As filed with the Securities and Exchange Commission on September 27, 1999
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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
incorporation or organization) Identification No.)
----------
11000 REGENCY PARKWAY
THIRD FLOOR, EAST TOWER
CARY, NORTH CAROLINA 27511
(919) 462-8787
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
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C. CAMMACK MORTON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KONOVER PROPERTY TRUST, INC.
11000 REGENCY PARKWAY
THIRD FLOOR, EAST TOWER
CARY, NORTH CAROLINA 27511
(919) 462-8787
(Name, address, including zip code and telephone number,
including area code, of agent for service)
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COPIES TO:
Robert H. Bergdolt, Esq.
Alston & Bird LLP
3605 Glenwood Avenue, Suite 310
Raleigh, North Carolina 27612
(919) 420-2200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this registration statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.|_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.|X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement from the same offering.|_|
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.|_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.|_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=======================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A convertible preferred 780,680 shares $6 3/32(1) $4,757,269 $1,323
stock, $25.00 par value
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common stock, $.01 par value 3,988,255 shares (2) $6 3/32(3) $24,303,429 $3,083 (4)
=======================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
Calculated by multiplying the number of shares of common stock into
which a share of Series A convertible preferred stock is convertible by
the average of the high and low prices for the common stock reported on
the New York Stock Exchange on September 23, 1999.
(2) Includes 53,666 outstanding shares, 2,168,556 shares issuable upon
conversion of Series A preferred stock, 1,066,033 shares issuable upon
redemption of partnership units and 700,000 shares issuable upon
exercise of warrants.
(3) Estimated solely for the purpose of calculating the registration fee.
Calculated pursuant to Rule 457(c), based on the average of the high
and low prices reported on the New York Stock Exchange on September 23,
1999.
(4) Fee for 1,819,699 shares of common stock, comprising 53,666 outstanding
shares, 1,066,033 shares issuable upon redemption of partnership units
and 700,000 shares issuable upon exercise of warrants. Pursuant to Rule
457(i), the 2,168,556 shares of common stock issuable upon conversion
of the Series A preferred stock are not included in calculating the
fee.
Pursuant to Rule 416, there are also being registered for resale such
indeterminate number of additional shares of common stock as may become issuable
pursuant to "anti-dilution" provisions of the Series A preferred stock and
warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, DATED __________,1999
KONOVER PROPERTY TRUST, INC.
780,680 Shares, Series A Convertible Preferred Stock
3,988,255 Shares, Common Stock
---------------------
This prospectus relates to the offer and sale by the selling
shareholders identified in this prospectus of up to:
o 780,680 shares of Konover's Series A preferred stock;
o 2,168,556 shares of Konover's common stock that we may issue to
the selling shareholders in exchange for their Series A preferred
stock;
o 700,000 shares of Konover's common stock that we may issue to the
selling shareholders upon exercise of outstanding warrants;
o 1,066,033 shares of Konover's common stock that we may issue in
exchange for the same number of limited partnership units in KPT
Properties, L.P., the operating partnership through which Konover
conducts its business; and
o 53,666 outstanding shares of Konover's common stock.
The price and the commissions (if any) paid in connection with any sale
will be on terms to be determined at the time of each sale. We will not receive
any of the proceeds of any sales of the shares offered by the selling
shareholders.
Our common stock is traded on the New York Stock Exchange under the
ticker "KPT." On September 23, 1999, the closing price of one share of our
common stock as reported on the New York Stock Exchange was $6.0625. There is no
public market for our Series A preferred stock. The Series A preferred stock has
priority over the common stock in the event of liquidation, is non-voting except
in limited circumstances and is convertible into common stock. The Series A
preferred stock ranks on a parity with the common stock as to dividends. See
"Description of Equity Securities" beginning on page 25.
We are a real estate investment trust that owns and operates retail
shopping centers. Our principal executive offices are located at 11000 Regency
Parkway, Third Floor, East Tower, Cary, North Carolina 27511, and our phone
number is (919) 462-8787.
---------------------
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATERIAL RISKS SET
FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 2 OF THIS PROSPECTUS.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THE SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
The date of this prospectus is ___________, 1999
<PAGE>
KONOVER
Konover Property Trust, Inc. ("Konover," "we" or "us") is real estate
investment trust ("REIT") principally engaged in the acquisition, development,
operation and ownership of retail shopping centers. Our revenues are primarily
derived under real estate leases with national, regional and local retailing
companies.
We are organized as an "Umbrella Partnership Real Estate Investment
Trust" or "UPREIT." An UPREIT is a REIT that controls and holds most of its
properties through an umbrella limited partnership. Our umbrella limited
partnership is KPT Properties, L.P. We are the sole general partner and own 97%
of KPT Properties, L.P.
In this prospectus, we will refer to KPT Properties, L.P. as the
"Operating Partnership" and to limited partnership interests in the Operating
Partnership as "Units."
RISK FACTORS
An investment in our securities involves various risks. You should
carefully consider the following information together with the other information
contained in this prospectus before purchasing shares of our common stock or
Series A preferred stock.
PROMETHEUS' OWNERSHIP INTEREST IN KONOVER ENABLES IT TO CONTROL THE ELECTION OF
THE BOARD AND ANY MATTER SUBMITTED TO OUR SHAREHOLDERS
Prometheus Southeast Retail Trust, an affiliate of Lazard Freres and
Co., LLC, owns 68% of our outstanding common stock. As part of our sale to
Prometheus of a controlling interest in Konover, we granted Prometheus the right
to nominate three directors to our board of directors. In addition, many
significant actions cannot currently be approved without the consent of at least
one of the Konover board nominees. As a result of these rights and its
controlling interest in Konover, Prometheus has a substantial influence over our
affairs. Prometheus can control the election of the Board or the outcome of any
corporate transaction or other matter submitted to the shareholders for
approval. This concentration of ownership in one stockholder could be
disadvantageous to other stockholders. Prometheus may cause Konover to take
actions that are not in the best interests of the minority stockholders to the
extent Prometheus' interests and those of the other stockholders differ.
In addition, our board of directors waived the application of the
Maryland Business Combination Statute with respect to all aspects of the stock
issuance to Prometheus and amended its bylaws to exempt the transaction from the
Control Share Acquisition Statute. As a result, such statutes impose no
restrictions on the voting of Prometheus' shares or on its ability to enter into
a business combination with Konover.
OUR BOARD MAY NOT TAKE CERTAIN ACTIONS WITHOUT THE APPROVAL OF PROMETHEUS
Our bylaws prohibit certain transactions without the approval of more
than 67% of all of our directors. Since Prometheus nominees are currently
entitled to one-third of the board seats, the supermajority voting provisions
have the effect of preventing certain actions without the approval of
Prometheus' nominees. The transactions requiring supermajority approval are:
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<PAGE>
o significant acquisitions and sales;
o the incurrence of debt beyond a specified level;
o significant issuances of capital stock and other securities;
o amendments to the charter or bylaws that would be materially
adverse to Prometheus; and
o transactions that would result in any person other than
Prometheus holding more than 15% of the voting power of Konover.
As a result, Prometheus may prevent Konover from taking actions in the
best interests of the other stockholders to the extent their interests differ
from Prometheus'.
WE MAY HAVE TO ISSUE ADDITIONAL SHARES OR PAY CASH TO PROMETHEUS IN THE YEAR
2004
In connection with our issuance of stock to Prometheus, we also issued
contingent value rights ("CVRs"). The CVRs obligate us to pay Prometheus (in
shares of common stock or cash) to the extent it has not essentially doubled its
$200 million investment (measured by stock appreciation and dividends) by
January 1, 2004. Our obligation, however, is limited to the value of 4,500,000
shares as of January 1, 2004. The value of those 4,500,000 shares, of course,
will depend on the stock price at January 1, 2004. The following table shows the
amount of our obligation under the CVRs at various stock price levels and
aggregate dividend amounts through January 1, 2004:
<TABLE>
<CAPTION>
CUMULATIVE DIVIDENDS
PAID
PER SHARE CONTINGENT VALUE RIGHT PAYMENT AMOUNT
THROUGH 1/1/04 ($ IN MILLIONS)
- ------------------------- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$12.00 0 0 0 0 0 0 0
$11.00 21.0 0 0 0 0 0 0
$10.00 31.5 0 0 0 0 0 0
$9.00 31.5 21.0 0 0 0 0 0
$8.00 31.5 40.5 0 0 0 0 0
$7.00 31.5 40.5 21.0 0 0 0 0
$6.00 31.5 40.5 42.0 0 0 0 0
$5.00 31.5 40.5 49.5 21.0 0 0 0
$4.00 31.5 40.5 49.5 42.0 0 0 0
$3.00 31.5 40.5 49.5 58.5 21.0 0 0
$2.00 31.5 40.5 49.5 58.5 42.0 0 0
$1.00 31.5 40.5 49.5 58.5 63.0 21.0 0
$0.00 31.5 40.5 49.5 58.5 67.5 42.0 0
---------- ------------- ------------ ------------- ------------- ----------- ----------
$7.00 $9.00 $11.00 $13.00 $15.00 $17.00 $19.00
</TABLE>
FAIR MARKET VALUE PER SHARE AS OF JANUARY 1, 2004
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<PAGE>
THERE IS NO PUBLIC MARKET FOR THE SERIES A PREFERRED STOCK
There is no established trading market for the Series A preferred
stock. We do not currently intend to list the Series A preferred stock on a
national securities exchange or the Nasdaq National Market, and even if we did,
the Series A preferred stock does not currently meet the listing requirements of
any national exchange or the Nasdaq National Market. Accordingly, we cannot give
assurance as to (i) the likelihood that an active market for the Series A
preferred stock will develop, (ii) the liquidity of any such market, (iii) the
ability of securityholders to sell their Series A preferred stock and (iv) the
prices that securityholders may obtain for their Series A preferred stock.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH REAL ESTATE INVESTMENTS
ADVERSE CONDITIONS IN THE REAL ESTATE MARKET MAY IMPAIR OUR ABILITY TO
MAKE DISTRIBUTIONS TO YOU. Events or conditions which are beyond our control may
adversely affect our ability to generate revenues in excess of operating
expenses, including debt service and capital expenditures. Such events or
conditions could include:
o conditions in the retail segments of the economy such as
inflation, consumer confidence, unemployment rates and consumer
tastes and preferences, which could adversely impact the
profitability of our properties;
o general and regional economic conditions, particularly in the
southeastern region of the United States;
o changes in interest rate levels and the availability of
financing; and
o increases in operating costs (including real estate taxes) due to
inflation and other factors, which may not necessarily be offset
by increased rents.
WE MAY BE UNABLE TO RENEW LEASES OR RENT SPACE AS LEASES EXPIRE. If our
tenants fail to renew their leases upon expiration, we may be unable to rent the
space. Even if tenants renew their leases or we can rent the space, the terms of
renewal or rental (including the cost of required renovations) may be less
favorable than current lease terms.
WE FACE SIGNIFICANT COMPETITION FROM OTHER REAL ESTATE DEVELOPERS. We
compete with a number of real estate developers, operators and institutions for
tenants and acquisition opportunities. Some of these competitors have
significantly greater resources than we do. In addition, new construction or
expansion of retail properties, particularly outlet and off-price centers and
community centers, could adversely impact occupancy or rental rates of our
properties.
FINANCIALLY DISTRESSED TENANTS MAY LIMIT OUR ABILITY TO REALIZE THE
VALUE OF OUR INVESTMENTS. Following a tenant's lease default, we may experience
delays in enforcing our rights as a landlord and may incur substantial costs in
protecting our investment. In addition, a tenant may seek bankruptcy law
protection, which could relieve the tenant from its obligation to make lease
payments.
BECAUSE REAL ESTATE IS ILLIQUID, WE MAY NOT BE ABLE TO SELL PROPERTIES
WHEN APPROPRIATE. Real estate investments generally cannot be sold quickly. We
may not be able to vary our portfolio promptly in response to economic or other
conditions. In addition, the Internal Revenue Code limits our ability to sell
properties held for fewer than four years. These factors could adversely
4
<PAGE>
affect our cash flow and ability to make distributions to shareholders as well
as the ability of someone to purchase us, even if a purchase were in our
shareholders' best interests.
CHANGES IN THE LAW MAY ADVERSELY AFFECT OUR CASH FLOW. Because
increases in income and service taxes are generally not passed through to
tenants under our leases, such increases may adversely affect our cash flow and
ability to make expected distributions to shareholders. Our properties are also
subject to various regulatory requirements, such as those relating to fire and
safety. Our failure to comply with these requirements could result in the
imposition of fines and damage awards. We can give no assurance that these
requirements will not change or that newly imposed requirements will not require
significant unanticipated expenditures.
FUTURE ACQUISITIONS MAY FAIL TO PERFORM IN ACCORDANCE WITH OUR
EXPECTATIONS AND MAY REQUIRE DEVELOPMENT AND RENOVATION COSTS EXCEEDING OUR
ESTIMATES. In the normal course of business, we typically evaluate potential
acquisitions, enter into non-binding letters of intent, and may, at any time,
enter into contracts to acquire and may acquire additional properties. However,
changing market conditions, including competition from others, may diminish our
opportunities for making attractive acquisitions. Once made, our investments may
fail to perform in accordance with our expectations. In addition, the renovation
and improvement costs we incur in bringing an acquired property up to market
standards may exceed our estimates. Although we anticipate financing future
acquisitions and renovations through a combination of advances under lines of
credit and other forms of secured or unsecured financing, no assurance can be
given that we will have the financial resources to make suitable acquisitions or
renovations. If new developments are financed through construction loans, there
is a risk that, upon completion of construction, permanent financing for newly
developed properties may not be available or may be available only on
disadvantageous terms.
In addition to acquisitions, we periodically consider developing,
redeveloping and constructing properties. Risks associated with development,
redevelopment and construction activities include:
o the unavailability of favorable financing;
o the abandonment of development activities prior to completion;
o construction costs exceeding original estimates;
o construction and lease-up delays resulting in increased debt
service expense and construction costs; and
o insufficient occupancy rates and rents at a newly completed
property causing a property to be unprofitable.
Development and redevelopment activities are also subject to risks
relating to our inability to obtain, or delays in obtaining, all necessary
zoning, land-use, building, occupancy and other required governmental and
utility company authorizations.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND MAY BE COSTLY. Federal, state
and local laws, ordinances and regulations may require a current or previous
owner or operator of real estate to investigate and clean up hazardous or toxic
substances or releases at such property. The owner or operator may be forced to
pay for property damage and for investigation and clean-up costs incurred by
others in connection with environmental contamination. Such laws typically
impose
5
<PAGE>
clean-up responsibility and liability without regard to whether the owner or
operator knew of or caused the presence of the contaminants. Even if more than
one person may have been responsible for the contamination, each person covered
by the environmental laws may be held responsible for all of the clean-up costs
incurred. In addition, third parties may sue the owner or operator of a site for
damages and costs resulting from environmental contamination emanating from that
site. These costs may be substantial and the presence of such substances may
adversely affect the owner's ability to sell or rent such property or to borrow
using such property as collateral.
OUR INDEBTEDNESS SUBJECTS US TO ADDITIONAL RISKS
WE MAY BE UNABLE TO REPAY OR REFINANCE OUR EXISTING INDEBTEDNESS. We
are subject to risks normally associated with debt financing, such as the
insufficiency of cash flow to meet required payment obligations and the
inability to refinance existing indebtedness. If our debt cannot be paid,
refinanced or extended at maturity, in addition to our failure to repay our
debt, we may not be able to make distributions to shareholders at expected
levels or at all. Furthermore, if any refinancing is done at higher interest
rates, the increased interest expense could adversely affect our cash flow and
ability to make distributions to shareholders. If we do not meet our mortgage
financing obligations, any properties securing such indebtedness could be
foreclosed on, which would have a material adverse effect our cash flow and
ability to make distributions and, depending on the number of properties
foreclosed on, could threaten our continued viability.
RISING INTEREST RATES COULD INCREASE OUR INTEREST EXPENSE. Increases in
interest rates on variable rate indebtedness would increase our interest
expense, which could adversely affect our cash flow and ability to make
distributions to shareholders.
OUR STATUS AS A REIT IS DEPENDENT UPON COMPLIANCE WITH FEDERAL INCOME TAX
REQUIREMENTS
WE MAY BE SUBJECT TO TAXATION AS A REGULAR CORPORATION IF WE FAIL TO
MAINTAIN OUR REIT STATUS. Our failure to qualify as a REIT would have serious
adverse consequences to our shareholders. Many of the requirements for taxation
as a REIT, however, are highly technical and complex. The determination that we
are a REIT requires an analysis of various factual matters and circumstances
that may not be totally within our control. For example, to qualify as a REIT,
at least 95% of our gross income must come from certain sources that are
itemized in the REIT tax laws. We are also required to distribute to
shareholders at least 95% of our REIT taxable income (excluding capital gains).
The fact that we hold our assets through the Operating Partnership and its
subsidiaries further complicates the application of the REIT requirements. Even
a technical or inadvertent mistake could jeopardize our REIT status.
Furthermore, Congress and the IRS might change the tax laws and regulations, and
the courts might issue new rulings that make it more difficult, or impossible,
for Konover to remain qualified as a REIT.
If we fail to qualify as a REIT, we would be subject to federal income
tax at regular corporate rates. Also, unless the IRS granted us relief under
certain statutory provisions, we would remain disqualified as a REIT for four
years following the year we first failed to qualify. If we failed to qualify as
a REIT, we would have to pay significant income taxes and would therefore have
less money available for investments or for distributions to shareholders. This
would likely have a significant adverse effect of the value of our securities.
In addition, we would no longer be required to make any distributions to
shareholders.
6
<PAGE>
WE MAY NEED TO BORROW MONEY OR SELL ASSETS IN ORDER TO MAKE REQUIRED
DISTRIBUTIONS. In order to make the distributions required to maintain our REIT
status, we may need to borrow funds. To obtain the favorable tax treatment
associated with REIT qualification, we generally will be required to distribute
to shareholders at least 95% of our annual REIT taxable income (excluding net
capital gain). In addition, we will be subject to tax on our undistributed net
taxable income and net capital gain and a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by us with respect to any
calendar year are less than the sum of 85% of our ordinary income plus 95% of
our capital gain net income for the calendar year, plus certain undistributed
amounts from prior years. We intend to make distributions to shareholders to
comply with the distribution provisions of the Internal Revenue Code and to
avoid income and other taxes. Differences in timing between the receipt of
income and the payment of expenses in arriving at taxable income and the effect
of required debt amortization payments could require us to borrow funds on a
short-term basis or liquidate funds on adverse terms to meet the REIT
qualification distribution requirements.
THERE ARE LIMITATIONS ON A THIRD PARTY'S ABILITY TO ACQUIRE US OR EFFECT A
CHANGE IN CONTROL
LIMITATIONS IMPOSED TO PROTECT OUR REIT STATUS MAY PREVENT OR
DISCOURAGE A CHANGE IN CONTROL. In order to protect us against loss of our REIT
status, our charter limits any shareholder from owning more than 9.8% in value
of our outstanding shares, subject to certain exceptions. If you or anyone else
acquires shares in excess of the ownership limit, we may:
o consider the transfer to be null and void;
o not reflect the transaction on our books;
o institute legal action to stop the transaction;
o not pay dividends or other distributions with respect to those
shares;
o not recognize any voting rights for those shares; and
o consider the shares held in trust for the benefit of a person to
whom such shares may be transferred.
PROVISIONS OF THE OPERATING PARTNERSHIP AGREEMENT MAY PREVENT OR
DISCOURAGE A CHANGE IN CONTROL. A provision in the operating partnership
agreement prevents the operating partnership from disposing of all or
substantially all of the Operating Partnership's assets (including by way of
merger or other combination) without the consent of partners holding 50% or more
of the outstanding Units. Although we expect that we always will hold a majority
of the outstanding Units, we cannot guarantee that this will be the case. If we
ever own less than 50% of the outstanding Units, this voting requirement might
limit the possibility of an acquisition or change in control, even if such a
transaction would be in our shareholders' best interests.
PROMETHEUS' OWNERSHIP OF A CONTROLLING INTEREST IN US MAY PREVENT OR
DISCOURAGE A CHANGE IN CONTROL. Prometheus currently owns approximately 68% of
our common stock, and one-third of all of our directors must be nominees of
Prometheus. Prometheus will be able to control the outcome of most matters
submitted for a vote of the shareholders, and its interest in us may discourage
or prevent a change of control in us, including transactions in which our
shareholders might receive a premium for their shares over the prevailing market
price.
7
<PAGE>
OUR ABILITY TO ISSUE PREFERRED SHARES MAY PREVENT OR DISCOURAGE A
CHANGE IN CONTROL. Our charter authorizes our Board of Directors to issue
preferred shares. The Board of Directors may establish the preferences and
rights of any preferred shares issued that could have the effect of delaying or
preventing someone from taking control of us, even if a change in control were
in our shareholders' best interests. Konover currently has shares of Series A
preferred stock outstanding. Without the consent of the holders of a majority of
the Series A preferred stock outstanding, Konover may not merge or consolidate
with another entity, unless the Series A preferred stock shareholders receive
preferred stock of the surviving entity having substantially identical terms as
the Series A preferred stock and the surviving entity does not have outstanding
senior capital stock.
MARYLAND'S BUSINESS COMBINATION LAW MAY PREVENT OR DISCOURAGE A CHANGE
IN CONTROL. The Maryland General Corporation Law establishes special
restrictions against "business combinations" between a Maryland corporation and
"interested shareholders" or their affiliates unless an exemption is applicable.
The business combination statute could have the effect of discouraging offers to
acquire us and of increasing the difficulty of consummating any such offers,
even if our acquisition would be in our shareholders' best interests.
MARYLAND CONTROL SHARE STATUTE MAY PREVENT OR DISCOURAGE A CHANGE IN
CONTROL. Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of beneficial interest owned by the acquiror, by
officers or by trustees who are employees of the corporation. The control share
statute could have the effect of discouraging offers to acquire us and of
increasing the difficulty of consummating any such offers, even if our
acquisition would be in our shareholders' best interests.
NO PROCEEDS TO KONOVER
Konover will not receive any proceeds from the sale of shares by the
selling shareholders.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations to
Konover and its shareholders relating to this registration statement and the
treatment of Konover as a REIT is based on current law, is for general purposes
only, and is not tax advice. Proposed legislation includes provisions that would
affect the operations of REITs but, based on current proposals, such legislation
will not become effective until it is duly passed by Congress and signed by the
President. Consequently, it is not possible to determine at this time all the
ramifications that would result from this legislation and therefore this summary
is based on current law only. The summary is not intended to represent a
detailed description of the federal income tax consequences applicable to a
particular shareholder in view of such shareholder's particular circumstances
nor is it intended to represent a detailed description of the federal income tax
consequences applicable to certain types of shareholders subject to special
treatment under the federal income tax laws (such as insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations, and persons who are not citizens or residents of the United
States).
EACH INVESTOR IS ADVISED TO CONSULT HIS OR HER PERSONAL TAX ADVISOR
REGARDING THE TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE OFFERED STOCK, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, OR SALE AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
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<PAGE>
GENERAL
Beginning with our taxable year ended December 31, 1993, we have
elected to be taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code ("Code"). We believe that beginning with that taxable year we have
been organized and have operated in a manner to qualify for taxation as a REIT
under the Code. We intend to continue to operate in such a manner, but we can
provide no assurance that we have operated or will operate in a manner so as to
qualify or remain qualified as a REIT.
The sections of the Code relating to the qualification and operation as
a REIT are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. This summary is qualified in its
entirety by the applicable Code provisions, relevant rules and regulations, and
administrative and judicial interpretations of Code provisions and regulations.
We have not requested a ruling from the Internal Revenue Service ("IRS") with
respect to any issues relating to our qualification as a REIT. Therefore, we can
provide no assurance that the IRS will not challenge our REIT status.
Alston & Bird LLP has acted as tax counsel to us in connection with
this offering and our election to be taxed as a REIT. Alston & Bird LLP is of
the opinion that we have been organized and operated in conformity with the
requirements for qualification and taxation as a REIT under the Code for our
taxable years ended December 31, 1998, and that, based on our proposed method of
operation, we are in a position to continue our qualification and taxation as a
REIT within the definition of Section 856(a) of the Code for the taxable year
that will end December 31, 1999. This opinion is based solely on our
representations with respect to factual matters concerning our business
operations and our properties. Alston & Bird LLP has not independently verified
these facts. In addition, our qualification as a REIT at any time during 1999 is
dependent, among other things, upon our meeting the requirements of Sections 856
through 860 of the Code throughout each of such years and for each year as a
whole. Accordingly, because our satisfaction of such requirements will depend
upon future events, including the final determination of operational results, no
assurance can be given that we will satisfy the REIT requirements during the
taxable year that will end December 31, 1999.
FEDERAL INCOME TAXATION OF KONOVER
If we qualify for taxation as a REIT, we generally will not be subject
to federal corporate income tax on that portion of our ordinary income or
capital gain that we currently distribute to our shareholders. The REIT
provisions of the Code generally allow a REIT to deduct distributions paid to
its shareholders, substantially eliminating the federal "double taxation" on
earnings (once at the corporate level when earned and once again at the
shareholder level when distributed) that usually results from investments in a
corporation. Nevertheless, we will be subject to federal income tax as follows:
First, we will be taxed at regular corporate rates on our undistributed
REIT taxable income, including undistributed net capital gains.
Second, we may be subject to the "alternative minimum tax" as a
consequence of our items of tax preference under certain circumstances.
Third, if we have net income from "foreclosure property" held primarily
for sale to customers in the ordinary course of business, including income from
the sale or other disposition of
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such property, we will be subject to tax at the highest corporate rate on such
income to the extent that it does not constitute qualifying income for purposes
of the 75% income test (discussed below).
Fourth, if we have net income from prohibited transactions (which are,
in general, certain sales or other dispositions of property that is held
primarily for sale to customers in the ordinary course of business but that is
not foreclosure property), we will be subject to a 100% tax on such income.
Fifth, if we fail to satisfy either the 75% or 95% gross income test
(discussed below) but have nonetheless maintained our qualification as a REIT
because certain other safe harbor requirements have been met, we will be subject
to a 100% tax on the net income attributable to the greater of the amount by
which we fail either the 75% or 95% test multiplied by a fraction intended to
reflect our profitability.
Sixth, if we fail to distribute each year at least the sum of:
(1) 85% of our ordinary income for such year;
(2) 95% of our capital gain net income for such year; and
(3) any undistributed taxable income from prior periods,
then we will be subject to a 4% excise tax on the excess of the required
distribution over the amounts actually distributed.
Seventh, if we acquire any asset from a corporation generally subject
to full corporate-level tax in a carryover-basis transaction and we subsequently
recognize gain on the disposition of such asset during the 10-year period
beginning on the date on which we acquired the asset, then to the extent of the
excess of (1) the fair market value of the asset at the time we acquired it over
(2) our adjusted basis in the asset at the time we acquired it, we will be
subject to tax at the highest regular corporate rate, pursuant to guidelines
issued by the IRS (the "Built-In Gain Rules").
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, we must elect to be treated as a REIT and must
meet the requirements, discussed below, relating to our organization, sources of
income, and nature of assets.
ORGANIZATIONAL REQUIREMENTS
The Code defines a REIT as a corporation, trust or association that:
(1) is managed by one or more trustees or directors;
(2) uses transferable shares or transferable certificates
to evidence beneficial ownership;
(3) would be taxable as a domestic corporation but for
Sections 856 through 860 of the Code;
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(4) is neither a financial institution nor an insurance
company within the meaning of the applicable
provisions of the Code;
(5) has at least 100 persons as beneficial owners;
(6) during the last half of each taxable year, is not
closely held, i.e., not more than 50% of the value of
the outstanding stock is owned, directly or
indirectly, by five or fewer shareholders;
(7) files an election or continues such election to be
taxed as a REIT on its return for each taxable year;
and
(8) satisfies the 95% and 75% income assets and the 75%,
25%, 10%, and 5% asset tests, all of which are
described below.
The Code provides that conditions (1) through (4) must be met during
the entire taxable year and that condition (5) must be met during at least 335
days of a taxable year of 12 months, or during a proportionate part of a taxable
year of less than 12 months. For purposes of condition (5), certain pension
funds and other tax-exempt entities are treated as persons. For purposes of
condition (6), on the other hand, the beneficiaries of a pension or
profit-sharing trust under Section 401(a) of the Code are treated as REIT
shareholders. In addition, our charter currently includes certain restrictions
regarding transfer of our common stock, which are intended (among other things)
to assist us in continuing to satisfy conditions (5) and (6) noted above.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership retain the same character in the
hands of the REIT for purposes of satisfying the REIT criteria of Section 856 of
the Code, including the gross income tests and asset tests. Thus, our
proportionate share of the assets, liabilities, and items of income of the
Operating Partnership will be treated as our assets, liabilities, and items of
income for purposes of applying and meeting the various REIT requirements. In
addition, the Operating Partnership's proportionate share of the assets,
liabilities, and items of income with respect to any partnership (including any
limited liability company treated as a partnership) in which it holds an
interest would be considered assets, liabilities, and items of income of the
Operating Partnership for purposes of applying and meeting the various REIT
requirements.
INCOME TESTS
To maintain qualification as a REIT, we must meet two gross income
requirements annually. First, we must derive directly or indirectly at least 75%
of our gross income (excluding gross income from prohibited transactions) from
investments relating to real property, including investments in other REITs or
mortgages on real property (including "rents from real property" and, in certain
circumstances, interest). Second, we must derive at least 95% of our gross
income (excluding gross income from prohibited transactions) from the real
property investments described in the preceding sentence or from dividends,
interest, or gain from the sale or disposition of stock or securities (or from
any combination of the foregoing). In addition, for taxable years ended prior to
the current taxable year, short term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions and gain from the sale or
other disposition of real property held for less than four years (other than
involuntary conversions and sales of foreclosure property) must have represented
less than 30% of our gross income (including gain from prohibited transactions).
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Rents we receive or that we are deemed to receive will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First, the amount of
rent must not be based in whole or in part on the income or profits of any
person but can be based on a fixed percentage of gross receipts or gross sales.
Second, "rents from real property" excludes any amount received directly or
indirectly from any corporation in which we own 10% or more of the total
combined voting power of all classes of voting stock or 10% or more of the total
number of shares of all classes of stock and from any other person in which we
own an interest of 10% or more in the assets or net profits of such person.
Third, rent attributable to personal property is generally excluded from "rents
from real property," except where such personal property is leased in connection
with such real property and the rent attributable to such personal property is
less than or equal to 15% of the total rent received under the lease. Finally,
amounts that are attributable to services furnished or rendered in connection
with the rental of real property, whether or not separately stated, will not
constitute "rents from real property" unless such services are customarily
provided in the geographic area. Customary services that are not provided to a
particular tenant (e.g., furnishing heat and light, the cleaning of public
entrances, and the collection of trash) can be provided directly by the REIT.
Where, however, such services are provided primarily for the convenience of the
tenants or are provided to such tenants, such services must be provided by an
independent contractor. In the event that an independent contractor provides
such services, the REIT must adequately compensate any such independent
contractor, the REIT must not derive any income from the independent contractor,
and neither the independent contractor nor certain of its shareholders may,
directly or indirectly, own more than 35% of the REIT, taking into consideration
the applicable attributed ownership. Pursuant to the Taxpayer Relief Act and
beginning with our taxable year ending December 31, 1998, our rental income will
not cease to qualify as "rents from real property" merely because we perform a
de minimis amount of services to tenants of a property that are not usually and
customarily provided and are considered rendered to the occupant. The income
from these services will be considered de minimis if the value of such services
(valued at not less than 150% of our direct cost of performing such services) is
less than 1% of the total income derived from such property.
We do not anticipate deriving rent attributable to personal property
leased in connection with real property that exceeds 15% of the total rent
attributable to such lease or receiving rent from related party tenants.
If we fail one or both of the 75% or 95% gross income tests for any
taxable year, we may nevertheless qualify as a REIT for that year if we are
eligible for relief under a certain provision of the Code. This relief provision
generally will be available if: (1) our failure to meet such gross income tests
is due to reasonable cause and not due to willful neglect; (2) we attach a
schedule of the nature and amount of each item of income to our federal income
tax return; and (3) the inclusion of any incorrect information on such schedule
is not due to fraud with the intent to evade tax. We, however, cannot state
whether in all circumstances we would be entitled to the benefit of this relief
provision. For example, if we fail to satisfy the gross income tests because
non-qualifying income that we intentionally receive exceeds the limits on such
income, the IRS could conclude that our failure to satisfy the tests was not due
to reasonable cause. As discussed above in "Federal Income Taxation of Konover,"
even if this relief provision applies, a 100% tax would be imposed with respect
to the part of our taxable income that fails the 75% or 95% tests.
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ASSET TESTS
At the close of each quarter of our taxable year, we also must satisfy
four tests relating to the nature and diversification of our assets. First, at
least 75% of the value of our total assets must be represented by real estate
assets, cash and cash items (including receivables), and government securities.
Second, not more than 25% of the value of our total assets may consist of
securities (other than those securities includible in the 75% asset test).
Third, not more than 5% of the value of our total assets may consist of
securities of any one issuer (other than those securities includible in the 75%
asset test).
Fourth, not more than 10% of the outstanding voting securities of any
one issuer may be held by us (other than those securities includible under the
75% asset test).
After initially meeting the asset tests at the close of each quarter,
we will not lose our REIT status if we fail to satisfy the asset tests at the
end of a later quarter solely because of changes in the market values of our
assets. If we fail to satisfy the asset tests because of an acquisition of
securities or other property during a quarter, we have the opportunity to cure
the failure by disposition of sufficient securities (other than those securities
includible in the 75% asset test) within 30 days after the close of that
quarter. We intend to maintain adequate records of the value of our assets to
ensure compliance with the asset tests. We also will take any other actions
within 30 days after the close of any quarter as may be required to cure any
noncompliance.
ANNUAL DISTRIBUTION REQUIREMENTS
To qualify for taxation as a REIT, we must meet the following annual
distribution requirements.
First, we must make distributions (other than capital gain
distributions) to our shareholders in an amount at least equal to (a) the sum of
(1) 95% of our "REIT taxable income" (computed without regard to the
dividends paid deduction and by excluding our net capital gain),
and
(2) 95% of the net income, if any, from foreclosure property in
excess of the excise tax on income from foreclosure property,
minus (b) the sum of certain items of non-cash income.
We must pay these distributions in the taxable year to which they
relate. Dividends paid in the subsequent year, however, will be treated as if
paid in the prior year for purposes of such prior year's 95% distribution
requirement if one of the following two sets of criteria are satisfied: (1) the
dividends were declared in October, November, or December, the dividends were
payable to shareholders of record on a specified date in such a month, and the
dividends were actually paid during January of the subsequent year; or (2) the
dividends were declared before we timely file our federal income tax return for
such year, the dividends were distributed in the 12-month period following the
close of the prior year and not later than the first regular dividend payment
after such declaration, and we elected on our tax return for the prior year to
have a specified amount of the subsequent dividend treated as if paid in the
prior year. Even if we satisfy this annual distribution requirement, we will be
subject to tax at regular capital gains or ordinary corporate tax rates to the
extent that we do not distribute all of our net capital gain or "REIT taxable
income" as adjusted.
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Second, we must distribute during each calendar year at least the sum
of:
(1) 85% of our ordinary income for that year,
(2) 95% of our capital gain net income for that year, and
(3) any undistributed taxable income from prior periods. In the event
that we do not satisfy this distribution requirement, we will be
subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed.
Third, if we dispose of any asset, which is subject to the Built-In
Gain Rules, during the 10-year period beginning on the date on which we acquired
the asset, we will be required to distribute at least 95% of the Built-In Gain
(after tax), if any, recognized on the disposition of the asset.
We intend to make timely distributions sufficient to satisfy the annual
distribution requirements. In this regard, the Operating Partnership agreement
authorizes us, as general partner, to take such steps as may be necessary to
cause the Operating Partnership to distribute to its partners an amount
sufficient to permit us to meet these distribution requirements.
We expect that our REIT taxable income will be less than our cash flow
due to the allowance of depreciation and other non-cash charges in computing
REIT taxable income. Accordingly, we anticipate that we generally will have
sufficient cash or liquid assets to enable us to satisfy the 95% distribution
requirement. It is possible, however, that we may not have sufficient cash or
other liquid assets to meet the 95% distribution requirement or to distribute
such greater amount as may be necessary to avoid income and excise taxation. In
such event, we may find it necessary to borrow funds to pay the required
distribution or, if possible, pay taxable stock dividends in order to meet the
distribution requirement.
In the event that we are subject to an adjustment to our REIT taxable
income (as defined in Section 860(d)(2) of the Code) resulting from an adverse
determination by either a final court decision, a closing agreement between us
and the IRS under Section 7121 of the Code, or any agreement as to tax liability
between us and an IRS district director, we may be able to correct any resulting
failure to meet the 95% annual distribution requirement by paying "deficiency
dividends" to our shareholders that relate to the adjusted year but that are
paid in the subsequent year. To qualify as a deficiency dividend, the
distribution must be made within 90 days of the adverse determination and we
also must satisfy certain other procedural requirements. If the statutory
requirements of Section 860 of the Code are satisfied, a deduction is allowed
for any deficiency dividend subsequently paid by us to offset an increase in our
REIT taxable income resulting from the adverse determination. We, however, will
be required to pay statutory interest on the amount of any deduction taken for
deficiency dividends to compensate for the deferral of the tax liability.
EARNINGS AND PROFITS
Throughout the remainder of this discussion, we frequently will refer
to "earnings and profits." Earnings and profits is a concept used extensively
throughout corporate tax law, but it is undefined in the Code. Each corporation
maintains an "earnings and profits" account that helps to measure whether a
distribution originates from corporate earnings or from other sources.
Distributions generally decrease the earnings and profits while income generally
increases earnings and profits. If a corporation has positive earnings and
profits, the distributions generally will be considered to come from corporate
earnings. If a corporation has no earnings and profits,
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distributions generally will be considered a return of capital and then capital
gain.
A REIT cannot have, at the close of any taxable year, accumulated
earnings and profits attributable to any non-REIT year and remain qualified as a
REIT.
FAILURE TO QUALIFY
If we fail to qualify as a REIT in any year and the relief provisions
do not apply, we will be subject to tax (including any applicable alternative
minimum tax) on our taxable income at regular corporate rates. Distributions to
shareholders in any year in which we fail to qualify will not be deductible by
us nor will they be required to be made. In such event, to the extent of
positive current or accumulated earnings and profits, all distributions to
shareholders will be dividends, taxable as ordinary income, except that, subject
to certain limitations of the Code, corporate distributees may be eligible for
the dividends-received deduction. Unless we are entitled to relief under
specific statutory provisions, we also will be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances we would be
entitled to such statutory relief.
TAXATION OF U.S. SHAREHOLDERS
When we use the term "U.S. Shareholder," we mean a holder of common
stock that, for federal income tax purposes:
(1) is a citizen or resident of the United States;
(2) is a corporation or partnership (including an entity treated as a
corporation or partnership for United States federal income tax
purposes) created or organized in or under the laws of the United
States or of any of its political subdivisions;
(3) is an estate the income of which is subject to federal income
taxation regardless of its source, or
(4) is a trust if a court within the United States is able to
exercise primary supervision over the administration of the
trust, and one or more United States persons have the authority
to control all substantial decisions of the trust. For any
taxable year for which we qualify for taxation as a REIT, amounts
distributed to taxable U.S. Shareholders will be taxed as
discussed below.
DISTRIBUTIONS GENERALLY
Distributions to U.S. Shareholders, other than capital gain dividends
discussed below, will constitute dividends up to the amount of our positive
current or accumulated earnings and profits and, to that extent, will be taxable
to shareholders as ordinary income. Because a REIT is not subject to tax on
income distributed to its shareholders, the distributions made to corporate
shareholders are not eligible for the dividends-received deduction. To the
extent that we make a distribution in excess of our positive current or
accumulated earnings and profits, the distribution will be treated first as a
tax-free return of capital, reducing the tax basis in the U.S. Shareholder's
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shares of common stock, and then the distribution in excess of the tax basis
will be taxable as gain realized from the sale of the common stock. Dividends we
declare in October, November, or December of any year payable to a shareholder
of record on a specified date in any such month shall be treated as both paid by
us and received by the shareholders on December 31 of the year, provided that we
actually pay the dividends during January of the following calendar year.
Shareholders are not allowed to include on their own federal income tax returns
any of our tax losses.
We will be treated as having sufficient earnings and profits to treat
as a dividend any distribution we make up to the amount required to be
distributed in order to avoid imposition of the 4% excise tax discussed in " --
Federal Income Taxation of Konover" above.
CAPITAL GAIN DISTRIBUTIONS
Distributions to U.S. Shareholders that we properly designated as
capital gain distributions will be treated as long-term capital gains (to the
extent they do not exceed our actual net capital gain) for the taxable year
without regard to the period for which the shareholder has held the stock.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Capital gain dividends are not
eligible for the dividends-received deduction for corporations.
Pursuant to the Taxpayer Relief Act and beginning with our taxable year
ending December 31, 1998, we may elect to retain and pay income tax on any net
long-term capital gain. In this instance, U.S. Shareholders will include in
their income their proportionate share of the undistributed long-term capital
gain. The U.S. Shareholders also will be deemed to have paid their proportionate
share of tax on such long-term capital gain and, therefore, will receive a
credit or refund for the amount of such tax. In addition, the basis of the U.S.
Shareholders' shares will be increased in an amount equal to the difference
between the undistributed long-term capital gain and the amount of tax paid by
us that is included in such shareholders' long-term capital gains.
As a result of changes made to the capital gains rates by the Taxpayer
Relief Act (See "-- Certain Disposition of Shares"), the IRS issued Notice 97-64
outlining when a REIT may designate its dividends as capital gain dividends.
This Notice is effective until Treasury Regulations are issued. When a REIT
designates a distribution as a capital gain dividend, which is attributable to a
taxable year ending after May 7, 1997, for purposes of the annual distribution
requirement, the REIT also may designate such dividend as a 20% rate gain
distribution or as unrecaptured Section 1250 gain distribution. These additional
designations by the REIT are effective only to the extent that they do not
exceed certain limitations. For example, the maximum amount of each distribution
that can be classified as a particular type of distribution must be calculated
in accordance with the Code and the IRS Notice. The additional 28% tax rate
group identified by IRS Notice 97-64 has effectively been eliminated by the
Internal Revenue Restructuring Act of 1998 (the "IRS Restructuring Act").
CERTAIN DISPOSITIONS OF SHARES
In general, you will realize capital gain or loss on the disposition of
common stock equal to the difference between (1) the amount of cash and the fair
market value of any property received on such disposition, and (2) your adjusted
basis of such common stock. Losses incurred on the sale or exchange of our
common stock that you held for less than six months (after applying certain
holding company rules) will be treated as a long-term capital loss to the extent
of any capital gain dividend received by the selling U.S. Shareholder from those
shares.
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As a result of the Taxpayer Relief Act and the IRS Restructuring Act,
the maximum rate of tax on net capital gains on individuals, trusts, and estates
from the sale or exchange of assets held for more than one year has been reduced
to 20%, and such maximum rate is further reduced to 18% for assets acquired
after December 31, 2000, and held for more than five years. For 15% bracket
taxpayers, the maximum rate on net capital gains is reduced to 10%, and such
maximum rate is further reduced to 8% for assets sold after December 31, 2000,
and held for more than five years. The maximum rate for net capital gains
attributable to the sale of depreciable real property held for more than one
year is 25% to the extent of the deductions for depreciation with respect to
such property. Long-term capital gain that we allocate to U.S. Shareholders will
be subject to the 25% rate to the extent that the gain does not exceed
depreciation on real property that we sold. The taxation of capital gains of
corporations was not changed by the Taxpayer Relief Act or the IRS Restructuring
Act.
PASSIVE ACTIVITY LOSS AND INVESTMENT INTEREST LIMITATIONS
You may not treat distributions we make to you or any gain from
disposing of our common stock as passive activity income. Therefore, you will
not be able to apply any "passive losses" against such income. Dividends we pay
(to the extent they do not constitute a return of capital) generally will be
treated as investment income for purposes of the investment interest limitation.
Net capital gain from the disposition of our common stock (or capital gain
dividends) generally will be excluded from investment income unless you elect to
have such gain taxed at ordinary income rates.
TREATMENT OF TAX-EXEMPT SHAREHOLDERS
Distributions we make to a tax-exempt employee pension trust or other
domestic tax-exempt shareholder generally will not constitute "unrelated
business taxable income" ("UBTI") unless the shareholder has borrowed to acquire
or carry our shares of common stock. Qualified trusts that hold more than 10%
(by value) of the shares of pension-held REITs may be required to treat a
certain percentage of such REIT's distributions as UBTI. The restriction on
ownership of common stock in our charter generally will prevent application of
the provisions treating a portion of REIT distributions as UBTI to tax-exempt
entities purchasing common stock.
SPECIAL TAX CONSIDERATIONS FOR NON-U.S. SHAREHOLDERS
The rules governing United States income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and foreign trusts and
estates (collectively, "Non-U.S. Shareholders") are complex. We intend the
following discussion to be only a summary of these rules. This discussion is
based on current law, which is subject to change, and assumes we will qualify
for taxation as a REIT. Prospective Non-U.S. Shareholders should consult with
their own tax advisors to determine the impact of federal, state, local and
foreign income tax laws on an investment in our common stock, including any
reporting requirements.
In general, Non-U.S. Shareholders will be subject to regular United
States federal income tax with respect to their investment in us if the income
from such investment is "effectively connected" with the Non-U.S. Shareholder's
conduct of a trade or business in the United States. A corporate Non-U.S.
Shareholder that receives income that is (or is treated as) effectively
connected with a U.S. trade or business also may be subject to the branch
profits tax under Section 884 of the Code, which is imposed in addition to
regular United States federal income tax and which generally is at the rate of
30%, subject to reduction under a tax treaty, if applicable. Certain
certification requirements must be met in order for effectively connected income
to be exempt from withholding.
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The following discussion will apply to Non-U.S. Shareholders whose income from
their investments in us is not effectively connected (except to the extent that
the FIRPTA rules discussed below treat such income as effectively connected).
If we make a distribution that is not attributable to gain from the
sale or exchange by us of a United States real property interest and that we do
not designate as a capital gain distribution, then a Non-U.S. Shareholder must
treat the distribution as an ordinary income dividend to the extent that it is
made out of current or accumulated earnings and profits. Generally, any ordinary
income dividend will be subject to a federal income tax equal to 30% of the
gross amount of the dividend unless this tax is reduced by an applicable tax
treaty. Such a distribution in excess of our earnings and profits will be
treated first as a return of capital that will reduce a Non-U.S. Shareholder's
basis in its common stock (but not below zero) and then as gain from the
disposition of such shares, the tax treatment of which is described under the
rules discussed below with respect to dispositions of common stock.
Distributions by us that are attributable to gain from the sale or
exchange of a United States real property interest will be taxed to a Non-U.S.
Shareholder under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S. Shareholder
as if the distributions were gains "effectively connected" with a United States
trade or business. Accordingly, a Non-U.S. Shareholder will be taxed at the
normal capital gain rates applicable to a U.S. Shareholder (subject to any
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). Distributions that are taxable under
FIRPTA also may be subject to a 30% branch profits tax when made to a foreign
corporation that is not entitled to an exemption or reduced branch profits tax
under an income tax treaty.
Although tax treaties may reduce our withholding obligations, we
generally will be required to withhold from distributions to Non-U.S.
Shareholders, and remit to the IRS, (1) 35% of designated capital gain dividends
(or, if greater, 35% of the amount of any distributions that could be designated
as capital gain dividends) and (2) 30% of ordinary dividends paid out of
earnings and profits. In addition, if we designate prior distributions as
capital gain dividends, subsequent distributions, up to the amount of such prior
distributions that were designated as capital gains dividends, will be treated
as capital gain dividends for withholding purposes. We may be required to
withhold 10% of distributions in excess of our current and accumulated earnings
and profits. If the amount of tax withheld by us with respect to a distribution
to a Non-U.S. Shareholder exceeds the shareholder's United States tax liability
with respect to such distribution, the Non-U.S. Shareholder may file for a
refund of the excess from the IRS.
Unless the common stock constitutes a "United States real property
interest" within the meaning of FIRPTA, a sale of common stock by a Non-U.S.
Shareholder generally will not be subject to federal income taxation. The common
stock will not constitute a United States real property interest if we are a
"domestically controlled REIT." A domestically controlled REIT is a REIT in
which at all times during a specified testing period Non-U.S. Shareholders held,
directly or indirectly, less than 50% in value of the REIT's shares. We
anticipate that we will be a domestically controlled REIT and, therefore, that a
sale of common stock will not be subject to taxation under FIRPTA. However,
because the common stock will be publicly traded, we cannot give assurance that
we will continue to be a domestically controlled REIT. If we were not a
domestically controlled REIT, a Non-U.S. Shareholder's sale of our common stock
would be subject to tax under FIRPTA as a sale of a United States real property
interest unless the common stock were "regularly traded" on an established
securities market (such as the American Stock
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Exchange) on which the common stock will be listed and the seller owned no more
than 5% of the common stock throughout the applicable testing period. If the
gain on the sale of common stock were subject to taxation under FIRPTA, the
Non-U.S. Shareholder would be subject to the same treatment as a U.S.
Shareholder with respect to the gain (subject to applicable alternative minimum
tax or a special alternative minimum tax in the case of nonresident alien
individuals). Notwithstanding the foregoing, capital gains not subject to FIRPTA
will be taxable to a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and if certain other
conditions apply, in which case the nonresident alien individual will be subject
to a 30% tax on his or her U.S. source capital gains.
A purchaser of common stock from a Non-U.S. Shareholder will not be
required to withhold under FIRPTA on the purchase price if our common stock is
"regularly traded" on an established securities market or if we are a
domestically controlled REIT. Otherwise, a purchaser of common stock from a
Non-U.S. Shareholder may be required to withhold 10% of the purchase price and
remit this amount to the IRS. Our common stock is currently a "regularly traded"
security on the American Stock Exchange. We believe that we qualify under both
the "regularly traded" and the domestically controlled REIT exceptions to
withholding but cannot provide any assurance to that effect.
Upon the death of a nonresident alien individual, such individual's
common stock will be treated as part of such individual's U.S. estate for
purposes of the United States estate tax, except as may be otherwise provided in
an applicable estate tax treaty.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
Under certain circumstances, U.S. Shareholders may be subject to backup
withholding at a rate of 31% on payments made with respect to, or cash proceeds
of a sale or exchange of, our common stock. Backup withholding will apply only
if:
(1) the payee fails to furnish his or her taxpayer identification
number (which, for an individual, would be his or her Social
Security Number) to the payor as required;
(2) the IRS notifies the payor that the taxpayer identification
number furnished by the payee is incorrect;
(3) the IRS has notified the payee that such payee has failed to
properly include reportable interest and dividends in the payee's
return or has failed to file the appropriate return and the IRS
has assessed a deficiency with respect to such underreporting; or
(4) the payee has failed to certify to the payor, under penalties of
perjury, that the payee is not subject to withholding. In
addition, backup withholding will not apply with respect to
payments made to certain exempt recipients, such as corporations
and tax-exempt organizations. U.S. Shareholders should consult
their own tax advisors regarding their qualifications for
exemption from backup withholding and the procedure for obtaining
such an exemption.
Backup withholding is not an additional tax. Rather, the amount of any
backup withholding with respect to a payment to a U.S. Shareholder will be
allowed as a credit against the U.S. Shareholder's federal income tax liability.
19
<PAGE>
Additional issues may arise pertaining to information reporting and
backup withholding for Non-U.S. Shareholders. For example, on October 7, 1997,
the Treasury Department issued new regulations (the "New Regulations") that make
certain modifications to the withholding, backup withholding, and information
reporting rules. On March 27, 1998, the Treasury Department and the IRS released
Notice 98-16, which announced that the effective date of the New Regulations
will be extended to apply generally to payments made to foreign persons after
December 31, 1999. Non-U.S. Shareholders should consult their tax advisors with
regard to U.S. information reporting and backup withholding.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
GENERAL
Substantially all of our investments are held through the Operating
Partnership. In general, partnerships are "pass-through" entities that are not
subject to federal income tax. Rather, partners are allocated their
proportionate share of the items of income, gain, loss, deduction, and credit of
a partnership, and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. We include in
our income our proportionate share of the Operating Partnership's income, gain,
loss, deduction, and credit for purposes of the various REIT income tests and in
the computation of our REIT taxable income. In addition, we include our
proportionate share of assets held by the Operating Partnership in the REIT
asset tests.
TAX ALLOCATIONS WITH RESPECT TO OUR PROPERTIES
When property is contributed to a partnership in exchange for an
interest in the partnership, the partnership generally takes a carryover basis
in that property for tax purposes. That carryover basis is equal to the
contributing partner's adjusted basis in the property rather than the fair
market value of the property at the time of contribution. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to such
contributed property must be allocated in a manner such that the contributing
partner is charged with or benefits from the unrealized gain or unrealized loss
associated with the property at the time of the contribution. The amount of such
unrealized gain or unrealized loss generally is equal to the difference between
the fair market value of the contributed property at the time of contribution
and the adjusted tax basis of such property at the time of contribution (a
"Book-Tax difference"). Such allocations are solely for federal income tax
purposes and do not affect the book capital accounts or other economic or legal
arrangements among the partners.
The Operating Partnership has been formed by way of contributions of
appreciated property, and we expect that future contributions to the Operating
Partnership also will take the form of appreciated property. Consequently, the
Operating Partnership agreement requires tax allocations to be made in a manner
consistent with Section 704(c) of the Code.
In general, the partners who have contributed their interests in
properties to the Operating Partnership (the "Contributing Partners") will be
allocated lower amounts of depreciation deductions for tax purposes than such
deductions would be if determined on a pro rata basis. In addition, in the event
of the disposition of any of the contributed assets that have a Book-Tax
Difference, all taxable income attributable to such Book-Tax Difference
generally will be allocated to the Contributing Partners, and Konover generally
will be allocated only its share of capital gains attributable to appreciation,
if any, occurring after the closing of the acquisition of such properties. This
will tend to eliminate the Book-Tax Difference over the life of the Operating
Partnership. However, the special allocation rules of Section 704(c) of the Code
do not always entirely eliminate
20
<PAGE>
the Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed assets
in the hands of the Operating Partnership may cause Konover to be allocated
lower depreciation and other deductions and cause Contributing Partners to be
allocated less taxable income. As a result, Konover could recognize taxable
income in excess of distributed amounts, which might adversely affect our
ability to comply with the REIT distribution requirements, and Contributing
Partners may realize income on the distribution of cash because their basis has
not been increased sufficiently from income allocations. See " -- Annual
Distribution Requirements."
With respect to any property purchased by the Operating Partnership,
such property initially will have a tax basis equal to its fair market value,
and Section 704(c) of the Code will not apply.
BASIS IN OPERATING PARTNERSHIP INTEREST.
Our adjusted tax basis in our interest in the Operating Partnership
generally
(1) will be equal to the amount of cash and the basis of any other
property that we contributed to the Operating Partnership,
(2) will be increased by (a) our allocable share of the Operating
Partnership's income and (b) our allocable share of indebtedness
of the Operating Partnership and
(3) will be reduced, but not below zero, by our allocable share of
(a) losses suffered by the Operating Partnership, (b) the amount
of cash distributed to Konover, and (c) constructive
distributions resulting from a reduction in our share of
indebtedness of the Operating Partnership.
If the allocation of Konover's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of its partnership interest in
the Operating Partnership, the recognition of such excess loss will be deferred
until such time and to the extent that it has an adjusted tax basis in our
partnership interest. To the extent that the Operating Partnership's
distributions, or any decrease in our share of the indebtedness of the Operating
Partnership (such decreases being considered a cash distribution to the
partners) exceed our adjusted tax basis, such excess distributions (including
such constructive distributions) constitute taxable income to Konover. Such
taxable income normally will be characterized as a capital gain if the interest
in the Operating Partnership has been held for longer than one year, subject to
reduced tax rates described above (See " -- Taxation of U.S. Shareholders --
Capital Gain Distributions"). Under current law, capital gains and ordinary
income of corporations generally are taxed at the same marginal rates.
SALE OF THE PROPERTIES.
Konover's share of gain realized by the Operating Partnership on the
sale of any property held by the Operating Partnership as inventory or other
property held primarily for sale to customers in the ordinary course of the
Operating Partnership's trade or business will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. See " --
Requirements for Qualification -- Income Tests." Such prohibited transaction
income also may have an adverse effect upon its ability to satisfy the income
tests for qualification as a REIT. Under existing law, whether property is held
as inventory or primarily for sale to customers in the ordinary course of the
Operating Partnership's trade or business is a question of fact that depends on
all the facts and
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<PAGE>
circumstances with respect to the particular transaction. The Operating
Partnership intends to hold the properties for investment with a view to
long-term appreciation, to engage in the business of acquiring, developing,
owning, and operating the properties (and other properties) and to make such
occasional sales of the properties, including peripheral land, as are consistent
with the Operating Partnership's investment objectives.
STATE AND LOCAL TAX
We may be subject to state and local tax in various states and
localities. Our shareholders also may be subject to state and local tax in
various states and localities. The tax treatment to us and to our shareholders
in such jurisdictions may differ from the federal income tax treatment described
above. Consequently, before you buy our common stock, you should consult your
personal tax advisor regarding the effect of state and local tax laws on an
investment in our common stock.
SELLING SHAREHOLDERS
Konover agreed to register the resale by the selling shareholders of
the Series A preferred stock, the common stock underlying the Series A preferred
stock and certain warrants, and the shares of common stock that may be issued
upon redemption of certain Units. Our registration of the Series A preferred
stock and the common stock does not necessarily mean that the selling
shareholders will sell all or any of the shares. We cannot estimate the number
of shares that a selling shareholder will own upon completion of the offering.
The following table sets forth certain information regarding the
beneficial ownership of Series A preferred stock and common stock by the selling
shareholders as of September 20, 1999, and the number of shares of Series A
preferred stock and common stock covered by this prospectus. The information in
the table concerning the selling shareholders who may sell shares hereunder is
based upon information furnished to Konover by the respective selling
shareholders or available to Konover through its stock transfer records.
Assuming all of the shares offered hereby are sold, no selling shareholder will
own one percent or more of the Series A preferred stock or the common stock
after completion of the offering.
22
<PAGE>
<TABLE>
<CAPTION>
SHARES
OF
COMMON STOCK SHARES OF SHARES OF SERIES A
NAME OF SELLING OWNED BEFORE COMMON STOCK PREFERRED STOCK OWNED
SHAREHOLDER (1) OFFERING (2)(3) OFFERED HEREBY (3) AND OFFERED HEREBY (2)
---------------- --------------- ------------------ ----------------------
<S> <C> <C> <C>
1998 Rodwell Family Trust 110,500 (4) 110,500 (4) 0
Antrade N.V. 16,142 (5) 16,142 (5) 0
Bank of New York 220,000 220,000 79,200
Blackacre Capital Group, L.P. 555,555 815,555 (6) 200,000
Clifford Clark 22,202 (4) 22,202 (4) 0
Jane Coppa (7) 133,200 (8) 133,200 (8) 0
Delaware Charter Guarantee & Trust Co. for
the benefit of Steven L. Volla
IRA Rollover 5,556 (9) 5,556 (9) 0
Festival Associates Limited Partnership 35,732 (4) 35,732 (4) 0
Francarep SA 12,473 (10) 12,185 (10) 4,272
John W. Gildea (11) 855,408 (12) 111,111 40,000
John M. Kane 215,001 (4) (13) 215,001 (4) 0
Simon Konover (7) 46,786 (4) (14) 29,882 (4) 0
Steven M. Konover (7) 133,200 (8) 133,200 (8) 0
Konover Management Corp. (7) 717 (4) 717 (4) 0
Konover Mobile, Inc. (7) 1,015 (4) 1,015 (4) 0
KR Commercial Associates
Limited Partnership (7) 15,172 (4) 15,172 (4) 0
Carolyn E. Martin 208,759 (4) 208,759 (4) 0
Massachusetts Mutual Life Insurance
Company 555,556 555,556 200,000
Mattatuck Realty Associates
Limited Partnership 133,600 (8) 133,600 (8) 0
Montsol Investments Inc. 16,142 (15) 16,142 (15) 0
National Union Fire Insurance Company of
Pittsburgh 20,000 (8) 20,000 (8) 0
Network Fund III, Ltd. (11) 722,197 (16) 722,197 (16) 253,208
Mary Nimkoff 32,127 (4) 32,127 (4) 0
Petersburg Commercial Associates
Limited Parntership 71,009 (4) 71,009 (4) 0
Roy Rodwell 104,766 (4) 104,766 (4) 0
Jonathan Rosen 192,202 (4) 192,202 (4) 0
Fred Steinmark 26,949 (4) 26,949 (4) 0
Steven L. Volla and Stephanie Volla 16,667 (9) 16,667 (9) 0
William P. O'Donnell IRA 11,111 11,111 4,000
-------------------------------------------------------------
Total 3,988,255 780,680
</TABLE>
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<PAGE>
(1) A "selling shareholder" shall also include any person or entity that
receives shares of the Series A preferred stock or common stock offered
hereby (or Units or warrants redeemable or exercisable for such shares) as
a result of (i) their pro rata distribution by an entity to its equity
holders, (ii) a gift or (iii) a pledge. Any selling shareholder who is not
specifically named in the table above will be named in a supplement to the
Prospectus if a supplement is required by Securities and Exchange
Commission rules at the time such selling shareholder offers the shares.
(2) To our knowledge, except as noted below, each selling shareholder has sole
voting and investment power with respect to the shareholder's securities.
(3) Unless otherwise indicated by footnote, the number of shares indicated
below solely comprises shares issuable upon conversion of outstanding
Series A preferred stock.
(4) Consists of shares issuable upon redemption of Units.
(5) Consists of 15,722 shares of outstanding common stock and 420 shares of
common stock issuable upon exercise of warrants.
(6) Includes 260,000 shares of common stock issuable upon exercise of the
warrants.
(7) Simon Konover is Chairman of the Company's board of directors. Steven
Konover and Jane Coppa are the adult children of Simon Konover. Konover
Mobile, Inc., Konover Management Corp. and KR Commercial Associates Limited
Partnership are affiliates of Simon Konover.
(8) Consists of shares of common stock issuable upon exercise of warrants.
(9) Consists of outstanding shares of common stock.
(10) Number of shares owned includes 288 shares of outstanding common stock and
318 shares of common stock issuable upon exercise of warrants. Number of
shares offered includes 318 shares of common stock issuable upon exercise
of warrants.
(11) John W. Gildea is a director of Konover, a director of Network Funds III,
Inc. (a selling shareholder) and a managing director of Gildea Management
Company. Gildea Management Company provides, by contract, investment
advisory services to Network Funds III, Inc.
(12) Consists of (a) 4,000 shares held by Mr. Gildea's spouse as custodian for
their children as to which Mr. Gildea has sole voting power only and as to
which he disclaims beneficial ownership, (b) 111,111 shares of common stock
presently issuable upon conversion of Series A preferred stock as to which
Mr. Gildea has sole voting and dispositive power, (c) 722,197 shares of
common stock presently issuable upon conversion of Series A preferred stock
and warrants owned by Network Fund III, Ltd. ("Network"), with respect to
which Mr. Gildea has shared dispositive power only, and (d) 18,100 shares
of common stock owned by Network, with respect to which Mr. Gildea has
shared dispositive power only.
(13) Excludes 163,848 shares issuable upon redemption of the same number of
Units that Mr. Kane is anticipated to receive October 1, 1999, pursuant to
certain earn-out provisions in an agreement with the Operating Partnership.
(14) Consists of (a) 29,882 shares of common stock issuable upon redemption of
Units held by Mr. Konover; (b) 717 shares of common stock issuable upon
redemption of Units held by Konover Management Corp.; (c) 1,015 shares of
common stock issuable upon redemption of Units held by Konover Mobile,
Inc.; and (d) 15,172 shares issuable upon redemption of Units held by KR
Commercial Associates Limited Partnership.
(15) Includes 420 shares of common stock issuable upon exercise of warrants.
(16) Includes 18,100 shares of outstanding common stock and 18,842 shares of
common stock issuable upon exercise of warrants.
24
<PAGE>
DESCRIPTION OF EQUITY SECURITIES
The authorized capital stock of Konover consists of 100,000,000 shares
of common stock, $0.01 par value, of which 30,838,711 shares were outstanding on
August 10, 1999; 5,000,000 shares of preferred stock, $25.00 par value,
1,000,000 shares of which have been designated Series A convertible preferred
stock, of which 780,680 were outstanding on September 20, 1999; and 25,000,000
shares of "excess stock," $0.01 par value, of which no shares were outstanding
on such date. For more detail about our charter and bylaws you should refer to
the charter and bylaws, which have been filed as exhibits either to the
registration statement of which this prospectus is a part, or to other reports
incorporated by reference into this prospectus. In addition, for a discussion of
limitations on the ownership of our capital stock, see "Risk Factors - There are
Limitations on a Third Party's Ability to Acquire Us or Effect a Change of
Control - LIMITATIONS IMPOSED TO PROTECT OUR REIT STATUS MAY PREVENT OR
DISCOURAGE A CHANGE OF CONTROL."
COMMON STOCK
Holders of shares of common stock are entitled to one vote per share on
all matters to be voted on by shareholders. The holders of common stock are
entitled to receive such dividends, if any, as may be declared from time to time
by Konover's Board of Directors out of funds legally available therefor. Upon
liquidation or dissolution of Konover, the holders of the common stock are
entitled to share ratably in the distribution of assets, subject to the rights
of the holders of the Series A preferred stock or any other series of preferred
stock that may then be outstanding. There are no redemption or sinking fund
provisions with respect to the common stock. Holders of common stock have no
preemptive rights with respect to any shares of capital stock of Konover.
SERIES A PREFERRED STOCK
Pursuant to the terms of the Series A preferred stock, dividends on the
Series A preferred stock and the common stock will rank on a parity; dividends
will be paid on the Series A preferred stock only if dividends are declared and
paid on the common stock and only in an amount per share of Series A preferred
stock equal to dividends payable on the common stock into which such share of
Series A preferred stock is convertible. The Series A preferred stock will rank
senior and prior to the common stock as to rights upon liquidation, winding up
or dissolution of Konover.
Holders of Series A preferred stock have no preemptive rights with
respect to any shares of capital stock of Konover. Shares of Series A preferred
stock are not subject to any sinking fund or other obligation of Konover to
redeem or retire the Series A preferred stock.
Holders of Series A preferred stock have no voting rights, except as
may be required by law, and except that they are entitled to vote as a class:
(1) on any proposal to amend the terms of the preferred stock or as required by
applicable law in connection with an amendment to Konover's charter that would
adversely alter or change the powers, preferences or special rights of the
Series A preferred stock; and (2) for the authorization or issuance of any new
class of capital stock of Konover ranking (a) senior to the Series A preferred
stock as to rights upon liquidation, winding up or dissolution of Konover, or
(b) on a parity with the Series A preferred stock as to rights upon liquidation,
winding up or dissolution, unless the average closing price of the common stock
for the 30 trading days before Konover notices an intent to issue such parity
stock is at least $15.00 and such parity stock is issued within six months of
such notice.
25
<PAGE>
Each share of Series A preferred stock is convertible at the option of
the holder, without payment of any additional consideration, into approximately
2.78 shares of common stock, subject to adjustment in certain events, including:
o the issuance of capital stock of Konover as a dividend or
distribution on the common stock not otherwise payable to holders
of Series A preferred stock;
o the subdivision, reclassification or combination of common stock
into a greater or smaller number of shares;
o the issuance of common stock for consideration having a fair
market value that is less than $9.00 per share (subject to
certain adjustments); and
o the issuance, by reclassification of any common stock, of any
assets or securities of Konover.
To exercise the conversion privilege, a holder of the Series A
preferred stock must provide Konover with written notice of its election to
convert (the "Conversion Notice") and must surrender its stock certificates,
duly endorsed, or accompanied by instruments of transfer duly executed, by the
holder. Within 10 business days after receipt of the Conversion Notice and the
certificates evidencing Series A preferred stock, Konover will issue
certificates for the number of full shares of common stock issuable upon the
conversion of such shares of Series A preferred stock. Konover will not issue
fractional shares of common stock but will pay the holder of the converted
Series A preferred stock the fair market value of any fractional shares of
common stock. In the event that less than all the shares of a holder's Series A
preferred stock are converted, Konover will issue a new certificate for the
number of shares of unconverted Series A preferred stock.
In the event of a sale of all of Konover's assets, or a consolidation,
merger or similar transaction pursuant to which the outstanding shares of common
stock are exchanged for, or changed, reclassified or converted into, other stock
or securities, or cash or other property, each share of Series A preferred stock
will be convertible into the kind and amount of shares of stock and other
securities, property or assets receivable by a holder of the number of shares of
common stock issuable upon conversion of such share of Series A preferred stock.
Absent the consent of the holders of a majority of the shares of Series
A preferred stock, Konover may not consolidate or merge with another entity
where Konover does not survive, unless the holders of Series A preferred stock
receive preferred stock of the surviving entity having substantially identical
terms as the Series A preferred stock, the surviving entity does not have
outstanding any capital stock that is senior to the Series A preferred stock and
the surviving entity has a class of equity securities listed on a national
securities exchange or the Nasdaq National Market.
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERENCE DIVIDENDS
The following table sets forth Konover's ratio of earnings to combined
fixed charges and preferred stock dividends for the periods indicated. This
ratio was calculated by dividing income from continuing operations before income
taxes plus fixed charges (excluding capitalized interest)
26
<PAGE>
by total fixed charges and preferred stock dividends. Fixed charges consist of
interest expense, including capitalized interest and the amortization of any
debt issuance costs. Preferred stock dividends consist of the amount of pre-tax
earnings that would be required to cover preferred stock dividend requirements.
The shares of Series A preferred stock were issued on August 1, 1996.
<TABLE>
<CAPTION>
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERENCE DIVIDENDS
For the fiscal year ended
December 31,
For the six
months ended
June 30, 1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
1.32x 1.08x 0.89x 0.80x 0.47x 3.03x
</TABLE>
For the years ended December 31, 1997, 1996, and 1995, respectively, total fixed
charges and preferred stock dividends exceeded pre-tax income plus fixed charges
(excluding capitalized interest) by approximately $1,955,000, $3,323,000 and
$7,168,000.
DETERMINATION OF OFFERING PRICE
The Series A convertible preferred stock offered by this prospectus
will be offered at prices determined at the time of sale.
PLAN OF DISTRIBUTION
This prospectus relates to the offer by the selling shareholders of
780,680 shares of Series A preferred stock and 3,988,255 shares of common stock.
The selling shareholders are offering the shares for their own account, and not
for the account of Konover. Konover will not receive any proceeds from the sale
of the shares by the selling shareholders.
The Series A preferred stock and common stock offered hereby may be
sold by the selling shareholders or by pledgees, donees, transferees or other
successors-in-interest (including sales after exercise of conversion
privileges). Such sales may be made in the over-the-counter market, in privately
negotiated transactions, or otherwise, at prices and at terms then prevailing,
at prices related to the then-current market prices or at negotiated prices, or,
with respect to the common stock, in transactions on the New York Stock
Exchange. The shares may be sold by one or more of the following methods:
o a block trade in which the broker or dealer so engaged will
attempt to sell the stock as agent but may position and resell a
portion of the block as principal in order to consummate the
transaction;
o a purchase by a broker or dealer as principal, and the resale by
such broker or dealer for its account pursuant to this
prospectus, including resale to another broker or dealer; or
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers.
27
<PAGE>
In effecting sales, brokers or dealers engaged by a selling shareholder
may arrange for other brokers or dealers to participate. Any such brokers or
dealers will receive commissions or discounts from a selling shareholder in
amounts to be negotiated immediately prior to the sale. Such brokers or dealers
and any other participating brokers or dealers may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933. Any gain
realized by such a broker or dealer on the sale of shares that it purchases as a
principal may be deemed to be compensation to the broker or dealer in addition
to any commission paid to the broker by a selling shareholder.
The selling shareholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of shares
against certain liabilities, including liabilities arising under the Securities
Act of 1933.
The selling shareholders have not advised Konover that they have
entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of their shares, or that there
is an underwriter or coordinating broker acting in connection with the proposed
sale of shares by the selling shareholders.
The securities covered by this prospectus may also be sold under Rule
144 instead of under this prospectus. Rule 144 provides an exemption from
registration for the resale of securities by persons other than the issuer after
the securities have been held by persons for at least one year from original
issuance, and such securities are sold in strict compliance with Rule 144
"manner of sale" requirements and maximum number of shares requirements.
Konover will pay all reasonable expenses of registration of the common
stock and the Series A preferred stock (other than fees and expenses of
investment bankers, brokerage commissions and the selling shareholders' counsel
fees and expenses, if any).
The selling shareholders will be subject to the prospectus delivery
requirements of the Securities Act of 1933, which may include, with respect to
the common stock, delivery through the facilities of the New York Stock Exchange
pursuant to Rule 153.
The anti-manipulation rules of Regulation M under the Securities
Exchange Act of 1934 may apply to sales of the shares in the market and to the
activities of the selling shareholders.
There is no assurance that the selling shareholders will sell any or
all of the shares offered hereby.
LEGAL MATTERS
The validity of the shares of common stock and the Series A preferred
stock to which this prospectus relates has been passed upon for Konover by
Alston & Bird LLP, Raleigh, North Carolina. In addition, Alston & Bird LLP,
Atlanta, Georgia, has issued an opinion to us regarding tax matters.
EXPERTS
The consolidated financial statements of Konover as of and for the year
ended December 31, 1997, and as of and for the year ended December 31, 1998,
included in Konover's annual report on Form 10-K for the year ended December 31,
1998, have been audited by Arthur Andersen LLP, independent public accountants,
as stated in their report appearing therein, and are
28
<PAGE>
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said report.
The consolidated financial statements of Konover as of and for the year
ended December 31, 1996, included in Konover's annual report on Form 10-K for
the year ended December 31, 1998, have been audited by Ernst & Young LLP,
independent public accountants, as stated in their report appearing therein, and
are incorporated by reference herein in reliance upon the authority of said firm
as experts in giving said report.
ADDITIONAL INFORMATION AND INCORPORATION BY REFERENCE
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). You
may read and copy any materials that we have filed with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0300. We file information electronically with the SEC. The SEC
maintains an internet site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The SEC's internet site address is http://www.sec.gov. Our internet
site address is http://www.konovertrust.com.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring to documents we have filed with the SEC previously. The information we
incorporate by reference is considered to be part of this prospectus, and
information that we file with the SEC later will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings we make with the SEC under Sections 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934:
o Quarterly reports on Form 10-Q for the quarters ended March 31,
1999 and June 30, 1999.
o Annual report on Form 10-K for the fiscal year ended December 31,
1998.
o Current report on Form 8-K dated September 16, 1998 as amended on
Form 8-K/A filed November 30, 1998.
o The description of the common stock contained in Registration
Statement on Form 8-A, dated May 19, 1993.
We will provide copies of any or all of these documents to you at no
cost upon written or verbal request. You may request a copy of these documents
by writing or telephoning us at:
Investor Relations
Konover Property Trust, Inc.
11000 Regency Parkway
Third Floor, East Tower
Cary, North Carolina 27511
(919) 462-8787
29
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. Certain
forward-looking statements can be identified by the use of terminology such as
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "pro forma," "estimates," "anticipates" or comparable
terminology, or by discussions of strategy, plans or intentions. Forward-looking
statements are subject to risks and uncertainties, and assumptions about
Konover, including, among other things the risk factors discussed in this
prospectus under the heading "Risk Factors."
In light of these risks and uncertainties, and assumptions, the
forward-looking events discussed in this prospectus might not occur. We assume
no obligation to update or review forward-looking statements, whether as a
result of new information, future events or otherwise.
This prospectus is part of a registration statement filed with the SEC.
You should rely only on the information or representations in this prospectus.
Neither Konover nor the selling shareholders have authorized anyone else to
provide you with different information. Neither Konover nor the selling
shareholders will make an offer of the shares in any state where the offer is
not permitted. You should not assume that the information in this prospectus or
any supplement is accurate as of any date other than the date on the front cover
of those documents.
30
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with this offering are as follows:
Amount
------
SEC registration fee............................. $ 4,406
Legal fees and expenses ......................... 30,000
Accounting fees and expenses..................... 15,000
Miscellaneous ................................... 594
--------
Total ........................................... $ 50,000
=========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our charter limits the liability of Konover's directors and officers to
Konover and its shareholders to the fullest extent permitted by the laws of the
State of Maryland. Maryland law presently permits the liability of directors and
officers to a corporation or its shareholders for money damages to be limited,
except (i) to the extent that it is proved that the director or officer actually
received an improper benefit or profit in money property or services for the
amount of the benefit or profit in money, property or services actually
received, or (ii) to the extent that a judgment or other final adjudication
adverse to the person is entered in a proceeding based on a finding that the
director's or officer's action, or failure to act, was the result of active and
deliberate dishonesty and was material to the cause of action adjudicated in the
proceeding. This provision does not limit the ability of Konover or its
shareholders to obtain other relief, such as an injunction or rescission.
Our charter provides for indemnification of directors and officers to
the full extent permitted by the laws of the State of Maryland.
Article VI of our bylaws provides that we shall indemnify any person
who was or is an "authorized representative" of Konover (which means a director
or officer of Konover, or a person serving at the request of Konover as a
director, officer, employee, agent or trustee of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans) and who was or is a "party" (which includes the giving of
testimony or similar involvement) or is threatened to be made a party to any
"third-party proceeding" (which means any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of Konover) by reason of
the fact that such person was or is unauthorized representative of Konover, from
and against expenses (which include attorneys' fees), judgments, penalties,
fines and amounts paid in settlement actually and reasonably incurred by such
persons in connection with such third-party proceeding if such person
II-1
<PAGE>
acting and good faith and in a manner such person reasonably believed to be in
or not opposed to the best interests of Konover and, with respect to any
criminal third-party proceedings (which could or does lead to a criminal
third-party proceeding) had no reasonable cause to believe that such conduct was
unlawful. The termination of any third-party proceeding by judgment, order,
settlement, conviction or upon plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the authorized representative did not
act in good faith and in a manner that such person reasonably believed to be in,
or not opposed to, the best interests of Konover, and, with respect to any
criminal third-party proceeding, had reasonable cause to believe that such
conduct was unlawful.
Article VI of our bylaws further provides that we shall indemnify any
person who was or is an authorized representative of Konover and who was or is a
party or is threatened to be made a party to any "corporate proceeding" (which
means any threatened, pending or completed action or suit by or in the right of
Konover to procure a judgment in its favor or investigative proceeding by
Konover) by reason of the fact that such person was or is an authorized
representative of Konover, against expenses actually and reasonably incurred by
such person in connection with the defense or settlement of such corporate
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of Konover,
except that no indemnification shall be made in respect or any claim, issue or
matter as to which such person shall have been adjudged to be liable to Konover
unless and only to the extent that the court in which such corporate proceeding
was pending shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such authorized
representative is fairly and reasonably entitled to indemnity for such expenses
that the court shall deem proper.
The Maryland General Corporation Law ("MGCL") permits a corporation to
indemnify its directors, officers and certain other parties against judgments,
penalties, fines, settlements and reasonable expenses incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service to or at the request of the corporation, unless it is established
that (i) the act or omission of the indemnified party was material to the matter
giving rise to the proceeding and (x) was committed in bad faith or (y) was the
result of active and deliberate dishonesty, (ii) the indemnified party actually
received an improper personal benefit in money, property or services or (iii) in
the case of any criminal proceeding, the indemnified party had reasonable cause
to believe that the act or omission was unlawful. Indemnification may be made
against judgments, penalties, fines, settlements and reasonable expenses
(including attorneys' fees) actually incurred by the director or officer in
connection with the proceeding.
Indemnification is limited to court-ordered reimbursement for expenses;
however, if the proceeding is one by or in the right of the corporation, and the
director or officer was adjudged to be liable to the corporation or if the
proceeding is one charging improper personal benefit to the director or officer
and the director or officer was adjudged to be liable on the basis that personal
benefit was improperly received. The termination of any proceeding by
conviction, or upon a plea of nolo contendere or its equivalent, or an entry of
any order of probation prior to judgment, creates a rebuttable presumption that
the director or officer did not meet the requisite standard of conduct required
for indemnification to be permitted. Maryland law requires a corporation (unless
its charter provides otherwise, which Konover's charter does not) to indemnify a
director or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity. It is the position of the Securities and Exchange Commission
that indemnification of directors and officers for liabilities arising under the
II-2
<PAGE>
Securities Act is against public policy and is unenforceable pursuant to Section
14 of the Securities Act.
Konover has provided a Directors and Officers Liability Policy for the
benefit of its directors and officers.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
4.1(a) Amended and Restated Charter (incorporated by reference
to Exhibit 3.1 of Konover's Registration Statement on
Form S-4 (File No. 333-39491)).
4.1(b) Articles of Amendment of FAC Realty Trust, Inc.
(incorporated by reference to Exhibit 3.1 of Konover's
Form 10-Q for the quarter ended June 30, 1998 (File No.
011-11998)).
4.2 Amended and Restated Bylaws of Konover Property Trust,
Inc. (incorporated by reference to Exhibit 3.2 of
Konover's Form 10-Q for the quarter ended March 31, 1999
(File No.
011-11998)).
4.3 Certificate of Designation of Convertible Preferred
Stock, Series A (incorporated by reference to Exhibit
3.2 of Konover's current report on Form 8-K, filed on
July 10, 1996 (File No. 011-11998)).
5.1 Opinion of Alston & Bird LLP.
8.1 Tax opinion of Alston & Bird LLP.
12.1 Statements re Computation of Ratios
24.1 Consent of Ernst & Young LLP.
24.2 Consent of Arthur Andersen LLP.
24.3 Consent of Alston & Bird LLP (contained in Exhibit 5.1
hereto and in Exhibit 8.1 hereto).
25.1 Power of Attorney (contained on signature page hereto).
99.1 Amended and Restated Agreement of Limited Partnership of
the Operating Partnership (incorporated by reference to
Exhibit 3.3 of Konover's Form 10-K for the year ended
December 31, 1997 (File No. 011-11998)).
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
PROVIDED, HOWEVER, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in the post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cary, State of North Carolina, on September 23, 1999.
KONOVER PROPERTY TRUST, INC.
By: /s/ C. Cammack Morton
---------------------
C. Cammack Morton
President and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints C. Cammack Morton and Patrick M.
Miniutti, and each of them, his attorneys-in-fact and agents, each with full
power of substitution and resubstitution, for him in any and all capacities, to
sign any and all amendments (including post-effective amendments) to this
Registration Statement, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully as to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that each of said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ C. Cammack Morton President and Chief Executive September 23, 1999
- ---------------------- Officer (Principal Executive
C. Cammack Morton Officer), Director
/s/ Patrick M. Miniutti Executive Vice President and September 23, 1999
- ----------------------- Chief Financial Officer
Patrick M. Miniutti (Principal Financial and
Accounting Officer), Director
______________________ Chairman of the Board September ___, 1999
Simon Konover
II-5
<PAGE>
/s/ William D. Eberle Director September 23, 1999
- ---------------------
William D. Eberle
______________________ Director September ___, 1999
J. Richard Futrell, Jr.
/s/ John W. Gildea Director September 23, 1999
- ------------------
John W. Gildea
______________________ Director September ___, 1999
Klaus P. Kretschmann
/s/ Jonathan O'Herron Director September 23, 1999
- -----------------------
Jonathan O'Herron
_______________________ Director September ___, 1999
Mark S. Ticotin
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4.1(a) Amended and Restated Charter (incorporated by reference
to Exhibit 3.1 of Konover's Registration Statement on
Form S-4 (File No. 333-39491)).
4.1(b) Articles of Amendment of FAC Realty Trust, Inc.
(incorporated by reference to Exhibit 3.1 of Konover's
Form 10-Q for the quarter ended June 30, 1998 (File No.
011-11998)).
4.2 Amended and Restated Bylaws of Konover Property Trust,
Inc. (incorporated by reference to Exhibit 3.2 of
Konover's Form 10-Q for the quarter ended March 31, 1999
(File No.
011-11998)).
4.3 Certificate of Designation of Convertible Preferred
Stock, Series A (incorporated by reference to Exhibit
3.2 of Konover's current report on Form 8-K, filed on
July 10, 1996 (File No. 011-11998)).
5.1 Opinion of Alston & Bird LLP.
8.1 Tax opinion of Alston & Bird LLP.
12.1 Statements re Computation of Ratios.
24.1 Consent of Ernst & Young LLP.
24.2 Consent of Arthur Andersen LLP.
24.3 Consent of Alston & Bird LLP (contained in Exhibit 5.1
hereto and in Exhibit 8.1 hereto).
25.1 Power of Attorney (contained on signature page hereto).
99.1 Amended and Restated Agreement of Limited Partnership of
the Operating Partnership (incorporated by reference to
Exhibit 3.3 of Konover's Form 10-K for the year ended
December 31, 1997 (File No. 011-11998)).
Exhibit 5.1
ALSTON&BIRD LLP
3605 Glenwood Avenue, Suite 310
P. O. Drawer 31107
Raleigh, NC 27622-1107
919-420-2200
Fax: 919-420-2260
www.alston.com
ROBERT H. BERGDOLT DIRECT DIAL: 919-420-2216 E-MAIL: [email protected]
--------------------
September 23, 1999
Konover Property Trust, Inc.
11000 Regency Parkway, Suite 300
Cary, North Carolina 27511
Re: Legality of shares covered by Registration Statement on Form S-3 (File
No. 333-______)(the "Registration Statement")
Dear Ladies and Gentlemen:
We are acting as counsel for Konover Property Trust, Inc., a Maryland
corporation (the "Company"), in connection with the preparation and filing of
the Registration Statement, which covers the registration by the Company of
780,680 shares of its Series A preferred stock; 2,168,556 shares of its common
stock that may be issued upon conversion of the Series A preferred stock;
1,066,033 shares issuable upon the redemption of certain outstanding partnership
units in KPT Properties, L.P.; 700,000 shares of its common stock that may be
issued upon exercise of certain outstanding warrants; and 53,666 shares of its
outstanding common stock (collectively, the "Shares").
We have reviewed such documents and considered such matters of law and
fact as we, in our professional judgment, have deemed appropriate to render the
opinion contained herein. We are familiar with the proceedings taken and
proposed to be taken by the Company in connection with the authorization and
issuance of the Shares and for the purpose of this opinion, have assumed such
proceedings will be timely completed in the manner presently proposed.
Based upon and subject to the foregoing and the further limitations and
qualifications hereinafter expressed, it is our opinion that the Company has the
authority pursuant to its charter to issue the Shares, and the Shares will be
duly authorized, validly issued, fully paid and non-assessable upon (a) the
adoption by the board of directors of a resolution in form and content required
by Maryland law, and (b) delivery of the consideration contemplated by its
charter, the Agreement of Limited Partnership of KPT Properties, L.P. or the
warrants, as appropriate.
One Atlantic Center 1211 East Morehead Street 601 Pennsylvania
1201 West Peachtree Street P. O. Drawer 34009 Avenue, N.W.
Atlanta, GA 30309-3424 Charlotte, NC 28234-4009 North Building,
404-881-7000 704-331-6000 11th Floor
Fax: 404-881-7777 Fax: 704-334-2014 Washington, DC
20004-2601
202-756-3300
Fax: 202-756-3333
<PAGE>
Konover Property Trust, Inc.
September 23, 1999
Page 2
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
references therein to us and this opinion under the heading "Legal Opinions." In
giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended.
Our opinion expressed herein is as of the date hereof, and we undertake
no obligation to advise you of any changes in applicable law or any other
matters that may come to our attention after the date hereof that may affect our
opinion expressed herein.
Very truly yours,
ALSTON & BIRD LLP
By: /s/ Robert H. Bergdolt
-----------------------
Robert H. Bergdolt, Partner
RHB/ppb
Exhibit 8.1
ALSTON&BIRD LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
404-881-7000
Fax: 404-881-4777
www.alston.com
<TABLE>
<CAPTION>
<S> <C> <C>
1211 East Morehead Street 3605 Glenwood Avenue, Suite 310 601 Pennsylvania Avenue, N.W.
P. O. Drawer 34009 P. O. Drawer 31107 North Building, 11th Floor
Charlotte, NC 28234-4009 Raleigh, NC 27622-1107 Washington, DC 20004-2601
704-331-6000 919-420-2200 202-756-3300
Fax: 704-334-2014 Fax: 919-881-3175 Fax: 202-756-3333
</TABLE>
September 23, 1999
Konover Property Trust, Inc.
11000 Regency Parkway
Third Floor, East Tower
Cary, North Carolina 27511
Re: Certain Federal Income Tax Matters
Ladies and Gentlemen:
In connection with the registration statement on Form S-3, File No.
333-__________, to be filed on the date hereof (the "Registration Statement"),
relating to the registration of 3,988,255 shares of common stock and 780,680
shares of Series A preferred stock by Konover Property Trust, Inc. a Maryland
Corporation (the "Company"), you have requested our opinion concerning the
Company's qualification for federal income tax purposes as a real estate
investment trust ("REIT") as defined in Section 856 of the Internal Revenue Code
of 1986, as amended (the "Code"). Capitalized terms not defined herein have the
meanings ascribed thereto in the Registration Statement.
This opinion is based solely on various facts and factual assumptions
as set forth in the Registration Statement and is conditioned upon certain
representations made by the Company as to factual matters through a certificate
of an officer of the Company (the "Officer's Certificate") attached hereto and
made a part hereof. We have made no independent inquiry as to the factual
matters set forth in the Officer's Certificate. In addition, we have examined no
documents other than the Registration Statement for purposes of this opinion
and, therefore, our opinion is limited to matters determined through an
examination of such document and the factual matters set forth in the Officers'
Certificates.
In rendering the opinion set forth herein, we have assumed the
authenticity of all documents submitted to us as originals, the genuineness of
all signatures thereon, the legal capacity of natural persons executing such
documents and the conformity to authentic original documents of all documents
submitted to us as copies.
We are opining herein as to the effect on the subject transaction only
of the federal income tax laws of the United States and we express no opinion
with respect to the applicability thereto, or the effect thereon, of other
federal laws, the laws of any other
<PAGE>
Konover Property Trust, Inc.
September 23, 1999
Page 2
jurisdiction, the laws of any state or as to any matters of municipal law or the
laws of any other local agencies within any state.
Based solely on the facts in the Registration Statement and the facts
in the Officer's Certificate, we are of the opinion that the Company has been
organized and has operated in conformity with the requirements for qualification
and taxation as a REIT under the Code for its taxable years ended December 31,
1998, and that the Company is in a position to continue its qualification and
taxation as a REIT within the definition of Section 856(a) of the Code for the
taxable year that will end December 31, 1999. With respect to the taxable year
that will end December 31, 1999, we note that the Company's status as a REIT at
any time during such year is dependent, among other things, upon the Company
meeting the requirements of Sections 856 through 860 of the Code throughout the
year and for the year as a whole. Accordingly, because the Company's
satisfaction of such requirements will depend upon future events, and the final
determination of operational results, it is not possible to assure that the
Company will satisfy the requirements to be a REIT during the taxable year that
will end December 31, 1999.
This opinion is based on various statutory provisions, regulations
promulgated thereunder and interpretations thereof by the Internal Revenue
Service and the courts having jurisdiction over such matters, all of which are
subject to change either prospectively or retroactively. In addition, this
opinion is based on current federal law, and we do not undertake to advise you
as to any future changes in federal income tax law that may affect this opinion
unless we are specifically engaged to do so. Also, any variation or difference
in the facts from those set forth in the Registration Statement or the Officers'
Certificates may affect the opinions stated herein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "U.S. Income
Tax Considerations" in the Registration Statement. This opinion is provided by
Alston & Bird LLP solely for the benefit and use of the Company and the
shareholders of the Company. No other party or person is entitled to rely on the
opinions.
Very truly yours,
ALSTON & BIRD LLP
By: /s/ James E. Croker, Jr.
-------------------------
James E. Croker, Jr.
<PAGE>
KONOVER PROPERTY TRUST, INC.
September 23, 1999
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Officer's Certificate
Ladies & Gentlemen:
As a basis for your opinion to be rendered to Konover Property Trust,
Inc., a Maryland Corporation (the "Company") regarding the Company's
qualification for federal income tax purposes as a real estate investment trust
("REIT") as defined in section 856 of the Internal Revenue Code of 1986, as
amended (the "Code"), in connection with the registration statement on Form S-3,
filed on date hereof (the "Registration Statement"), you have requested that the
Company certify certain factual statements and representations. (Capitalized
terms which are not defined in this Certificate are defined in Exhibit "A.") I
am President and Chief Executive Officer of the Company and in such capacity
have access to relevant information regarding each of the factual matters set
forth below. I have also made such inquiries of current and former officers and
employees of the Company as I have considered appropriate in reviewing this
Certificate. Accordingly, on behalf of the Company, I hereby certify that the
following factual statements and representations are true, correct and complete:
1. At all times since December 31, 1993, one hundred (100) or more
Persons have held the beneficial ownership of the Company.
2. After applying the Attribution Rules, five or fewer Individuals did
not own either directly or indirectly more than fifty percent (50%) of the
Company's outstanding stock during any of its taxable years beginning after
December 31, 1993.
3. Beginning with its taxable year ending December 31, 1993, the
Company filed a U.S. federal income tax election to be taxed as a real estate
investment trust (a "REIT"), and such election has not been terminated or
revoked. The Company has filed Form 1120-REIT for its 1998 taxable year and
timely filed Form 1120-REIT for each of its prior taxable years. The Company has
not received notification formally or informally from the Internal Revenue
Service or any other person that the Company's REIT election may not be valid or
has been revoked or withdrawn in any respect.
<PAGE>
4. Since the organization of the Company, all of the beneficial
ownership of the Company has been evidenced by transferable shares, and there
are no restrictions on the transferability of such shares in the Articles of
Incorporation or in any agreement to which the Company is a party, other than
restrictions designed to protect the Company's REIT status.
5. The Company has owned shares of stock in the subsidiaries listed in
Exhibit B (collectively, the "Subsidiaries"). At all times that the Company has
owned shares of stock in the Subsidiaries, the Company has directly owned all of
the outstanding stock of the Subsidiaries, and the Company has owned all such
stock since the Subsidiaries were organized. The Company has not owned and does
not presently own shares of stock in any other corporation (including mutual
funds) other than the Subsidiaries and the corporations listed on Exhibit C
(collectively, the "Active Companies") either directly, through a partnership,
or through some other arrangement. The Company has never owned voting stock of
the Active Companies. The owners of the Active Companies since their formation
are listed on Exhibit C. There are no shareholder agreements or understandings
evidenced in any form among the shareholders of the Active Companies or
restrictions on transferability of the voting shares of the Active Companies,
and the Company does not have any right to acquire or direct ownership of the
voting shares of the Active Companies or to appoint directors or direct the
election of directors of the Active Companies. All debt instruments for which
the Company or any Subsidiary is or was an obligor are or were (i) held by an
unrelated party, (ii) not contingent on income or profits of the Company or the
Subsidiary, and (iii) not convertible into stock of the Company or the
Subsidiary, except as noted on Exhibit D. The Company has never owned, directly
or indirectly, any of the stock of Truefinds.com, Inc., a Maryland corporation
("Truefinds"), has not transferred any property to or performed any services on
behalf of Truefinds, and does not possess, directly or indirectly, any right to
acquire stock of Truefinds or to participate in the management, profits, or
assets of Truefinds. All of the stock of Truefinds has been owned, since its
inception, by John W. Gildea and C. Cammack Morton.
6. The Company and the Subsidiaries have owned interests in the
partnerships and limited liability companies listed in Exhibit E (collectively,
the "Partnerships"). The Company and the Subsidiaries have not owned and do not
presently own interests in any partnership or limited liability companies other
than the Partnerships either directly, through a partnership, or through some
other arrangement. None of the Partnerships have elected or will elect to be
classified as an association taxable as a corporation. The Partnerships are not
publicly-traded partnerships that are treated as corporations under Code section
7704 and have not at any time been treated other than as partnerships for
federal income tax purposes.
7. Each of the Subsidiaries and the Partnerships have not and do not
presently own securities in any other corporation (including mutual funds) other
than stock of the Subsidiaries and the Active Companies either directly, through
a partnership, or through some other arrangement. The Company, the Subsidiaries
and the Partnerships have never,
-2-
<PAGE>
either collectively or individually, owned more than ten percent (10%) of the
outstanding voting securities of another corporation (including mutual funds)
other than voting stock of the Subsidiaries. The Company, the Subsidiaries and
the Partnerships have never had more than five percent (5%) of the Company's
aggregate assets invested in securities of a single issuer (including shares in
a mutual fund) other than stock of the Subsidiaries.
8. When the assets, liabilities, items of income, deductions, and
credits of the Company (including its allocable share of assets, liabilities,
items of income, deductions, and credits of the Partnerships) are aggregated
with those of the Subsidiaries during the relevant taxable year:
(a) In each taxable year of the Company's existence, at least
ninety-five percent (95%) of the gross income (excluding gross income
from Prohibited Transactions) was derived from (i) dividends, (ii)
interest, (iii) rents from real property (excluding rents from
properties listed in Exhibit F), (iv) gain from the sale or other
disposition of stock, securities and real property, Interests in Real
Property and interests in mortgages on real property, but excluding
gain on real property held as inventory or primarily for sale to
customers in the ordinary course, (v) abatements and refunds of taxes
on real property, (vi) income and gain derived from Foreclosure Real
Property, (vii) amounts (other than amounts, the determination of which
depends in whole or part on income or profits of any Person) received
or accrued as consideration for entering into agreements (A) to make
loans secured by mortgages on real property or on Interests in Real
Property, or (B) to purchase or lease real property (including
Interests in Real Property and interests in mortgages on real
property), and (viii) gain from the sale or other disposition of a Real
Estate Asset which is not a Prohibited Transaction;
(b) In each taxable year of the Company's existence, at least
seventy-five percent (75%) of the gross income (excluding gross income
from Prohibited Transactions) was derived from (i) rents from real
property (excluding rents from properties listed in Exhibit F), (ii)
Interests on Obligations Secured by Mortgages on Real Property or on
Interests in Real Property, (iii) gain from the sale or disposition of
real property (including Interests in Real Property and interests in
mortgages on real property), but excluding real property held as
inventory or primarily for sale to customers in the ordinary course,
(iv) dividends or other distributions on, and gain (other than gain
from Prohibited Transactions) from the sale or other disposition of,
transferable shares or beneficial certificates in other REITs, (v)
abatements and refunds of taxes on real property, (vi) income and gain
derived from Foreclosure Real Property, (vii) amounts (other than
amounts, the determination of which depends in whole or in part on the
income of profits of any Person) received or accrued as consideration
for entering into agreements (A) to make loans secured by mortgages on
real property or on Interests in Real Property, or (B) to purchase or
lease real property (including Interests in Real Property and interests
in mortgages on real property), (viii) gain from the sale or
-3-
<PAGE>
other disposition of a Real Estate Asset which is not a Prohibited
Transaction, and (ix) Qualified Temporary Investment Income;
(c) In each taxable year of the Company's existence, less than
thirty percent (30%) of the gross income was derived from (i) the sale
or other disposition of stock or securities held for less than one
year, (ii) property in a Prohibited Transaction, and (iii) real
property (including Interests in Real Property and interests in
mortgages on real property) held for less than four years, other than
property compulsorily or involuntarily converted (by means of
destruction, theft, seizure, requisition, condemnation or threat of
imminence thereof) and Foreclosure Real Property;
(d) The Company intends to monitor and manage the management
fee income earned with respect to third-party management contracts held
by the Company, the Subsidiaries, and the Partnerships, including those
acquired, or to be acquired, in the transaction involving RMC Realty
Companies, Ltd. pursuant to the agreement dated as of March 18, 1999
(the "RMC transaction"), to permit the Company to satisfy the 75% and
95% tests in paragraph 7(a) and 7(b).
9. In respect of each taxable year of the Company's existence, the
Company has paid dividends (without regard to capital gains dividends) equal to
or in excess of the sum of (1) ninety-five percent (95%) of the Company's and
the Subsidiaries' taxable income for the year (determined without regard to the
deduction for dividends paid and by excluding any net capital gain), and (ii)
ninety-five percent (95%) of the excess of the net income from Foreclosure
Property over the tax imposed on such income, minus (iii) any excess noncash
income;
10. In the case of each taxable year of the Company's existence, the
dividends paid by the Company on the Company's Common Stock were made pro rata,
with no preference to any share of the Company's Common Stock as compared with
other such shares.
11. At the close of each quarter of each taxable year of the Company's
existence, Real Estate Assets, cash and cash items (including receivables), and
U.S. Government securities represented at least seventy-five percent (75%) of
the value of the combined total assets of the Company, the Subsidiaries and the
Company's allocable share of the assets of the Partnerships.
12. Since the organization of the Company, the Company, directly and
through the Subsidiaries and the Partnerships, has not actively conducted
businesses from which it earned fees exceeding in the aggregate in any year 2%
of the Company's gross income for such year for services they performed.
13. Since the organization of the Company, personal property, if leased
in connection with real properties held by the Company, the Subsidiaries or the
Partnerships
-4-
<PAGE>
(the "Properties"), or if leased in connection with any portion of any of the
Properties or the Company's headquarters, has been and will be leased only
together with real property, and the Company's, the Subsidiaries' and the
Partnerships' aggregate adjusted bases in all personal property subject to such
lease has been and will be no more than 15% of the Company's, the Subsidiaries'
and the Partnerships' aggregate adjusted bases in all real and personal property
subject to such lease.
14. Since the organization of the Company, no amount due from the
rental of the Properties, or a portion thereof, has been or will be determined
in whole or in part by reference to the income or profits derived by any person
from the leased property unless (i) substantially all of the tenant's income
from the property consists of rents derived from subleasing substantially all of
the property, and (ii) those rents would be treated as rents from real property
if received directly by the Company, the Subsidiaries or the Partnerships.
15. Since the organization of the Company, none of the Properties, nor
any portion thereof, have been or will be leased to any party who subleases the
property or a portion thereof, if the rent payable with respect to the sublease
is based on a percentage of the sublessee's receipts or sales and the rent
payable with respect to the sublease is determined in whole or in party by
reference to the income or profits derived by any person from the subleased
property.
16. Since the organization of the Company, none of the Properties have
been or will be leased to a corporation in which the Company owns, directly or
indirectly, ten percent (10%) of more of the voting stock or ten percent (10%)
or more of the total number of shares, or to any other entity in which the
Company owns, directly or indirectly, an interest of ten percent (10%) or more
in the net profits or assets.
17. Since the organization of the Company, all services that have been
or will be provided to tenants of the Properties constitute services customarily
furnished or rendered to tenants based on the class of the Property and its
geographical locale.
18. Since the organization of the Company, the Company, the
Subsidiaries and the Partnerships have not and will not provide services to
tenants at the Properties (other than though an Independent Contractor from whom
the Company does not derive or receive any income) except for providing: heat,
light, water, electricity, air conditioning, sewer, collection of trash and
similar utilities, and other services customarily provided to tenants in
buildings of a similar class in the geographic market in which the Properties
are located. Since the organization of the Company, the Company, the
Subsidiaries and the Partnerships have not and will not provide reserved
parking, parking for fees, or parking attendants to tenants and guests at the
Properties (other than through an Independent Contractor).
19. Since the organization of the Company, the Company, the
Subsidiaries, and the Partnerships have not owned any property the fair market
value of which was less
-5-
<PAGE>
than the amount of indebtedness secured by such property (or allocable portion
of an indebtedness secured by more than one property).
20. The Company has reviewed all of the leases to which all properties
acquired, or to be acquired, by the Company, directly or indirectly, in 1999,
and all rents to be received thereon will qualify as rents from real property
within the meaning of Code section 856(d).
21. Since the organization of the Company, no interest (including
Interest on Obligations Secured by Mortgages on Real Property or Interests in
Real Property) received or accrued, directly or indirectly, by the Company, the
Subsidiaries or the Partnerships has been or will be determined in whole or in
part by reference to the income or profits derived by any person.
22. Since the organization of the Company, the Company, the
Subsidiaries and the Partnerships have held and intend to hold the Properties
for purposes of obtaining income through the rental of the Properties and
through long-term appreciation of the Properties. None of the Properties, nor
any portion thereof, have been or will be held by the Company, the Subsidiaries
or the Partnerships primarily for sale to customers in the ordinary course of
the Company's, the Subsidiaries' or the Partnerships' trade or business. The
Company, the Subsidiaries and the Partnerships do not intend to subdivide any
Property.
23. Since the organization of the Company, neither the Company, any of
the Subsidiaries nor any of the Partnerships have owned any Foreclosure Real
Property (other than property the income from which would not cause the
statements contained in paragraph 7(a) and 9(b) to no longer be true).
24. Except as previously disclosed, the Company has sent, within 30
days after the close of each of its taxable years, such letter or letters as are
required to be sent to record holders of the Company's outstanding shares
pursuant to Treasury Regulation Section 1.857-8(d), demanding the information
required by paragraphs (b) and (c) of Treasury Regulation Section 1.857-8 and
informing each such holder of its duty to submit at the time it files its United
States federal income tax return the statements required by Treasury Regulation
Section 1.857-9 if such holder fails or refuses to comply with such demand. A
closing agreement relating to the Company's demand letter obligations for 1997
has been fully executed by the Company and the Internal Revenue Service and has
not been revoked or withdrawn by the Internal Revenue Service. Since its
organization, the Company has maintained the records required under Treasury
Regulation Section 1.857-8.
25. Each Partnership is and has been organized and operated in
accordance with the partnership agreement of the Partnership.
-6-
<PAGE>
26. With respect to each Partnership that is a limited partnership, at
least one General Partner therein holds and has held its interests in the
Partnership for its own account and acts and has acted independently of the
limited partners of the Partnership.
27. The Company has never acquired the assets of another corporation in
a merger or other transaction that qualified as a reorganization under Code
section 368(a).
28. The information contained in the Company's filings with the
Securities and Exchange Commission, including all filings on Form 10K and Form
10Q, and contained in its financial statements is true, correct, and complete in
all material respects.
29. The Company has operated in 1998 and to date in 1999 and, except
insofar as does not jeopardize its status as a REIT, the Company intends to
operate in future periods in a manner consistent with the foregoing
representations, has no plan to change its method of operation from that
described herein, and is not aware of any set of facts that are likely to occur
and would keep it from being able to operate as described herein.
/s/ C. Cammack Morton
------------------------
C. CAMMACK MORTON
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
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<PAGE>
EXHIBIT A
Definitions
"Attribution Rules": (i) stock owned directly or indirectly by or for a
corporation, partnership, estate, or trust shall be considered as being owned
proportionately by its shareholders, partners, or beneficiaries; (ii) an
individual shall be considered as owning th0e stock owned, directly or
indirectly or by or for his family (for this purpose, the family of an
individual includes only his brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants); (iii) if any Person has an
option to acquire stock, such stock shall be considered as owned by such Person
(for this purpose, an option to acquire such an option, and each one of a series
of such options, shall be considered as an option to acquire such stock); (iv)
stock constructively owned by a Person by reason of the application of (i) or
(iii) above shall, for purposes of applying (i) or (ii) above, be treated as
actually owned by such Person; but stock constructively owned by an individual
by reason of the application of (ii) above shall not be treated as owned by him
for purposes of again applying such paragraph in order to make another
constructive owner of such stock; (v) if stock may be considered as owned by an
individual under either (ii) or (iii) above it shall be considered as owned by
him under paragraph (iii); and (v) outstanding securities convertible into stock
(whether or not convertible during the taxable year) shall be considered as
outstanding stock. Subparagraphs (ii), (iii) and (vi) shall only be applied if
the effect is to cause five or fewer Individuals to own directly or indirectly
more than 50% of the Company's outstanding stock during the last half of the
taxable year in question.
"Code": The Internal Revenue Code of 1986, as amended.
"Foreclosure Real Property": any real property (including Interests in
Real Property), and any personal property incident to such real property
acquired by the Company, any Subsidiary or any Partnership as a result of the
Company, any Subsidiary of any Partnership having bid in such property at
foreclosure, or having otherwise reduced such property to ownership or
possession by agreement or process of law, after there was default or default
was imminent on a lease of such property or on an indebtedness which such
property secured. Such term does not include property acquired by the Company,
any Subsidiary or any Partnership as a result of indebtedness arising from the
sales or other disposition of property that was inventory or primarily held for
sale to customers in the ordinary course and not originally acquired as
foreclosure property.
"Independent Contractor": an independent contractor (and not an
employee of the Company, the Subsidiaries or the Partnerships) from which the
Company and the Subsidiaries to not directly or indirectly derive or receive any
income and that satisfies the requirements of Treasury Regulation Section
1.856-5(b)(5)(iv).
"Individual": an individual, private foundation, charitable trust, and
any employee pension, profit sharing, stock bonus or supplemental unemployment
benefit trust.
<PAGE>
"Interest on Obligations Secured by Mortgages on Real Property or
Interests in Real Property": an amount which constitutes compensation for the
use or forbearance of money secured by Interests in Real Property provided that
the "loan value of the real property" (as defined in Treasury Regulation Section
1.856-5(c)(2)) equals or exceeds the highest principal amount of the loan
outstanding at any time during the taxable year.
"Interests in Real Property": fee ownership and co-ownership of land or
improvements thereon, leaseholds of land or improvements thereon, options to
acquire land or improvements thereon, and options to acquire leaseholds of land
or improvements thereon, but does not include mineral, oil or gas royalty
interests.
"Person": an Individual, a trust, an estate, a partnership, an
association, a company or a corporation.
"Prohibited Transaction": the sale or other disposition of property
held as inventory or primarily for the sale to customers in the ordinary course,
other than Foreclosure Real Property unless (i) the property sold was a Real
Estate Asset, (ii) the Company, the Subsidiary or the Partnership held the Real
Estate Asset for at least four years; (iii) the aggregate expenditures made by
the Company, the Subsidiary or the Partnership during the four (4) year period
preceding the date of the sale which are includible in the basis of the Real
Estate Asset do not exceed thirty percent (30%) of the net selling price of such
asset, (iv) (A) the Company, the Subsidiary or the Partnership did not make more
than seven sales of property during any taxable year (other than Foreclosure
Real Property or (B) the aggregate adjusted bases (as determined for purposes of
computing earnings and profits) of Real Estate Assets (other than Foreclosure
Real Property) sold during the taxable year does not exceed ten percent (10%) of
the aggregate adjusted bases (as so determined) of all of the assets of the
Company and the Subsidiaries as of the beginning of the taxable year, (v) in the
case of property which consists of land or improvements not acquired through
foreclosure (or deed in lieu of foreclosure), or lease termination, the Company,
the Subsidiary or the Partnership has held the property for not less than four
(4) years for production of rental income, and (vi) if the requirement of clause
(iv)(A) is not satisfied, substantially all of the marketing and development
expenditures with respect to the property were made through an Independent
Contractor.
"Qualified Temporary Investment Income": any income which (i) is
attributable to stock, or a bond, debenture, note, certificate or other evidence
of indebtedness (excluding any annuity contract which depends, in whole or in
substantial part, on the life expectancy of one or more individuals, or is
issued by an insurance company in a transaction in which there is no
consideration other than cash or another annuity contract meeting the
requirements of this definition, pursuant to the exercise of an election under
an insurance contract by a beneficiary thereof on the death of the insured party
under such contract or in a transaction involving a qualified pension or
employee benefit plan), (ii) is attributable
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<PAGE>
to the temporary investment of new capital, and (iii) is received or accrued
during the one year period beginning on the date such capital was received.
"Real Estate Asset": real property (including Interests in Real
Property and interests in mortgages on real property) and shares (or
transferable certificates of beneficial interest) in other REITs. Such term also
includes any property (not otherwise a Real Estate Asset) attributable to the
temporary investment of new capital, but only if such property is stock or a
debt instrument, and only for the one year period beginning on the date the
company receives such capital.
"REIT": a real estate investment trust which meets the requirements of
Sections 856 and 857 of the Code.
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<PAGE>
EXHIBIT B
Subsidiaries
------------
KPT Properties Holding Corp.
FSA Finance, Inc.
Factory Stores Management, Inc.
KPT REMIC Loan, Inc.
FAC Mortgage Formation, Inc.
Mobile KPT Formation, Inc.
RVA One Formation, Inc.
RVA Two Formation, Inc.
Square One KPT Formation, Inc.
FAC Tampa Formation, Inc.
<PAGE>
EXHIBIT C
Active Companies
----------------
Name of Company Owners of Voting Stock
--------------- Since Formation
---------------
KPT Outparcels, Inc. Konover Property Trust, Inc.
Wakefield Investment, Inc. C. Cammack Morton, Patrick M. Miniutti,
William H. Neville, Christopher G. Gavrelis
<PAGE>
EXHIBIT D
Debt Instruments
----------------
The $20 million of Exchangeable Notes issued to Gildea Management Company and
Blackacre Bridge Capital L.L.C. in April 1996 which were converted into Series A
Preferred Stock of the Company in August 1996.
<PAGE>
EXHIBIT E
Partnerships
------------
KPT Properties, L.P.
Atlantic Realty LLC
Celebration KPT LLC
DPKPT LLC
FALLS KPT LLC
KPT Mortgage LLC
KPT Non-REMIC Loan LLC
KPT REMIC Loan LLC
Mobile KPT LLC
Mount Pleasant KPT LLC
Park Place KPT LLC
RVA One, LLC
RVA Two, LLC
Square One KPT LLC
WPKPT LLC
RMC/Konover Property Trust LLC
Dukes KPT LLC
Waverly Place KPT, LLC
Wakefield Commercial, LLC
Carolina FAC LP
<PAGE>
Lenoir FAC LLC
Lenoir FAC II LLC
Tampa KPT LLC
-2-
Exhibit 12.1
CALCULATION OF RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN THOUSANDS)
KONOVER PROPERTY TRUST, INC.
<TABLE>
<CAPTION>
Six months Year ended December 31,
ended ------------------------------------------------
June 30, 1999 1998 1997 1996 1995 1994
------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings (1) $ 5,280 3,143 (430) (981) (4,601) 12,226
Fixed charges:
Interest expense 12,429 24,603 17,008 14,175 10,903 4,435
Capitalized interest 360 987 1,525 1,974 2,567 1,059
Preferred stock dividends 550 -- -- 368 -- --
Total fixed charges (A) $13,339 25,590 18,533 16,517 13,470 5,494
------- ------- ------- ------- ------- -------
Total earnings and fixed charges (2) (B) $17,543 27,660 16,578 13,194 6,302 16,661
======= ======= ======= ======= ======= =======
Ratio of earnings to combined fixed charges
and preferred stock dividends (B/A) 1.32 1.08 0.89 0.80 0.47 3.03
======= ======= ======= ======= ======= =======
</TABLE>
(1) Earnings represent income (loss) before minority interest less income from
unconsolidated investment partnerships.
(2) Excludes capitalized interest, preferred stock dividends and minority
interests in pre-tax income of subsidiaries that have not incurred fixed
charges, which minority interests were approximately $166,000 for the six
months ended June 30, 1999, and approximately $86,000 for the year ended
December 31, 1998.
EXHIBIT 24.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement, Form S-3, and related Prospectus of Konover Property
Trust, Inc. for the registration of 780,680 shares of its Series A convertible
preferred stock and 3,988,255 shares of its common stock and to the
incorporation by reference therein of our report dated January 31, 1997, with
respect to the consolidated statements of operations, cash flows, and changes in
stockholders' equity of Konover Property Trust, Inc. included in its Annual
Report (Form 10-K) for the year ended December 31, 1996, filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Raleigh, North Carolina
September 20, 1999
EXHIBIT 24.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement, filed on Form S-3 File No. 333-XXXXX
for the registration of 780,680 shares of Series A convertible preferred stock
and 3,988,255 shares of common stock, of our report dated February 19, 1999,
included in Konover Property Trust, Inc.'s Form 10-K filed April 1, 1999, and to
all references to our firm included in this registration statement.
/s/ Arthur Andersen LLP
Raleigh, North Carolina,
September 23, 1999.
