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 September 30, 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)
(919) 372-3000
3434 Kildaire Farm Road (Registrant's telephone
Suite 200 number, including area code)
Raleigh, North Carolina 27606
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 31,435,863 shares of Common
Stock, $0.01 par value, as of November 9, 2001.
KONOVER PROPERTY TRUST, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements (Unaudited) ................................. 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 15
Item 3. Quantitative and Qualitative Disclosures of Market Risk .......... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 27
Item 2. Changes in Securities and Use of Proceeds ........................ 27
Item 3. Defaults Upon Senior Securities .................................. 27
Item 4. Submission of Matters to a Vote of Security Holders .............. 27
Item 5. Other Information ................................................ 27
Item 6. Exhibits and Reports on Form 8-K ................................. 27
Signatures ................................................................ 28
2
PART I
Item 1. Financial Statements (Unaudited)
Index to Unaudited Financial Statements
Page No.
--------
Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 .............................. 4
Consolidated Statements of Operations for the three months ended September 30, 2001 and 2000 ............ 5
Consolidated Statements of Operations for the nine months ended September 30, 2001 and 2000 ............. 6
Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2001 ............. 7
Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 ............. 8
Notes to Consolidated Financial Statements .............................................................. 9
3
KONOVER PROPERTY TRUST, INC.
Consolidated Balance Sheets
September 30, 2001 December 31, 2000
(Unaudited) (Audited)
-------------------------------------------
(in thousands)
Assets
Income producing properties:
Land $ 43,875 $ 122,165
Buildings and improvements 240,498 525,699
Deferred leasing and other charges 14,243 43,304
---------------------------------------
298,616 691,168
Accumulated depreciation and amortization (31,223) (97,957)
--------------------------------------
267,393 593,211
Properties under development 4,472 22,576
Properties held for sale 73,039 18,900
Other assets:
Cash and cash equivalents 14,982 10,660
Restricted cash 7,981 11,540
Tenant and other receivables, net of allowance of $3,135 and $2,069 at
September 30, 2001 and December 31, 2000, respectively 6,922 6,980
Notes receivable 479 663
Investment in and advances to unconsolidated entities 21,718 25,120
Deferred charges and other assets 7,035 13,621
--------------------------------------
$ 404,021 $ 703,271
======================================
Liabilities and Stockholders' Equity
Liabilities:
Debt on income properties $ 229,817 $ 399,812
Capital lease obligations 117 437
Accounts payable and other liabilities 19,575 26,451
--------------------------------------
249,509 426,700
Commitments and contingencies
Minority interests 4,027 8,356
--------------------------------------
Stockholders' equity:
Convertible preferred stock, Series A, 5,000,000 shares authorized, 780,680
issued and outstanding at September 30, 2001 and December 31, 2000,
respectively 18,679 18,679
Stock purchase warrants 9 9
Common stock, $0.01 par value, 100,000,000 shares authorized, 31,440,668 and
31,274,845 issued and outstanding at September 30, 2001 and December 31,
2000, respectively 314 313
Additional paid-in capital 287,282 290,059
Accumulated deficit (155,647) (40,481)
Deferred compensation - Restricted Stock Plan (152) (364)
--------------------------------------
150,485 268,215
--------------------------------------
$ 404,021 $ 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 September 30,
2001 2000
-------------------------------------
Rental operations: (in thousands, except per share data)
Revenues:
Base rents $ 16,061 $ 16,849
Percentage rents 139 327
Property operating cost recoveries 3,945 4,248
Other income 446 260
----------------------------------
20,591 21,684
----------------------------------
Property operating costs:
Common area maintenance 2,828 2,646
Utilities 856 829
Real estate taxes 2,216 2,192
Insurance 381 313
Marketing 44 148
Other 1,083 1,409
----------------------------------
7,408 7,537
Depreciation and amortization 3,153 6,337
----------------------------------
10,561 13,874
----------------------------------
10,030 7,810
----------------------------------
Other expenses:
General and administrative 1,817 1,467
Stock compensation and amortization 113 602
Severance and other related costs 899 -
Interest 8,083 7,353
----------------------------------
Loss from operations (882) (1,612)
(Gain) loss on sale of real estate (476) 1,069
Abandoned transaction costs 24 88
Equity in losses of unconsolidated ventures:
Technology venture - 1,226
Real estate operations 414 566
Minority interest (2) (121)
----------------------------------
Loss before extraordinary item (842) (4,440)
Extraordinary gain on early retirement of debt 775 -
----------------------------------
Net loss (67) (4,440)
Preferred dividends - (271)
----------------------------------
Net loss applicable to common stockholders $ (67) $ (4,711)
==================================
Basic loss applicable to common stockholders per share $ (0.00) $ (0.15)
==================================
Weighted-average number of common shares outstanding 31,332 31,109
==================================
Diluted loss applicable to common stockholders per share $ (0.00) $ (0.15)
==================================
Weighted-average number of diluted shares outstanding 31,332 31,109
==================================
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
5
KONOVER PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
Nine Months ended September 30,
2001 2000
-------------------------------------
Rental operations: in thousands, except per share data)
Revenues:
Base rents $ 50,322 $ 51,770
Percentage rents 669 558
Property operating cost recoveries 11,535 13,048
Other income 2,216 1,536
-------------------------------------
64,742 66,912
-------------------------------------
Property operating costs:
Common area maintenance 8,267 7,707
Utilities 2,253 2,189
Real estate taxes 6,607 6,552
Insurance 1,007 831
Marketing 164 229
Other 3,151 4,063
-------------------------------------
21,449 21,571
Depreciation and amortization 15,686 19,074
-------------------------------------
37,135 40,645
-------------------------------------
27,607 26,267
-------------------------------------
Other expenses:
General and administrative 5,481 4,792
Stock compensation amortization 676 2,252
Severance and other related costs 6,830 -
Interest, net 23,661 20,475
-------------------------------------
Loss from operations (9,041) (1,252)
(Gain) loss on sale of real estate (476) 1,943
Adjustment to carrying value of property 105,110 -
Abandoned transaction costs 70 106
Equity in losses of unconsolidated entities:
Technology venture - 4,865
Real estate operations 5,495 1,384
Minority interest (3,299) (456)
-------------------------------------
Loss before extraordinary item (115,941) (9,094)
Extraordinary gain on early retirement of debt 775 -
-------------------------------------
Net loss (115,166) (9,094)
Preferred dividends (271) (813)
-------------------------------------
Net loss applicable to common stockholders $ (115,437) $ (9,907)
=====================================
Basic loss applicable to common stockholders per share $ (3.69) $ (0.32)
=====================================
Weighted-average number of common shares outstanding 31,247 30,884
=====================================
Diluted loss applicable to common stockholders per share $ (3.69) $ (0.32)
====================================
Weighted-average number of diluted shares outstanding 31,247 30,884
=====================================
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
6
KONOVER PROPERTY TRUST, INC.
Consolidated Statement of Stockholders' Equity
Nine Months ended September 30, 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 8,159 employee stock purchase plan
shares - - - 29
Issuance of 11,892 restricted shares - - - 60
Repurchase of 37,765 restricted shares - - - (120)
Cancellation of 11,786 restricted stock - - - (71)
Exercise of stock purchase rights for 99,158
shares of restricted stock - - - 583
OP units converted into 95,657 common shares - - 1 908
Compensation under stock plans - - - -
Stock options issued for services - - - 18
Preferred stock dividends ($0.125 per share) - - - (271)
Common stock dividends ($0.125 per share) - - - (3,913)
Net loss - - - -
-------------------------------------------------------------
Balance at September 30, 2001 $ 18,679 $ 9 $ 314 $ 287,282
=============================================================
Deferred
Compensation
Accumulated Restricted Stock
Deficit Plan Total
-----------------------------------------
Balance at December 31, 2000 $ (40,481) $ (364) $ 268,215
Issuance of 8,159 employee stock purchase plan
shares - - 29
Issuance of 11,892 restricted shares - (60) -
Repurchase of 37,765 restricted shares - - (120)
Cancellation of 11,786 restricted stock - 71 -
Exercise of stock purchase rights for 99,158
shares of restricted stock - - 583
OP units converted into 95,657 common shares - - 909
Compensation under stock plans - 201 201
Stock options issued for services - - 18
Preferred stock dividends ($0.125 per share) - - (271)
Common stock dividends ($0.125 per share) - - (3,913)
Net loss (115,166) - (115,166)
-----------------------------------------
Balance at September 30, 2001 $(155,647) $ (152) $ 150,485
=========================================
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
7
KONOVER PROPERTY TRUST, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
2001 2000
--------------------------------
(in thousands)
Cash flows from operating activities:
Net loss $ (115,166) $ (9,094)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of debt premium (391) (391)
Minority interest (3,299) (456)
Extraordinary gain on early retirement of debt (775) -
Depreciation and amortization 15,686 19,074
Stock compensation amortization 676 2,252
(Gain) loss on sale of real estate (476) 1,943
Adjustments to carrying value of property 105,110 -
Adjustments to carrying value of other assets held for sale 4,256 -
Abandoned transaction costs 70 106
Amortization of deferred financing costs 1,755 1,772
Technology venture operations - 4,865
Net changes in:
Tenant and other receivables (2,164) 2,830
Deferred charges and other assets (460) (1,471)
Accounts payable and other liabilities (4,245) (1,729)
--------------------------------
Net cash provided by operating activities 577 19,701
--------------------------------
Cash flows from investing activities:
Investment in income-producing properties (9,773) (24,550)
Net proceeds from sale of real estate 185,560 3,553
Payments received on notes receivable, net 184 4,639
Investment in and advances to unconsolidated entities (854) (4,819)
Change in restricted cash 3,560 2,020
--------------------------------
Net cash provided by (used in) investing activities 178,677 (19,157)
--------------------------------
Cash flows from financing activities:
Proceeds from debt on income properties 69,239 24,950
Repayment of debt on income properties (232,843) (4,052)
Expenses related to sale of common stock - (479)
Deferred financing charges (2,076) (3,129)
Other debt repayments (321) (210)
Issuance of shares under employee stock purchase plan 30 98
Dividends paid (8,963) (9,267)
Exercise of stock purchase rights 123 -
Repurchase of common stock (121) (48)
--------------------------------
Net cash (used in) provided by financing activities (174,932) 7,863
--------------------------------
Net increase in cash and cash equivalents 4,322 8,407
Cash and cash equivalents at beginning of period 10,660 8,164
--------------------------------
Cash and cash equivalents at end of period $ 14,982 $ 16,571
================================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 25,600 $ 22,681
================================
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
8
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.
As discussed further in Note 7, the Company sold 32 centers during the
three months ended September 30, 2001. On September 30, 2001, the Company's
owned properties consisted of:
1. 31 community shopping centers in six states aggregating approximately
4,003,000 square feet;
2. 3 centers with approximately 942,000 square feet that are held for sale;
and
3. One center under development with 207,000 square feet which is scheduled
for completion in late 2001.
In addition, the Company had investments in:
. three operating joint-venture community centers with 246,000 square
feet and one joint venture community center under development with
98,000 square feet;
. a land-development joint venture consisting of approximately 2,700
acres; and
. third-party management company with 7.1 million square feet under
management or leasing contracts.
The weighted-average square feet of gross leasable area was 9.3 million
square feet for the nine months ended September 30, 2001 and 9.5 million square
feet for the same period in 2000 (see Note 7).
On December 17, 1997, following shareholder approval, the Company
changed its domicile from the State of Delaware to the State of Maryland. The
reincorporation was accomplished through the merger of FAC Realty, Inc. into its
Maryland subsidiary, Konover Property Trust, Inc. (formerly FAC Realty Trust,
Inc.). Following the reincorporation on December 18, 1997, the Company
reorganized as an umbrella partnership real estate investment trust (an
"UPREIT"). The Company then contributed to KPT Properties, L.P. (formerly FAC
Properties, L.P.), a Delaware limited partnership (the "Operating Partnership"),
all of its assets and liabilities. In exchange for the Company's assets, the
Company received limited partnership interests ("Units") in the Operating
Partnership in an amount and designation that corresponded to the number and
designation of outstanding shares of capital stock of the Company at the time.
The Company is the sole general partner of the Operating Partnership and owns a
97% interest as of September 30, 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., both organized under the
laws of Delaware. 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. truefinds.com, Inc. was
formed to explore e-commerce and other technology related opportunities. All
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 affiliated company of
a director of the Company. Accordingly, these entities are accounted for under
the equity method for investments. Additionally, these taxable subsidiaries are
taxed as regular corporations.
9
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.
Entities that are owned by or that are 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 and
nine-month period ended September 30, 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 (loss) per share
Basic earnings per share is calculated by dividing the income (loss)
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 September 30, 2001 and September 30, 2000,
basic and dilutive earnings per share are computed based on a weighted average
number of shares of 31,332,415 and 31,108,904, respectively. For the nine months
ended September 30, 2001 and September 30, 2000, basic and dilutive earnings per
share are computed based on a weighted average number of shares of 31,247,354
and 30,884,019, respectively. Potential dilutive common shares have been
excluded from diluted earnings per share for the three and nine months ended
September 30, 2001 and September 30, 2000 because their inclusion would be
antidilutive.
10
Dividends
No dividends were declared during the three months ended September 30,
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 September 30, 2001 and December 31, 2000 is as
follows (all investments in unconsolidated entities are accounted for under the
equity method):
September 30, December 31,
Entity Location Ownership 2001 2000
-------------------------------------------------------------------------------------------------------------
Community Center Ventures:
Atlantic Realty LLC (2 community centers) Apex and Pembroke, NC 50% $ 2,720 $ 2,571
Park Place KPT LLC Morrisville, NC 50% 6,442 6,594
Falls Pointe KPT LLC Raleigh, NC 50% 5,629 5,991
Taxable Subsidiaries (see Note 1):
Sunset KPT Investment, Inc. 86.5% 6,920 9,981
truefinds.com, Inc. 95% 7 (17)
--------------------------
$ 21,718 $ 25,120
==========================
The development of the properties in Sunset KPT Investment, Inc. 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
Prior to the Outlet Portfolio sale in September 2001, management
determined under Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information", that it
had four reportable segments: community centers, outlet centers, Vanity Fair
("VF") anchored centers, and centers held for sale. 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. Future
presentations will include community center and held-for-sale only. The Company
now includes properties under development or redevelopment in an "all others"
segment column. Previously, these properties had been grouped into the
held-for-sale segment. The prior-year 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 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.
11
(All data in thousands)
Community Outlet VF Held All
Centers/(1)/ Centers/(1)/ Centers/(1)/ for Sale/(1)/ others /(2)/ Total
Nine months ended September 30, 2001:
NOI $ 18,130 $ - $ - $ 24,835 $ 328 $ 43,293
Total Assets $ 243,002 $ - $ - $ 76,120 $ 84,899 $ 404,021
Nine months ended September 30, 2000:
NOI $ 26,610 $ 14,450 $ 3,024 $ 1,559 $ (302) $ 45,341
Total Assets $ 352,946 $ 187,300 $ 43,841 $ 38,759 $ 96,361 $ 719,207
(1) See Footnotes 6 and 7 for detail on properties held-for-sale and
disposals.
(2) Includes investment in and advances to unconsolidated entities,
properties under development, cash and other corporate assets.
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 immediate
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 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 for the three months
ended March 31, 2001 of $5.9 million is partially offset by a $0.9 million
reduction in previously amortized stock compensation for Mr. Morton and Mr.
Miniutti. Additional severance of $0.9 million was reported in the three months
ended June 30, 2001.
During the quarter ended September 30, 2001, the Company continued its
cost-savings efforts including the elimination of certain positions resulting in
additional terminations of employees. The total severance including cash and
accelerated stock vesting totaled $0.9 million during the quarter ended
September 30, 2001.
12
6. Properties Held for Sale
As part of the Company's ongoing strategic evaluation of its portfolio of
assets, the Company has classified the following properties as held for sale as
of September 30, 2001:
a) The Company's centers in Las Vegas and Nashville are presented as held
for sale consistent with prior periods. These centers are currently
being marketed.
b) The Company has received unsolicited offers on a community center
totaling 426,000 square feet. This community center is classified as
held for sale as of September 30, 2001.
The following summary financial information pertains to the properties held
for sale for the nine months ended September 30 (in thousands):
2001 2000
---- ----
Revenues $ 5,568 $ 6,873
Operating expenses 1,956 1,985
--------------------------------
NOI 3,612 4,888
Deprecation and amortization 1,444 2,164
Interest, net 3,644 3,567
Other - 34
--------------------------------
Net loss $ (1,476) $ (877)
================================
7. Property Disposals
On September 25, 2001, the Company sold a 31-property portfolio for $180
million. The portfolio consists 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, as
discussed above, of community centers 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. All other
references herein to the portfolio include a description of 28 outlet centers
and three community centers. The loss on the sale approximates the adjustment to
the carrying value of these properties which was recognized in the three month
period ended June 30, 2001.
In addition, the Company sold its Shoreside, NC community center on
September 13, 2001 for $7.5 million. The sale resulted in a gain of $0.8
million. This gain is partially offset by $0.3 million of additional costs
related to the sale of a property in 2000.
The following summary financial information pertains to the above-mentioned
properties sold for the nine months ended September 30 (in thousands):
2001 2000
---- ----
Revenues $ 33,832 $ 34,339
Operating expenses 12,431 12,055
------------------- -------------
NOI 21,401 22,284
Deprecation and amortization 5,910 9,229
Interest, net 9,781 9,836
Other 10 10
---------------------------------
Net income $ 5,700 $ 3,209
=================================
13
8. Debt on Income Properties
Debt on income properties consists of the following (in thousands):
September 30, December 31,
2001 2000
-----------------------------------
Mortgage notes secured by 18 properties, interest rates ranging from 7.37% to
10.13 %. Unpaid principal and accrued interest due from October 2001 to July 2018. $ 144,647 $ 156,053
$58,000 term loan, interest at a rate of LIBOR, as defined, plus 3.2% (7.20% at September
30, 2001) (a) 58,000 -
$60,000 term loan, interest at a rate of LIBOR plus 3.25% (a) - 58,925
$75,000 credit facility secured by 11 properties, monthly principal payments range from
approximately $19 to $146 with entire balance due March 2013 and effective interest
rate of 7.73% (b) - 66,139
Class A Mortgage Notes - payable in 85 monthly principal payments ranging from
approximately $140 to $173 determined using various parameters plus weighted average
monthly interest payments at 7.51%. Unpaid principal and accrued interest due June,
2002 (b) - 49,393
Class B Mortgage Notes - monthly interest payments at 7.87% with entire balance due June,
2002 (b) - 20,000
Class C Mortgage Notes - monthly interest payments at 8.40% with entire balance due June,
2002 (b) - 17,000
Construction loans on development properties and expansions, interest at a rate of LIBOR
plus 1.5% (4.14% at September 30, 2001), maturing in December 2002. 17,170 19,211
$10,000 line of credit secured by 1 property - monthly interest payments at LIBOR plus 2%
(4.64% at September 30, 2001), maturing in February 2002. 10,000 6,700
$1,500 line of credit secured by 1 property - monthly interest payments at prime plus 1/2 - -
-----------------------------------
229,817 393,421
Unamortized premium on $75,000 credit facility (b) - 6,391
-----------------------------------
$ 229,817 $ 399,812
===================================
(a) Simultaneous with the closing of the September 25, 2001 outlet
portfolio sale, the Company refinanced its $60,000 term loan with a
$58,000 term loan. The $58,000 term loan matures in November 2003.
(b) The debt was paid or assumed by the buyer of the outlet portfolio (see
Note 7).
9. Extraordinary Gain on Early Retirement of Debt
The Company recognized an extraordinary gain of approximately $0.8
million upon closing the outlet portfolio sale due to the early extinguishment
of certain debt facilities. The gain is related to the recognition of an
unamortized debt premium of $6 million offset by $5.2 million of unamortized
deferred loan fees and other costs.
14
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.
15
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).
Konover Property Trust, Inc.
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
--------------------------------------------------------------------
Operating Data:
Rental revenues $ 20,591 $ 21,684 $ 64,742 $ 66,912
Property operating costs 7,408 7,537 21,449 21,571
--------------------------------------------------------------------
Net operating income 13,183 14,147 43,293 45,341
Depreciation and amortization 3,153 6,337 15,686 19,074
General and administrative 1,817 1,467 5,481 4,792
Stock compensation amortization 113 602 676 2,252
Severance and other related costs 899 - 6,830 -
Interest, net 8,083 7,353 23,661 20,475
(Gain) loss on sale of real estate (476) 1,069 (476) 1,943
Adjustment to carrying value of property - - 105,110 -
Abandoned transaction costs 24 88 70 106
Equity in losses of unconsolidated entities:
Technology venture - 1,226 - 4,865
Real estate operations 414 566 5,495 1,384
Minority interest (2) (121) (3,299) (456)
--------------------------------------------------------------------
Loss before extraordinary item $ (842) $ (4,440) $ (115,941) $ (9,094)
Extraordinary gain on early retirement of debt 775 - 775 -
--------------------------------------------------------------------
Net loss $ (67) $ (4,440) $ (115,166) $ (9,094)
Preferred dividends - (271) (271) (813)
--------------------------------------------------------------------
Loss applicable to common stockholders $ (67) $ (4,711) $ (115,437) $ (9,907)
====================================================================
Basic loss per common share:
Basic loss applicable to common stockholders
per share $ (0.00) $ (0.15) $ (3.69) $ (0.32)
====================================================================
Weighted-average common shares outstanding 31,332 31,109 31,247 30,884
====================================================================
Diluted loss per common share:
Diluted loss income applicable to common
stockholders per share $ (0.00) $ (0.15) $ (3.69) $ (0.32)
====================================================================
Weighted-average common shares outstanding diluted 31,332 31,109 31,247 30,884
====================================================================
16
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Other Data:
EBITDA:
Net loss $ (67) $ (4,440) $(115,166) $ (9,094)
Adjustments:
Interest, net 8,083 7,353 23,661 20,475
Depreciation and amortization 3,153 6,337 15,686 19,074
(Gain) loss on sale of real estate (476) 1,069 (476) 1,943
Stock compensation amortization 113 602 676 2,252
Abandoned transaction costs 24 88 70 106
Extraordinary gain on early retirement of debt (775) - (775) -
Adjustment to carrying value of property - - 105,110 -
Equity in losses of unconsolidated entities 414 1,792 5,495 6,249
Minority interest (2) (121) (3,299) (456)
========= ========= ========= =========
$ 10,467 $ 12,680 $ 30,982 $ 40,549
========= ========= ========= =========
Funds from Operations:
Net loss before extraordinary item $ (842) $ (4,440) $(115,941) $ (9,094)
Adjustments:
Real estate depreciation and amortization 2,858 5,971 14,812 18,161
(Gain) loss on sale of real estate (476) 1,069 (476) 1,943
Technology venture operations - 1,226 - 4,865
Share of depreciation in unconsolidated
ventures 72 197 215 588
Adjustment to carrying value of property - - 105,110 -
Minority interest in Operating Partnership (2) (121) (3,299) (252)
--------- --------- --------- ---------
Funds from Operations 1,610 3,902 421 16,211
Severance and other related costs 899 - 6,830 -
Adjustment to carrying value of other assets
held for sale - - 4,256 -
--------- --------- --------- ---------
Funds from operations, excluding severance and
Held for sale charges $ 2,509 $ 3,902 $ 11,507 $ 16,211
========= ========= ========= =========
Weighted average shares outstanding diluted (a) 34,671 34,708 34,737 34,575
========= ========= ========= =========
Funds Available for Distribution/Reinvestment:
Funds from Operations $ 1,610 $ 3,902 $ 421 $ 16,211
Adjustments:
Stock compensation amortization 113 602 676 2,252
Capitalized leasing costs (488) (489) (1,532) (1,468)
Capitalized tenant allowances (173) (461) (762) (1,591)
Recurring capital expenditures (133) (500) (725) (549)
--------- --------- --------- ---------
Funds Available for Distribution/Reinvestment 929 3,054 (1,922) 14,855
Severance and other related costs 899 - 6,830 -
Adjustment to carrying value of other assets
held for sale - - 4,256 -
--------- --------- --------- ---------
Funds Available for Distribution/Reinvestment,
excluding severance and held-for-sale
charges $ 1,828 $ 3,054 $ 9,164 $ 14,855
========= ========= ========= =========
Dividends declared $ - $ 4,630 $ 4,306 $ 13,897
========= ========= ========= =========
Dividends declared per share $ - $ 0.125 $ 0.125 $ 0.375
========= ========= ========= =========
Cash Flows:
Cash flows (used in) provided by operating
activities $ (3,268) $ 7,339 $ 577 $ 19,701
Cash flows provided by (used in) investing activities 189,167 (994) 178,677 (19,157)
Cash flows (used in) provided by financing
Activities (172,000) (4,329) (174,932) 7,863
--------- --------- --------- ---------
Net increase in cash and cash equivalents $ 13,899 $ 2,016 $ 4,322 $ 8,407
========= ========= ========= =========
(a) The computation of the denominator to be used in calculating the
weighted-average shares outstanding based on SFAS No. 128, "Earnings Per
Share", appears in the table on the following page.
17
Balance at September 30,
2001 2000
---------------------------
Balance Sheet Data:
Income-producing properties, including net
realizable value of properties held for sale
(before depreciation and amortization) $ 371,655 $ 729,671
Total assets $ 404,021 $ 719,207
Debt on income properties $ 229,817 $ 382,549
Total liabilities $ 249,509 $ 408,570
Minority interest $ 4,027 $ 9,180
Total stockholders' equity $ 150,485 $ 301,457
Portfolio Property Data:
Operating Properties:
Owned properties:
Weighted-average GLA 9,296 9,505
Total GLA (at end of period) 4,945 9,400
Number of properties (at end of period) 34 66
Joint venture properties:
Total GLA (at end of period) 246 246
Number of properties (at end of period) 3 3
Development Properties:
Owned properties:
Total GLA (at end of period) 207 -
Number of properties (at end of period) 1 -
Joint venture properties:
Total GLA (at end of period) 98 -
Number of properties (at end of period) 1 -
Managed/Leased:
Total GLA (at end of period) 7,205 6,864
Number of properties (at end of period) 78 71
Total GLA owned/joint venture/managed/leased 12,701 16,510
Total number of properties 117 140
Occupancy:
Operating, exclusive of assets held for sale/
redevelopment/development 91.1% 92.1%
Held for sale/redevelopment/development 48.5% 48.5%
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
--------------------------------------------------------
Denominator:
Denominator-weighted average common shares 31,332 31,109 31,247 30,884
Effect of dilutive securities:
Preferred stock 2,169 2,169 2,169 2,169
Restricted stock 261 450 401 464
Operating Partnership units 909 980 920 1,058
------------- --------------- ------------ -------------
Dilutive potential common shares 3,339 3,599 3,490 3,691
------------- --------------- ------------ -------------
Denominator- adjusted weighted average shares
and assumed conversions 34,671 34,708 34,737 34,575
============= =============== ============ =============
18
Results of Operations
Three Months Ended September 30, 2001 compared to the Three Months Ended
September 30, 2000
Net Loss Applicable to Common Stockholders
The Company reported a net loss applicable to common stockholders of
($0.1) million, or ($0.00) per common share, for the three months ended
September 30, 2001. For the same period in 2000, the Company reported a net loss
applicable to common stockholders of ($4.7) million, or ($0.15) per common
share. The elements having a material impact on the change are discussed below:
. The Company's NOI decreased by $0.9 million, or 6%, to $13.2 million from
$14.1 million for the same period in 2000. This decrease is primarily
related to the sale of the Company's Shoreside, NC community center on
September 13, 2001 and the sale of the Company's outlet portfolio which
consisted of 28 outlet centers and 3 community centers on September 25,
2001.
. The Company recognized losses from unconsolidated ventures of $0.4 million
for the three months ended September 30, 2001. The same period in 2000
reported a loss from unconsolidated ventures of $1.8 million, including a
$1.2 million loss related to a technology venture. Losses from
unconsolidated real estate venture operations for 2001 include three
operating community centers and RMC/Konover Property Trust LLC, a third-
party property-management business.
. Net interest expense increased by $0.7 million, or 9%, to $8.1 million from
$7.4 million for the same period in 2000.
. Depreciation and amortization decreased by $3.1 million due to the
classification of 35 centers as held-for-sale in prior quarters.
. General and administrative expenses including stock compensation
amortization decreased by $0.2 million.
. The Company recognized a $0.5 million net gain on the sale of a community
center during the three months ended September 30, 2001. The Company
incurred losses on the sale of real estate of $1.1 million for the three
months ended September 30, 2000.
Earnings Before Interest, Taxes, Depreciation, and Amortization and Funds from
Operations
EBITDA was $10.5 million for the three months ended September 30,
2001, a decrease of $2.2 million or 17%, from $12.7 million for the same period
in 2000. The decrease was primarily due to decreased NOI of $0.9 million as
compared to 2000, and by a $0.9 million charge for severance and other related
costs during the three months ended September 30, 2001.
Funds from Operations ("FFO") for the three months ended September 30,
2001 decreased $2.3 million, or 59%, to $1.6 million. The Company's FFO for the
same period in 2000 was $3.9 million. FFO decreased primarily as a result of:
. a $0.9 million decrease in NOI,
. a $0.9 million of severance and other related costs in 2001, and
. an increase in net interest expense of $0.7 million.
Tenant Income
Base rent decreased to $16.1 million for the three months ended
September 30, 2001 from $16.8 million for the same period in 2000. The decrease
in base rent for the three months ended September 30, 2001 is attributable
primarily to the sale of the Company's Shoreside, NC community center on
September 13, 2001 and the sale of the Company's outlet portfolio, which
consisted of 28 outlet centers and 3 community centers on September 25, 2001.
The Company's weighted-average square feet of gross leasable area in operation
was 4% lower for the three months ended September 30, 2001 compared to the same
period in 2000.
Recoveries from tenants decreased for the three months ended September
30, 2001 to $3.9 million compared to $4.2 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 to $0.43 for the three
months ended September 30, 2001 when compared to $0.45 for the same period in
2000. With respect to approximately 3% of the leased gross leasable area, the
Company is obligated to pay all utilities and operating expenses.
19
Other Income
Other income increased $0.1 million to $0.4 million for the three months
ended September 30, 2001 compared to $0.3 million in the same period of 2000
primarily as a result of a lease buyout in 2001.
Property Operating Expenses
Property operating costs decreased $0.1 million, or 1%, to $7.4 million for
the three months ended September 30, 2001 from $7.5 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 fell 4% to 9.1
million square feet in 2001 from 9.5 million square feet in 2000. On a
weighted-average square-foot basis, operating expenses increased 2% to $0.81
from $0.79 per weighted average square foot.
General and Administrative Expenses and Stock Compensation
General and administrative expenses including stock compensation for the
three months ended September 30, 2001 decreased $0.2 million, or 10%, to $1.9
million in 2001 from $2.1 million in the same period of 2000. General and
administrative expenses including stock compensation decreased as a percentage
of revenues to 9% for the three months ended September 30, 2001 from 10% in the
same period of 2000. The decrease is primarily related to a reduction in the
number of employees.
Depreciation
Depreciation decreased to $3.2 million for the three months ended September
30, 2001 compared to $6.3 million in the same period of 2000. The decrease is
due primarily to the classification of 35 centers as held for sale in prior
quarters. Depreciation is discontinued for assets classified as held for sale.
Interest Expense
Interest expense for the three months ended September 30, 2001, net of
interest income of $0.4 million, increased by $0.7 million, or 9%, to $8.1
million compared to $7.4 million, net of interest income of $1.4 million, for
the same period in 2000. On a weighted-average basis, in the three months ended
September 30, 2001, debt outstanding was $404.2 million, and the average
interest rate was 8.1%. This compares to $382.8 million of outstanding debt and
a 7.6% average interest rate in 2000. The Company capitalized $0.4 million of
interest costs associated with its development projects in the three months
ended September 30, 2001 and 2000. Additionally, the decrease in interest income
is related to income on the Company's equity investment in real estate venture
projects primarily Towne Centre in Mount Pleasant, South Carolina, which is
wholly owned by the Company for 2001.
20
Results of Operations
Nine Months Ended September 30, 2001 compared to the Nine Months Ended September
30, 2000
Net Loss Applicable to Common Stockholders
The Company reported a net loss applicable to common stockholders of
($115.4) million, or ($3.69) per common share, for the nine months ended
September 30, 2001. The same period in 2000 reflected a net loss applicable to
common stockholders of ($9.9) million, or ($0.32) per common share. The elements
having a material impact on the change are discussed below:
. The Company recognized a charge of $105.1 million as an adjustment to the
carrying value of certain held-for-sale properties in 2001.
. The Company's NOI decreased by $2.0 million, or 4%, to $43.3 million from
$45.3 million for the same period in 2000. This decrease was primarily
attributable to the sale of the Company's Shoreside, NC community center on
September 13, 2001, the sale of the Company's outlet portfolio on September
25, 2001, the sale of a community center in September 2000, and a decline
in third-party management and leasing fee income of $0.8 million.
. The Company recognized losses from unconsolidated ventures of $5.5 million
for the nine months ended September 30, 2001. For the same period in 2000,
the Company reported losses from unconsolidated ventures of $6.2 million
including a $1.4 million loss related to a technology venture. Losses from
unconsolidated real estate venture operations for 2001 include three
operating community centers and RMC/Konover Property Trust LLC.
. Net interest expense increased by $3.2 million, or 16%, to $23.7 million
from $20.5 million for the same period in 2000.
. Depreciation and amortization decreased by $3.4 million due to the
classification of 35 properties as held-for-sale in prior quarters.
. The Company recognized a gain on the sale of real estate of $0.5 million
for the nine months ended September 30, 2001 as compared to a loss on the
sale of real estate of $1.9 million for the same period in 2000.
. General and administrative expenses including stock compensation
amortization decreased $0.9 million.
. The Company incurred severance and other related costs of $6.8 million
during the nine months ended September 30, 2001.
Earnings Before Interest, Taxes, Depreciation, and Amortization and Funds from
Operations
EBITDA was $31.0 million for the nine months ended September 30, 2001,
a decrease of $9.5 million or 23%, from $40.5 million for the same period in
2000. The decrease was primarily due to decreased NOI of $2.0 million as
compared to 2000, and charges for severance and other related costs during the
nine months ended September 30, 2001.
FFO for the nine months ended September 30, 2001 decreased $15.8
million, or 98%, to $0.4 million. The Company's FFO for the same period in 2000
was $16.2 million. FFO decreased primarily as a result of:
. $2.0 million decrease in NOI,
. an increase in equity in losses in unconsolidated ventures of $4.1 million,
exclusive of losses from the e-commerce operations, primarily related to
the impairment of certain assets held by Sunset KPT Investments, Inc.,
. an increase in net interest expense of $3.2 million, and
. $6.8 million of severance and other related costs in 2001 offset by,
. a decrease in general and administrative expenses including stock
compensation amortization of $0.9 million.
Tenant Income
Base rent decreased to $50.3 million for the nine months ended
September 30, 2001 from $51.8 million for the same period in 2000. The decrease
in base rent for the nine months ended September 30, 2001 is attributable
primarily to the sale of the Company's Shoreside, NC community center on
September 13, 2001, and the sale of the Company's outlet portfolio on September
25, 2001 and the sale of a community center in September 2000. The Company's
weighted-average square feet of gross leasable area in operation was 2% lower
for the nine months ended September 30, 2001 compared to the same period in
2000.
Recoveries from tenants decreased for the nine months ended September
30, 2001 to $11.5 million compared to $13.0 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 to $1.24 for the nine
months ended September 30, 2001 compared to $1.37 for the same period in 2000.
With respect to approximately 3% of the leased gross leasable area, the Company
is obligated to pay all utilities and operating
21
expenses.
Other Income
Other income increased $0.7 million to $2.2 million for the nine months
ended September 30, 2001 compared to $1.5 million in the same period of 2000
primarily as a result of a $1.2 million lease buyout in March 2001 offset by
decreased leasing fee income of $0.3 million and decreased management fee income
of $0.4 million.
Property Operating Expenses
Property operating costs decreased $0.2 million, or 1%, to $21.4 million
for the nine months ended September 30, 2001 from $21.6 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 fell 2%
to 9.3 million square feet in 2001 from 9.5 million square feet in 2000. On a
weighted-average square-foot basis, operating expenses increased slightly to
$2.30 in 2001 as compared to $2.27 in 2000.
General and Administrative Expenses and Stock Compensation
General and administrative expenses including stock compensation for the
nine months ended September 30, 2001 decreased $0.9 million, or 13%, to $6.2
million in 2001 from $7.0 million in the same period of 2000. General and
administrative expenses including stock compensation decreased as a percentage
of revenues to 10% for the nine months ended September 30, 2001 from 11% in the
same period of 2000.
Depreciation
Depreciation decreased to $15.7 million for the nine months ended September
30, 2001 compared to $19.1 million in the same period of 2000. The decrease is
due to the classification of 35 centers as held for sale in prior quarters.
Depreciation is discontinued for assets classified as held for sale.
Interest Expense
Interest expense for the nine months ended September 30, 2001, net of
interest income of $1.4 million, increased by $3.2 million, or 16%, to $23.7
million compared to $20.5 million, net of interest income of $5.2 million, in
the first nine months of 2000. On a weighted-average basis, in the first nine
months of 2001, debt outstanding was $404.0 million, and the average interest
rate was 8%. This compares to $315.8 million of outstanding debt and a 8.2%
average interest rate in 2000. The Company capitalized $1.6 million of interest
costs associated with its development projects in the first nine months of 2001
and 2000. In addition, the Company incurred costs related to short-term line of
credit extensions in the nine months ended September 30, 2000. Additionally, the
decrease in interest income is related to income on the Company's equity
investment in real estate venture projects primarily Towne Centre in Mount
Pleasant, South Carolina, which is wholly owned by the Company for 2001.
Liquidity and Capital Resources
Cash Flows
The Company's cash and cash equivalents balance at September 30, 2001 was
$15.0 million. Restricted cash, as reported in the financial statements, as of
such date, was $8.0 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 environmental and engineering
work and recurring replacement costs.
Net cash provided by operating activities was $0.6 million for the nine
months ended September 30, 2001. Net cash provided by investing activities was
$178.7 million in that same period. The primary source and use of these funds
included:
. $9.8 million invested in income-producing properties, primarily in
community centers in North and South Carolina, and
. $0.9 million invested in or advanced to unconsolidated entities offset
by,
. $0.2 million collected on the repayment of notes receivable,
. $185.6 million of net proceeds from sale of real estate, and
. $3.6 million reduction in restricted cash.
Net cash used in financing activities was $174.9 million for the nine
months ended September 30, 2001. The
22
primary transactions included:
. $9.0 million for dividends paid,
. $232.8 million for debt repayments,
. $2.1 million in deferred financing charges offset by,
. $69.2 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 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 matures in November 2003.
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 September 30, 2001 was $10 million
and matures in February 2002. The line of credit is secured by a community
shopping center in Georgia.
The Company has a $1.5 million line of credit with a financial institution
which expires in February 2002. The line of credit is secured by one of the
Company's income-producing properties in North Carolina and has an interest rate
of prime plus 1/2%. There were no outstanding borrowings on this line of credit
at September 30, 2001.
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.
Outlet Portfolio Sale
On September 2001, the Company completed the sale of a portfolio of 28
outlet shopping centers and three community centers in 17 states totaling 4.3
million square feet for $180 million to Chelsea GCA Realty, Inc.
Concurrent with the sale of the outlet assets, the Company refinanced
certain existing debt with a new credit facility of approximately $58 million to
be secured by 14 community centers. The term of the debt is for three years at a
rate of 320 basis points over one month LIBOR, with a LIBOR floor of 4.0%.
The transaction with Chelsea included the assumption and/or paydown of
approximately $165 million in current indebtedness secured by the sold
properties. Net proceeds from the sale of the outlets and the $58 million
financing was approximately $15 million.
Lazard Transaction
On August 5, 1998, stockholders approved the Lazard transaction involving
the Prometheus Southeast Retail, LLC ("PSR") $200 million purchase of the
Company's Common Stock at $9.50 per share. 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.
23
Current and Future Cash Needs
The Company's management anticipates that cash generated from
operations as well as planned property dispositions and access to capital
resources, including additional borrowings, refinancing of existing debt and
issuances of debt or equity securities, will provide the necessary funds for
operating expenses, interest expense and repayment of principal 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
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. 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. The Company has
recently suspended paying dividends. The Company is undergoing 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.
Operating Plan
Over the last three years, the Company's strategy has been to
transition from an outlet center company to a community center company focused
on the southeast. At September 30, 2001, the Company has 4.0 million square feet
of community shopping centers, excluding JV properties and properties held for
sale. Two community shopping centers with total square feet of 305,000 were
under development for most of 2001 and will be operational in the fourth quarter
of 2001. One of these developments is held in a joint venture. The Company has
two other outlet properties with minimal operations and a 2,700-acre tract of
undeveloped land held in a joint venture that the Company is continuing to
market for sale. Additionally, the Company is evaluating offers received to
purchase a 426,000-square foot shopping center.
The Company continues to evaluate its long-term strategic alternatives
to enhance shareholder value, including among other things, the possibility of a
sale, merger or restructuring of the Company to continue as a going concern.
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 a tenant, which could result in reduced revenue. Percentage and
overage rent are directly impacted by sales volumes and represented 2.3% of the
Company's total revenue for the nine months ended September 30, 2001 and 3.3%
for the same period in 2000. 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.
24
Disclosure Regarding Forward Looking Statements
Some of the information in this Quarterly Report on Form 10-Q may
contain forward-looking statements. Such statements include, in particular,
statements about our plans, strategies and prospects under the headings
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." You can identify forward-looking statements by our use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," "continue," or other similar words. Although we believe that our
plans, projections and expectations reflected in or suggested by such
forward-looking statements are reasonable, we cannot assure you that our plans,
projections or expectations will be achieved. When considering such
forward-looking statements, you should keep in mind the following important
factors that could cause our actual results to differ materially from those
contained in any forward-looking statement:
. our markets could suffer unexpected increases in development of retail
properties;
. the financial condition of our tenants could deteriorate;
. the costs of our development projects could exceed our original
estimates;
. we may not be able to complete development, acquisition or joint
venture projects as quickly or on as favorable terms as anticipated;
. we may not be able to lease or release space quickly or on as favorable
terms as old leases;
. we may have incorrectly assessed the environmental condition of our
properties;
. an increase in interest rates would increase our debt service costs;
. we could lose key executive officers; and
. our markets may suffer decline in economic growth or increase in
unemployment rates.
Given these uncertainties, we caution you not to place undue reliance
on forward-looking statements. We undertake no obligation to release publicly
the results of any revisions to these forward-looking statements that may be
made to reflect any future events or circumstances or to reflect the occurrence
of unanticipated events.
25
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The effects of potential changes in interest rates are discussed below.
Our market risk discussion includes "forward-looking statements" and represents
an estimate of possible changes in future earnings that would occur assuming
hypothetical future movements in interest rates. These disclosures are not
precise indicators of expected future results, but only indicators of reasonably
possible results. As a result, actual future may differ materially from those
presented. See "Management's Discussion and Analysis of Results of Operations -
Liquidity and Capital Resources," which provides information related to these
financial instruments.
To meet in part 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 cap related to the September
2001 $58 million term loan. The agreement, which required a $0.1 million payment
out of the loan proceeds, caps the variable rate term loan at 9.66% for the
entire term of the loan. The agreement also set an interest rate floor at 7.20%.
As of September 30, 2001, the Company had approximately $85.2 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 $0.6 million for the nine
months ended September 30, 2001. The Company has no fixed rate debt maturing in
2001.
26
PART II
Item 1. Legal Proceedings
On July 17, 2001, Atlantic Realty LLC, by and through the non-managing
member, Effell LLC, filed a lawsuit alleging that the Company, as plaintiff's
managing member, breached its fiduciary duty in connection with the management
of certain properties. The Company filed a motion to dismiss and answer on
October 8, 2001. A hearing on the Company's motion to dismiss has not yet been
scheduled.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of shareholders on August 22, 2001. At that
meeting, our board of directors was elected. Information about the votes casts
for each nominee is set forth below:
Nominee Votes Cast For Against Abstain
---------------------------------------------------------------------------------------------------------
William D. Eberle 30,292,825 - 265,632
Carol R. Goldberg 30,290,428 - 268,029
Simon Konover 30,295,912 - 262,545
J. Michael Maloney 29,960,622 - 597,835
L. Glenn Orr, Jr. 30,265,433 - 293,024
Robert A. Ross 30,269,570 - 288,887
Philip A. Schonberger 30,268,719 - 289,738
Mark S. Ticotin 30,000,263 - 558,194
Andrew E. Zobler 30,266,962 - 291,495
---------------------------------------------------------------------------------------------------------
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 The Agreement for Purchase and Sale, dated July 12, 2001, by and
between Konover Property Trust, Inc. as seller and Chelsea GCA
Realty, Inc. as buyer (1).
10.2 Loan Agreement dated September 25, 2001, between KPT Communities
LLC as borrower and CDC Mortgage Capital Inc. as lender.
10.3 Agreement for Sale dated July 6, 2001, by and between KPT
Properties, L.P. as seller and Home Depot USA, Inc. as buyer.
10.4 Separation Settlement Agreement dated September 17, 2001 by and
between Christopher G. Gavrelis and Konover Property Trust, Inc.
(1) Incorporated herein by reference from the Company's current report
on Form 8-K dated September 25, 2001.
(b) Reports on Form 8-K
The Company filed an 8-K on August 14, 2001. The filing reported under
Item 9 that certain dividend information that had been unintentionally
disclosed should not be relied upon.
The Company filed an 8-K on October 10, 2001. The report dated
September 25, 2001, reported under Item 2 the disposal of 31 centers to
Chelsea GCA Realty, Inc. The Company also reported under Item 5 the
refinancing of certain properties. The report included proforma
financial information.
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Signatures
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KONOVER PROPERTY TRUST, INC.
Date: November 14, 2001
By: /S/Daniel J. Kelly
----------------------------------------
Daniel J. Kelly, Sr. Vice President,
Chief Financial Officer
28