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, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
Commission File Number 1-11998
For the transition period from _______ to ________
KONOVER PROPERTY TRUST, INC.
(Exact name of registrant as specified in its charter)
Maryland 56-1819372
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3434 Kildaire Farm Road
Suite 200
Raleigh, North Carolina (919) 372-3000 27606
(Address of principal executive offices) (Registrant's telephone (Zip Code)
number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 31,298,007 shares of Common
Stock, $0.01 par value, as of May 8, 2001.
KONOVER PROPERTY TRUST, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Consolidated Financial Statements (Unaudited)................. 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 22
Item 2. Changes in Securities and Use of Proceeds..................... 22
Item 3. Defaults Upon Senior Securities............................... 22
Item 4. Submission of Matters to a Vote of Security Holders........... 22
Item 5. Other Information............................................. 22
Item 6. Exhibits and Reports on Form 8-K.............................. 22
2
PART I
Item 1. Consolidated Financial Statements (Unaudited)
Index to Unaudited Consolidated Financial Statements
Page No.
Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000................................. 4
Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000............... 5
Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2001............... 6
Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000............... 7
Notes to Consolidated Financial Statements............................................................. 8
3
KONOVER PROPERTY TRUST, INC.
Consolidated Balance Sheets
March 31, 2001 December 31, 2000
(Unaudited) (Audited)
----------------------------------------------
(in thousands)
Assets
Income producing properties:
Land $ 122,176 $ 122,165
Buildings and improvements 529,736 525,699
Deferred leasing and other charges 43,918 43,304
----------------------------------------------
695,830 691,168
Accumulated depreciation and amortization (103,720) (97,957)
----------------------------------------------
592,110 593,211
Properties under development 23,370 22,576
Properties held for sale 18,900 18,900
Other assets:
Cash and cash equivalents 4,245 10,660
Restricted cash 12,486 11,540
Tenant and other receivables, net allowance of $2,443 and $2,069 at March 31,
2001 and December 31, 2000, respectively 7,474 6,980
Notes receivable 536 663
Investment in and advances to unconsolidated entities 24,694 25,120
Deferred charges and other assets 13,159 13,621
----------------------------------------------
$ 696,974 $ 703,271
==============================================
Liabilities and Stockholders' Equity
Liabilities:
Debt on income properties $ 403,439 $ 399,812
Capital lease obligations 385 437
Accounts payable and other liabilities 26,863 26,451
----------------------------------------------
430,687 426,700
Commitments and contingencies
Minority interests 8,070 8,356
----------------------------------------------
Stockholders' equity:
Convertible preferred stock, Series A, 5,000,000 shares authorized, 780,680
issued and outstanding at March 31, 2001 and December 31, 2000 18,679 18,679
Stock purchase warrants 9 9
Common stock, $0.01 par value, 100,000,000 shares authorized, 31,289,923 and
31,274,845 issued and outstanding at March 31, 2001 and December 31,
2000, respectively 313 313
Additional paid-in capital 285,965 290,059
Accumulated deficit (46,406) (40,481)
Deferred compensation - Restricted stock plan (343) (364)
----------------------------------------------
258,217 268,215
----------------------------------------------
$ 696,974 $ 703,271
==============================================
The accompanying Notes to Consolidated Financial Statements are an integral
part of these balance sheets.
4
KONOVER PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months ended March 31,
2001 2000
-------------------------------------------
Rental operations: (in thousands, except per share data)
Revenues:
Base rents $ 17,123 $ 17,670
Percentage rents 135 139
Property operating cost recoveries 3,777 3,858
Other income 1,445 465
-------------------------------------------
22,480 22,132
-------------------------------------------
Property operating costs:
Common area maintenance 2,554 2,658
Utilities 748 698
Real estate taxes 2,237 2,239
Insurance 335 249
Marketing 61 38
Other 1,045 1,185
-------------------------------------------
6,980 7,067
Depreciation and amortization 6,113 6,223
-------------------------------------------
13,093 13,290
-------------------------------------------
9,387 8,842
Other expenses:
General and administrative 1,988 1,598
Stock compensation amortization 380 751
Severance and other related costs 5,013 -
Interest, net 7,776 6,331
-------------------------------------------
(Loss) income from operations (5,770) 162
Loss on sale of real estate - 559
Abandoned transaction costs 38 13
Equity in losses of unconsolidated entities:
Technology venture operations - 2,432
Real estate operations 281 293
-------------------------------------------
Loss before minority interest (6,089) (3,135)
Minority interest 164 286
-------------------------------------------
Net loss (5,925) (2,849)
Preferred dividends (271) (271)
-------------------------------------------
Net loss applicable to common stockholders $(6,196) $ (3,120)
===========================================
Basic loss applicable to common stockholders per share $ (0.20) $ (0.10)
===========================================
Weighted-average number of common shares outstanding 31,174 30,516
===========================================
Diluted loss applicable to common stockholders per share $ (0.20) $ (0.10)
===========================================
Weighted-average number of diluted shares outstanding 31,174 30,516
===========================================
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, 2001
(Unaudited)
(in thousands except per share data)
Convertible Stock Purchase Additional Paid
Preferred Stock Warrants Common Stock in Capital
----------------------------------------------------------------------
Balance at December 31, 2000 $ 18,679 $ 9 $ 313 $ 290,059
Issuance of 7,573 employee stock purchase plan
shares - - - 28
Issuance of 11,892 restricted shares - - - 60
Repurchase of 4,165 restricted shares - - - (18)
Cancellation of 3,590 restricted shares - - - (21)
Exercise of stock purchase rights for 3,368
shares of restricted stock - - - 23
Stock options issued for services - - - 18
Compensation under stock plans - - - -
Preferred stock dividends ($0.125 per share) - - - (271)
Common stock dividends ($0.125 per share) - - - (3,913)
Net loss - - - -
----------------------------------------------------------------------
Balance at March 31, 2001 $ 18,679 $ 9 $ 313 $ 285,965
======================================================================
Deferred
Compensation
Accumulated Restricted Stock
Deficit Plan Total
-----------------------------------------------------
Balance at December 31, 2000 $ (40,481) $ (364) $ 268,215
Issuance of 7,573 employee stock purchase plan
shares - - 28
Issuance of 11,892 restricted shares - (60) -
Repurchase of 4,165 restricted shares - - (18)
Cancellation of 3,590 restricted shares - 21 -
Exercise of stock purchase rights for 3,368
shares of restricted stock - - 23
Stock options issued for services - - 18
Compensation under stock plans - 60 60
Preferred stock dividends ($0.125 per share) - - (271)
Common stock dividends ($0.125 per share) - - (3,913)
Net loss (5,925) - (5,925)
-----------------------------------------------------
Balance at March 31, 2001 $ (46,406) $ (343) $ 258,217
=====================================================
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,
2001 2000
--------------------------------
(in thousands)
Cash flows from operating activities:
Net loss $ (5,925) $ (2,849)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of debt premium (130) (130)
Minority interest (164) (286)
Depreciation and amortization 6,113 6,223
Stock compensation amortization 380 751
Loss on sale of real estate - 559
Abandoned transaction costs 38 13
Amortization of deferred financing costs 588 729
Technology venture operations - 2,432
Net changes in:
Tenant and other receivables (494) 2,128
Deferred charges and other assets (482) (622)
Accounts payable and other liabilities 424 (4,614)
--------------------------------
Net cash provided by operating activities 348 4,334
--------------------------------
Cash flows from investing activities:
Investment in income-producing properties (5,480) (8,742)
Payments received on notes receivable, net 126 2,518
Distribution from (investment in and advances to) unconsolidated entities 425 (2,549)
Change in restricted cash (945) (775)
--------------------------------
Net cash used in investing activities (5,874) (9,548)
--------------------------------
Cash flows from financing activities:
Proceeds from debt on income properties 4,988 9,054
Repayment of debt on income properties (1,230) (949)
Expenses related to sale of common stock - (37)
Deferred financing charges (8) (1,007)
Other debt repayments (53) (72)
Issuance of shares under employee stock purchase plan 28 49
Dividends paid (4,658) (4,635)
Exercise of stock purchase rights 62 -
Repurchase of common stock (18) (9)
--------------------------------
Net cash (used in) provided by financing activities (889) 2,394
--------------------------------
Net decrease in cash and cash equivalents (6,415) (2,820)
Cash and cash equivalents at beginning of period 10,660 5,366
--------------------------------
Cash and cash equivalents at end of period $ 4,245 $ 2,546
================================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 7,966 $ 7,833
================================
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
7
Notes to Consolidated Financial Statements
March 2001
(Unaudited)
1. Interim Financial Statements
Organization
Konover Property Trust, Inc. (the "Company"), formerly FAC Realty
Trust, Inc., was incorporated on March 31, 1993 as a self-advised and
self-managed real estate investment trust (REIT). The Company is principally
engaged in the acquisition, development, ownership and operation of retail
shopping centers. The Company's revenues are primarily derived under real estate
leases with national, regional and local retailing companies.
On March 31, 2001, the Company's owned properties consisted of:
1. 39 community shopping centers in nine states aggregating approximately
5,483,000 square feet;
2. Nine outlet centers in nine states aggregating approximately 1,977,000
square feet;
3. 16 Vanity Fair (VF) anchored centers in 12 states aggregating approximately
1,424,000 square feet;
4. Two centers with approximately 516,000 square feet that are held for sale;
and
5. One center under development which is scheduled for completion in Fall
2001.
In addition, the Company had investments in:
>> four joint-venture community centers/developments which will consist of
404,000 square feet;
>> a land-development joint venture consisting of approximately 2,700
acres; and
>> third-party management company with 6.9 million square feet under
management or leasing contracts.
The weighted-average square feet of gross leasable area was 9.4 million
square feet for the three months ended March 31, 2001 and 9.5 million square
feet for the same period in 2000.
On December 17, 1997, following shareholder approval, the Company
changed its domicile from the State of Delaware to the State of Maryland. The
reincorporation was accomplished through the merger of FAC Realty, Inc. into its
Maryland subsidiary, Konover Property Trust, Inc. (formerly FAC Realty Trust,
Inc.). Following the reincorporation on December 18, 1997, the Company
reorganized as an umbrella partnership real estate investment trust (an
"UPREIT"). The Company then contributed to KPT Properties, L.P. (formerly FAC
Properties, L.P.), a Delaware limited partnership (the "Operating Partnership"),
all of its assets and liabilities. In exchange for the Company's assets, the
Company received limited partnership interests ("Units") in the Operating
Partnership in an amount and designation that corresponded to the number and
designation of outstanding shares of capital stock of the Company at the time.
The Company is the sole general partner of the Operating Partnership and owns a
97% interest as of March 31, 2001. As additional limited partners are admitted
to the Operating Partnership in exchange for the contribution of properties, the
Company's percentage ownership in the Operating Partnership will decline. As the
Company issues additional shares of capital stock, it will contribute the
proceeds for that capital stock to the Operating Partnership in exchange for a
number of Units equal to the number of shares that the Company issues. The
Company conducts all of its business and owns all of its assets through the
Operating Partnership (either directly or through subsidiaries) such that a Unit
is economically equivalent to a share of the Company's common stock.
An UPREIT may allow the Company to offer Units in the Operating
Partnership in exchange for ownership interests from tax-motivated sellers.
Under certain circumstances, the exchange of Units for a seller's ownership
interest will enable the Operating Partnership to acquire assets while allowing
the seller to defer the tax liability associated with the sale of such assets.
Effectively, this allows the Company to use Units instead of stock to acquire
properties, which provides an advantage over non-UPREIT entities.
The Company has a majority interest in two taxable subsidiaries, Sunset
KPT Investment, Inc. and truefinds.com, Inc. under the laws of Delaware. Sunset
KPT Investment, Inc. has the ability to develop properties, buy and sell
8
properties, provide equity to developers and perform third-party management,
leasing and brokerage services. truefinds.com, Inc. attempted to commercialize
an apparel-sizing technology. The operations of truefinds.com, Inc. have been
suspended. The Company holds substantially all of the non-voting common stock of
these taxable subsidiaries. Substantially all of the voting common stock is held
by an officer of the Company and other related parties. Accordingly, these
entities are accounted for under the equity method for investments.
Additionally, these taxable subsidiaries are taxed as regular corporations.
Basis of Presentation
The accompanying consolidated financial statements include the accounts
of the Company, its subsidiaries and the Operating Partnership. All significant
intercompany balances have been eliminated in consolidation.
Properties that are owned or owned less than 100% and are controlled by
the Operating Partnership have been consolidated. Control is demonstrated by the
ability of the Operating Partnership to manage, directly or indirectly,
day-to-day operations, refinance debt and sell the assets of the entity that
owns the property without the consent of the other owners and the inability of
the other owners to replace the general partner or manager. Investments in
ventures which represent noncontrolling ownership interests or where control is
deemed temporary are accounted for using the equity method of accounting. These
investments are recorded initially at cost and subsequently adjusted for net
equity in income (loss) and cash contributions and distributions.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
the information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(primarily consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended March 31, 2001 are not necessarily indicative of results that may
be expected for a full fiscal year. For further information, refer to the
audited financial statements and accompanying footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Certain amounts from prior years were reclassified to conform with
current-year presentation. These reclassifications had no effect on net loss or
stockholders' equity as previously reported.
2. Significant Accounting Policies
Cash and cash equivalents
The Company considers highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Basic and diluted income per share
Basic earnings per share is calculated by dividing the income
applicable to common stockholders by the weighted-average number of shares
outstanding. Diluted earnings per share reflects the potential dilution that
could occur if options or warrants to purchase common shares were exercised and
preferred stock was converted into common shares ("potential common shares").
For the three months ended March 31, 2001 and March 31, 2000, basic and
dilutive earnings per share are computed based on a weighted average number of
shares of 31,173,502 and 30,515,935, respectively. Potential dilutive common
shares have been excluded from diluted earnings per share for the three months
ended March 31, 2001 and
9
March 31, 2000 because their inclusion would be antidilutive.
Dividends
On March 7, 2001, the Company declared a $0.125 per share quarterly
dividend to shareholders of record as of March 30, 2001. The dividend totaling
$4.3 million was paid on April 10, 2001.
Comprehensive Income
Comprehensive income equals net income for all periods presented.
3. Investment in and Advances to Unconsolidated Entities
A summary of the Company's investments in and advances to
unconsolidated entities at March 31, 2001and December 31, 2000 is as follows
(all investments in unconsolidated entities are accounted for under the equity
method):
March 31, December 31,
Entity Location Ownership 2001 2000
------------------------------------------- ------------------------- -------------- ----------- --------------
Community Center Ventures:
Atlantic Realty LLC (2 community centers) Apex and Pembroke, NC 50% $ 2,626 $ 2,571
Park Place KPT LLC Morrisville, NC 50% 6,615 6,594
Falls Pointe KPT LLC Raleigh, NC 50% 5,999 5,991
Taxable Subsidiaries (see Note 1):
Sunset KPT Investment, Inc. 85% 9,357 9,981
truefinds.com, Inc. 95% 97 (17)
----------- --------------
$ 24,694 $ 25,120
=========== ==============
The development of the properties in the entities listed above is
subject to, among other things, completion of due diligence and various
contingencies, including those inherent in development projects, such as zoning,
leasing and financing. There can be no assurance that such development will be
completed. All debt incurred by unconsolidated ventures is secured by their
respective properties as well as various guarantees of the Company and by the
Company's respective venture partners.
4. Reportable Segments
Management has determined under Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information", that it has four reportable segments: community centers,
outlet centers, VF anchored centers, and centers held for
sale/redevelopment/development (HRD). The outlet segment includes properties
which generate a majority of their revenue from traditional outlet manufacturers
and are destination oriented. The VF anchored segment includes properties that
have less than $1.5 million in total revenue, generate at least 20% of their
revenue from VF and have less than 150,000 square feet. The Company evaluates
performance and allocates resources based on the net operating income (NOI) of
the Company's investment portfolio. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. The Company's reportable segments are business units that
offer retail space to varied tenants and in varied geographical areas.
(All data in thousands)
Community Outlet VF
Centers Centers Centers HRD All others Total
Three months ended March 31, 2001:
NOI $ 8,908 $ 5,586 $ 890 $ 117 $ (1) $ 15,500
Total Assets $ 361,751 $ 183,849 $ 42,264 $ 51,604 $ 57,506 $ 696,974
Three months ended March 31, 2000:
NOI $ 8,803 $ 4,642 $ 968 $ 593 $ 59 $ 15,065
Total Assets $ 358,482 $ 190,265 $ 45,071 $ 54,034 $ 67,878 $ 715,730
10
5. Severance and Other Related Costs
C. Cammack Morton resigned as an officer and director of the Company on
March 6, 2001. In connection with his resignation, the Company and Mr. Morton
entered into a Separation Agreement and General Release. Under the separation
agreement, which was a complete settlement of Mr. Morton's rights under his
former employment agreement, the Company paid Mr. Morton $2.5 million in cash
and released him from the non-compete restrictions in his employment agreement.
In addition, the parties agreed upon Mr. Morton's rights under various equity
awards.
Mr. Morton agreed that his 225,851 vested in-the-money Repurchase
Rights and 300,000 vested out-of-the-money Repurchase Rights would remain
outstanding (and entitled to dividend equivalent rights) until April 1, 2002. He
also agreed to the immediate cancellation of his remaining 391,299 in-the-money
Repurchase Rights in exchange for an additional cash payment of $900,000, of
which the Company has already paid $400,000 and will pay the remaining $500,000
in January 2002. Mr. Morton also forfeited his interest in 140,000
out-of-the-money Repurchase Rights and 210,000 out-of-the-money stock options in
exchange for $35,000 in cash.
Patrick M. Miniutti's employment with the Company terminated on March
6, 2001, and he resigned from the Board of Directors on March 30, 2001. In
complete settlement of all rights under his former employment agreement, Mr.
Miniutti entered into a Separation and Settlement Agreement and General Release
with the Company on March 30, 2001. Pursuant to the agreement, the Company paid
a severance benefit to Mr. Miniutti consisting of $1.5 million in cash (payable
in five equal monthly installments) and the forgiveness of a $125,000 loan. The
Company also released Mr. Miniutti from the non-compete restrictions imposed by
his employment agreement.
In addition, in exchange for the issuance of 259,545 shares of common
stock (the "Settlement Shares"), Mr. Miniutti agreed to the cancellation of all
rights (including dividend equivalent rights) with respect to all equity awards
granted by the Company. The shares are issuable upon the earlier of April 1,
2002, the sale of 50% or more of the Company's voting securities, the
liquidation or winding-up of the Company or the payment by Mr. Miniutti of an
amount equal to the Company's tax withholding obligations on the Settlement
Shares. Under the agreement, Mr. Miniutti is entitled to dividend equivalent
payments with respect to the Settlement Shares (in lieu of his still-outstanding
equity awards) for any record date occurring after March 30, 2001 but before the
issuance of the Settlement Shares.
In addition to the $5.1 million of severance noted above, the Company
recorded a charge of $0.8 million for additional severance and legal fees for
Mr. Morton, Mr. Miniutti and eight other Company employees in the quarter ended
March 31, 2001. The total severance and other related costs of $5.9 million is
partially offset by a $0.9 million reduction in previously amortized stock
compensation for Mr. Morton and Mr. Miniutti.
6. Related-Party Transactions
In 1998, the Company entered into an agreement with Konover &
Associates South to take over the management and leasing of certain properties.
In consideration of the assignment of the management and leasing agreements to
the Company, the Company agreed to pay $1.1 million in 1999, $1.4 million in
2000 and $1.3 million in 2001. The final $1.4 million payment was made in
January 2001. The chairman of the Board of Directors of the Company is an
affiliate of Konover & Associates South.
11
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).
12
Three months ended March 31,
----------------------------
2001 2000
--------------- ------------
Operating Data:
Rental revenues $ 22,480 $ 22,132
Property operating costs 6,980 7,067
--------------- ------------
Net operating income 15,500 15,065
Depreciation and amortization 6,113 6,223
General and administrative 1,988 1,598
Stock compensation amortization 380 751
Severance and other related costs 5,013 -
Interest, net 7,776 6,331
Loss on sale of real estate - 559
Abandoned transaction costs 38 13
Equity in losses of unconsolidated entities:
Technology venture operations - 2,432
Real estate operations 281 293
--------------- ------------
Loss before minority interest (6,089) (3,135)
Minority interest 164 286
--------------- ------------
Net loss (5,925) (2,849)
Preferred dividends (271) (271)
--------------- ------------
Loss applicable to common stockholders $ (6,196) $ (3,120)
=============== ============
Basic loss per common share:
Net loss applicable to common
stockholders per share $ (0.20) $ (0.10)
=============== ============
Weighted-average common shares outstanding 31,174 30,516
=============== ============
Diluted loss per common share:
Net loss applicable to common
stockholders per share $ (0.20) $ (0.10)
============== =============
Weighted-average common shares outstanding
diluted 31,174 30,516
============== =============
13
Three months ended
March 31,
-------------- ----------------
2001 2000
-------------- ----------------
Other Data:
EBITDA:
Net loss $ (5,925) $ (2,849)
Adjustments:
Interest, net 7,776 6,331
Depreciation and amortization 6,113 6,223
Stock compensation amortization 380 751
Loss on sale of real estate - 559
Abandoned transaction costs 38 13
Equity in losses of unconsolidated ventures 281 2,725
Minority interest (164) (286)
-------------- ----------------
$ 8,499 $ 13,467
============== ================
Funds from Operations (a):
Net loss $ (5,925) $ (2,849)
Adjustments:
Real estate depreciation and amortization 5,812 5,954
Loss on sale of real estate - 559
Technology venture operations - 2,432
Share of depreciation in unconsolidated ventures 71 210
Minority interest in Operating Partnership (164) (82)
------------- ----------------
Funds From Operations $ (206) $ 6,224
Severance and other related costs 5,013 -
------------- ----------------
Funds from operations, excluding severance and
other related costs $ 4,807 $ 6,224
============= ================
Weighted-average shares outstanding diluted (b): 34,798 34,304
============= ================
Funds Available for Distribution/Reinvestment:
Funds from Operations $ (206) $ 6,224
Adjustments:
Stock compensation amortization 380 751
Capitalized tenant allowances (80) (230)
Capitalized leasing costs (455) (454)
Recurring capital expenditures (397) (1)
------------- ----------------
Funds Available for Distribution/Reinvestment $ (758) $ 6,290
Severance and other related costs 5,013 -
------------- ----------------
Funds Available for Distribution/ Reinvestment,
excluding severance and other related costs $ 4,255 $ 6,290
============= ================
Dividends declared on quarterly earnings $ 4,306 $ 4,635
============= ================
Dividends declared on quarterly earnings per share $ 0.125 $ 0.125
============= ================
Cash Flows:
Cash flows provided by operating activities $ 348 $ 4,334
Cash flows used in investing activities (5,874) (9,548)
Cash flows (used in) provided by financing (889) 2,394
activities
------------- ----------------
Net decrease in cash and cash equivalents $ (6,415) $ (2,820)
============= ================
(a) FFO is presented in accordance with National Association of Real Estate
Investment Trusts (NAREIT) Best Practices. Prior year FFO has been restated
to conform with current year presentation.
(b) The 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."
14
Balance at March 31,
2001 2000
-------------- -------------
Balance Sheet Data:
Income-producing properties (before
depreciation and amortization) $ 695,830 $ 732,365
Total assets $ 696,974 $ 715,730
Debt on income properties $ 403,439 $ 370,016
Total liabilities $ 430,687 $ 389,337
Minority interest $ 8,070 $ 10,683
Total stockholders' equity $ 258,217 $ 315,710
Portfolio Property Data:
Total GLA (at end of period) 9,400 9,519
Weighted average GLA 9,400 9,519
Number of properties (at end of period) 66 68
Occupancy (at end of period):
Operating 90.7% 92.4%
Held for sale/redevelopment/development 15.2% 68.9%
March 31,
2001 2000
-------------- -------------
Denominator:
Denominator- weighted average common shares 31,174 30,516
Effect of dilutive securities:
Preferred stock 2,169 2,169
Restricted stock 475 446
Operating Partnership units 980 1,173
-------------- -------------
Dilutive potential common shares 3,624 3,788
-------------- -------------
Denominator- adjusted weighted average shares
and assumed conversions 34,798 34,304
============== =============
15
Results Of Operations
Three Months Ended March 31, 2001 Compared to the Three Months Ended March 31,
2000
Net Income
The Company reported a net loss applicable to common stockholders of
$6.2 million, or $(0.20) per common share, for the three months ended March 31,
2001. The same period in 2000 reflected net loss applicable to common
stockholders of $3.1 million, or $(0.10) per common share. The elements having a
material impact on the change are discussed below:
>> The Company's NOI increased by $0.4 million, or 3%, to $15.5 million from
$15.1 million for the same period in 2000. This increase was partly
attributable to a $1.2 million lease buyout in the outlet segment. The
lease buyout was partially offset by a decrease in NOI of $0.6 million at
the Company's Nashville center which is being held for sale, charges for
certain tenant bankruptcies and an NOI decrease related to two properties
sold in 2000.
>> The Company recognized losses from its unconsolidated technology venture of
$2.4 million during the three months ended March 31, 2000. The operations
of this venture ceased in December 2000.
>> Net interest expense increased by $1.5 million, or 24%, to $7.8 million
from $6.3 million for the same period in 2000.
>> The Company incurred severance and other related costs of $5.0 million
during the three months ended March 31, 2001.
>> General and administrative expenses increased $0.4 million primarily
related to the Company's corporate office move.
Earnings Before Interest, Taxes, Depreciation, and Amortization and Funds from
Operations
EBITDA was $8.5 million for the three months ended March 31, 2001, a
decrease of $5.0 million or 37%, from $13.5 million for the same period in 2000.
The decrease was primarily due to severance and other related costs incurred in
2001.
Funds from Operations ("FFO") for the three months ended March 31, 2001
decreased $6.4 million, or 103%, to ($0.2) million. The Company's FFO for the
same period in 2000 was $6.2 million. FFO decreased primarily as a result of:
>> $0.4 million increase in NOI, offset by
>> an increase in net interest expense of $1.5 million,
>> an increase in general and administrative expenses of $0.4 million; and
>> $5.0 million in severance and other related costs incurred in 2001.
Tenant Income
Base rent decreased to $17.1 million for the three months ended March
31, 2001 from $17.7 million for the same period in 2000. This decrease is
primarily due to a decrease in base rent of $0.5 million at the company's
Nashville center and decreases related to the two properties sold in May and
September 2000.
During this same period, the Company's weighted-average square feet of
gross leasable area in operation decreased 1%. Gross leasable area in operation
decreased by 0.1 million square feet primarily related to the sale of two
properties in May and September 2000.
Recoveries from tenants decreased for the three months ended March 31,
2001 to $3.8 million compared to $3.9 million in the same period of 2000. These
recoveries represent contractual reimbursements from tenants of certain common
area maintenance, real estate taxes and insurance costs. On a weighted-average
square-foot basis, recoveries decreased 2% to $0.40 for the three months ended
March 31, 2001 when compared to $0.41 for the same period in 2000. With respect
to approximately 10% of the leased gross leasable area, the Company is obligated
to pay all utilities and operating expenses.
16
Other Income
Other income increased $1.0 million to $1.5 million in 2001 compared to
$0.5 million in 2000 primarily as a result of a lease buy out in the Company's
outlet segment of $1.2 million.
Property Operating Expenses
Property operating costs decreased $0.1 million, or 1%, to $7.0 million
in 2001 from $7.1 million in the same period of 2000. The decrease in operating
costs was principally due to the decrease in the weighted-average square feet in
operation in 2001, which decreased 1% to 9.4 million square feet in 2001 from
9.5 million square feet in 2000. On a weighted-average square-foot basis,
operating expenses remained constant at $0.74 per weighted average square foot.
General and Administrative Expenses
General and administrative expenses for the three months ended March
31, 2001 increased $0.4 million, or 25%, to $2.0 million in 2001 from $1.6
million in 2000. General and administrative expense increased as a percentage of
revenues to 8.8% from 7.2% in 2000. The increase in general and administrative
expenses is primarily due to the Company's corporate office move.
Severance and Other Related Costs
C. Cammack Morton resigned as an officer and director of the Company on
March 6, 2001. In connection with his resignation, the Company and Mr. Morton
entered into a Separation Agreement and General Release. Under the separation
agreement, which was a complete settlement of Mr. Morton's rights under his
former employment agreement, the Company paid Mr. Morton $2.5 million in cash
and released him from the non-compete restrictions in his employment agreement.
In addition, the parties agreed upon Mr. Morton's rights under various equity
awards.
Mr. Morton agreed that his 225,851 vested in-the-money Repurchase
Rights and 300,000 vested out-of-the-money Repurchase Rights would remain
outstanding (and entitled to dividend equivalent rights) only until April 1,
2002. He also agreed to the immediate cancellation of his remaining 391,299
in-the-money Repurchase Rights in exchange for an additional cash payment of
$900,000, of which the Company has already paid $400,000 and will pay the
remaining $500,000 in January 2002. Mr. Morton also forfeited his interest in
140,000 out-of-the-money Repurchase Rights and 210,000 out-of-the-money stock
options in exchange for $35,000 in cash.
Patrick M. Miniutti's employment with the Company terminated on March
6, 2001, and he resigned from the Board of Directors on March 30, 2001. In
complete settlement of all rights under his former employment agreement, Mr.
Miniutti entered into a Separation and Settlement Agreement and General Release
with the Company on March 30, 2001. Pursuant to the agreement, the Company paid
a severance benefit to Mr. Miniutti consisting of $1.5 million in cash (payable
in five equal monthly installments) and the forgiveness of a $125,000 loan. The
Company also released Mr. Miniutti from the non-compete restrictions imposed by
his employment agreement.
In addition, in exchange for the issuance of 259,545 shares of common
stock (the "Settlement Shares"), Mr. Miniutti agreed to the cancellation of all
rights (including dividend equivalent rights) with respect to all equity awards
granted by the Company. The shares are issuable upon the earlier of April 1,
2002, the sale of 50% or more of the Company's voting securities, the
liquidation or winding-up of the Company or the payment by Mr. Miniutti of an
amount equal to the Company's tax withholding obligations on the Settlement
Shares. Under the agreement, Mr. Miniutti is entitled to dividend equivalent
payments with respect to the Settlement Shares (in lieu of his still-outstanding
equity awards) for any record date occurring after March 30, 2001 but before the
issuance of the Settlement Shares.
In addition to the $5.1 million of severance noted above, the Company
recorded a charge of $0.8 million for additional severance and legal fees for
Mr. Morton, Mr. Miniutti and eight other Company employees in the quarter ended
March 31, 2001. The total severance and other related costs of $5.9 million is
partially offset by a $0.9 million reduction in previously amortized stock
compensation for Mr. Morton and Mr. Miniutti.
17
Depreciation
Depreciation decreased to $6.1 million for the three months ended March
31, 2001 compared to $6.2 million in the same period of 2000. On a
weighted-average square-foot basis, depreciation and amortization remained
constant at $0.65.
Interest Expense
Interest expense for the three months ended March 31, 2001, net of
interest income of $0.5 million, increased by $1.5 million, or 24%, to $7.8
million compared to $6.3 million, net of interest income of $2.0 million, in the
first three months of 2000. On a weighted-average basis, in the first three
months of 2001, debt outstanding was $401 million, and the average interest rate
was 8.16%. This compares to $366 million of outstanding debt and a 8.30% average
interest rate in 2000. The Company capitalized $0.6 million of interest costs
associated with its development projects in the first three months of 2001
compared to $1.0 million in the same period of 2000. Additionally, the impact to
interest income is related to the accounting for preferred return income on real
estate venture projects including Towne Centre in Mt. Pleasant, South Carolina,
which is currently wholly owned by the Company.
Liquidity and Capital Resources
Cash Flows
The Company's cash and cash equivalents balance at March 31, 2001 was
$4.2 million. Restricted cash, as reported in the financial statements, as of
such date, was $12.5 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 $0.3 million for the
three months ended March 31, 2001. Net cash used in investing activities was
$5.9 million in that same period. The primary use of these funds included:
>> $5.5 million invested in income-producing properties, and
>> $0.9 million placed in restricted escrows, offset by
>> $0.4 million received from unconsolidated entities, and
>> $0.1 million collected on the repayment of a note receivable.
Net cash used in financing activities was $0.9 million for the three
months ended March 31, 2001. The primary transactions included:
>> $4.7 million for dividends paid,
>> $1.2 million for debt repayments, offset by
>> $5.0 million of net proceeds from debt on income-producing
properties.
Financing Activities
The Company's policy is to finance its activities with the source of
capital believed by management to be most appropriate and provide the proper
balance of equity and fixed and floating rate debt. Sources may include
undistributed cash flow, borrowings from institutional lenders, equity
issuances, and the issuance of debt securities on a secured or unsecured basis.
The Company's philosophy is to use its Funds Available for Distribution as a key
source of financing.
In December 1998, the Company completed a substitution and
recollateralization of its REMIC facility. This $95 million facility was
originally issued in May 1995 and was secured by 18 properties. The substitution
was the first step in an effort by the Company to gain greater flexibility in
the sale of assets that may no longer meet the Company's ongoing strategy. The
REMIC balance as of March 31, 2001 was $85.9 million, which was secured by 23
properties, and matures in June 2002 with the ability to prepay in December
2001.
An acquisition line of credit was put in place in early 1997 for $150
million. The availability under this line was based upon a predetermined formula
on the Net Operating Income of the properties that secure the facility. The $150
18
million line was converted into a $60 million term loan in June 2000 and is
currently secured by nine properties plus an assignment of the excess cash flow
of the REMIC facility referenced above. The loan expires the earlier of December
2002 or the termination of the REMIC facility.
On March 11, 1998, the Company closed on a $75 million, 15-year
permanent credit facility. The loan has an effective rate of 7.73% and is
amortized on a 338-month basis. Eleven properties secure this facility. The
proceeds were used to pay down borrowings outstanding on the $150 million credit
facility. The credit facility balance as of March 31, 2001, was $66.0 million
excluding a $6.3 million unamoritized interest premium.
The Company closed on a $46.4 million 10-year mortgage loan on Mt.
Pleasant's Towne Centre in conjunction with its purchase of its partner's
interest in December 2000. The 30-year amortized loan bears interest at 7.58%.
Certain escrows totaling approximately $2.1 million are in place for leasing,
earnout or tenant allowance. $1.0 million of the cash held in escrow may be
replaced with a letter of credit.
On January 11, 2000, the Company closed on a $5 million credit facility
with a bank. In March 2000, the available borrowings were increased by $5
million to $10 million. The credit facility has an interest rate of LIBOR plus
2%. The balance as of March 31, 2001 was $10 million and matures on August 31,
2001. The credit facility is secured by a community center.
The Company has a $2.5 million line of credit with a financial
institution which expires on September 30, 2001. The line of credit is secured
by one of the Company's income-producing properties and has an interest rate of
prime plus 1/2%. There were no outstanding borrowings on this line of credit at
March 31, 2001.
The Company may enter into additional mortgage indebtedness related to
certain joint venture development projects. Generally, the Company's policy is
to extend loans to unconsolidated entities only upon terms similar to those that
would be made by third parties.
Any additional debt financing, including additional lines of credit,
may be secured by mortgages on the Properties. Such mortgages may be recourse or
non-recourse or cross-collateralized or may contain cross-default provisions.
The Company does not have a policy limiting the number of mortgages that may be
placed on, or the amount of indebtedness that may be secured by, any particular
property; however, current mortgage financing instruments do limit additional
indebtedness on such properties.
Lazard Transaction
On August 5, 1998, stockholders approved the sale of common stock to
Prometheus Southeast Retail, LLC ("PSR"), an affiliate of Lazard Freres & Co.,
LLC, for $200 million. As part of the Lazard transaction, the Company signed a
Contingent Value Rights Agreement with PSR. Under this agreement, if PSR has not
essentially doubled its investment (through stock appreciation and dividends) by
January 1, 2004, the Company will be required to pay PSR, in cash or stock at
its discretion, an amount necessary to achieve such a return, subject to a
maximum payment of 4,500,000 shares or the cash value thereof.
Current and Future Cash Needs
The Company's management anticipates that cash generated from
operations as well as access to capital resources, including additional
borrowings and issuances of debt or equity securities, will provide the
necessary funds for operating expenses, interest expense on outstanding
indebtedness, current and future severance payments, dividends and distributions
in accordance with REIT federal income tax requirements, re-tenanting and lease
renewal tenant improvement costs, capital expenditures to maintain the quality
of its existing centers as well as development projects.
Dividends
On March 7, 2001, the Company declared a $0.125 per share quarterly
dividend to shareholders of record as of March 30, 2001. The dividend totaling
$4.3 million was paid on April 10, 2001.
The Company will make determinations regarding its dividend
distributions quarterly following review of the Company's financial results,
capital availability, 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
19
required to maintain REIT status. Based upon previous losses, the Company will
have approximately $10.6 million of net operating loss carry forwards for income
tax reporting purposes, which could result in no dividend payment requirement to
maintain its REIT status in 2001. Given the Company's desire to maintain a
reasonable funds from operations payout ratio, a reduction in dividend payments
is possible.
Economic Conditions
Inflation has remained relatively low during the past three years with
certain segments of the economy experiencing disinflation, such as apparel
sales. Disinflation in this market segment has slowed the growth of tenant
sales, which adversely affects the Company's revenue due to lower percentage and
overage rents on some properties. Any weakness in the overall retail environment
as it relates to tenant sales volumes may have an impact on the Company's
ability to renew leases at current rental rates or to re-lease space to other
tenants. A decline in sales can effect renewal of tenant leases as well as the
viability of the tenant, which could result in reduced revenue. Percentage and
overage rent are directly impacted by sales volumes and represented 2% and 4% of
the Company's total revenue for the three months ended March 31, 2001 and 2000,
respectively. Continuation of this economic trend may affect the Company's
operating centers' occupancy rate, rental rates, and concessions, if any,
granted on new leases or re-leases of space. This in turn may cause fluctuations
in the cash flow from the operation and performance of the operating centers.
Disclosure Regarding Forward Looking Statements
Some of the information in this Quarterly Report on Form 10-Q may
contain forward-looking statements. Such statements include, in particular,
statements about our plans, strategies and prospects under the headings
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." You can identify forward-looking statements by our use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," "continue," or other similar words. Although we believe that our
plans, projections and expectations reflected in or suggested by such
forward-looking statements are reasonable, we cannot assure you that our plans,
projections or expectations will be achieved. When considering such
forward-looking statements, you should keep in mind the following important
factors that could cause our actual results to differ materially from those
contained in any forward-looking statement:
>> our markets could experience significant increases in development of
retail properties;
>> the financial condition of our tenants could deteriorate;
>> the costs of our development projects could exceed our original
estimates;
>> we may not be able to complete development, acquisition or joint
venture projects as quickly or on as favorable terms as anticipated;
>> we may not be able to lease or release space quickly or on as favorable
terms as old leases;
>> we may have incorrectly assessed the environmental condition of our
properties;
>> an increase in interest rates would increase our debt service costs;
>> we could lose key executive officers; and
>> our markets may suffer decline in economic growth or increase in
unemployment rates.
Given these uncertainties, we caution you not to place undue reliance
on forward-looking statements. We undertake no obligation to disclose the
results of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances or to reflect the occurrence of
unanticipated events.
20
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The effects of potential changes in interest rates are discussed below.
Our market risk discussion includes "forward-looking statements" and represents
an estimate of possible changes in future earnings that would occur assuming
hypothetical future movements in interest rates. These disclosures are not
precise indicators of expected future results, but only indicators of reasonably
possible results. As a result, actual future results may differ materially from
those presented. See "Management's Discussion and Analysis of Results of
Operations - Liquidity and Capital Resources," which provides information
related to these financial instruments.
To meet in part long-term liquidity requirements, the Company borrows
funds at a combination of fixed and variable rates. In addition, the Company has
assumed fixed rate debt in connection with acquiring properties. The Company's
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower our overall borrowing costs.
Currently, the Company is party to an interest rate agreement which limits the
interest to a maximum of 10.66% on $58.9 million of variable rate debt. As of
March 31, 2001, the Company had approximately $89.7 million of variable rate
debt outstanding. If the weighted-average interest rate on this variable rate
debt is 100 basis points higher or lower in 2001, our interest expense would be
increased or decreased approximately $0.2 million for the three months ended
March 31, 2001. The Company has $4.4 million of fixed rate debt maturing in
2001.
21
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
Although the Board of Directors has not yet set a date for the 2001
annual meeting, it is apparent that the meeting will be significantly later than
the date used for last year's annual meeting. Currently, management expects a
meeting date before August 25. As a result of the delayed meeting date, our
bylaws allow a stockholder until May 25 to give advance written notice to the
secretary of the Company of a proposal to be presented in connection with the
annual meeting. We will consider any stockholder proposal received by this date
for inclusion in the 2001 proxy materials.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed an 8-K on March 7, 2001. The filing, dated March 6,
2001, reported under Item 5 the resignation of C. Cammack Morton as an officer
and director of the Company and the appointment of J. Michael Maloney as Interim
President and Chief Executive Officer.
22
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 15, 2001
By: /S/Daniel J. Kelly
--------------------------------------
Daniel J. Kelly, Executive Vice President,
Chief Financial Officer
23