FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2002
or
[_] Transition Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
Commission File Number 1-11998
KONOVER PROPERTY TRUST, INC.
(Exact name of registrant as specified in its charter)
Maryland 56-1819372
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3434 Kildaire Farm Road
Suite 200
Raleigh, North Carolina 27606
(Address of principal executive offices) (Zip Code)
(919) 372-3000
(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 CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 31,916,354 shares of Common
Stock, $0.01 par value, as of April 30, 2002.
KONOVER PROPERTY TRUST, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Consolidated Financial Statements (Unaudited) ....................... 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk .......... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................... 25
Item 2. Changes in Securities and Use of Proceeds ........................... 25
Item 3. Defaults Upon Senior Securities ..................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ................. 25
Item 5. Other Information ................................................... 26
Item 6. Exhibits and Reports on Form 8-K .................................... 26
2
PART I
Item 1. Consolidated Financial Statements (Unaudited)
Index to Unaudited Consolidated Financial Statements
Page No.
--------
Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 ............................ 4
Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001 .......... 5
Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2002 .......... 6
Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 .......... 7
Notes to Consolidated Financial Statements ........................................................ 8
3
KONOVER PROPERTY TRUST, INC.
Consolidated Balance Sheets
(in thousands, except share data)
March 31, 2002 December 31, 2001
(Unaudited) (Audited)
----------------------------------------------
Assets
Income producing properties:
Land $ 45,220 $ 43,725
Buildings and improvements 245,329 240,993
Deferred leasing and other charges 14,501 14,361
----------------------------------------------
305,050 299,079
Accumulated depreciation and amortization (35,823) (33,373)
----------------------------------------------
269,227 265,706
Properties under development 1,054 4,694
Properties held for sale 63,107 60,701
Other assets:
Cash and cash equivalents 18,316 17,615
Restricted cash 6,475 4,956
Tenant and other receivables, net of allowance of $3,171 and $2,948 at March
31, 2002 and December 31, 2001, respectively 4,401 5,406
Notes receivable 2,628 477
Investment in and advances to unconsolidated entities 13,071 18,606
Deferred charges and other assets 6,360 6,855
----------------------------------------------
$ 384,639 $ 385,016
==============================================
Liabilities and Stockholders' Equity
Liabilities:
Debt on income properties $ 229,212 $ 229,709
Capital lease obligations 74 196
Accounts payable and other liabilities 10,764 10,732
----------------------------------------------
240,050 240,637
Commitments and contingencies
Minority interests 4,952 3,680
----------------------------------------------
Stockholders' equity:
Convertible preferred stock, Series A, 5,000,000 shares authorized, 780,680
issued and outstanding at March 31, 2002 and December 31, 2001 18,679 18,679
Stock purchase warrants 9 9
Common stock, $0.01 par value, 100,000,000 shares authorized, 31,918,794 and
31,647,387 issued and outstanding at March 31, 2002 and December 31,
2001, respectively 319 316
Additional paid-in capital 291,045 290,453
Accumulated deficit (170,359) (168,756)
Deferred compensation - Restricted stock plan (56) (2)
----------------------------------------------
139,637 140,699
----------------------------------------------
$ 384,639 $ 385,016
==============================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
4
KONOVER PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months ended March 31,
2002 2001
-----------------------------------------
Rental operations: (in thousands, except per share data)
Revenues:
Base rents $ 7,914 $ 17,123
Percentage rents 422 135
Property operating cost recoveries 2,183 3,777
Other income 129 1,445
-----------------------------------
10,648 22,480
-----------------------------------
Property operating costs:
Common area maintenance 1,061 2,554
Utilities 195 748
Real estate taxes 1,060 2,237
Insurance 179 335
Marketing 12 61
Other 693 1,045
-----------------------------------
3,200 6,980
Depreciation and amortization 2,698 6,113
-----------------------------------
5,898 13,093
-----------------------------------
4,750 9,387
Other expenses:
General and administrative 1,909 1,988
Stock compensation amortization 44 380
Operating loss of sold management business 84 -
Severance and other related costs - 5,013
Interest, net 4,523 7,776
-----------------------------------
Loss from operations (1,810) (5,770)
Abandoned transaction costs - 38
Equity in (earnings) losses of unconsolidated entities (150) 281
-----------------------------------
Loss before minority interest (1,660) (6,089)
Minority interest 57 164
-----------------------------------
Net loss (1,603) (5,925)
Preferred dividends - (271)
-----------------------------------
Net loss applicable to common stockholders $ (1,603) $ (6,196)
===================================
Basic loss applicable to common stockholders per share $ (0.05) $ (0.20)
===================================
Weighted-average number of common shares outstanding 31,767 31,174
===================================
Diluted loss applicable to common stockholders per share $ (0.05) $ (0.20)
===================================
Weighted-average number of diluted shares outstanding 31,767 31,174
===================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
KONOVER PROPERTY TRUST, INC.
Consolidated Statement of Stockholders' Equity
Three months ended March 31, 2002
(Unaudited)
(in thousands except share data)
Convertible Stock Purchase Additional Paid
Preferred Stock Warrants Common Stock in Capital
----------------------------------------------------------------------
Balance at December 31, 2001 $ 18,679 $ 9 $ 316 $ 290,453
Issuance of 267,878 shares of restricted stock - - 3 440
Repurchase of 3,087 shares of restricted stock - - - (5)
Cancellation of 3,838 shares of restricted stock - - - (20)
OP units converted into 10,454 shares of common
stock - - - 99
Conversion of restricted stock into repurchase
rights - - - 38
Reclassification - - 40
Compensation under stock plans - - - -
Net loss - - - -
----------------------------------------------------------------------
Balance at March 31, 2002 $ 18,679 $ 9 $ 319 $ 291,045
======================================================================
Deferred
Compensation
Accumulated Restricted Stock
Deficit Plan Total
---------------------------------------------------
Balance at December 31, 2001 $ (168,756) $ (2) $ 140,699
Issuance of 267,878 shares of restricted stock - (15) 428
Repurchase of 3,087 shares of restricted stock - - (5)
Cancellation of 3,838 shares of restricted stock - 20 -
OP units converted into 10,454 shares of common
stock - - 99
Conversion of restricted stock into repurchase
rights - (55) (17)
Reclassification - (40) -
Compensation under stock plans - 36 36
Net loss (1,603) - (1,603)
---------------------------------------------------
Balance at March 31, 2002 $ (170,359) $ (56) $ 139,637
===================================================
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
6
KONOVER PROPERTY TRUST, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
2002 2001
----------------------------
(in thousands)
Cash flows from operating activities:
Net loss $ (1,603) $ (5,925)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Amortization of debt premium - (130)
Minority interest (57) (164)
Depreciation and amortization 2,698 6,113
Stock compensation amortization 44 380
Abandoned transaction costs - 38
Amortization of deferred financing costs 338 588
Net changes in:
Tenant and other receivables 895 (494)
Deferred charges and other assets 378 (482)
Accounts payable and other liabilities (806) 424
Restricted cash - operational escrows (859) (426)
----------------------------
Net cash provided by (used in) operating activities 1,028 (78)
----------------------------
Cash flows from investing activities:
Investment in income-producing properties (634) (5,480)
Net cash acquired in connection with Sunset KPT Investment, Inc. 1,928 -
Payments received on notes receivable, net - 126
(Investment in and advances to) distributions from unconsolidated entities (315) 425
Change in restricted cash - investing (410) (519)
----------------------------
Net cash provided by (used in) investing activities 569 (5,448)
----------------------------
Cash flows from financing activities:
Proceeds from debt on income properties - 4,988
Repayment of debt on income properties (497) (1,230)
Deferred financing charges (32) (8)
Other debt repayments (122) (53)
Issuance of shares under employee stock purchase plan - 28
Dividends paid - (4,658)
Distributions to minority member of consolidated joint venture (240) -
Exercise of stock purchase rights - 62
Repurchase of common stock (5) (18)
----------------------------
Net cash used in financing activities (896) (889)
----------------------------
Net increase (decrease) in cash and cash equivalents 701 (6,415)
Cash and cash equivalents at beginning of period 17,615 10,660
----------------------------
Cash and cash equivalents at end of period $ 18,316 $ 4,245
============================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 3,956 $ 7,966
============================
The accompanying Notes to Consolidated Financial Statements an integral part of
these statements.
7
Notes to Consolidated Financial Statements
March 2002
(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 in the Southeast. The Company's revenues are primarily derived
under real estate leases with national, regional and local retailing companies.
During 2001, the Company's Board of Directors created a Special
Committee of the Board of Directors to evaluate potential long-term strategic
alternatives for the Company. These alternatives may include the sale or merger
of the Company or operating as a private or public company. The ultimate
determination of fair value of the Company may differ from the net book value of
assets recorded in the accompanying balance sheets.
On March 31, 2002, the Company's owned properties consisted of:
1. thirty-two community shopping centers in six states aggregating
approximately 4,113,000 square feet of retail space and 97,000
square feet of office space; and
2. two centers that are held for sale consisting of a
426,000-square-foot operating community shopping center and a
230,000-square-foot non-operating outlet center.
In addition, the Company had investments in:
.. four operating community shopping center joint-ventures with 344,000 square
feet; and
.. a land-development joint venture consisting of approximately 590 acres,
which is currently held for sale.
The weighted-average square feet of gross leasable area was 4.6 million
square feet for the three months ended March 31, 2001 and 9.4 million square
feet for the same period in 2001.
In January 2002, the Company acquired the remaining interest in Sunset
KPT Investment, Inc. from the affiliate of a director. As of March 31, 2002, the
Company is the sole shareholder in Sunset KPT Investment, Inc., which is a
wholly owned taxable REIT subsidiary. Sunset KPT Investment, Inc. has the
ability to develop properties, buy and sell properties, provide equity to
developers and perform third-party management, leasing and brokerage services.
Sunset KPT Investment, Inc. owns undeveloped outparcels adjacent to the Millpond
Village shopping center in Raleigh, North Carolina and a 60% interest in
Brunswick Commercial LLC, a joint venture holding 590 acres of undeveloped land
in Brunswick County, North Carolina. Prior to January 2002, the Company held
substantially all of the non-voting common stock of this taxable REIT subsidiary
and all of the voting common stock was held by a company affiliated with a
director of the Company. Accordingly, this entity was accounted for under the
equity method for investments during 2001. The accompanying 2002 consolidated
financial statements include the assets, liabilities and results of operations
of Sunset KPT Investment, Inc. and subsidiaries.
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 March 31, 2002. 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,
8
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.
Basis of Presentation
The accompanying consolidated financial statements include the accounts
of the Company, its subsidiaries and the Operating Partnership. All significant
intercompany balances have been eliminated in consolidation. The accompanying
2002 consolidated financial statements include the assets, liabilities and
results of operations of Sunset KPT Investment, Inc. and subsidiaries. This
entity was accounted for under the equity method for investments during 2001.
Properties that are owned or that are owned less than 100% but
controlled by the Operating Partnership have been consolidated. Control is
demonstrated by the ability of the Operating Partnership to manage, directly or
indirectly, day-to-day operations, refinance debt and sell the assets of the
entity that owns the property without the consent of the other owners and the
inability of the other owners to replace the general partner or manager.
Investments in ventures which represent noncontrolling ownership interests or
where control is deemed temporary are accounted for using the equity method of
accounting. These investments are recorded initially at cost and subsequently
adjusted for net equity in income (loss) and cash contributions and
distributions.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
the information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(primarily consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended March 31, 2002 are not necessarily indicative of results that may
be expected for a full fiscal year. For further information, refer to the
audited financial statements and accompanying footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2001.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Certain amounts from prior years were reclassified to conform with
current-year presentation. These reclassifications had no effect on net loss or
stockholders' equity as previously reported.
2. Significant Accounting Policies
Cash and cash equivalents
The Company considers highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Basic and diluted income per share
Basic earnings per share is calculated by dividing the income
applicable to common stockholders by the weighted-average number of shares
outstanding. Diluted earnings per share reflects the potential dilution that
could occur if options or warrants to purchase common shares were exercised and
preferred stock was converted into common shares ("potential common shares").
For the three months ended March 31, 2002 and March 31, 2001, both
basic and dilutive earnings per share are computed based on a weighted average
number of shares of 31,767,226 and 31,173,502, respectively. Potential dilutive
9
common shares of 3,480,000 and 3,624,000 have been excluded from diluted
earnings per share for the three months ended March 31, 2002 and March 31, 2001,
respectively, because their inclusion would be antidilutive. On February 8,
2002, 259,545 shares of restricted stock were issued in settlement of a
Separation and Settlement Agreement dated March 30, 2001 with a former Executive
Vice President of the Company. The cost of this settlement was recorded in 2001,
the period the agreement was executed.
Dividends
The Company's policy is to make a determination regarding its dividend
distributions quarterly following review of the Company's financial results,
capital availability, capital expenditures and improvement needs, strategic
objectives and REIT requirements. The Company's policy is to declare dividends
in amounts at least equal to 90% of the Company's taxable income, which is the
minimum dividend required to maintain REIT status. The Company has not paid any
dividends since April 2001. The Company continually undergoes an evaluation of
its capital needs, including the renovation of certain community shopping
centers and reduction of debt. Consistent with the Company's policy, the Company
will evaluate and determine any dividend payment each quarter based on its
operating results and capital needs. Although the decision is made on a
quarterly basis, the Company has no present intention to pay cash dividends
until a long-term strategic direction is established.
Comprehensive Income
Comprehensive income equals net income for all periods presented.
3. Investment in and Advances to Unconsolidated Entities
A summary of the Company's investments in and advances to unconsolidated
entities at March 31, 2002 and December 31, 2001 is as follows (all investments
in unconsolidated entities are accounted for under the equity method):
March 31, December 31,
Entity Location Ownership 2002 2001
-------------------------------------------------------------------------------------------------------------
Community Center Ventures: (in thousands)
Atlantic Realty LLC (2 community centers) Apex and Pembroke, NC 50% $ 2,559 $ 2,501
Park Place KPT LLC Morrisville, NC 50% 4,664 4,514
Falls Pointe KPT LLC Raleigh, NC 50% 5,848 5,734
Taxable Subsidiaries (see Note 1):
Sunset KPT Investment, Inc. 100% - 5,850
truefinds.com, Inc. 100% - 7
-------------------------
$ 13,071 $ 18,606
=========================
The Company guarantees the repayment of an $8.3 million mortgage debt for
Falls Pointe KPT LLC, which is currently structured as a construction loan, due
in December 2002. The Company anticipates that the debt will be refinanced and
replaced with a permanent, non-recourse loan by mid-2002. The mortgage debt held
by Atlantic Realty LLC and Park Place KPT LLC is non-recourse and has certain
guarantees of the non-managing member.
4. Reportable Segments
Prior to the outlet portfolio sale in September 2001, management
determined under SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," it had four reportable segments: community centers, outlet
centers, Vanity Fair (VF) anchored centers, and centers held for
sale/redevelopment/development. The outlet segment includes properties that
generate a majority of their revenue from traditional outlet manufacturers and
are destination oriented. The VF-anchored segment includes properties that have
less than $1.5 million in total revenue, generate at least 20% of their revenue
from VF and have less than 150,000 square feet. The 2002 presentation includes
community center and held-for-sale only. The Company now includes properties
under development or redevelopment in the "All others" segment column.
Previously these properties had been grouped into the held-for-sale segment. The
prior years segment presentation has been restated to reflect this change. The
Company evaluates performance and allocates resources based on the net operating
income (NOI) of the Company's investment portfolio. The accounting
10
policies of the reportable segments are the same as those described in the
summary of significant accounting policies. The Company's reportable segments
are business units that offer retail space to varied tenants and in varied
geographical areas.
(All data in thousands)
Community Outlet VF Held-For
Centers Centers/(1)/ Centers/(1)/ Sale/(2)/ All others Total
Three months ended March 31, 2002:
NOI $ 6,137 $ - $ - $ 1,207 $ 104 $ 7,448
Total Assets $ 271,253 $ - $ - $ 64,662 $ 48,724 $ 384,639
Three months ended March 31, 2001:
NOI $ 8,908 $ 5,586 $ 890 $ (101) $ 217 $ 15,500
Total Assets $ 361,751 $ 183,849 $ 42,264 $ 18,782 $ 90,328 $ 696,974
(1) See Note 5 on property disposals.
(2) Mount Pleasant Towne Centre was classified as held-for-sale during the
second quarter of 2001.
4. Properties Held For Sale
As part of the Company's ongoing strategic evaluation of its portfolio of
assets, management has been authorized to pursue the sale of certain properties
that currently are not fully consistent with or essential to the Company's
long-term strategies. Management evaluates all properties on a regular basis in
accordance with its long-term strategy and in the future may identify other
properties for disposition or may decide to defer the pending disposition of the
assets now held for sale. Assets held for sale are valued at the lower of
carrying value or estimated fair value less selling costs and actual sales value
may vary from these estimates. As part of the Company's ongoing strategic
evaluation of its portfolio of assets, the Company intends to sell one remaining
outlet shopping center, a 426,000-square-feet community shopping center and 590
acres of undeveloped land in Brunswick County, North Carolina held in a joint
venture. The Company continues to operate the community shopping center. The one
remaining outlet shopping center had nominal rental operations in 2002 and 2001.
The Company is actively marketing the properties.
The net carrying value of assets currently being marketed for sale at
March 31, 2002 is $63.1 million. The held-for-sale community center property is
encumbered by $45.9 million of indebtedness at March 31, 2002. There is no debt
outstanding on the held-for-sale outlet property or the undeveloped land in
Brunswick County, North Carolina.
The following summary financial information pertains to the properties
held for sale at March 31, 2002 and for the three months ended March 31 (in
thousands):
2002 2001
---- ----
Revenues $ 1,805 $ 1,810
Operating expenses 598 551
---------------------
NOI 1,207 1,259
Depreciation and amortization 5 537
Interest, net 923 960
---------------------
Net income (loss) $ 279 $ (238)
=====================
5. Property Disposals
On December 27, 2001, the Company sold its Nashville outlet property for
its approximate net book value of $5.6 million.
On September 25, 2001, the Company sold a 31-property portfolio for $180
million. The portfolio consisted of nine outlet properties, 16 VF-anchored
properties and six community center properties. Three of the six community
centers in the portfolio have outlet tenants but meet the definition of
community centers, as discussed in Note 3, due to their proximity to the local
market and other property characteristics. The community centers included in the
portfolio were sold because they are collateral under certain common debt
facilities with certain of the outlet and VF-anchored properties.
11
In addition, the Company sold its Shoreside, NC community center on
September 13, 2001 for $7.5 million.
The following summary financial information pertains to the above-
mentioned properties sold for the three months ended March 31, 2001 (in
thousands):
Revenues $ 12,010
Operating expenses 4,260
----------
Net operating income 7,750
Depreciation and amortization 2,839
Interest, net 3,326
Other 13
----------
Net income $ 1,572
==========
6. Sale of Florida Property Management Business
On February 28, 2002, the Company sold RMC/Konover Trust LLC ("RMC"), a
subsidiary of Sunset KPT Investment, Inc., to RMC Management Company LLC, a
Florida limited liability company whose sole member is Suzanne L. Rice, a former
officer of the Company. Under the terms of the agreement, the entity affiliated
with Ms. Rice will assume the operating assets, third-party liabilities and
property management and leasing contracts for 70 shopping centers totaling 6.5
million square feet. The Company's net liabilities and other obligations
including office space and equipment leases and related employee benefits
assumed by RMC Management Company LLC were approximately $0.2 million. The
Company will retain the Sunrise, Florida office that manages and leases five of
the Company's Florida shopping centers, along with three other third-party
management and leasing contracts. RMC had a net operating loss of $0.1 million
for the two-month period ending February 28, 2002. This loss is reported as
"Operating loss of sold management business" in the accompanying consolidated
statement of operations for 2002. The operating results of RMC for 2001, which
were nominal, are included in "Equity in losses of unconsolidated entities" in
the accompanying 2001 consolidated statement of operations.
7. Commitments and Contingencies
On June 11, 1999, WHE Associates, Inc., purportedly a licensed real estate
broker, filed a lawsuit claiming that the Company is liable to the plaintiff for
a "finder's fee" in the amount of $2 million to $4 million. Plaintiff sought its
purported fee pursuant to both breach of contract and equitable claims. At a
hearing held on January 5, 2000, the plaintiff's motion for summary judgment was
denied as to its contractual claims and granted as to liability with respect to
its equitable claims. The case was tried before a jury during November 2000. As
the trial began, the plaintiff dismissed its contract claims and proceeded to
try only the issue of damages with respect to its equitable claims. The jury
returned a verdict in favor of the plaintiff as to damages with respect to those
claims, and on November 27, 2000, a judgment was entered by the court in favor
of the plaintiff in the amount of $2,756,550. In an opinion issued on February
1, 2002, the Maryland Court of Special Appeals reversed the $2,756,550, judgment
on plaintiff's detrimental reliance claim entered by the Circuit Court of
Baltimore City on November 27, 2000. Nevertheless, it also held that there were
insufficient grounds for reversal of the verdict returned on plaintiff's
remaining claims of unjust enrichment and quantum meruit. Although the appellate
court left application of its ruling on the remaining claims to the trial court,
it did instruct the trial court that the two remaining verdicts reflected the
same damages and that the trial court should enter the judgment as to one, not
both. On April 4, 2002, the trial court entered a new, significantly reduced
judgment in the amount of $1,275,000, plus interest in the amount of $407,000.
The Company paid the damages on April 4, 2002. The liability for the claim and
related interest is included in "Accounts payable and other liabilities" in the
accompanying consolidated balance sheets.
The Company previously entered into a joint venture, Atlantic Realty LLC,
with Effell LLC for the development, ownership and operation of Peak Plaza
Shopping Center in Apex, North Carolina and University Shopping Center in
Pembroke, North Carolina. The Company, through KPT Properties, L.P., is the
managing member of the joint venture and Effell is its non-managing member. On
July 17, 2001, Effell, on behalf of Atlantic Realty, filed a lawsuit against the
Company in the Superior Court of Wake County, North Carolina alleging that the
Company breached its fiduciary duty as managing member of the joint venture by
failing to adequately manage, maintain and lease the joint venture's shopping
centers and to sell its outparcels. Atlantic Realty seeks equitable relief and
monetary damages. The Company believes that it has meritorious defenses against
Atlantic Realty's allegations and intends to vigorously defend
12
this litigation. Discovery in the matter is proceeding. Due to the inherent
uncertainties of litigation, the Company is not able to predict the outcome of
this litigation. At this time, the Company does not expect the result of this
litigation to have a material adverse effect on its business, financial
condition and results of operations.
On March 15, 2002, a purported class action lawsuit was filed on behalf of
all shareholders of the Company not affiliated with any of the defendants in the
Circuit Court for Baltimore City against the Company, certain officers and
directors of the Company and Prometheus Southeast Retail Trust ("Prometheus").
The complaint alleges, among other things, that in connection with a non-binding
offer by Prometheus to acquire all of the remaining shares of the Company that
it does not already own, (1) Prometheus, as majority shareholder of the Company,
is purportedly engaging in self dealing, acting in bad faith, and breaching its
fiduciary duties toward the Company's other public shareholders, and (2) the
named officers and directors of the Company, who Prometheus allegedly controls,
are breaching fiduciary duties to the Company's other public shareholders. The
plaintiffs seek equitable relief and monetary damages. On April 3, 2002, two
additional similar purported class action lawsuits were filed. The Company
believes that the defendants have meritorious defenses to the plaintiffs'
allegations. The Company intends to vigorously defend this litigation.
8. Related-Party Transactions
In 1998, the Company acquired Lake Point Centre, which had been developed
by certain affiliates of Mr. Konover prior to its sale to the Company. Mr.
Konover is Chairman of the Board of Directors of the Company. The amount paid by
the Company for the property was $14.5 million; however, as a condition of the
sale, the seller, another of Mr. Konover's affiliates (the"Guarantor"),
guaranteed certain monthly lease payments on unleased space at the center until
March 2003. There were no payments received during 2001 or the first three
months of 2002 pursuant to this lease-guarantee obligation. As of March 2002,
affiliates of Mr. Konover owed approximately $0.5 million under this
lease-guarantee obligation. The Guarantor is disputing these payments. The
Company is actively pursuing the resolution of these disputes.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion should be read with the selected financial data in this
section and the consolidated financial statements and notes in this report.
Certain comparisons between the periods have been made on a percentage basis and
on a weighted-average square-foot basis. Comparisons on a weighted-average
square-foot basis adjust for square-footage added at different times during the
year.
Selected Financial Data
The following information should be read with the consolidated financial
statements and notes thereto included in this report.
Industry analysts generally consider Funds From Operations ("FFO") an
appropriate measure of performance for an equity REIT. FFO means net income
before extraordinary items (computed in accordance with accounting principles
generally accepted in the United States) excluding gains or losses on the sale
of real estate plus real estate depreciation and amortization. Management
believes that FFO, as defined herein, is an appropriate measure of the Company's
operating performance because reductions for depreciation and amortization
charges are not meaningful in evaluating the operating results of its
properties, which have historically been appreciating assets.
"EBITDA" is defined as revenues less operating costs, including general and
administrative expenses, before interest, depreciation and amortization and
unusual items. As a REIT, the Company is generally not subject to Federal income
taxes. Management believes that EBITDA provides a meaningful indicator of
operating performance for the following reasons: (i) it is industry practice to
evaluate the performance of real estate properties based on net operating income
("NOI"), which is generally equivalent to EBITDA; and (ii) both NOI and EBITDA
are unaffected by the debt and equity structure of the property owner.
FFO and EBITDA (i) do not represent cash flow from operations as defined by
generally accepted accounting principles, (ii) are not necessarily indicative of
cash available to fund all cash flow needs and (iii) should not be considered as
an alternative to net income for purposes of evaluating the Company's operating
performance or as an alternative to cash flow as a measure of liquidity.
Other data that management believes is important in understanding trends in
its business and properties are also included in the following table (in
thousands, except per share data).
13
Three months ended
March 31,
----------------------------
2002 2001
----------------------------
Operating Data:
Rental revenues $ 10,648 $ 22,480
Property operating costs 3,200 6,980
----------------------------
Net operating income 7,448 15,500
Depreciation and amortization 2,698 6,113
General and administrative 1,909 1,988
Stock compensation amortization 44 380
Operating loss of sold management business 84 -
Severance and other related costs - 5,013
Interest, net 4,523 7,776
Abandoned transaction costs - 38
Equity in (earnings) losses of unconsolidated
entities (150) 281
----------------------------
Loss before minority interest (1,660) (6,089)
Minority interest 57 164
----------------------------
Net loss (1,603) (5,925)
Preferred dividends - (271)
----------------------------
Loss applicable to common stockholders $ (1,603) $ (6,196)
============================
Basic loss per common share:
Net loss applicable to common
stockholders per share $ (0.05) $ (0.20)
============================
Weighted-average common shares outstanding 31,767 31,174
============================
Diluted loss per common share:
Net loss applicable to common
stockholders per share $ (0.05) $ (0.20)
============================
Weighted-average common shares outstanding
diluted 31,767 31,174
============================
14
Three months ended
March 31,
--------------------------
2002 2001
--------------------------
Other Data:
EBITDA:
Net loss $ (1,603) $ (5,925)
Adjustments:
Interest, net 4,523 7,776
Depreciation and amortization 2,698 6,113
Stock compensation amortization 44 380
Abandoned transaction costs - 38
Equity in (earnings) losses of unconsolidated entities (150) 281
Minority interest (57) (164)
--------------------------
$ 5,455 $ 8,499
==========================
Funds from Operations (a):
Net loss $ (1,603) $ (5,925)
Adjustments:
Real estate depreciation and amortization 2,425 5,812
Share of depreciation in unconsolidated entities 102 71
Minority interest in Operating Partnership (57) (164)
--------------------------
Funds From Operations $ 867 $ (206)
==========================
Weighted-average shares outstanding diluted (b): 35,247 34,798
==========================
Funds Available for Distribution/Reinvestment:
Funds from Operations $ 867 $ (206)
Adjustments:
Stock compensation amortization 44 380
Capitalized tenant allowances (170) (80)
Capitalized leasing costs (168) (455)
Recurring capital expenditures (54) (397)
--------------------------
Funds Available for Distribution/Reinvestment $ 519 $ (758)
==========================
Dividends declared on quarterly earnings $ - $ 4,306
==========================
Dividends declared on quarterly earnings per share $ - $ 0.125
==========================
Cash Flows:
Cash flows provided by (used in)operating activities $ 1,028 $ (78)
Cash flows provided in (used in) investing activities 569 (5,448)
Cash flows used in financing activities (896) (889)
--------------------------
Net increase (decrease) in cash and cash equivalents $ 701 $ (6,415)
==========================
15
Balance at March 31,
2002 2001
------------------------
Balance Sheet Data:
Income-producing properties including net
realizable value of properties held for
sale (before depreciation and amortization) $ 368,157 $ 714,730
Total assets $ 384,639 $ 696,974
Debt on income properties $ 229,212 $ 403,439
Total liabilities $ 240,050 $ 430,687
Minority interest $ 4,952 $ 8,070
Total stockholders' equity $ 139,637 $ 258,217
Portfolio Property Data:
Total GLA (at end of period)/(b)/ 4,636 9,400
Weighted average GLA/(b)/ 4,636 9,400
Number of properties (at end of period)/(b)/ 33 66
Occupancy (at end of period):
Operating - retail 85.7% 90.7%
Operating - office 38.8% N/A
Held for sale/(b)/ 95.3% 15.2%
(a) FFO is presented in accordance with National Association of Real Estate
Investment Trusts (NAREIT) Best Practices.
(b) Excludes the Las Vegas non-operating outlet shopping center for 2002
presentation.
(c) The following table sets forth the computation of the denominator to be
used in calculating the weighted-average shares outstanding based on SFAS
No. 128, "Earnings Per Share."
March 31,
2002 2001
-------------------
Denominator:
Denominator- weighted average common shares 31,767 31,174
Effect of dilutive securities:
Preferred stock 2,264 2,169
Restricted stock 298 475
Operating Partnership units 918 980
-------------------
Dilutive potential common shares 3,480 3,624
-------------------
Denominator- adjusted weighted average shares
and assumed conversions 35,247 34,798
===================
16
Results Of Operations
Three Months Ended March 31, 2002 Compared to the Three Months Ended March 31,
2001
Net Income
The Company reported a net loss applicable to common stockholders of
$1.6 million, or $(0.05) per common share, for the three months ended March 31,
2002. The same period in 2001 reflected net loss applicable to common
stockholders of $6.2 million, or $(0.20) per common share. The elements having a
material impact on the change are discussed below:
.. The Company's NOI decreased by $8.1 million, or 52%, to $7.4 million from
$15.5 million for the same period in 2001. The decrease in NOI is primarily
related to the sale of 33 properties in the second half of 2001. The NOI
for these sold properties during the three months ended March 31, 2001 was
$7.8 million.
.. Depreciation and amortization expense decreased by $3.4 million due to the
sale of 33 properties in the second half of 2001 and the discontinuation of
depreciation of the Company's Mount Pleasant Towne Centre which is
currently held for sale.
.. General and administrative expenses including stock compensation
amortization decreased $0.4 million.
.. Net interest expense decreased by $3.3 million, or 42%, to $4.5 million
from $7.8 million for the same period in 2001 resulting from the decrease
in debt outstanding pursuant to the debt payoff/assumption associated with
the outlet portfolio sale in September 2001.
.. The Company incurred severance and other related costs of $5.0 million
during the three months ended March 31, 2001.
Earnings Before Interest, Taxes, Depreciation, and Amortization and Funds from
Operations
EBITDA was $5.5 million for the three months ended March 31, 2002, a
decrease of $3.0 million or 35%, from $8.5 million for the same period in 2001.
The decrease was primarily due to the decrease of $8.1 million in NOI offset by
a $0.1 million decrease in general and administrative expenses and a decrease in
severance and other related costs of $5.0 million.
Funds from Operations ("FFO") for the three months ended March 31, 2002
increased $1.1 million to $0.9 million. The Company's FFO for the same period in
2001 was $(0.2) million. FFO increased primarily as a result of:
.. $5.0 million in severance and other related costs incurred in 2001,
.. a decrease in net interest expense of $3.3 million,
.. $0.5 million increase in earnings from unconsolidated entities, and
.. a decrease in general and administrative expenses including stock
compensation amortization of $0.4 million offset by an $ 8.1 million
decrease in NOI.
Tenant Income
Base rent decreased 54% to $7.9 million for the three months ended
March 31, 2002 from $17.1 million for the same period in 2001. The decrease in
base rent for the three months ended March 31, 2002 is attributable primarily to
the sale of 33 properties in the second half of 2001. The Company's
weighted-average square feet of gross leasable area in operation was 48% lower
for the three months ended March 31, 2002 compared to the same period in 2001.
Recoveries from tenants decreased for the three months ended March 31,
2002 to $2.2 million compared to $3.8 million in the same period of 2001. 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 increased to $0.47 for the three months ended
March 31, 2002 when compared to $0.40 for the same period in 2001.
17
Other Income
Other income decreased $1.3 million to $0.1 million for the three
months ended March 31, 2002 compared to $1.4 million in the same period of 2001
primarily as a result of lease buyouts of $1.3 million in the first quarter of
2001.
Property Operating Expenses
Property operating costs decreased $3.8 million, or 54%, to $3.2
million in 2002 from $7.0 million in the same period of 2001. The decrease in
operating costs was principally due to the decrease in the weighted-average
square feet in operation in 2002, which decreased 48% to 4.9 million square feet
in 2002 from 9.4 million square feet in 2001. On a weighted-average square-foot
basis, operating expenses decreased to $0.69 per weighted average square foot as
compared to $0.74 per weighted average square foot for the same period in 2001.
General and Administrative Expenses
General and administrative expenses including stock compensation for
the three months ended March 31, 2002 decreased $0.4 million, or 17%, to $2.0
million in 2001 from $2.4 million in the same period of 2001. General and
administrative expenses including stock compensation increased as a percentage
of revenues to 19% for the three months ended March 31, 2002 from 11% in the
same period of 2001. The decrease is primarily related to a decrease in $0.3
million of stock compensation amortization, $0.3 million of rent incurred in the
first quarter of 2001 for the Company's previous corporate office space and $0.1
million incurred in the first quarter of 2001 for the Company's corporate office
move to Millpond Village offset by increases in the cost of the Special
Committee of the Board of Directors and financial consultants evaluating the
strategic alternatives for the Company.
Depreciation and Amortization Expense
Depreciation and amortization decreased to $2.7 million for the three
months ended March 31, 2002 compared to $6.1 million in the same period of 2001.
The decrease is due to the sale of the outlet portfolio and other properties in
the second half of 2001 and the discontinuation of depreciation on the Company's
Mount Pleasant Towne Centre which is held for sale. Depreciation is discontinued
for assets classified as held for sale.
Interest Expense
Interest expense for the three months ended March 31, 2002, net of
interest income of $0.1 million, decreased by $3.3 million, or 42%, to $4.5
million compared to $7.8 million, net of interest income of $0.5 million, in the
first three months of 2001. On a weighted-average basis, in the first three
months of 2002, debt outstanding was $229 million, and the average interest rate
was 7.4%. This compares to $401 million of outstanding debt and a 8.2% average
interest rate in 2001. The reduction of debt is due to the payoff/assumption of
debt associated with the outlet portfolio sale in September 2001. The Company
capitalized $0.6 million of interest costs associated with its development
projects in the first three months of 2001. There was no interest capitalized
during the three months ended March 31, 2002.
Impact of Known Trends and Uncertainties on Results of Operations
Owned Properties
Tenant Uncertainties
The Company has two K-Mart stores in its portfolio totaling 187,000
square feet with base rents ranging from $4.98 to $5.61 per square foot. K-Mart
filed for bankruptcy in 2002. The Company has received a request from K-Mart on
one of the stores for a 20% rent reduction. The Company is currently negotiating
this issue with K-Mart. The Company does not expect this store to be to be
closed, but the Company may see an annual rent reduction of approximately
$100,000 as a result of K-Mart's restructuring.
The Company has five Winn-Dixie stores totaling 244,000 square feet.
Although one of these stores is currently unoccupied, Winn Dixie continues to
pay rent.
18
General and Administrative Expenses and Employee Retention
The Company down-sized its staffing levels during 2001 due to the 33
properties sold during 2001 and due to other internal cost savings efforts. The
Company currently incurs approximately $0.5 million per month in recurring
general and administrative expenses. This amount does not include additional
costs that may be incurred as part of the Company's evaluation of strategic
alternatives and related professional advisor fees or external legal fees
related to current litigation matters. General and administrative expenses will
be directly impacted, up or down, based on the final strategic direction of the
Company and the Company's litigation position.
While the Company continues evaluating strategic alternatives, the
employees are faced with a period of uncertainty. The Company has implemented
certain compensation plans to mitigate the risk of high employee turnover. The
plans include enhanced severance plans and varying levels of bonuses available
to employees on certain dates. The Company continues to evaluate the stability
of its workforce. General and administrative expenses may be significantly
impacted if additional employee incentives are required.
Possibility of Future Write-Downs
The Company continues to investigate possible transactions including
asset sales or a merger or sale of the entity as a whole. The Company follows
the provisions of SFAS No. 121 in determining the impairment, if any, of its
current long-lived assets. The application of these provisions differ between
the sale of individual assets and the sale, merger or business combination of
the Company. Additional write-downs of assets may be required in sales of
individual assets.
Unconsolidated Entities
Tenant Uncertainties
The Company's Park Place venture has a Carmike Theater with
approximately 60,000 square feet of leasable area and a current base rent of
$6.17 per square foot. Carmike declared bankruptcy in August 2000. The Company
agreed to a rent reduction effective March 1, 2001. Carmike continues to operate
at this location. The venture continues to evaluate other re-tenanting
opportunities at this location and maintains certain rights to replace this
tenant under certain conditions.
Liquidity and Capital Resources
Cash Flows
The Company's cash and cash equivalents balance at March 31, 2002 was
$18.3 million. Restricted cash, as reported in the financial statements, as of
such date, was $6.5 million. The restricted cash is an amount the Company was
required to escrow in connection with various loans. The escrows are required to
provide additional loan collateral and to fund real estate taxes, property
insurance, capital improvements and tenant replacement costs.
Net cash provided by operating activities was $1.0 million for the
three months ended March 31, 2002. Net cash provided by investing activities was
$0.6 million in that same period. The primary source and use of these funds
included:
. $1.9 million of net cash provided by the acquisition of the
remaining interest in Sunset KPT Investment, Inc. and related
consolidation of this entity and its subsidiaries, offset by
. $0.6 million invested in income-producing properties,
. $0.3 million invested in or advanced to unconsolidated entities,
and
. $0.4 million of additional restricted escrow deposits.
Net cash used in financing activities was $0.9 million for the three
months ended March 31, 2002. The primary transactions included:
. $0.2 million of distributions to a minority member of a
consolidated joint venture,
. $0.5 million for debt repayments, and
. $0.2 million in deferred financing charges and capital lease
obligation payments.
Financing Activities
19
The Company's policy is to finance its activities with the source of
capital believed by management to be most appropriate and provide the proper
balance of equity and fixed and floating rate debt. Sources may include
undistributed cash flow, borrowings from institutional lenders, equity
issuances, and the issuance of debt securities on a secured or unsecured basis.
In connection with the sale of the outlet portfolio on September 25,
2001, the balances of the REMIC facility and the $75 million permanent credit
facility were paid or assumed. In addition, simultaneous with the sale, the
Company refinanced its $60 million term loan with a $58 million term loan. The
$58 million term loan has an interest rate of LIBOR, with a floor of 4.0% plus
3.20%, and expires in November 2003. The term loan can be extended for an
additional year providing there are no events of default and the Company extends
an interest rate protection agreement for the period of extension.
On January 11, 2000, the Company closed on a $5 million line of credit
with a financial institution. In March, 2000, the available borrowings were
increased by $5 million to $10 million. The line of credit has an interest rate
of LIBOR plus 2.0%. The line of credit balance as of March 31, 2002 was $10
million and matures in May 2002. The line of credit is secured by a community
shopping center in Georgia. The Company is in the process of negotiating an
extension to the term of the line of credit and reducing the principal by $1 to
$2 million.
The Company may enter into additional mortgage indebtedness related to
certain joint venture development projects. The Company's policy is to extend
loans to unconsolidated entities only upon terms similar to those that would be
made by third parties.
Any additional debt financing, including additional lines of credit,
may be secured by mortgages on the properties. Such mortgages may be recourse or
non-recourse or cross-collateralized or may contain cross-default provisions.
The Company does not have a policy limiting the number of mortgages that may be
placed on or the amount of indebtedness that may be secured by, a particular
property; however, current mortgage financing instruments limit additional
indebtedness on such properties.
Current Cash Needs
Capital Expenditures
The Company anticipates capital expenditures needed to maintain its
owned and venture properties will be approximately $2.3 million during 2002. In
addition, the Company plans to remodel the Lake Washington shopping center in
Florida. The Company estimates the remodeling will cost approximately $0.5
million in 2002. The Company's current plan also includes an investment of $0.5
million to $1.0 million in its Mobile Festival center located in Alabama during
2003. The Company anticipates that cash generated from operations will provide
these funds.
Tenant Allowance and Upfit
The Company's plan for normal recurring lease up of space includes an
estimated $5 to $10 per square foot leased for tenant allowance and/or upfit
costs. Annual expenditures depend on leasing activity. The cost per square foot
could be significantly higher depending on the tenant mix and overall market
conditions. If the Company proceeds with its plans at Mobile Festival, tenant
allowance and upfit costs may be significantly higher than normal. The Company
anticipates that cash generated from operations will provide sufficient funds
for these expenditures.
Development Properties
The construction loan on the Millpond Village shopping center in
Raleigh, North Carolina becomes due in December 2002. The ability for the
Company to refinance the entire construction loan balance depends on the status
of the lease up phase of the property. The Company believes leasing activity for
2002 and the cash on hand will enable the Company to refinance this debt or
obtain an extension of the debt along with a manageable level of principal
reduction.
20
The construction loan on the Falls Pointe shopping center in Raleigh,
North Carolina becomes due in December 2002. The Falls Pointe shopping center is
94% leased and the venture is currently in the process of obtaining permanent
financing. The Company anticipates the refinancing will be completed in the
second quarter of 2002 and will generate cash proceeds in excess of the
construction loan. The venture plans to make distributions of this excess cash
in 2002.
Park Place Venture
The debt on the Park Place shopping center in North Carolina becomes
due in August 2002. The venture recently met with the current lender and
requested a one-year extension on the loan. The venture believes that with
continued operations and rent payments from Carmike, a tenant in bankruptcy, and
the successful completion of out parcel sales pledged to be used to reduce debt
principal and normal principal payments through August 2002, it will be able to
refinance the loan. The venture may be required to make a capital call from the
venture partners or request a loan from the Company to complete the refinancing
process. Any cash needed from the Company would be funded from the Company's
available cash on hand. The Company believes it has adequate cash available to
fund the potential needs of this venture, if needed.
WHE Associates, Inc. Litigation
The Company paid damages in the WHE Associates, Inc. litigation of
approximately $1.7 million in April 2002. The damages were paid from current
cash on hand.
Merchant's Festival Line of Credit
The Company currently has $10 million outstanding on its line of credit
secured by the Merchant's Festival shopping center in Georgia. The line of
credit expires in May 2002. The Company is in the process of obtaining an
extension of the line of credit through December 2002. The Company anticipates a
required principal reduction of $1 to $2 million to enable the debt to be
extended. The Company will use current available cash to pay the principal
reduction.
Celebration Shopping Center
The debt on the Company's Celebration shopping center in North Carolina
of $5.2 million becomes due in December 2002. The Company is in the process of
refinancing the debt and does not believe a principal reduction will be
required.
Towne Centre
The Company believes it will sell Towne Centre shopping center located
in Mount Pleasant, South Carolina during 2002. It is expected that the sale of
the property would generate significant net proceeds in 2002.
Variable Rate Debt
The Company has $85.5 million of variable rate debt on its owned
properties. If interest rates rose 100 basis points, it would increase annual
interest costs by approximately $0.9 million. The Company anticipates cash
generated from operations and its current available cash would be sufficient to
cover its debt service costs on variable rate debt.
Long-Term Cash Needs
Term Loan Due 2003
The Company's $58 million term loan expires in November 2003. The
Company can extend the loan for one additional year as long as the Company does
not have any loan defaults and agrees to extend its interest rate protection
agreement on the loan. The Company believes it will be successful in refinancing
this term loan given the expected property operations and its anticipated
remaining cash reserves at the time of refinancing.
21
Las Vegas
The Company continues to market its Las Vegas property. The property
consists of 25.7 acres of land and a 229,959-square-foot center previously
operated as an outlet shopping center. The property is unencumbered and all
sales proceeds would be available to the Company. The current economic
conditions make it difficult to estimate the timing of the sale of this
property.
Lazard Transaction
On August 5, 1998, stockholders approved the Lazard transaction
involving Prometheus Southeast Retail LLC's $200 million purchase of the
Company's Common Stock at $9.50 per share. All funds were used in 1999 and 1998
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 at
its discretion, an amount necessary to achieve such a return, subject to a
maximum payment of 4,500,000 shares or the cash value thereof.
Dividends
The Company's policy is to make a determination regarding its dividend
distributions quarterly following review of the Company's financial results,
capital availability, capital expenditures and improvement needs, strategic
objectives and REIT requirements. The Company's policy is to declare dividends
in amounts at least equal to 90% of the Company's taxable income, which is the
minimum dividend required to maintain REIT status. The Company has not paid any
dividends since April 2001. The Company continually undergoes an evaluation of
its capital needs, including the renovation of certain community shopping
centers and reduction of debt. Consistent with the Company's policy, the Company
will evaluate and determine any dividend payment each quarter based on its
operating results and capital needs. Although the decision is made on a
quarterly basis, the company has no present intention to pay cash dividends
until a long-term strategic direction is established.
Economic Conditions
Inflation has remained relatively low during the past three years with
certain segments of the economy experiencing disinflation, such as apparel
sales. Disinflation in this market segment has slowed the growth of tenant
sales, which adversely affects the Company's revenue due to lower percentage and
overage rents on some properties. Any weakness in the overall retail environment
as it relates to tenant sales volumes may have an impact on the Company's
ability to renew leases at current rental rates or to re-lease space to other
tenants. A decline in sales can effect renewal of tenant leases as well as the
viability of the tenant, which could result in reduced revenue. Percentage and
overage rent are directly impacted by sales volumes and represented 4% and 2% of
the Company's total revenue for the three months ended March 31, 2002 and 2001,
respectively. Continuation of this economic trend may affect the Company's
operating centers' occupancy rates, 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 are
forward-looking statements. Such statements include, in particular, statements
about our plans, strategies and prospects under the headings "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." You can identify forward-looking statements by our use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," "continue," or other similar words. Although we believe that our
plans, 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 competitive
retail properties;
.. the financial condition of our tenants could deteriorate;
.. the costs of our development projects could exceed our original estimates;
22
.. we may not be able to complete development 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;
.. we may not be able to refinance debt on as favorable terms as anticipated;
.. an increase in interest rates would increase our debt service costs;
.. we could lose key executive officers and employees and/or the cost to retain
such personnel may increase;
.. our markets may suffer decline in economic growth or increase in unemployment
rates;
.. the perception of community shopping centers by investors might deteriorate;
.. general and administrative costs, as a percentage of revenue, may increase as
the size of portfolio decreases.
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.
23
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The effects of potential changes in interest rates are discussed below.
Our market risk discussion includes "forward-looking statements" and represents
an estimate of possible changes in future earnings that would occur assuming
hypothetical future movements in interest rates. These disclosures are not
precise indicators of expected future results, but only indicators of reasonably
possible results. As a result, actual future results may differ materially from
those presented. See "Management's Discussion and Analysis of Results of
Operations - Liquidity and Capital Resources," which provides information
related to these financial instruments.
To meet in part long-term liquidity requirements, the Company borrows
funds at a combination of fixed and variable rates. In addition, the Company has
assumed fixed rate debt in connection with acquiring properties. The Company's
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower our overall borrowing costs.
Currently, the Company is party to an interest rate agreement which limits the
interest to a maximum of 9.66% on $58.0 million of variable rate debt. As of
March 31, 2002, the Company had approximately $85.5 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 2002, our interest expense would
have increased or decreased approximately $0.2 million for the three months
ended March 31, 2002. The Company has $5.2 million of fixed rate debt maturing
in 2002.
24
PART II
Item 1. Legal Proceedings
On June 11, 1999, WHE Associates, Inc., purportedly a licensed real
estate broker, filed a lawsuit claiming that the Company is liable to the
plaintiff for a "finder's fee" in the amount of $2 million to $4 million.
Plaintiff sought its purported fee pursuant to both breach of contract and
equitable claims. At a hearing held on January 5, 2000, the plaintiff's motion
for summary judgment was denied as to its contractual claims and granted as to
liability with respect to its equitable claims. The case was tried before a jury
during November 2000. As the trial began, the plaintiff dismissed its contract
claims and proceeded to try only the issue of damages with respect to its
equitable claims. The jury returned a verdict in favor of the plaintiff as to
damages with respect to those claims, and on November 27, 2000, a judgment was
entered by the court in favor of the plaintiff in the amount of $2,756,550. In
an opinion issued on February 1, 2002, the Maryland Court of Special Appeals
reversed the $2,756,550, judgment on plaintiff's detrimental reliance claim
entered by the Circuit Court of Baltimore City on November 27, 2000.
Nevertheless, it also held that there were insufficient grounds for reversal of
the verdict returned on plaintiff's remaining claims of unjust enrichment and
quantum meruit. Although the appellate court left application of its ruling on
the remaining claims to the trial court, it did instruct the trial court that
the two remaining verdicts reflected the same damages and that the trial court
should enter the judgment as to one, not both. On April 4, 2002, the trial court
entered a new, significantly reduced judgment in the amount of $1,275,000, plus
interest in the amount of $407,000. The Company paid the damages on April
4, 2002.
The Company previously formed a joint venture, Atlantic Realty LLC,
with Effell LLC for the development, ownership and operation of Peak Plaza
Shopping Center in Apex, North Carolina and University Shopping Center in
Pembroke, North Carolina. The Company, through KPT Properties, L.P., is the
managing member of the joint venture and Effell is its non-managing member. On
July 17, 2001, Effell, on behalf of Atlantic Realty, filed a lawsuit against the
Company in the Superior Court of Wake County, North Carolina alleging that the
Company breached its fiduciary duty as managing member of the joint venture by
failing to adequately manage, maintain and lease the joint venture's shopping
centers and to sell its outparcels. Atlantic Realty seeks equitable relief and
monetary damages. The Company believes that it has meritorious defenses against
Atlantic Realty's allegations and intends to vigorously defend this litigation.
Discovery in the matter is proceeding. Due to the inherent uncertainties of
litigation, the Company is not able to predict the outcome of this litigation.
At this time, the Company does not expect the result of this litigation to have
a material adverse effect on its business, financial condition and results of
operations.
On March 15, 2002, a purported class action lawsuit was filed on behalf
of all shareholders of the Company not affiliated with any of the defendants in
the Circuit Court for Baltimore City against the Company, certain officers and
directors of the Company and Prometheus Southeast Retail Trust ("Prometheus").
The complaint alleges, among other things, that in connection with a non-binding
offer by Prometheus to acquire all of the remaining shares of the Company that
it does not already own, (1) Prometheus, as majority shareholder of the Company,
is purportedly engaging in self-dealing, acting in bad faith, and breaching its
fiduciary duties toward the Company's other public shareholders, and (2) the
named officers and directors of the Company, who Prometheus allegedly controls,
are breaching fiduciary duties to the Company's other public shareholders. The
plaintiffs seek equitable relief and monetary damages. On April 3, 2002, two
additional similar purported class action lawsuits were filed. The Company
believes that the defendants have meritorious defenses to the plaintiffs'
allegations. The Company intends to vigorously defend this litigation.
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
25
None
Item 6. Exhibits and Reports on Form 8-K
(a) (1) Included with this report is the following exhibit
Exhibit # Title
-----------------------------------------------------------------------
10.1 Form of Indemnification Agreement entered into with
members of the Special Committee of the Board of
Directors
None
(b) Reports on Form 8-K
None
26
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: May 14, 2002
By: /S/Daniel J. Kelly
------------------------------------------------
Executive Vice President and Chief Financial Officer
27