compared to $0.5 million in the same period of 1998 as a result of increased leasing fee income of $0.4 million from development projects. PROPERTY OPERATING EXPENSES Property operating costs increased $0.8 million, or 14%, to $6.6 million in 1999 from $5.8 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 9.9% to 8.9 million square feet in 1999 from 8.1 million square feet in 1998. On a weighted-average square-foot basis, operating expenses increased 2.8% to $0.74 from $0.72 per weighted average square foot. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the three months ended September 30, 1999 increased $0.8 million, or 53%, to $2.3 million in 1999 from $1.5 million in 1998. General and administrative expenses increased as a percentage of revenues to 11% in 1999 from 8% in 1998. The increase in general and administrative expenses as a percentage of revenues is primarily related to the Company's change in employee health benefit plan coverages from a self-insured to a premium plan. DEPRECIATION AND AMORTIZATION Depreciation increased to $4.9 million for the three months ended September 30, 1999 compared to $4.6 million in the same period of 1998. The increase is due primarily to the 1999 acquisitions. Amortization of deferred leasing and other charges increased $0.9 million to $1.7 million. On a weighted-average square-foot basis, depreciation and amortization increased to $0.74 in 1999 from $0.67 in 1998. 19 INTEREST EXPENSE Interest expense for the three months ended September 30, 1999, net of interest income of $2.6 million, decreased by $2.1 million, or 36%, to $3.7 million compared to $5.8 million, net of interest income of $1.5 million, for the three months ended September 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 September 30, 1999, debt outstanding was $309.3 million, and the average interest rate was 7.9%. This compares to $322.3 million of average outstanding debt and a 7.9% average interest rate in 1998. The Company capitalized $0.5 million of interest costs associated with its development projects for the three months ended September 30, 1999 compared to $0.4 million for the same period in 1998. PROPERTIES HELD FOR SALE For the three months ended September 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 September 30, 1998, the properties held for sale contributed approximately $0.1 million of revenue and incurred a loss of $0.3 million after deducting related interest expense. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998. NET INCOME The Company reported a net income available to common shareholders of $6.8 million, or $0.22 per common share, for the nine months ended September 30, 1999. The same period in 1998 reported a net loss available to common shareholders of $0.7 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 $5.6 million, or 15.4%, to $41.9 million from $36.3 million for the same period in 1998. Including the effect of straight-line rent adjustment, ($0.1 million) NOI increased by $5.7 million. This increase was partly attributable to property acquisitions as follows: NOI for the nine months ended September 30, 1999 (IN THOUSANDS) ---------------------- 1999 Acquisitions $ 2,351 University Shoppes (8/98) 290 Waverly Place (12/98) 1,049 Konover (portfolio) (1998) 1,740 Rodwell/Kane (portfolio) (1998) 1,155 ---------------------- $ 6,585 ====================== The above acquisition impact on NOI is offset by a $1.2 million decrease in NOI related to two properties under redevelopment. >> The Company recognized earnings from unconsolidated ventures of $1.6 million. There were no earnings from unconsolidated ventures in 1998. >> The Company's acquisition activity was funded primarily with the use of proceeds generated from the 1998 sale of common stock. The proceeds also enabled the Company to reduce interest expense $0.6 million to $18.7 million in 1999 from $19.3 in 1998 and resulted in increased interest income of $4.7 million over 1998. >> Through acquisitions, the Company had increased depreciation and amortization of $3.0 million and increased general and administrative expenses of $1.2 million. >> The Company paid a $0.8 million dividend in 1999 to its convertible preferred shareholders, who receive dividends equal to that of common shareholders on an as-converted basis. 20 EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION AND FUNDS FROM OPERATIONS EBITDA was $37.8 million for the nine months ended September 30, 1999, an increase of $6.3 million or 20%, from $31.5 million for the same period in 1998. The increase was due primarily to increased NOI of $5.7 million over 1998, including adjustment for straight-line rent (as described above), an increase in earnings from unconsolidated ventures of $1.6 million over 1998, offset by an increase in general and administrative expenses of $1.2 million. Funds from Operations ("FFO") for the nine months ended September 30, 1999 increased $11.7 million or 76% to $27.0 million. The Company's FFO for the same period in 1998 was $15.3 million. FFO increased primarily as a result of: >> the $5.6 million increase in NOI, exclusive of straight-line rent, >> an increase in earnings from unconsolidated ventures of $1.6 million, >> a decrease in net interest expense of $5.4 million, and >> an increase in general and administrative expenses of $1.2 million. TENANT INCOME Base rent, including straight-line rent, increased 21% to $45.8 million for the nine months ended September 30, 1999 from $37.9 million for the same period in 1998. Base rent before the adjustment for straight-line rent increased $7.8 million, or 20%, to $46.2 million for the nine months ended September 30, 1999 when compared to $38.4 million in 1998. The increase in base rent for the nine months ended September 30, 1999, is attributable primarily to the following: Base Rent (*) Nine Months ended September 30, 1999 (IN THOUSANDS) ----------------------- 1999 Acquisitions $ 2,636 University Shoppes (8/98) 374 Waverly Place (12/98) 1,231 Konover (portfolio) (1998) 2,094 Rodwell/Kane (portfolio) (1998) 2,026 ----------------------- $ 8,361 ======================= (*) Base rent excludes straight-line rent The above acquisition impact on base rent is offset by a $0.7 million decrease in base rent related to two properties under redevelopment. During this same period, the Company's weighted-average square feet of gross leasable area in operation increased 19%. In addition, gross leasable area in operation at period end increased by 1 million square feet, primarily because of the nine properties acquired in 1999 totaling 0.9 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 7.3% for the nine months ended September 30, 1999 to $11.7 million compared to $10.9 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 11.1% to $1.35 for the nine months ended September 30, 1999 when compared to $1.52 for the same period in 1998. The average recovery of property operating expenses, exclusive of marketing and other non-recoverable operating costs, decreased to 75% in 1999 as compared to 80% in 1998. OTHER INCOME Other income decreased $0.1 million to $2.1 million in 1999 compared to $2.2 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 $0.5 million primarily from development projects. The decrease is directly attributable to the fact that prior 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. 21 PROPERTY OPERATING EXPENSES Property operating costs increased $3.1 million, or 20%, to $18.9 million in 1999 from $15.8 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 19% to 8.7 million square feet in 1999 from 7.3 million square feet in 1998. On a weighted-average square-foot basis, operating expenses decreased 1% to $2.18 from $2.20 per weighted average square foot. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the nine months ended September 30, 1999 increased $1.2 million, or 29%, to $5.4 million in 1999 from $4.2 million in 1998. General and administrative expenses increased as a percentage of revenues to 9% in 1999 from 8% in 1998. DEPRECIATION AND AMORTIZATION Depreciation increased to $14.4 million for the nine months ended September 30, 1999 compared to $12.9 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. Amortization of deferred leasing and other charges increased $1.5 million to $4.2 million. On a weighted-average square-foot basis, depreciation and amortization decreased to $2.15 in 1999 from $2.18 in 1998. INTEREST EXPENSE Interest expense for the nine months ended September 30, 1999, net of interest income of $7.8 million, decreased by $5.3 million, or 33%, to $10.9 million compared to $16.2 million, net of interest income of $3.1 million, in the first nine months of 1998. This decrease resulted primarily from the interest income generated from the proceeds from the sale of common stock in 1998. On a weighted-average basis, in the first nine months of 1999, debt outstanding was $307.4 million, and the average interest rate was 7.9%. This compares to $299.0 million of average outstanding debt and a 7.9% average interest rate in 1998. The Company capitalized $0.9 million of interest costs associated with its development projects in the first nine months of 1999 and 1998. PROPERTIES HELD FOR SALE For the nine months ended September 30, 1999, the properties held for sale contributed approximately $0.2 million of revenue. After deducting related interest expense on the debt associated with those properties, the properties held for sale incurred a loss of $0.4 million. For the nine months ended September 30, 1998, the properties held for sale contributed approximately $0.6 million of revenue and incurred a loss of $1.4 million after deducting related interest expense and the $0.4 million loss on the sale of one property in April 1998. 22 LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS The Company's cash and cash equivalents balance at September 30, 1999 was $9.0 million. Restricted cash, as reported in the financial statements, as of such date, was $5.6 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 $20 million for the nine months ended September 30, 1999. Net cash used in investing activities was $73.3 million in that same period. The primary use of these funds included: >> $54.8 million of cash to acquire nine centers aggregating 0.9 million square feet located in Florida, North Carolina, South Carolina and Virginia, >> $7.3 million invested in ventures and >> $23.5 million invested in the Company's income-producing properties. These cash uses were offset by repayments received on certain notes receivables of $11.9 million. Net cash used in financing activities was $9.9 million for the nine months ended September 30, 1999. The primary use of these funds included: >> $13.5 million for dividends paid, >> $3.0 million for the repurchase of 493,200 shares of the Company's common stock, and >> $3.1 million for debt repayments. These cash uses were offset by proceeds from debt borrowings of $10.9 million. 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 September 30, 1999, 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 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 September 30, 1999 was $88.6 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 allowing for the maximum available at up to $150 million. The availability under this line is based upon a predetermined formula based 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 $31 million paydown. The paydown 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 September 30, 1999 was $73.7 million, including a $7 million unamortized interest rate premium. DIVIDENDS In September, 1999, the Company declared a $0.125 per share quarterly dividend to shareholders of record as of September 15, 1999. The quarterly dividend of $4.5 million was paid on September 30, 1999. As of September 30, 1999, the Company has paid dividends totaling $13.5 million to its shareholders including $0.4 million to operating partnership unit holders. SHARE REPURCHASE For the nine months ended September 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 September 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% 1Q99 95% 4Q99 95% 4Q99 Non-IT 100% 1Q99 90% 4Q99 90% 4Q99
* 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. 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 25 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 nine months ended September 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 re-lease 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 RESULTS MAY DIFFER MATERIALLY FROM THOSE PRESENTED. 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 September 30, 1999, we had approximately $41.9 million of variable rate debt outstanding. If the weighted average interest rate on this variable rate debt were 100 basis points higher or lower in 1999, our interest expense would be increased or decreased approximately $0.4 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 None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Letter to Simon Konover, Chairman of the Board, dated June 7, 1999 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 September 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: November 10, 1999 By: /S/Patrick M. Miniutti ------------------------------------------- Patrick M. Miniutti, Executive Vice President, Chief Financial Officer and Director 29 EX-10 2 EXHIBIT 10.1 Dated as of June 7, 1999 Mr. Simon Konover Konover Investments Corporation 342 North Main Street, Suite 200 West Hartford, CT 06117 Dear Simon: The purpose of this letter is to summarize the terms of the agreement recently reached between us regarding the Boca office and related issues: 1. Effective June 7, 1999, Konover Management South Corporation ("KMSC") will operate the Boca office located at 7000 W. Palmetto Park Road, Suite 409, Boca Raton, Florida ("Boca office"). Notwithstanding the foregoing, Konover Property Trust, Inc. ("KPT") will continue to pay all staff, including providing benefits, through September 30, 1999, except for Maria Ashenfelter, who will be paid by KMSC commencing June 7, 1999, and Ted Konover, who will be paid by KMSC commencing June 1, 1999, and KPT will pay all rent, utilities, and other charges due under the Lease for the operation of the Boca office through the end of its current lease term, April 30, 2000. Commencing October 1, 1999, KMSC shall assume responsibility for paying all staff in the Boca office, except Fred P. Steinmark. 2. From and after June 7, 1999, as to any properties owned or controlled by Simon Konover, if Maria Ashenfelter registers a prospective tenant, in writing, with Chuck Taylor of RMC/Konover Property Trust LLC, with a copy to Chris Gavrelis of KPT, then any leasing commission due to KPT under the Management and Leasing Agreements as to such tenant will be split equally between KPT and KMSC. 3. Fred P. Steinmark, an employee of KPT, shall continue to work at the Boca office after September 30, 1999, through the end of the lease term of the Boca office, or any substitute therefor. From October 1, 1999 through June 30, 2001, he shall be provided, free of charge, with office space, receptionist services, telephone services and secretarial services. 4. KPT shall pay KMSC on October 1, 1999, $150,000 (less any salary paid by KPT to Ted Konover after June 1, 1999 and to Maria Ashenfelter after June 7, 1999, prior to each of them going onto KMSC's payroll) in consideration of the terms and conditions of this agreement. 5. The following existing Management and Leasing Agreements shall remain in place after June 7, 1999: Ocala Factory Stores, Sunrise Center, Tampa Festival Centre, and The Plaza (Davie, FL). In addition, and subject to the terms of paragraph 8 below, a Management and Leasing Agreement, in form identical to the foregoing Agreements, shall be executed, on or before September 10, 1999 by the owner of the Admiral's Crossing, Jupiter Palms Associates, Ltd., and KPT, effective April 1, 1999. The Management and Leasing Agreements, for Liberty, NY, Tri-State Mall, NJ, Monticello, NY and Brunswick, GA are terminated as of June 1, 1999. 6. With respect to the properties with ongoing Management and Leasing Agreements as set forth in Paragraph 5 above, all accounting functions shall be handled by the Boca office throughout the remaining term of such Agreements. The accounting staff in the Boca office shall continue to reasonably cooperate with KPT in providing information to KPT necessary for KPT to perform its management and leasing obligations under the Management and Leasing Agreements. Specifically, KPT and Boca will exercise due diligence in reaching the transition deadlines as set forth on the June 18, 1999 Memorandum attached as Exhibit A with respect to properties not owned or controlled by Simon Konover. Notwithstanding the foregoing, under all circumstances the transition will be complete no later than September 30, 1999. As soon as practical, after the KIC Internet mail server is available to the Boca office, KPT will cooperate in transitioning the Boca office (except Fred Steinmark) from the KPT to the KIC Internet mail server. Until that time, KPT will permit the Boca office to remain on the KPT Internet mail server. 7. All furniture, fixtures and equipment presently in the Boca office shall be transferred to KMSC as of June 7, 1999, by Bill of Sale identical in form to the one which KMSC provided to KPT, subject to Board approval of this transaction, if necessary. 8. Please note that the terms contained herein are set forth as approved by KPT's Board of Directors on August 12, 1999. Should this letter accurately reflect your understanding of the arrangement we discussed, please sign the enclosed copy of this letter and return it to me for our records. Please retain the original for your files. Sincerely, C. Cammack Morton President & Chief Executive Officer Agreed to as of this 7th day of June 1999 Konover Management South Corporation By:__________________________ Simon Konover Its Chairman EX-27 3 EXHIBIT 27
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 14,649 0 14,735 0 0 0 669,399 81,139 688,268 0 315,888 0 18,820 309 321,723 688,268 0 60,403 0 22,884 0 0 10,856 7,616 0 7,616 0 0 0 7,616 0.22 0.22 The Company's balance sheet is unclassified.
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