UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File No. 0001042810
EQUITY ONE, INC.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
1600 N.E. MIAMI GARDENS DRIVE, SUITE 200
N. MIAMI BEACH, FLORIDA 33179
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(Address of Principal Executive Offices)
(305) 947-1664
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(Issuer's Telephone Number, Including Area Code)
MARYLAND 52-1794271
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Act of 1934 during the past 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:
As of the close of business on August 12, 1999, 10,908,320 shares of the
Company's common stock, par value $0.01 per share, were issued and outstanding.
<PAGE>
EQUITY ONE, INC.
INDEX TO FORM 10-Q
QUARTER ENDED JUNE 30, 1999
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets- As of June 30, 1999
(unaudited) and December 31, 1998
Condensed Consolidated Statements of Operations-
For the three months and six months ended June 30, 1999 and 1998
(unaudited)
Condensed Consolidated Statements of Comprehensive Income- For the
three months and six months ended June 30, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Stockholders' Equity- For the
three months and six months ended June 30, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows- For the six months
ended June 30, 1999 and 1998 (unaudited)
Notes to the Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Rental Properties:
Land, building and equipment............................. $ 152,313 $ 134,330
Building improvements.................................... 6,644 6,580
Land held for development................................ 2,769 2,680
Construction in progress................................. 10,662 4,497
--------- ---------
172,388 148,087
Accumulated depreciation................................. (11,059) (9,464)
--------- ---------
Rental properties, net................................. 161,329 138,623
Cash and cash equivalents................................... 2,414 1,594
Restricted cash............................................. -- 6,780
Accounts and other receivables, net......................... 993 1,142
Securities available for sale............................... 1,647 1,633
Deposits.................................................... 1,552 529
Prepaid and other assets.................................... 1,173 1,454
Deferred expenses, net...................................... 1,242 1,200
--------- ---------
Total assets......................................... $ 170,350 $ 152,955
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................................. $ 72,701 $ 67,145
Note payable............................................ 6,569 560
Accounts payable and accrued expenses................... 2,196 868
Put option liability.................................... 2,127 2,127
Tenants' security deposits.............................. 983 885
Deferred rental income.................................. 97 152
Minority interest in equity of consolidated subsidiary.. 988 --
--------- ---------
Total liabilities................................... 85,661 71,737
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock............................................ 108 102
Additional paid-in capital.............................. 85,196 81,214
Accumulated other comprehensive income.................. (70) (98)
Notes receivable from stock sales....................... (545) --
--------- ---------
Total stockholders' equity.......................... 84,689 81,218
--------- ---------
Total liabilities and stockholders' equity................. $ 170,350 $ 152,955
========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE>
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Rental income.............................. $ 6,256 $ 5,845 $12,241 $11,167
Investment revenue......................... 72 92 182 164
------- ------- ------- -------
Total revenues........................... 6,328 5,937 12,423 11,331
------- ------- ------- -------
COSTS AND EXPENSES:
Operating expenses........................ 1,629 1,477 3,220 2,854
Depreciation and amortization............. 823 697 1,620 1,355
Interest.................................. 1,039 1,412 2,111 2,897
General and administrative expenses....... 459 296 871 530
Put option expense........................ -- 1,320 -- 1,320
Minority interest in earnings of
consolidated subsidiary................... 24 -- 47 --
------- ------- ------- -------
Total costs and expenses................ 3,974 5,202 7,869 8,956
------- ------- ------- -------
Net income................................... $ 2,354 $ 735 $ 4,554 $ 2,375
======= ======= ======= =======
EARNINGS PER SHARE:
Basic earnings per share..................... $ 0.22 $ 0.09 $ 0.44 $ 0.31
======= ======= ======= =======
Number of shares used in computing basic
earnings per share........................ 10,610 8,482 10,455 7,699
======= ======= ======= =======
Diluted earnings per share................... $ 0.22 $ 0.08 $ 0.43 $ 0.30
======= ======= ======= =======
Number of shares used in computing diluted
earnings per share........................ 10,784 8,678 10,628 7,896
======= ======= ======= =======
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS)
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1999 1998 1999 1998
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income............................... $2,354 $ 735 $4,554 $2,375
Other comprehensive income:
Net unrealized holding gain on
securities available for sale...... 69 -- 28 --
------ ------ ------ ------
Comprehensive income..................... $2,423 $ 735 $4,582 $2,375
====== ====== ====== ======
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE>
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NOTES ACCUMULATED
ADDITIONAL RECEIVABLE OTHER TOTAL
COMMON PAID-IN FROM STOCK COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK CAPITAL SALES INCOME EARNINGS EQUITY
------ ---------- ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
Balance, April 1, 1999................ $ 105 $ 82,785 $ (139) $ 82,751
Net income......................... $ 2,354 2,354
Net unrealized holding gain on
securities available for sale.... 69 69
Issuance of common stock........... 3 2,761 $ (545) 2,219
Dividends paid..................... (350) (2,354) (2,704)
-------- -------- -------- -------- ------ --------
Balance, June 30, 1999 (Unaudited).... $ 108 $ 85,196 $ (545) $ (70) $ $ 84,689
======== ======== ======== ======== ====== ========
THREE MONTHS ENDED JUNE 30, 1998
Balance, April 1, 1998................ $ 69 $ 54,949 $ (1,525) $ 53,493
Net income......................... $ 735 735
Issuance of common stock........... 33 34,088 34,121
Transaction costs.................. (1,077) (1,077)
Put option liability............... (807) (807)
Property distributed............... (4,758) 1,525 (3,233)
Dividends paid..................... (1,392) (735) (2,127)
-------- -------- -------- -------- ------ --------
Balance, June 30, 1998 (Unaudited).... $ 102 $ 81,003 $ -- $ -- $ -- $ 81,105
-------- -------- -------- -------- ------ --------
SIX MONTHS ENDED JUNE 30, 1999
Balance, January 1, 1999 $ 102 $ 81,214 $ (98) $ 81,218
Net income......................... $ 4,554 4,554
Net unrealized holding gain on
securities available for sale.... 28 28
Issuance of common stock........... 6 4,752 $ (545) 4,213
Dividends paid..................... (770) (4,554) (5,324)
-------- -------- -------- -------- ------ --------
Balance, June 30, 1999 (Unaudited).... $ 108 $ 85,196 $ (545) $ (70) $ -- $ 84,689
-------- -------- -------- -------- ------ --------
SIX MONTHS ENDED JUNE 30, 1998
Balance, January 1, 1998.............. $ 69 $ 55,036 $ (1,525) $ 53,580
Net income......................... $ 2,375 2,375
Issuance of common stock........... 33 34,088 34,121
Transaction costs.................. (1,077) (1,077)
Put option liability............... (807) (807)
Property distributed............... (4,758) 1,525 (3,233)
Dividends paid..................... (1,479) (2,375) (3,854)
-------- -------- -------- -------- ------ --------
Balance, June 30, 1998 (Unaudited).... $ 102 $ 81,003 $ -- $ -- $ -- $ 81,105
======== ======== ======== ======== ====== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
6
<PAGE>
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.............................................................. $ 4,554 $ 2,375
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 1,667 1,504
Provision for losses on accounts receivable........................... 16 38
Put option liability.................................................. -- 1,320
Minority interest in earnings of consolidated subsidiary.............. 47 --
Changes in assets and liabilities:
Restricted cash..................................................... 6,780 --
Accounts and other receivables...................................... 133 (344)
Deposits............................................................ (985) (336)
Prepaid and other assets............................................ 217 (129)
Accounts payable and accrued expenses............................... 1,328 647
Tenants' security deposits.......................................... 98 129
Deferred rental income.............................................. (55) 15
Due from related parties............................................ 39 40
-------- --------
Net cash provided by operating activities........................... 13,839 5,259
-------- --------
INVESTING ACTIVITIES:
Acquisition of land held for development................................ (89) --
Acquisition of rental property.......................................... (14,183) (21,080)
Improvements to rental property......................................... (64) (1,971)
Construction costs incurred............................................. (6,165) (1,187)
Purchases of securities................................................. (6,709) (840)
Sales and prepayments of securities..................................... 6,723 11
Change in deposits for acquisition of rental property................... (38) 450
-------- --------
Net cash used in investing activities............................... (20,525) (24,617)
-------- --------
FINANCING ACTIVITIES:
Repayments of mortgage notes payable.................................... (2,280) (15,646)
Borrowings under mortgage notes payable................................. 5,001 7,700
Borrowings under note payable........................................... 6,009 --
Cash dividends paid to stockholders..................................... (5,324) (3,854)
Stock subscription and issuance......................................... 4,213 34,121
Deferred financing expenses, net........................................ (89) (204)
Change in minority interest............................................. (24) --
-------- --------
Net cash provided by financing activities........................... 7,506 22,117
-------- --------
Net Increase in Cash and Cash Equivalents.................................. 820 2,759
Cash and Cash Equivalents, Beginning of Period............................. 1,594 2,598
-------- --------
Cash and Cash Equivalents, End of Period................................... $ 2,414 $ 5,357
======== ========
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest, net of amount capitalized.................. $2,045 $2,637
====== ======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized holding gain on securities available for sale.... $ 28 --
====== ======
Accrued stock issuance cost........................................... $ 490
======
Common stock issued for notes receivable.............................. $ 545
======
Put option liability charged to stockholders' equity................. $ 807
======
Property and notes receivable distributed to shareholders............. $4,758
======
Acquisition of rental property........................................ $3,800
Change in minority interest........................................... 965
-------
Assumption of mortgage note payable................................... $2,835
=======
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
8
<PAGE>
EQUITY ONE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
AND DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Equity
One, Inc. and Subsidiaries (collectively, the "Company") as of June
1999 and 1998 and for the six months and three months then ended, have
been prepared by the Company which is responsible for their integrity
and objectivity and should be read in conjunction with the Company's
December 31, 1998 annual consolidated financial statements and the
related notes.
To the best of management's knowledge and belief, the statements and
related information were prepared in conformity with generally accepted
accounting principles and are based on recorded transactions and
management's best estimates and judgments. The interim results of
operations are not necessarily indicative of the results which may be
expected for the full year.
The condensed consolidated financial statements as of June 30, 1999 and
1998 and for the six months and three months then ended, include, in
the opinion of management, all adjustments (which are normal recurring
adjustments) necessary for a fair presentation of the financial
condition and results of operations of the Company for the periods
indicated.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies applied in the preparation of the
condensed consolidated financial statements are identical to those
applied in the preparation of the most recent annual consolidated
financial statements.
PUT OPTION EXPENSE - The Company has granted a former stockholder an
option to put 293,430 shares of common stock issuable upon exercise of
the Company's Series C Warrants to the Company at a price of $15.50 per
share or to put the Series C Warrants to the Company at a price of
$7.25 per Warrant, which equals the put option price of $15.50 per
Warrant less the Series C Warrant exercise price of $8.25 per Warrant.
The put option is exercisable in whole or in part by the former
stockholder from December 1, 1999 until December 15, 1999. The put
option would involve a maximum net expenditure of $2.1 million. During
1998, the Company recognized $1.3 million as an expense and
approximately $807 as a reduction of paid-in capital related to the
Company's initial public offering.
3. EARNINGS PER SHARE
Basic earnings per share is computed by dividing earnings attributable
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the Company.
9
<PAGE>
4. MINORITY INTEREST
On January 1, 1999, a wholly owned subsidiary of the Company, Equity
One (Walden Woods) Inc., entered into a limited partnership as a
general partner. The limited partners contributed an income producing
shopping center (Walden Woods Village) and the Company contributed
93,656 shares of common stock to the limited partnership at an agreed
upon price of $10.30 per share. Based on this per share price and the
net value of property contributed by the limited partners, each of the
partners received 93,656 limited partnership units. The Company and the
limited partners have entered into a Redemption Agreement whereby the
limited partners can request that the Company purchase back all or part
of the common stock at $10.30 per share no earlier than two years nor
later than fifteen years after the exchange date of January 1, 1999. As
a result of the Redemption Agreement, the minority interest has been
presented as a liability. In addition, under the terms of the limited
partnership agreement, the minority interest does not have an interest
in the common stock of the Company except to the extent of dividends
declared on such common stock. Accordingly, a preference in earnings
has been allocated to the minority interest to the extent of the
dividends declared. The shares of the Company held by the consolidated
limited partnership are not considered outstanding in the condensed
consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following should be read in conjunction with the Company's
Condensed Consolidated Financial Statements, including the notes thereto, which
are included elsewhere herein.
(1) RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1998
Total revenues increased by approximately $391,000 or 6.6%, to
$6.3 million for the three months ended June 30, 1999 from $5.9 million for the
comparable period of 1998. The increase resulted primarily from the Company's
acquisition of: (i) a supermarket anchored shopping center located in Fort
Myers, Florida in May 1998 ("Summerlin Square"); (ii) a drug store anchored
shopping center located in Jacksonville, Florida in June 1998 ("Beauclerc
Village"); (iii) a twenty-one unit apartment complex located on Miami Beach,
Florida in August 1998 ("Montclair Apartments"); (iv) a free-standing restaurant
located in Miami Beach, Florida in May 1998 ("El Novillo"); (v) a supermarket
anchored shopping center located in Plant City, Florida in January 1999 ("Walden
Woods"); (vi) a supermarket anchored shopping center located in Orlando, Florida
in January 1999 ("Park Promenade"); and (vii) a K-Mart lease and building
located in the Company's Lantana Village Shopping Center in Lantana, Florida in
April 1999. The Company sold Parker Town Shopping Center located in Plano, Texas
in October 1998. Lease termination fees of approximately $406,000 were included
in second quarter 1998, whereas, only a nominal amount was included in second
quarter 1999.
Operating expenses increased by approximately $152,000, or 10.3% to
$1.6 million for the three months ended June 30, 1999 from $1.5 million in the
comparable period of 1998. The primary cause for the increase was the net
addition of properties to the Company's portfolio reported above.
Depreciation and amortization expense increased by approximately
$126,000, or 18.1%, to $823,000 for the three months ended June 30, 1999, from
$697,000 for the comparable period of 1998. The increase resulted primarily from
the net addition of properties to the Company's portfolio reported above.
10
<PAGE>
Interest expense decreased by approximately $373,000, or 26.4%, to $1.0
million for the three months ended June 30, 1999 from $1.4 million for the
comparable period of 1998. The decrease was caused primarily from the Company's
use of proceeds from the IPO to reduce mortgage indebtedness and a substantial
increase in development and construction activity has resulted in the
capitalization of interest.
General and administrative expenses increased by $163,000, or 55.1%, to
$459,000 for the three months ended June 30, 1999 from $296,000, for the
comparable period of 1998. The increased resulted primarily from an increase in
compensation cost of approximately $67,000, an increase of expenses related to
the Company becoming publicly traded of approximately $143,000 (including
printing costs of $76,000) and a decline in directors' fees of $66,000.
During the three months ended June 30, 1998, the Company recognized a
one-time expense of $1.3 million relating to the put option granted to a former
stockholder of the Company in connection with the Company's offering of common
stock in May, 1998. Excluding this put option expense, net income would have
been approximately $2.1 million for the three months ended June 30, 1998 and
basic and diluted earnings per share would have been $0.24 and $0.24 for the
three months ended June 30, 1998, respectively.
As a result of the foregoing, net income increased by approximately
$1.6 million, or 220.3%, to $2.4 million for the three months ended June 30,
1999, compared to $735,000 for the comparable period of 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Total revenues increased by approximately $1.1 million, or 9.6%, to
$12.4 million for the six months ended June 30, 1999 from $11.3 million for the
comparable period of 1998. The increase resulted primarily from the net
acquisitions of properties described in the second quarter 1999 narrative above,
adjusted for approximately $436,000 of lease termination fees recognized in 1998
with only a nominal amount reported in 1999.
Operating expenses increased by approximately $366,000, or 12.8% to
$3.2 million for the six months ended June 30, 1999 from $2.9 million in the
comparable period of 1998. The increase is primarily the result of the net
addition of properties to the Company's portfolio reported above.
Depreciation and amortization expense increased by approximately
$265,000, or 19.6%, to $1.6 million for the six months ended June 30, 1999, from
$1.3 for the comparable period of 1998. The increase resulted primarily from the
net addition of properties to the Company's portfolio reported above.
Interest expense decreased by approximately $786,000, or 27.1%, to $2.1
million for the six months ended June 30, 1999, from $2.9 million for the
comparable period of 1998. The decrease was caused primarily from the Company's
use of proceeds from its IPO to reduce mortgage indebtedness and a substantial
increase in development and construction activities has resulted in the
capitalization of interest.
General and administrative expenses increased by $341,000, or 64.3%, to
$871,000 for the six months ended June 30, 1999 from $530,000 for the comparable
period of 1998. The increased resulted primarily from an increase in
compensation costs of approximately $145,000, an increase in expense relating to
the Company becoming a public company of approximately $260,000 (including
printing costs of $78,000) and a decline in directors' fees of $82,000.
During the six months ended June 30, 1998, the Company recognized a one
time expense of $1.3 million relating to the put option granted to a former
stockholder of the Company in connection with the Company's offering of Common
Stock in May, 1998. Excluding this put option expense, net income would have
been approximately $3.7 million for the six months ended June 30, 1998, and
basic and diluted earnings per share would have been $0.48 and $0.47 for the six
months ended June 30, 1998, respectively.
11
<PAGE>
As a result of the foregoing, net income increased by approximately
$2.2 million, or 91.7%, to $4.6 million for the six months ended June 30, 1999,
compared to $2.4 million for the comparable period of 1998.
FUNDS FROM OPERATIONS
In March, 1995, the National Association of Real Estate Investment
Trusts ("NAREIT") adopted the NAREIT White Paper on Funds from Operations (the
"White Paper") which provided additional guidance on the calculation of funds
from operations. The White Paper defines funds from operations as net income
(loss) (computed in accordance with generally accepted accounting principles
("GAAP")), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures ("FFO").
Management believes FFO is a helpful measure of the performance of an equity
real estate investment trust ("REIT") because, along with cash flows from
operating activities, investing activities and financing activities, it provides
an understanding of the ability of the Company to incur and service debt and
make capital expenditures. The Company computes FFO in accordance with standards
established by the White Paper, which may differ from the methodology for
calculating FFO utilized by other REITs, and accordingly, may not be comparable
to such other REITs. Further, FFO does not represent amounts available for
management's discretionary use because of needed capital replacement or
expansion, debt service obligations, or other commitments and uncertainties. The
Company believes that in order to facilitate a clear understanding of the
consolidated historical operating results of the Company, FFO should be examined
in conjunction with the net income as presented in the condensed consolidated
financial statements and information included elsewhere herein. FFO should not
be considered as an alternative to net income (determined in accordance with
GAAP) as an indication of the Company's financial performance or to cash flows
from operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make distributions.
The following table illustrates the calculation of FFO for the three
and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income........................................ $ 2,354 $ 735 $ 4,554 $ 2,375
Depreciation of real estate assets................ 808 684 1,584 1,330
Amortization of leasing costs..................... 13 12 22 25
Loan prepayment penalties......................... 119 119
Put option expense................................ 1,320 1,320
Write-off of unamortized loan costs related to
repayment of mortgage indebtedness............. 88 88
Minority interest................................. 24 47
Lease termination fee............................. 112 (412) 225 (446)
------- ------- ------- -------
FUNDS FROM OPERATIONS............................. $ 3,311 $ 2,546 $ 6,432 $ 4,811
======= ======= ======= =======
FUNDS FROM OPERATIONS PER SHARE
(DILUTED)...................................... $ 0.31 $ 0.29 $ 0.61 $ 0.61
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING
(DILUTED)...................................... 10,784 8,678 10,628 7,896
======= ======= ======= =======
</TABLE>
FFO increased by approximately $765,000 or 30.0%, to $3.3 million for
the three months ended June 30, 1999, from $2.5 million for the comparable
period of 1998. FFO increased by approximately $1.6 million or
12
<PAGE>
33.7%, to $6.4 million for the six months ended June 30, 1999, from $4.8 million
for the comparable period of 1998. The increase for both periods is primarily
the result of the acquisitions of additional properties.
PRO FORMA RESULTS OF OPERATIONS
The Company completed an IPO of an aggregate of 4,700,000 shares of
common stock, par value $0.01 per share, on May 19, 1998. Of the 4,700,000
shares of common stock sold in the offering, 3,330,398 shares, generating net
proceeds of approximately $33.0 million, were sold by the Company and 1,369,602
shares were sold by a stockholder of the Company.
The following table reports actual results of operations for three
months and six months ended June 30, 1999, and the pro forma results of
operations for the three months and six months ended June 30, 1998. The pro
forma results give effect to the initial public offering as if it had occurred
on January 1, 1998. Pro forma adjustments assume application of the net proceeds
of the offering to purchase properties, retire mortgage indebtedness and other
related adjustments. The following pro forma financial information is not
necessarily indicative of the results of operations which would have been
reported if the offering had occurred on the dates or for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------
(ACTUAL) (PRO FORMA) (ACTUAL) (PRO FORMA)
1999 1998 1999 1998
--------- ----------- --------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income ......................... $ 6,256 $ 6,147 $12,241 $11,925
Investment revenue .................... 72 113 182 230
------- ------- ------- -------
Total revenues ...................... 6,328 6,260 12,423 12,155
------- ------- ------- -------
COSTS AND EXPENSES:
Operating expenses .................... 1,629 1,512 3,220 2,984
Depreciation and amortization ......... 823 745 1,620 1,474
Interest .............................. 1,039 1,080 2,111 2,322
General and administrative expenses ... 459 296 871 530
Minority interest in earnings of
consolidated affiliate ................ 24 -- 47 --
------- ------- ------- -------
Total costs and expenses ............ 3,974 3,633 7,869 7,310
------- ------- ------- -------
NET INCOME ............................... $ 2,354 $ 2,627 $ 4,554 $ 4,845
------- ------- ------- -------
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE ................. $ 0.22 $ 0.26 $ 0.44 $ 0.47
------- ------- ------- -------
NUMBER OF SHARES USED IN COMPUTING BASIC
EARNINGS PER SHARE .................... 10,610 10,238 10,455 10,238
------- ------- ------- -------
DILUTED EARNINGS PER SHARE ............... $ 0.22 $ 0.25 $ 0.43 $ 0.46
------- ------- ------- -------
NUMBER OF SHARES USED IN COMPUTING DILUTED
EARNINGS PER SHARE .................... 10,784 10,435 10,628 10,435
------- ------- ------- -------
</TABLE>
13
<PAGE>
The following table illustrates the actual FFO calculation for the
three months and six months ended June 30, 1999 and the pro forma FFO
calculation for the three months and six months ended June 30, 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
(ACTUAL) (PRO FORMA) (ACTUAL) (PRO FORMA)
1999 1998 1999 1998
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Net income .............................. $ 2,354 $ 2,627 $ 4,554 $ 4,845
Depreciation of real estate assets ...... 808 732 1,584 1,449
Amortization of leasing costs ........... 13 12 22 25
Minority interest ....................... 24 -- 47 --
Lease termination fee ................... 112 (412) 225 (446)
-------- -------- -------- --------
FUNDS FROM OPERATIONS ................... $ 3,311 $ 2,959 $ 6,432 $ 5,873
======== ======== ======== ========
FUNDS FROM OPERATIONS PER SHARE (DILUTED)
$ 0.31 $ 0.28 $ 0.61 $ 0.56
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
(DILUTED) ............................ 10,784 10,435 10,628 10,435
======== ======== ======== ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the principal sources of funding for the Company's
operations, including the renovation, expansion, development and acquisition of
shopping centers, have been operating cash flows, the issuance of securities and
mortgage loans. The Company's principal demands for liquidity are maintenance,
repair and tenant improvements of existing properties, acquisitions and
development activities, debt service and repayment obligations and distributions
to its stockholders.
As of June 30, 1999, the Company had total mortgage indebtedness of
approximately $72.7 million, all of which was fixed rate mortgage indebtedness
bearing interest at a weighted average rate of 7.94% and collateralized by 15 of
the Company's existing properties. The Company also has provided a $1.5 million
letter of credit to secure certain obligations in connection with the
acquisition of one of the Company's properties. This letter of credit is
collateralized by a mixed-use property located in West Palm Beach, Florida.
On February 4, 1999, the Company secured a $35.0 million Master
Revolving Credit Agreement (the "Credit Agreement") with City National Bank of
Florida. Advances under this Agreement are limited to $16,590,000, with any
excess advances being conditioned on the lender securing participation from
other lenders. The Credit Agreement accrues interest at 225 basis points over
the thirty day LIBOR rate, payable monthly, adjusted every six months and
matures February 4, 2002. Advances under the Credit Agreement will be used to
fund property acquisitions, development activities and other Company activities,
and is secured by four of the Company's properties. Through June 30, 1999 the
Company has received net advances totaling $6.6 million.
In addition, the terms of the Credit Agreement allow the lender to
cease funding and/or accelerate the maturity date if neither Mr. Katzman nor Mr.
Valero remains as the executives in control of the Company. The Credit Agreement
also limits the amount that can be borrowed for the purchase of vacant land and
other customary conditions, including, among other things, the payment of
commitment fees and the required delivery of various title, insurance, zoning
and environmental assurances on the secured properties, and will contain various
covenants, such as a prohibition on secondary financing on any of the secured
properties.
The Company completed an IPO of its common stock in May 1998. Pursuant
to the IPO, an aggregate of 4,700,000 shares of the Company's common stock were
sold, of which 3,330,398 shares, generating net proceeds of approximately $33.0
million, were sold by the Company and 1,369,602 shares were sold by a
stockholder of the Company. As of June 30, 1999, no proceeds from the IPO
remained available for use.
14
<PAGE>
As of June 30, 1999, the Company had one major redevelopment project
under construction that will be completed in three phases and add approximately
280,000 square feet of retail space to the Company's portfolio. Phase I was
completed in July 1999, Phase II should be completed in the first quarter of
2000 and Phase III completed in the fourth quarter of 2000. It is anticipated
that future funding required for this project is estimated to be $10.0 million
and will come from the Credit Agreement and other sources of cash including
obtaining permanent debt on certain unencumbered existing properties. Management
expects this redevelopment to have a positive effect on cash generated by
operating activities and Funds from Operations.
The Company also has under construction Phase I of a new shopping
center that will total approximately 73,000 square feet of retail space. This
shopping center is located in Tallahassee, Florida and Phase I should be
completed in the first quarter of 2000 at an estimated construction cost of $6.0
million.
The Company believes, based on currently proposed plans and assumptions
relating to its operations, that the Company's existing financial arrangements,
together with cash flows from operations, will be sufficient to satisfy its cash
requirements for a period of at least 12 months. In the event that the Company's
plans change, its assumptions change or prove to be inaccurate or available
financing arrangements prove to be insufficient to fund the Company's expansion
and development efforts, the Company would be required to seek additional
sources of financing. There can be no assurance that any additional financing
will be available to the Company on acceptable terms, or at all. If adequate
funds are not available, the Company's business operations could be materially
adversely affected.
During the six months ended June 30, 1999, the Company declared and
paid cash dividends of $0.25 and $0.25 per outstanding share of Common Stock in
March and June 1999, respectively.
YEAR 2000 COSTS
The Company has undertaken a study of its functional application
systems to determine their compliance with year 2000 issues and, to the extent
of noncompliance, the required remediation. As a result of such study, the
Company believes the majority of its systems are year 2000 compliant. To date,
the expenses incurred by the Company in order to become year 2000 compliant,
including computer software costs, have been approximately $25,000. Costs other
than software have been expensed as incurred.
An assessment of the readiness of year 2000 compliance of third party
entities with which the Company has relationships, such as its banking
institutions, tenants and others is ongoing. The Company has inquired, or is in
the process of inquiring, of the significant aforementioned third party entities
as to their readiness with respect to year 2000 compliance and to date has
received indications that many of them are either compliant or in the process of
remediation. The Company will continue to monitor these third party entities to
determine the impact on the business of the Company and the actions the Company
must take, if any, in the event of non-compliance by any of these third parties.
The Company's initial assessment of compliance by third party entities is that
there is not a material business risk to the Company posed by any such
noncompliance and, as such, the Company has not yet developed any related
contingency plans.
INFLATION
Most of the Company's leases contain provisions designed to partially
mitigate the adverse impact of inflation. Such provisions include clauses
enabling the Company to receive percentage rents based on tenant's gross sales
above predetermined levels, which rents generally increase as prices rise, or
escalation clauses which are typically related to increases in the Consumer
Price Index or similar inflation indices. Most of the Company's leases require
the tenant to pay its share of operating expenses, including common area
maintenance, real estate taxes and insurance, thereby reducing the Company's
exposure to increases in costs and operating expenses resulting from inflation.
15
<PAGE>
The Company's financial results are affected by general economic
conditions in the markets in which its properties are located. An economic
recession, or other adverse changes in general or local economic conditions,
could result in the inability of some existing tenants of the Company to meet
their lease obligations and could otherwise adversely affect the Company's
ability to attract or retain tenants. The properties are typically anchored by
supermarkets, drug stores and other consumer necessity and service retailers
which typically offer day-to-day necessities rather than luxury items. These
types of tenants, in the experience of the Company, generally maintain more
consistent sales performance during periods of adverse economic conditions.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which represent the Company's expectations or beliefs concerning
future events, including, but not limited to, statements regarding growth in
rental revenues and sufficiency of the Company's cash flow for its future
liquidity and capital resource needs. These forward looking statements are
further qualified by important factors that could cause actual events to differ
materially from those in such forward looking statements. These factors include,
without limitation, increased competition, dependence on key tenants, geographic
concentration, lack of development experience, reliance on key personnel and
maintaining its REIT status. Results actually achieved may differ materially
from expected results included in these forward looking statements as a result
of these or other factors.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 26, 1998, Albertsons, Inc. ("Albertsons") commenced an
action against a subsidiary of the Company (the "Subsidiary") in the Circuit
Court for the Eleventh Judicial District in and for Miami-Dade County, Florida,
alleging breach of a letter agreement and seeking injunctive relief and the
payment of damages in excess of $10.0 million representing lost profits and
other damages. This action was commenced in response to the Subsidiary's
entering into a lease agreement with Publix Supermarkets, Inc. ("Publix")
respecting Publix's lease of anchor space at Sky Lake. Among other things, the
complaint alleged that Albertsons and the Subsidiary entered into a letter
agreement which the parties intended to be memorialized into a formal lease
agreement and as to which the parties intended to be bound. In February, 1999,
Albertsons voluntarily dismissed its complaint relating to this action in its
entirety.
Except as described above, neither the Company nor the Company's
properties are subject to any material litigation. Further, to the Company's
knowledge, except as described above, there is no litigation threatened against
the Company or any of its properties, other than routine litigation and
administrative proceedings arising in the ordinary course of business, which
collectively are not expected to have a material adverse affect on the business,
financial condition, results of operations or cash flows of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 1, 1999 a wholly owned subsidiary of the Company, Equity One
(Walden Woods) Inc., entered into a limited partnership as a general partner.
The limited partners contributed an income producing shopping center (Walden
Woods Village) and the Company contributed 93,656 shares of common stock to the
limited partnership at an agreed upon price of $10.30 per share. Based on this
per share price and the net value of property contributed by the limited
partners, each of the partners received 93,656 limited partnership units. The
Company and the limited partners have entered into a Redemption Agreement
whereby the limited partners can request that the Company purchase back all or
part of the common stock at $10.30 per share no earlier than two years nor later
than fifteen years after the exchange date of January 1, 1999. As a result of
the Redemption Agreement, the
16
<PAGE>
minority interest has been presented as a liability. In addition, under the
terms of the limited partnership agreement, the minority interest does not have
an interest in the common stock of the Company except to the extent of dividends
declared on such common stock. Accordingly, a preference in earnings has been
allocated to the minority interest to the extent of the dividends declared. The
shares of the Company held by the consolidated limited partnership are not
considered outstanding in the condensed consolidated financial statements.
On March 10, 1999, Gazit (1995), Inc. exercised 242,136 Series C
Warrants at an exercise price of $8.25 per share producing total proceeds to the
Company of $2.0 million. Approximately $1.1 million of these proceeds were used
to pay down the Company's line of credit, while the remaining balance was
applied towards the April 6, 1999 purchase of a K-Mart Lease at its Lantana
Village Shopping Center for a purchase price of $2.6 million.
On May 19, 1999, Gazit (1995), Inc. exercised 242,500 Series C Warrants
at an exercise price of $8.25 per share producing total proceeds to the Company
of $2.0 million. On June 16, 1999 two officers of the Company exercised 91,500
Series C Warrants at an exercise price of $8.25 per share producing total cash
proceeds of $210,000 and shareholder notes for $545,000. The proceeds were used
to pay down the Company's line of credit.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
27.1 - Financial Data Schedule
(B) Report on Form 8-K
None
17
<PAGE>
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.
Date: August 13, 1999 EQUITY ONE, INC.
/s/ CHAIM KATZMAN
---------------------------------------
Chaim Katzman
Chief Executive Officer
(Principal Executive Officer)
/s/ PETER SACKMANN
---------------------------------------
Peter Sackmann
Controller
(Principal Accounting Financial Officer)
18
<PAGE>
EXHIBIT INDEX
EXHIBITS DESCRIPTION
- -------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,414,000
<SECURITIES> 1,647,000
<RECEIVABLES> 993,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 172,388,000
<DEPRECIATION> 11,059,000
<TOTAL-ASSETS> 170,350,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 108,000
<OTHER-SE> 84,581,000
<TOTAL-LIABILITY-AND-EQUITY> 170,350,000
<SALES> 6,256,000
<TOTAL-REVENUES> 6,328,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,935,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,039,000
<INCOME-PRETAX> 2,354,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,354,000
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
</TABLE>
