FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File Number 1-11998
KONOVER PROPERTY TRUST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 56-1819372
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11000 Regency Parkway
Suite 300
Cary, North Carolina
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
27511
(ZIP CODE)
(919) 462-8787
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 19, 1999, was approximately $55.5 million.
As of March 19, 1999, there were 31,888,640 shares of the Registrant's Common
Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement relating to its 1999 Annual Meeting
is incorporated by reference into Part III of this report.
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KONOVER PROPERTY TRUST, INC.
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
Page
PART I
Item 1-Business..............................................................3
Item 2 - Properties..........................................................12
Item 3 - Legal Proceedings...................................................19
Item 4 - Submission of Matters to a Vote of
Security Holders.............................................................19
Item X - Executive Officers of the Registrant................................21
PART II
Item 5-Market for the Registrant's Common Equity
and Related Stockholder Matters..............................................22
Item 6-Selected Financial Data...............................................23
Item 7-Management's Discussion and Analysis of
Financial Condition and Results of Operation.................................26
Item 7A - Quantitative and Qualitative Disclosures About Market .............37
Item 8-Financial Statements and Supplementary
Data.........................................................................38
Item 9-Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................................38
PART III
Item 10-Directors and Executive Officers of
the Registrant...............................................................38
Item 11-Executive Compensation...............................................38
Item 12-Security Ownership of Certain Beneficial
Owners and Management........................................................38
Item 13-Certain Relationships and Related
Transactions.................................................................38
PART IV
Item 14-Exhibits, Financial Statement Schedules,
and Reports on Form 8-K......................................................38
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PART I
ITEM 1 - BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Konover Property Trust, Inc. (the "Company"), formerly FAC Realty Trust,
Inc., was incorporated on March 31, 1993 as a self-administrated and
self-managed real estate investment trust (REIT). The Company is principally
engaged in the acquisition, development, operation, and ownership of retail
shopping centers. The Company's revenues are primarily derived under real estate
leases with national, regional and local retailing companies.
Over the past five years, the Company has grown from an owner of retail
outlet shopping centers with an aggregate square footage of 4.2 million to an
owner of approximately 8.1 million square feet of diversified retail space
consisting of:
1. 47 community shopping centers in 17 states aggregating approximately
5,871,000 square feet;
2. 10 outlet centers in 9 states aggregating approximately 2,110,000 square
feet;
3. two centers aggregating approximately 167,000 square feet that are held
for sale; and
4. approximately 124 acres of outparcel land located near or adjacent to
certain of the Company's centers and which are being marketed for lease
or sale.
SIGNIFICANT TRANSACTIONS AND ACQUISITIONS
UPREIT CONVERSION
On December 17, 1997, following shareholder approval, the Company changed
its domicile from the State of Delaware to the State of Maryland. The
reincorporation was accomplished through the merger of FAC Realty, Inc. into its
Maryland subsidiary, Konover Property Trust, Inc. (formerly FAC Realty Trust,
Inc.). Following the reincorporation on December 18, 1997, the Company
reorganized as an umbrella partnership real estate investment trust (an
"UPREIT"). The Company then contributed to KPT Properties, L.P. (formerly FAC
Properties, L.P.), a Delaware limited partnership (the "Operating Partnership"),
all of its assets and liabilities. In exchange for the Company's assets, the
Company received limited partnership interests ("Units") in the Operating
Partnership in an amount and designation that corresponded to the number and
designation of outstanding shares of capital stock of the Company at the time.
The Company is the sole general partner of the Operating Partnership. As
additional limited partners are admitted to the Operating Partnership in
exchange for the contribution of properties, the Company's percentage ownership
in the Operating Partnership will decline. As the Company issues additional
shares of capital stock, it will contribute the proceeds for that capital stock
to the Operating Partnership in exchange for a number of Units equal to the
number of shares that the Company issues. The Company conducts all of its
business and owns all of its assets through the Operating Partnership (either
directly or through subsidiaries) such that a Unit is economically equivalent to
a share of the Company's common stock.
An UPREIT may allow the Company to offer Units in the Operating Partnership
in exchange for ownership interests from tax-motivated sellers. Under certain
circumstances, the exchange of Units for a seller's ownership interest will
enable the Operating Partnership to acquire assets while allowing the seller to
defer the tax liability associated with the sale of such assets. Effectively,
this allows the Company to use Units instead of stock to acquire properties,
which provides an advantage over many other potential buyers of property.
NORTH HILLS PORTFOLIO
In March 1997 the Company purchased five community shopping centers
located in the Raleigh, North Carolina area for $32.4 million from an unrelated
third party. The centers total approximately 606,000 square feet and feature
anchor tenants such as Winn-Dixie, Food Lion, Inc., K-Mart Corporation and
Eckerd Drug. The acquisition was funded from the Company's line of credit
facility. As a result of the acquisition, the Company ended 1997 with 41
shopping centers containing an aggregate of approximately 5.5 million square
feet of GLA. More importantly, the transaction marked the beginning of the
Company's diversification strategy. See "--Business Strategy--Acquisition and
Portfolio Diversification."
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RODWELL/KANE TRANSACTION
On March 30, March 31, and May 14, 1998, the Company concluded the
acquisition of eight community shopping centers located in North Carolina and
Virginia from Roy O. Rodwell, Chairman and co-founder of Atlantic Real Estate
Corporation ("ARC"), Mr. John N. Kane, Chairman of Kane Realty Corporation, and
their affiliates. The acquired centers encompass approximately 950,000 square
feet and are, in the aggregate, 94% leased.
The aggregate purchase price for the acquired shopping centers was $57.1
million, consisting of the assumption of $44.3 million of fixed-rate
indebtedness, the payment of $3.5 million in cash and the issuance of 974,347
limited partnership Units of the Operating Partnership. Of the purchase price,
292,447 Units and $0.8 million in cash will be issued or paid on a delayed or
contingent basis. The contingencies include the attainment of certain property
performance thresholds and the sale, lease or development of certain outparcels.
The purchase price for the acquisition was determined as a result of arms-length
negotiation between the Company and the sellers, with the Units being valued at
$9.50 per share.
The ninth and final center covered by the Rodwell/Kane acquisition agreement
will be managed by the Company and is expected to be acquired in the year 2000.
Its acquisition prior to the year 2000 would trigger an onerous loan assumption
fee.
KONOVER & ASSOCIATES SOUTH TRANSACTION
On February 24, 1998, the Company entered into definitive agreements with
affiliates of Konover & Associates South, a privately held real estate
development firm based in Boca Raton, Florida, to acquire eleven community
shopping centers. The Company acquired nine of the Konover & Associates South
community shopping centers for a total purchase price of $85.4 million
consisting of $55.2 million in debt assumption, $26.8 million in cash and
369,000 of Operating Partnership Units, valued at $9.50 per share. Of the
original eleven community centers, the remaining two will continue to be managed
by the Company, but will not be acquired.
For financial reporting purposes, the nine Konover properties were recorded
effective April 1, 1998, since the risks and rewards of ownership had passed to
the Company and there were no significant conditions outstanding. All of the
acquired properties are held directly or indirectly, by KPT Properties, L.P.
In December 1997, the Company issued a note receivable of $8.5 million to
Davie Plaza Limited Partnership, a Florida limited partnership of which Simon
Konover, Chairman of the Company, is a 49% owner. The loan is secured by a first
mortgage position on a 299,778-square foot retail shopping center located in
Davie, Florida. In January, 1999, the Company received a $2 million paydown. The
outstanding balance is now $6.5 million and carries interest at LIBOR plus 2.50%
payable monthly and matures on June 30, 1999.
The initial loan was made in anticipation of the Company's acquisition of
the center as part of the Konover & Associates South transaction and to take
advantage of the ability to repay the previous debt instrument at a discount.
The center was ultimately not acquired by the Company.
On August 10, 1998, following stockholder approval, the Company began
operating under the name "Konover Property Trust." The Company remains listed on
the New York Stock Exchange and changed its ticker symbol from FAC to KPT. The
Company will continue to operate an office in Boca Raton, Florida due to its
strategic location in the Southeast.
Simon Konover, founder of both Konover & Associates South and Konover &
Associates, Inc., a $500 million plus real estate company headquartered in West
Hartford, Connecticut, was elected as a non-executive Chairman of the Board of
the Company in connection with the acquisition.
LAZARD FRERES TRANSACTION
On August 5, 1998, the stockholders approved a Stock Purchase Agreement
between Prometheus Southeast Retail, LLC (including its assignee, "PSR"), a real
estate investment affiliate of Lazard Freres Real Estate Investors, LLC,
("Lazard") and the Company pursuant to which PSR made a $200 million purchase of
shares of Common Stock of the Company at a purchase price of $9.50 per share
(the "Lazard Transaction"). The investment was made in stages, at the Company's
option, through September 29, 1998, allowing the Company to obtain capital to
fund its
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future acquisition and development plans as well as retire debt. Upon completion
of funding, PSR owned an equity interest in the Company of approximately 58%, on
a diluted basis. As a result of subsequent stock repurchases by the Company,
PSR's ownership interest in the Company is 61%, assuming conversion of
outstanding preferred stock and units into shares. Under the terms of the Lazard
transaction agreements, for as long as PSR's investment in the Company is $50
million or more, PSR has the right to participate in future equity issuances to
preserve its ownership interest.
As part of the Lazard Transaction, and as approved by the stockholders,
three representatives of Lazard were elected to the Company's Board of
Directors, which currently has a total of nine directors. With three members of
the Board, PSR is able to prevent any action requiring super-majority board
approval, such as: (i) significant acquisitions and sales, (ii) the incurrence
of additional indebtedness beyond a stated level, (iii) significant issuances of
capital stock and other securities, (iv) amendments to the character of bylaws
of the Company in a manner that would be materially adverse to PSR, and (v)
transactions that would result in any person, other than PSR, holding more than
15% of the voting power of the Company.
Pursuant to the Contingent Value Rights Agreement, if PSR has not doubled
its investment (through stock appreciation and dividends) by January 1, 2004,
the Company will pay PSR, in cash or stock, an amount necessary to achieve such
a return, subject to a maximum payment of 4,500,000 shares or the cash value
thereof.
JOINT VENTURES
ATLANTIC REAL ESTATE CORPORATION (ARC). As a result of the Company's
relationship with Roy Rodwell, on September 22, 1997, the Company and ARC formed
a limited liability company known as Atlantic Realty, LLC to develop and manage
retail community and neighborhood shopping centers in North Carolina. The
venture plans to develop nearly one million square feet.
WAKEFIELD. Much like the Company's alliance with ARC, this strategic
alliance known as Wakefield Investment, Inc., was formed primarily to develop
community shopping centers. The retail centers will be located within a 500-acre
parcel of land zoned for commercial use known as Wakefield in Wake Forest, North
Carolina. The Company will perform all leasing, property management and
marketing functions for the venture. The Company will hold a 50% interest in the
venture.
The Wakefield development is an exclusive community expected to include
a Wake County public school campus, public library, city park and an 18-hole TPC
golf course. Wakefield's residential community is a 2,200-acre upscale,
mixed-use development of 3,400 homes priced from $225,000 to $1 million; 75% of
the community has been pre-sold to nationally recognized builders.
MOUNT Pleasant. The Company has entered into a strategic venture, known
as Mount Pleasant, LLC, with a local Charleston, South Carolina developer, AJS
Group. The venture will develop a 425,000-square foot retail/entertainment
shopping center in Mt. Pleasant, South Carolina. Construction on the center, to
be named Mt. Pleasant Towne Centre, began in May 1998, with opening targeted for
Summer 1999. Belk Department Store; Barnes and Noble; Bed, Bath and Beyond and
The Gap will be the primary anchors for the center.
A summary of the Company's investment in venture companies at December 31,
1998 and 1997, is as follows (all investments are accounted for under the equity
method, in thousands):
<TABLE>
<CAPTION>
Amounts Invested
(in thousands)
--------------------------
December 31,
Location Ownership % 1998 1997
-------- -------------- --------------------------
<S> <C> <C> <C>
Atlantic Realty North Carolina 50% $ 7,442 $ 2,803
Mount Pleasant KPT Mount Pleasant, SC 50% 18,759 1,480
Wakefield Investment Wake Forest, NC 95% 570 -
Falls KPT Raleigh, NC 50% 5,472 -
------------- ------------
$32,243 $ 4,283
============= ============
</TABLE>
At December 31, 1998, a majority of the properties owned by the ventures
were under development and had no operations with the exception of a center in
Pembroke, North Carolina, which is a project with Atlantic Realty. The
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operations of the Pembroke center were immaterial during 1998. The acquisition
and development of the above properties are subject to, among other things,
completion of due diligence and various contingencies, including those inherent
in development projects, such as zoning, leasing and financing. There can be no
assurance that all of the above transactions will be consummated. All debt
incurred by the ventures is non-recourse to the Company and is secured by their
respective properties and guaranteed by the Company's respective venture
partners.
During 1998, the Company made advances in the form of notes receivable to a
venture totaling $10.6 million, which includes the Company's interest in the
Lake Carmel, New York development site. Of this amount, $7.2 million carries
interest at 11% per annum plus participation in profits and matures August 2001.
The remaining $3.4 million carries interest at 15% and matures March 28, 1999.
ACQUISITION SUMMARY
(IN THOUSANDS)
<TABLE>
<CAPTION>
OP UNITS
STATE PURCHASE ($9.50
LOCATION DATE SQUARE FEET PRICE DEBT ASSUMED CASH PER SHARE)
-------------- --------- ---------- ----------- ------------ ------------ ----------
1999 TO DATE
<S> <C> <C> <C> <C> <C> <C>
Roberson Corners SC 1/6/99 48 $ 3,900 $ - $ 3,900 -
Dukes Plaza VA 3/1/99 140 6,500 4,100 2,400 -
--------- ---------- ----------- ------------ ------------ ----------
TOTAL 188 10,400 4,100 6,300 -
1998
Waverly Place NC 12/14/98 181 12,800 10,700 2,100 -
University Shoppes SC 8/31/98 54 4,700 3,200 1,500 -
Konover (portfolio) FL, NC, VA, AL 4/1/98 1,518 85,400 55,200 26,700 369
Kane (portfolio) NC, VA 3/31/98 955 57,100 44,300 3,500 974 (1)
Market Square VA 1/7/98 56 3,100 2,300 800 -
-------------- --------- ---------- ----------- ------------ ------------ ----------
TOTAL 2,764 163,100 115,700 34,600 1,343
1997
North Hills NC 3/31/97 606 32,300 - 32,300 -
(portfolio)
1996
N/A - - - - -
========== =========== ============ ============ ==========
TOTAL 3,558 $ 205,800 $119,800 $ 73,200 1,343
========== =========== ============ ============ ==========
</TABLE>
(1) Includes 292 units to be issued upon the completion of certain contingencies
contained in the acquisition agreement.
RECENT DEVELOPMENTS
RMC REALTY COMPANIES, LTD. The Company entered into an agreement on
March 18, 1999 to acquire the operations of RMC Realty Companies, Inc., in
Tampa, Florida. The acquisition is part of the Company's growth strategy in the
Southeast and involves the acquisition of management and leasing contracts in
excess of 7.2 million square feet in the state of Florida. The operation will
carry the name RMC/Konover Property Trust, LLC and will operate as a separate
business unit. The transaction is proposed to be effective April 1, 1999.
STOCK REPURCHASES Subsequent to December 31, 1998 and through March 19,
1999, the Company repurchased an additional 413,200 shares of its common stock
at an average share price of $5.96 for a total of $2.5 million. To date, the
Company has repurchased 2,161,800 shares at an average price of $6.93 under its
stock repurchase program. The Company is currently authorized to purchase an
additional 1,838,200 shares.
BUSINESS STRATEGY
The Company's business strategy is to increase overall shareholder value
through acquiring and selectively developing new properties, expanding its
existing centers and by increasing the value of its assets in the portfolio
through proactive asset management, leasing, marketing and financial controls.
The following is a brief description of the Company's current business strategy
and philosophy.
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ACQUISITION AND PORTFOLIO DIVERSIFICATION. The Company believes that
retail concepts within the retail shopping center industry are merging, and that
a diversified shopping center portfolio will provide the best opportunities for
growth and overall return to shareholders. This strategy involves a focus on
selective acquisitions and development of retail centers. Retail centers may
include, but are not limited to, community shopping centers,
retail/entertainment centers and "power strip" centers. The Company believes
that many opportunities for the acquisition of retail centers exist,
particularly in the southeastern United States. In such acquisitions, the
Company looks for strong demographics and traffic counts, good visibility and
access, and the potential for enhancing cash flows through increasing rents,
re-tenanting, remerchandising or future expansions. The Company intends to use
its existing tenant relationships to assist in accomplishing its objectives.
The 1997 acquisition of five community shopping centers from North
Hills, Inc. was the beginning of the implementation of the Company's
diversification strategy. This diversification strategy and focus has added,
since 1997, 3.6 million square feet of shopping centers to its portfolio along
with new tenants to offer a wider range of merchandise and amenities to
consumers. These tenants include full-service restaurants, theaters, and
entertainment.
EXPANSION AND IMPROVEMENTS TO EXISTING CENTERS. The Company intends to
continue selective expansion and redevelopment of its existing centers. The
Company's philosophy is to expand or redevelop its existing centers in response
to tenant demand. Prior to commencement of any type of development, the Company
conducts a complete analysis to determine the overall shareholder benefit and
requires significant tenant commitment as well. The Company intends to fund
future expansions and redevelopments primarily through internally generated cash
flow and its revolving credit facility.
The Company's asset management team, which includes development,
leasing, marketing, finance and property management personnel, continually
evaluates potential opportunities at its existing centers for further expansion,
remerchandising, capital improvements and renovation, all in an effort to
increase property value. The Company also monitors each center's sales,
occupancy and overall performance. Properties that may be underperforming are
considered for re-tenanting, change of use or in some cases sale. In addition,
the Company has an ongoing program of regular maintenance, periodic renovation
and capital improvement of existing facilities in an effort to increase property
values and tenants' sales.
DEVELOPMENT OF NEW PROPERTIES. The Company believes that opportunities
continue to exist to attract tenants to newly developed retail centers. The
Company intends to selectively develop centers on new sites in high growth areas
with easy access, good visibility and strong demographics, where a substantial
percentage of lease commitments have been obtained from tenants. The Company
looks for sites where it believes there is potential to expand. Accordingly, the
Company generally acquires a minimum site area sufficient to develop the initial
and at least one additional phase of a project, plus sufficient contiguous
property to be sold or otherwise developed for complementary uses.
The Company is currently in the pre-development stage of several retail
community centers in the North Carolina area. The centers are proposed to be
anchored primarily by well-known grocery chains. If appropriate tenant interest
and necessary approvals are obtained, the Company intends to pursue development.
No assurance can be given, however, that the projects will be developed.
STRATEGIC ALLIANCES. The Company has entered into several strategic
alliances with well-known and experienced developers, primarily in the
Carolinas. The philosophy is to align itself with large developers whose
reputation and/or knowledge in certain markets enhances the ability to complete
development projects. These alliances may also lead to new tenant relationships
and/or larger portfolio acquisitions. See "--Significant Transactions and
Acquisitions -- Joint Ventures."
FINANCING. The Company's policy is to finance its acquisitions,
expansions and developments with the source of capital believed by management to
be most appropriate and provide the proper balance of equity and fixed and
floating rate debt. Sources may include undistributed cash flow, borrowings from
institutional lenders, equity issuances, and the issuance of debt securities on
a secured or unsecured basis. The Company's philosophy is to use its Funds
Available for Distribution as a key source of financing. The Company's decision
to use its cash flow in this fashion results in a decrease in dividend
distributions (See "Item 5 - Market for the Registrant's Common Equity and
Related Stockholder Matters").
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In December 1998, the Company completed a substitution and
recollateralization of its REMIC facility. This $95 million facility was
originally issued in May 1995 and secured by 18 properties. The substitution was
the first step in an effort by the Company to gain greater flexibility in the
purchase of assets and the sale of assets that may no longer meet the Company's
ongoing strategy. The REMIC balance as of December 31, 1998 was $89.9 million
and is now secured by 24 properties. The Company is currently in the process of
obtaining bondholder approval for ongoing substitution rights based upon
predetermined criteria.
An acquisition line of credit was put in place in early 1997 for $150
million. The availability under this line is based upon a predetermined formula
on the Net Operating Income of the properties that secure the facility. The line
originally was secured by 21 properties plus an assignment of the excess
cashflow of the REMIC facility referenced above. During 1998, the security on
the portfolio was reduced to only five properties plus the excess cash flow of
the REMIC in conjunction with both a permanent facility transaction, as
described below, and a paydown. The paydown of $31 million was funded from the
issuance of shares to PSR. The line was renewed for $150 million during the
first quarter of 1999 through February 2000. The primary use of the line will be
to fund future acquisitions and developments. The addition of newly acquired
properties to the line would result in increased availability.
On March 11, 1998, the Company closed on a $75 million, 15-year
permanent credit facility. The loan has an effective rate of 7.73% and is
amortized on a 338-month basis. Eleven properties previously securing the $150
million revolving credit facility secure this new facility. The proceeds were
used to pay down borrowings outstanding on the $150 million credit facility.
During 1998 the Company issued 21,052,632 shares of its common stock to
PSR as part of the Lazard transaction previously discussed. The total
consideration was $200 million, of which $31 million was used to pay down the
line of credit facility.
Other equity sources have also been used in the past and may be part of
a future strategy if market conditions and company needs warrant. These
activities have assisted the company in reducing its interest rate risk so that
only 10% of its total debt is at a floating rate.
The Company may enter into additional mortgage indebtedness related to
certain joint venture development projects. The Company's policy is to extend
loans to joint ventures only upon terms similar to those that would be made by
third parties.
Any additional debt financing, including additional lines of credit, may
be secured by mortgages on the Properties. Such mortgages may be recourse or
non-recourse or cross-collateralized or may contain cross-default provisions.
The Company does not have a policy limiting the number of mortgages that may be
placed on, or the amount of indebtedness that may be secured by, any particular
property, however; current mortgage financing instruments do limit additional
indebtedness on such properties.
MARKETING. Management believes that the major goal of marketing is to
maximize sales and increase the net asset value of the Properties. The Company
has analyzed the Properties based on net operating income (NOI) and created a
marketing strategy to prioritize the marketing and leasing needs of each center
to better utilize marketing dollars. The marketing efforts are primarily focused
on the larger centers located in markets with regional customer draw.
Marketing plans for each center are prepared by the marketing manager
for use by the merchants, as well as for internal use by the Company's leasing
department. Each marketing plan details goals, strategies and tactics to create
awareness, generate traffic and maximize sales at the Properties. Marketing
efforts also include utilizing an advertising agency specializing in shopping
center marketing, television, radio and print advertising, billboards, special
events, promotions and a public relations program.
On a corporate level, information packages and the Company's internet
web site are continually updated in an effort to communicate more effectively
with the investment community. The web site includes a guest book to monitor
investment community interest.
OPERATING PRACTICES. The Company is vertically integrated, providing
acquisition, development, construction, leasing, marketing and asset management
services. The Company believes it can increase value to its
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shareholders by conducting the vast majority of these services in-house. Each
area has been set up along functional lines, with the Company's property
management, marketing and leasing areas being staffed by individuals with
industry accreditations such as CSM (Certified Shopping Center Manager), CMD
(Certified Marketing Director), and CLS (Certified Leasing Specialist).
The Company's leasing department has also been staffed to address the
Company's philosophy regarding the changing retail environment and the Company's
diversification strategy. The staff has individuals experienced in all areas of
retail leasing, such as key anchors, power centers, community centers, regional
malls, outlets, and specialty centers. This breadth of experience has brought to
the Company a broader range of tenant relationships to position the Company for
growth.
The Company believes that increased focus on financial controls and
information systems (IS) will be critical over the next several years to enhance
the analysis and communication of financial data. In order to accomplish this,
the Company has staffed its finance area with professionals with specialized
knowledge in real estate finance and acquisition analysis. The IS department is
continually focused on processes that will enhance the Company's systems to
allow all personnel easy access to all financial and lease data in a concise
format.
POLICIES WITH RESPECT TO INVESTMENTS AND CERTAIN OTHER ACTIVITIES
The Company's policies with respect to the activities and matters
discussed in this section have been determined by the Company's Board of
Directors and may be amended or revised from time to time at the discretion of
the Board of Directors without a vote of the Company's shareholders.
INVESTMENT POLICIES
At all times, it is the policy of the Company to make investments in
such a manner as to be consistent with the requirements of the Code to qualify
as a REIT unless, because of changed circumstances, the Board of Directors
determines that it is no longer in the best interests of the Company to qualify
as a REIT. Other than the limitations provided in the Code, the Company has no
stated policy that (i) limits a certain percentage of Company assets from being
invested in any one type of investment or in any one property or (ii) limits the
percentage of securities of any one issuer which the Company may acquire.
The Company may develop new properties, purchase or lease
income-producing properties for long-term investment, expand and improve the
properties it owns or sell such properties, in whole or in part, when
circumstances warrant. Equity investments may be subject to existing mortgage
financing and other indebtedness which have priority over the Company's equity
interest. These properties include outlet centers and community shopping centers
across the United States. See "Business Strategy -- Acquisition and Portfolio
Diversification," "-- Expansion and Improvements to Existing Centers," and "--
Development of New Properties."
The Company invests in real estate and interests in real estate
primarily for the purpose of producing income in the long-term, but the Company
also considers the potential for long-term appreciation when making investment
decisions.
While the Company has emphasized, and intends to continue its emphasis,
in equity real estate investments, it may, at its discretion, invest in
mortgages. The Company has not previously invested in mortgages and the Company
does not presently intend to invest to a significant extent in mortgages or
deeds of trust, but it may invest in participating or convertible mortgages if
it concludes that it may benefit from the cash flow or any appreciation in the
value of the subject property. Such investments would be consistent with the
Company's investment policies.
The Company may also participate with other entities in property
ownership through joint ventures or other types of co-ownership. The Company has
invested in real estate interests through joint ventures that intend to develop
community shopping centers or retail/entertainment shopping centers. See
"Business Strategy -- Strategic Alliances" above for more detail.
Subject to the percentage of ownership limitations and gross income
tests which must be satisfied to qualify as a REIT, the Company may also invest
in securities of concerns engaged in real estate activities, such as land
improvement or investments consistent with the Company's investment policies, or
in securities of other issuers. As disclosed above, the Company has not over the
last three years invested, and does not intend to invest, in the
9
<PAGE>
securities of any other issuer for the purpose of exercising control. In any
event, the Company does not intend that its investments in securities would
require the Company to register as an investment company under the Investment
Company Act of 1940, and the Company would divest securities before any such
registration would be required.
10
<PAGE>
POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES
The Company may, but does not presently intend to, make investments
other than as described above. The Company's policies regarding certain
activities (and the extent to which it has engaged in such activities during the
last three years) follow:
(i) The Company has authority to issue senior securities. The Company issued
$19.2 million of convertible preferred (Series A) stock in 1996, but it
has not otherwise issued senior securities.
(ii) The Company is authorized and will continue to borrow funds to fuel its
growth. See "Business Strategy -- Financing" above. See "Notes to
Consolidated Financial Statements" for a summary of borrowings at
December 31, 1998 and 1997.
(iii) The Company has authority to make loans to others and has done so on a
limited basis (see Note 5 to the Consolidated Financial Statements). The
Company has no immediate plans to lend money to other entities or
persons, except for loans to officers secured by their ownership of the
Company's vested stock. The Board has approved loans to officers to
enable them to raise funds without selling their Company stock.
(iv) The Company does not invest in the securities of any other issuer for
the purpose of exercising control, however, the Company may in the
future acquire all or substantially all of the securities or assets of
other REITs, management companies or similar entities where such
investments would be consistent with the Company's investment policies.
(v) The Company has not engaged in trading, underwriting or agency
distribution or resale of securities of other issuers and does not
intend to do so.
(vi) The Company engages in the purchase and sale of investment properties,
as described in more detail throughout this section and the "Business
Strategy" section.
(vii) The Company has authority to offer shares of its capital stock or other
senior securities in exchange for property, but it has not issued Common
Stock or any senior securities in exchange for property. However, the
Company has acquired property in exchange for Units in the Operating
Partnership.
(viii) The Company has the authority to repurchase or otherwise reacquire its
Common Stock or any other securities, and as of March 19, 1999 the
Company had repurchased 2,161,800 shares at an average price of $6.93
under its stock repurchase program and had board approval to purchase up
to another 1,838,200 shares.
(ix) The Company has issued and intends to continue issuing annual reports to
shareholders, with audited financial statements attached to the report.
MAJOR TENANT
VF Corporation ("VF"), which is one of the world's largest publicly
owned apparel manufacturers, has the largest number of stores and square footage
in the Company's property portfolio with 26 stores (25 of which anchor the
Company's centers) and approximately 1,153,000 square feet representing 15% of
the Company's total square footage. VF, through its operating subsidiaries and
divisions, designs, manufactures and markets clothing apparel. Rental revenues
from VF represented approximately 9.5% of the Company's 1998 rental revenues
compared to 11% in 1997. The Company could be adversely affected in the event of
the bankruptcy or insolvency of, or a downturn in the business of, VF or in the
event that VF does not renew its leases as they expire. Since VF is the anchor
tenant in 25 of the Company's 59 centers, the failure of VF to renew its leases
or otherwise to continue to operate in one or more of the centers could have a
material adverse impact on the performance of other tenants in the affected
center (and may permit some tenants to terminate their leases) and on the
Company. No other tenant accounted for more than 4% of the Company's base rental
revenues or aggregate leased GLA during 1998.
MAJOR TENANT LEASE EXPIRATION
The following table sets forth the expiration of each of the 26 leases
in place by VF at December 31, 1998:
Leases to Annual Base Percentage Average Base
Year Expire Leased GLA Rent of Total Rent PSF
- - ---------- ------------ -------------- ------------- ------------- -------------
1999 2 10,570 $ 40,498 0.7% $ 3.83
2000 - - - 0.0% -
2001 - - - 0.0% -
2002 - - - 0.0% -
2003 17 832,255 3,809,255 69.6% 4.58
11
<PAGE>
2004 3 156,345 625,380 11.4% 4.00
2005 4 154,072 1,000,203 18.3% 6.49
------------ -------------- ------------- ------------- -------------
26 1,153,242 $5,475,336 100.0% $ 4.75
COMPETITION
In seeking new investment opportunities, the Company competes with other
real estate investors, including pension funds, foreign investors, real estate
partnerships, other real estate investment trusts and other domestic real estate
companies. On properties presently owned by the Company or in which it has
investments, the Company competes with other owners of like properties for
tenants. Management believes that the Company is well positioned to compete
effectively for new investments and tenants.
ENVIRONMENTAL MATTERS
Phase I environmental site assessments and when applicable, Phase II
assessments (which generally did not include environmental sampling, monitoring
or laboratory analysis) have been completed by the Company with respect to all
of its properties either as required by a lender or upon
acquisition/development. No studies are dated prior to 1995.
The Company's policy going forward is to obtain new environmental site
assessments on all acquisition or development properties prior to purchase.
None of these environmental assessments or subsequent updates revealed
any environmental liability that management believes would have a material
adverse effect on the Company. No assurances can be given that (i) the
environmental assessments detected all environmental hazards, (ii) future laws,
ordinances or regulations will not impose any material environmental liability,
or (iii) current environmental conditions of the Properties will not be affected
by tenants, by properties in the vicinity of the Properties, or by third persons
unrelated to the Company.
INSURANCE
Management believes that each of the Properties is covered by adequate
fire, flood, property and, in the case of the Vacaville center, earthquake
insurance provided by reputable companies and with commercially reasonable
deductibles and limits.
EMPLOYEES
As of March 31, 1999, the Company employed 258 persons, 118 of whom are
located primarily at the Company's headquarters in Cary, North Carolina. The
remaining 140 employees are property management, marketing and maintenance
personnel located at the Properties including seven employees located in the
Company's Boca Raton, Florida office. The Company believes that its relations
with its employees are good.
12
<PAGE>
ITEM 2 - PROPERTIES
On December 31, 1998, the Company-owned properties consisted of:
1. 47 community shopping centers in 17 states aggregating approximately
5,871,000 square feet;
2. 10 outlet centers in nine states aggregating approximately 2,110,000
square feet;
3. two centers aggregating approximately 167,000 square feet that are held
for sale; and
4. approximately 124 acres of outparcel land located near or adjacent to
certain of the Company's centers and which are being marketed for lease
or sale.
The following tables set forth the location of, and certain information
relating to, the Properties as of December 31, 1998:
<TABLE>
<CAPTION>
TOTAL
NUMBER LAND AREA GROSS PERCENTAGE OF ECONOMIC
STATE OF CENTERS (ACRES) LEASABLE AREA TOTAL GLA OCCUPANCY
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMUNITY CENTERS
Alabama 1 53.5 525,351 6.4% 92.6%
Arizona 2 39.4 298,594 3.7% 87.6%
Florida 5 88.6 672,730 8.3% 91.7%
Georgia(5) 2 12.5 219,338 2.7% 81.7%
Illinois 1 20.0 91,063 1.1% 79.2%
Iowa 1 20.0 112,405 1.4% 96.5%
Kentucky 2 38.0 240,506 3.0% 99.3%
Louisiana(4) 2 28.7 220,281 2.7% 100.0%
Mississippi 1 16.8 129,412 1.6% 100.0%
Missouri 1 23.7 83,464 1.0% 100.0%
Nebraska 1 21.4 89,646 1.1% 91.1%
Nevada 1 25.7 229,958 2.8% 40.5%
North Carolina 12 193.4 1,559,005 19.1% 93.3%
South Carolina 1 7.3 54,184 0.7% 100.0%
Tennessee 2 46.6 193,137 2.4% 94.5%
Texas 6 97.8 515,412 6.3% 93.9%
Virginia 6 73.0 636,891 7.8% 97.9%
-----------------------------------------------------------------------
SUBTOTAL COMMUNITY
CENTERS 47 806.4 5,871,377 72.1% 91.5%
-----------------------------------------------------------------------
OUTLET CENTERS
Alabama(3) 1 Lease 104,630 1.3% 91.1%
California 1 52.6 447,725 5.5% 91.8%
Maine 1 5.3 24,620 0.3% 94.7%
Missouri 1 24.4 287,522 3.5% 85.3%
New York 1 4.6 43,650 0.5% 100.0%
North Carolina 1 51.6 355,756 4.4% 100.0%
Tennessee 2 49.6 437,064 5.4% 93.2%
Utah 1 28.9 185,281 2.3% 100.0%
Washington 1 16.0 223,383 2.7% 97.8%
-----------------------------------------------------------------------
SUBTOTAL OUTLET CENTERS 10 233.0 2,109,631 25.9% 94.1%
-----------------------------------------------------------------------
SUBTOTAL OPERATING
PROPERTIES 57 1,039.4 7,981,008 98.0% 93.2%
-----------------------------------------------------------------------
ASSETS HELD FOR SALE
Arizona 1 14.9 141,908 1.7% 50.9%
New Hampshire 1 2.1 24,740 0.3% 54.2%
-----------------------------------------------------------------------
SUBTOTAL HELD FOR SALE 2 17.0 166,648 2.0% 51.4%
-----------------------------------------------------------------------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
TOTAL ALL PROPERTIES 59 1,056.4 8,147,656 100.0% 91.3%
=======================================================================
LAND AREA GROSS ECONOMIC
STATE CENTER CITY (ACRES) YEAR BUILT LEASABLE AREA KEY TENANTS OCCUPANCY
- - -----------------------------------------------------------------------------------------------------------------
Alabama Mobile Festival Mobile 53.5 1986 525,351 Circuit City,
Marshall's,
Office Max,
PharMor, Wal Mart 92.6%
Arizona Mesa Mesa 26.9 1987 171,019 Vanity Fair 86.0%
Tucson Tucson 12.5 1984 127,575 Vanity Fair 89.7%
Florida Graceville Graceville 25.0 1985 83,962 Vanity Fair 95.8%
Hollywood Hollywood 14.4 1968 140,751 Winn-Dixie,
Festival Eckerd 91.2%
Lake Point West Palm 13.6 1997 119,570 Winn-Dixie,
Centre Beach Walgreens 85.8%
Oakland Park Oakland 14.5 1966 132,226 Winn-Dixie,
Eckerd 83.9%
Square One Stuart 21.1 1989 196,221 Home Depot. Pets
Mart 99.1%
Georgia Lake Park Lake Park 12.5 1989 141,587 Carolina Pottery 71.6%
South Cobb Smyrna Lease 1967 77,751 Cub Foods 100.0%
Festival (5)
Illinois West Frankfort West 20.0 1990 91,063 Vanity Fair 79.2%
Frankfort
Iowa Story City Story City 20.0 1990 112,405 Vanity Fair 96.5%
Kentucky Georgetown Georgetown 16.7 1991 176,615 Carolina Pottery 99.0%
Hanson Hanson 21.3 1989 63,891 Vanity Fair 100.0%
Louisiana Arcadia Arcadia 28.7 1989 89,528 Vanity Fair 100.0%
Iowa (4) Iowa Lease 1989 130,753 Vanity Fair 100.0%
Mississippi Tupelo Tupelo 16.8 1987 129,412 Vanity Fair, US 100.0%
Factory Outlet
Missouri Lebanon Lebanon 23.7 1985 83,464 Vanity Fair 100.0%
Nebraska Nebraska City Nebraska City 21.4 1985 89,646 Vanity Fair 91.1%
Nevada Las Vegas Las Vegas 25.7 1992 229,958 Vanity Fair 40.5%
North Bolling Creek Roanoke 5.9 1992 29,000 Food Lion 100.0%
Carolina Rapids
Celebration at Raleigh 11.1 1979 125,937 Revco 87.2%
Six Forks
Durham Festival Durham 11.8 1968 131,825 Kroger 100.0%
Eastgate Raleigh 6.0 1966 52,575 Books - a -
Million 100.0%
Gateway (1) Wilson 18.5 1992 163,545 Winn-Dixie, Kmart 94.6%
Lenoir Festival Lenoir 16.3 1968 144,239 Kmart, Bi-Lo 100.0%
MacGregor Cary 21.1 1986 142,655 Eckerd 92.0%
Northridge Raleigh 19.5 1980 165,309 Winn-Dixie 100.0%
Shoreside Kitty Hawk 26.4 1993 144,389 Wal-Mart, 100.0%
Seamark Grocery
Stanton Square Greenville 15.0 1985 125,116 Food Lion, Eckerd 76.8%
Tower Raleigh 19.3 1976 153,077 Food Lion, Kerr
Drug 96.9%
Waverly Place Cary 22.5 1987 181,338 Regal Cinemas,
(2) Eckerd 81.2%
South University Conway 7.3 1997 54,184 Food Lion, Revco 100.0%
Carolina Shoppes
Tennessee Tri Cities Tri Cities 23.3 1990 132,908 Carolina Pottery 92.0%
Union City Union City 23.3 1988 60,229 Vanity Fair 100.0%
Texas Corsicana Corsicana 20.0 1989 63,605 Vanity Fair 100.0%
Hempstead Hempstead 14.8 1989 63,605 Vanity Fair 100.0%
LaMarque LaMarque 19.2 1990 176,071 Westpoint
Pepperell 82.2%
Livingston Livingston 15.0 1989 63,605 Vanity Fair 100.0%
Mineral Wells Mineral Wells 15.5 1989 63,609 Vanity Fair 100.0%
Sulphur Springs Sulphur 13.3 1986 84,917 Vanity Fair 100.0%
Springs
Virginia Brookneal Brookneal 5.4 1993 25,000 Food Lion 100.0%
Food Lion Plaza Petersburg 5.4 1984 50,280 Food Lion 94.0%
Keysville Keysville 3.7 1993 36,680 Food Lion, Revco 100.0%
Market Square Danville 9.8 1989 55,909 Food Lion, Revco 97.9%
Towne Square Roanoke 35.0 1987 301,561 Office Max, MJ
Design 97.0%
Virginia Tech
University Mall Blacksburg 13.7 1973 167,461 Math Emporium 100.0%
--------------------------------------------------------------------
SUBTOTAL COMMUNITY CENTERS 806.4 5,871,377 91.5%
--------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
OUTLET CENTERS
<S> <C> <C> <C> <C>
Alabama Boaz (3) Boaz Lease 1982 104,630 Vanity Fair 91.1%
California Vacaville Vacaville 52.6 1988 447,725 GAP, Nike, 91.8%
Vanity Fair
Maine Kittery Kittery 5.3 1987 24,620 Bugle Boy, 94.7%
London Fog
Missouri Branson Branson 24.4 1995 287,522 Vanity Fair, 85.3%
Spiegel
New York Lake George Lake George 4.6 1987 43,650 Levi's 100.0%
North Smithfield (1) Smithfield 51.6 1988 355,756 GAP, Nike, Liz 100.0%
Carolina Claiborne
Tennessee Crossville Crossville 16.5 1988 151,256 Vanity Fair 96.0%
Nashville Nashville 33.1 1993 285,808 GAP 91.7%
Utah Draper Draper 28.9 1986 185,281 Vanity Fair,
Adidas 100.0%
Washington North Bend North Bend 16.0 1990 223,383 Vanity Fair, Nike 97.8%
---------------------------------------------------------------------
SUBTOTAL OUTLET
CENTERS 233.0 2,109,631 94.1%
---------------------------------------------------------------------
SUBTOTAL
OPERATING
PROPERTIES 1039.4 7,981,008 93.2%
---------------------------------------------------------------------
ASSETS HELD FOR SALE
Arizona Casa Grande Casa Grande 14.9 1991 141,908 Westpoint 50.9%
Pepperell
New Conway Conway 2.1 1985 24,740 54.2%
Hampshire
---------------------------------------------------------------------
SUBTOTAL HELD
FOR SALE 17.0 166,648 51.4%
---------------------------------------------------------------------
TOTAL ALL
PROPERTIES 1056.4 8,147,656 91.3%
=====================================================================
</TABLE>
1. Expansion under development.
2. Redevelopment - adding key anchor tenant.
3. The Company holds this property pursuant to a lease which has renewal
options through 2027. The Company has the right to purchase the land and
building during any term for a total of $25,000 plus the present value
of any future rental payments due during the remaining term. The
Company's monthly rental payments during the current term are $500
through and including January 31, 1999; $750 from February 1, 1999
through and including January 31, 2002; and $1,000 throughout the
remainder of the term and any renewal terms. The current term expires
January 31, 2007.
4. The Company holds a ground lease at its Iowa, Louisiana center which has
renewal options through 2087.
5. The Company holds a ground lease at Smyrna, Georgia at an annual payment
of approximately $27,000 and matures in 2026.
PROPERTIES HELD FOR SALE
As part of the Company's ongoing strategic evaluation of its portfolio
of assets, management has been authorized to pursue the sale of certain
properties that currently are not fully consistent with or essential to the
Company's long-term strategies. Management plans to evaluate all properties on a
regular basis in accordance with its strategy for growth and in the future may
identify other properties for disposition or may decide to defer the pending
disposition of those assets now held for sale. In accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," assets held for sale are valued at the lower of carrying value
or fair value less selling costs. Accordingly, in the fourth quarters of 1996
and 1995, the Company recorded a non-cash $5.0 million and $8.5 million
adjustment to the carrying values of the properties held for sale. On April 30,
1998, the Company sold a property it was holding for sale for $5.7 million
resulting in a loss of $0.4 million. The Company continues to operate the other
two properties held for sale as of December 31, 1998 and is actively marketing
these properties.
After recording the $5.0 million and $8.5 million valuation adjustment in
1996 and 1995, respectively, the net carrying value of assets currently being
marketed for sale at December 31, 1998 and 1997 are $6.0 million and $12.5
million, respectively. There was less than $0.1 million of debt associated with
these properties held for sale at December 31, 1998.
The following summary financial information pertains to the properties
held for sale for the year ended December 31:
1998 1997 1996
---- ---- ----
Revenues $ 409 $ 1,100 $ 2,100
Net loss after operating
15
<PAGE>
and interest expenses $ (920) $(1,100) $(1,000)
====== ======= =======
PLANNED EXPANSIONS/REDEVELOPMENTS
The Company has one expansion project planned for 1999. The expansion
would add another 87,000 gross leasable square feet to the Company's Smithfield,
North Carolina center at a cost of $9.5 million. All of such expansion space has
been preleased.
In undertaking developments and expansions, the Company will incur
certain risks, including the expenditure of funds on, and the devotion of
management's time to, projects which may not come to fruition. In addition,
completion of planned developments and expansions will be subject to the
availability of adequate debt or equity financing. Other risks inherent in
development and expansion activities include possible cost-overruns, work
stoppages and delays beyond the reasonable control of the Company. Accordingly,
there can be no assurance if or when any or all of the Company's planned
expansions or any other development or expansion project will be completed or,
if completed, that the costs of construction will not exceed, by a material
amount, estimated costs.
ADDITIONAL INFORMATION ABOUT CERTAIN CENTERS
As of December 31, 1998, the Company's center at Vacaville, California,
had a book value of 14% of the total assets of the Company and generated gross
revenue in 1998 that accounted for approximately 13% of the Company's 1998
aggregate gross revenue. No other existing or planned center accounts for
greater than 10% of either the Company's 1998 aggregate gross revenue or the
Company's total assets at December 31, 1998.
The Company holds title to the Vacaville center in fee simple, but the
property is one of 24 that secures $89.9 million of Collaterialized Mortgage
Notes. The Class B and C Mortgage Notes are payable in monthly payments of
interest only at 7.87% and 8.4%, respectively. The Class A Mortgage Note is
payable in a monthly principal payment ranging from $135,000 to $173,000
determined using various parameters plus monthly interest at 7.51%. Unpaid
principal and accrued interest will be due in June, 2002, with a balloon payment
of $46.7 million.
The Vacaville, California center is located on 53 acres at the
intersection of Interstate 80 and Nut Tree Road, approximately 60 miles east of
San Francisco and 30 miles west of Sacramento, the state capital. Phase I of the
center, which opened in 1988, contains approximately 206,000 square feet of GLA.
Phase II, which opened in 1992, contains approximately 120,000 square feet of
GLA. Phase III, which also opened in 1992, contains approximately 122,000 square
feet of GLA. The Company has added various tenants over the last several years
as part of its overall strategy of remerchandising key centers. Specific tenants
which have been added to the roster of over 100, are The Gap and Nike. The
center's other major tenants include: Vanity Fair, Levi's, Reebok, 9 West and
Carter Children's Wear, but no one tenant represents more than ten percent of
the center's total GLA.
The Company currently has no plans to further expand or renovate the
property. The realty tax rate on the property is $18.40 per $1,000 of assessed
value, and in 1998, the annual property taxes on the Vacaville center were $1.4
million.
The city of Vacaville developmental plans continue to allow the building
of additional retail stores, restaurants, and area services in the properties
adjacent to the Company's Center creating a hub of retail activity in this newly
built area. Interstate 80 motorists exit off the side of the freeway on which
the center is located, however, due to close proximity, the neighboring
complexes (which offer some name brand discounters) appear to be monogamous with
the Vacaville center. This can cause customer confusion. The Company has
countered this perception with an advertising campaign geared toward our
shopper.
The following table discloses the occupancy rate and average effective
annual rental revenue per square foot, with respect to the Vacaville center, for
each of the last five years ending December 31, 1998:
16
<PAGE>
Annual Rental Revenue
Year ended December 31, Occupancy Rate per Sq. Ft.(1)
----------------------- -------------- --------------
1998 92% $21.75
1997 92% $22.12
1996 89% $22.58
1995 88% $27.94
1994 92% $27.58
(1) Annual Rental Revenue consists of base and percentage rents plus recoveries
from tenants, excluding anchors.
The following table shows the lease expirations for tenants in occupancy
as of December 31, 1998 for the Vacaville center (assuming that none of the
tenants exercise renewal options):
PRO FORMA AVERAGE
ANNUALIZED % OF ANNUAL
LEASES TO LEASED GLA BASE RENTAL TOTAL BASE RENT
YEAR EXPIRE(1) (SQ. FT.)(2) REVENUE REVENUE PER SQ. FT.(3)
- - ---------------------------------------------------------------------------
1999 27 86,183 $1,166,619 17.4% $13.54
2000 20 67,860 1,194,059 17.9% 17.60
2001 28 90,771 1,517,567 22.7% 16.72
2002 7 32,645 585,415 8.8% 17.93
2003 19 106,146 1,738,025 26.0% 16.37
2004 3 15,600 265,200 4.0% 17.00
2005 0 0 0 0.0% 0.00
2006 1 6,000 114,000 1.7% 19.00
2007 0 0 0 0.0% 0.00
2008+ 1 5,600 100,800 1.5% 18.00
--------------------------------------------------------------
TOTALS 106 410,805 $6,681,685 100.0% $16.26
==============================================================
(1) Expirations assume no renewals or releasing for tenants in occupancy as
of December 31, 1998.
(2) Total leased GLA is not equal to leasable GLA due to vacancies.
(3) Annual base rents in place at December 31, 1998.
Management believes that all of its properties, including the Vacaville
center, are adequately insured. For a description of the Vacaville center's
Federal tax basis, rate, method and life claimed with respect to the property,
see Schedule III to the Company's Consolidated Financial Statements.
UNDEVELOPED PARCELS
The Company owns approximately 124 acres of undeveloped parcels located
near certain of the Company's shopping centers. The Company has a marketing
program to lease, develop or sell the parcels it owns through third- party
brokers. During 1998, 11.7 acres were sold at $1.5 million which resulted in a
$0.4 million gain. Because property held for sale by a REIT is subject to
significant restrictions imposed by the Code, the Company has formed a
non-qualified REIT subsidiary under Section 356 of the Code. By using a
non-qualified REIT subsidiary, the Company anticipates it will be not be subject
to the 100% tax imposed on the gain derived from the sale of certain outparcels
of land owned by the Company.
17
<PAGE>
TENANTS
GENERAL. Management believes the Properties offer tenants a diverse
tenant mix, which includes many well-known retailers. A large portion of the
Company's tenants are also large, publicly traded companies. The Company's
current core tenant mix at its properties and developments feature such
well-known retailers as Belk, Food Lion, Winn Dixie, Eckerd, K-Mart, Wal-Mart,
Nike, The Gap, Liz Claiborne, Vanity Fair, 9 West, L'eggs/ Hanes/Bali, Levi's
and Mikasa.
TENANT LEASES. The majority of the leases with the Company's tenants
have terms of between five and ten years. While many of these leases are
triple-net leases which require tenants to pay their pro rata share of
utilities, real estate taxes, insurance and operating expenses, as of December
31, 1998, 14% of the aggregate GLA of its shopping centers was leased to tenants
under gross leases, pursuant to which the Company is obligated to pay all
utilities and other operating expenses of the applicable center. VF is the
Company's largest tenant. See "Item 1 -- Business -- Major Tenant" for a
discussion of the Company's leases with VF.
LEASE EXPIRATION
The following table shows tenant lease expirations for tenants in
occupancy as of December 31, 1998 for the next ten years at the Properties
(assuming that none of the tenants exercises any renewal option):
<TABLE>
<CAPTION>
AVERAGE (3)
LEASED ACTUAL ANNUAL BASE
LEASES TO GLA BASE RENTAL % OF RENT PER
YEAR EXPIRE(1) (SQ. FT.)(2) REVENUE TOTAL SQ. FT.
- - ------------ ---------- ---------------- ----------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
1999 413 1,228,764 $ 9,111,757 15.8% $ 7.42
2000 251 929,748 9,921,542 17.2% 10.67
2001 188 741,901 7,941,287 13.8% 10.70
2002 108 485,819 4,631,849 8.1% 9.53
2003 151 1,578,022 9,815,830 17.1% 6.22
2004 32 322,043 2,208,052 3.8% 6.86
2005 16 344,798 2,296,397 4.0% 6.66
2006 20 412,730 3,163,965 5.5% 7.67
2007 7 151,716 842,203 1.5% 5.55
2008+ 45 1,374,427 7,592,053 13.2% 5.52
========== ================ =================== ============ ==============
TOTAL 1,231 7,569,968 $ 57,524,935 100.0% $ 7.60
========== ================ =================== ============ ==============
</TABLE>
(1) Expirations assume no renewals or releasing for tenants in occupancy as of
December 31, 1998.
(2) Total leased GLA is not equal to leasable GLA due to vacancies.
(3) Annual base rents in place at December 31, 1998.
18
<PAGE>
TENANT CONCENTRATIONS
The following table provides certain information regarding the ten
largest tenants (based upon total GLA leased) and other tenants for the year
ended December 31, 1998.
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL NUMBER ACTUAL
TOTAL GLA GLA OF BASE RENTAL % OF
TENANT LEASED(1) LEASED STORES REVENUE TOTAL
- - ---------------------------------- ------------- ------------ --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
VF Factory Outlet, Inc. 1,153,242 15.2% 26 $5,475,336 9.5%
Carolina Pottery Retail Group, Inc. 278,458 3.7% 4 1,116,335 1.9%
Food Lion, Inc. 247,265 3.3% 8 1,431,747 2.5%
Winn-Dixie Stores, Inc.. 242,082 3.2% 5 1,545,700 2.7%
Phillips-Van Heusen Corporation 218,776 2.9% 49 1,806,141 3.2%
Wal-Mart Stores, Inc.. 203,528 2.7% 2 966,052 1.7%
Kmart Corporation 186,107 2.5% 2 988,376 1.7%
Phar-Mor, Inc. 139,116 1.8% 2 877,208 1.5%
The Dress Barn, Inc. 127,440 1.7% 21 1,689,084 2.9%
Bugle Boy Industries 110,285 1.4% 19 744,211 1.3%
------------- ------------ --------- ------------- -----------
2,906,299 38.4% 138 16,640,190 28.9%
Others 4,663,669 61.6% 1,093 40,884,745 71.1%
------------- ------------ --------- ------------- -----------
TOTAL 7,569,968 100.0% 1,231 $57,524,935 100.0%
============= ============ ========= ============= ===========
(1) Total leased GLA is not equal to leasable GLA due to vacancies.
SUMMARY OF DEBT ON INCOME PROPERTIES
Outstanding Balance
(in thousands)
Description Maturity Interest Rate 12/31/98 12/31/97 Notes
- - ------------------------------------------------------------------------------------------------------
FIXED RATE
Collateralized Mortgage Notes May-02 7.51% $52,882 $ 54,583 24 Properties
Collateralized Mortgage Notes May-02 7.87% 20,000 20,000 24 Properties
Collateralized Mortgage Notes May-02 8.40% 17,000 17,000 24 Properties
Permanent Debt Facility Mar-13 7.73% 74,754 - 11 Properties
Mortgage May-17 10.13% 1,495 - Bolling Creek
Mortgage Jul-18 9.75% 2,634 - Shoreside #1
Mortgage Jul-15 8.75% 3,150 - Shoreside #2
Mortgage Jul-15 9.13% 1,097 - Brookneal
Mortgage Jul-15 9.13% 1,506 - Keysville
Mortgage Nov-07 7.37% 15,063 - Towne Square
Mortgage Nov-07 7.37% 7,135 - University Mall
Mortgage Dec-02 8.48% 5,743 - Celebration
Mortgage Jan-15 8.37% 2,270 - Danville
Mortgage Nov-05 7.88% 6,599 - Durham Festival
Mortgage May-14 7.63% 3,423 - Lenoir Festival #1
Mortgage Oct-01 8.50% 4,593 - Hollywood Festival
Mortgage Nov-07 7.39% 11,097 - Lake Point
Mortgage Dec-03 8.37% 9,339 - Square One
Mortgage Oct-05 8.55% 10,672 - Waverly Place
Mortgage Oct-08 9.22% 19,688 - Mobile Festival
Mortgage Oct-17 8.38% 3,204 - University Shoppes
------------- -------------
TOTAL FIXED RATE DEBT
AND WEIGHTED AVERAGE 7.96% $273,344 $ 91,583
INTEREST RATE
19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VARIABLE RATE
<S> <C> <C>
Mortgage - Prime + 2.25% - 5,711 Lathrop
Line of Credit - Prime + .50% - 736 Eastgate
Revolver Feb-00 LIBOR + 2.25% 31,439 134,545 Secured
------------- -------------
TOTAL VARIABLE RATE
DEBT AND WEIGHTED
AVERAGE INTEREST RATE 7.37% $31,439 $ 140,992
TOTAL DEBT 7.90% $304,783 $ 232,575
============= =============
- - ------------------------------------------------------------------------------------------------------
PERCENT OF TOTAL DEBT
Fixed 89.7% 39.4%
Variable 10.3% 60.6%
WEIGHTED AVERAGE INTEREST RATE AT END
OF PERIODS:
Fixed 7.96% 7.75%
Variable 7.37% 8.21%
------------- -------------
Total 7.90% 8.03%
- - ------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE OF MATURITIES BY YEAR
Year Balance Percentage
- - ---------------------------- ---------
1999 $ 3,504 1.1%
2000 35,210 11.6%
2001 8,500 2.8%
2002 91,734 30.1%
2003 11,074 3.6%
Thereafter 154,761 50.8%
------------- ---------
Total $304,783 100.0%
============= =========
EXECUTIVE OFFICES
The Company currently leases its 31,800-square foot executive offices in
Cary, North Carolina and its 3,400-square foot Florida regional office in Boca
Raton, Florida.
ITEM 3- LEGAL PROCEEDINGS
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on August 5, 1998 at
the Carolina Inn, Chapel Hill, North Carolina.
The purpose of the meeting was to obtain the approval from stockholders
of record as of June 12, 1998 pertaining to the following:
1. ELECTION OF SIX DIRECTORS TO SERVE UNTIL THE 1999 ANNUAL MEETING.
<TABLE>
<CAPTION>
C. CAMMACK PATRICK M. ROBERT O. AMICK
MORTON MINIUTTI
----------------- -------- ------------------ ------- ----------------- ---------
Votes % Votes % Votes %
----------------- -------- ------------------ ------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
For 13,599,077 90.8 13,578,503 90.7 13,599,356 90.8
Against - - - - -
Abstain 181,998 1.2 202,572 1.3 101,719 1.2
----------------- -------- ------------------ ------- ----------------- ---------
Total Voted 13,781,075 92.0 13,781,075 92.0 13,781,075 92.0
Total Shares
Outstanding 14,283,566 14,283,566 14,283,566
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
WILLIAM D. J. RICHARD JOHN GILDEA
EBERLE FUTRELL
----------------- -------- ------------------ ------- ----------------- ---------
Votes % Votes % Votes %
----------------- -------- ------------------ ------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
For 13,599,356 90.8 13,599,557 90.8 13,601,857 90.8
Against - - - - -
Abstain 181,719 1.2 181,518 1.2 179,218 1.2
----------------- -------- ------------------ ------- ----------------- ---------
Total Voted 13,781,075 92.0 13,781,075 92.0 13,781,075 92.0
Total Shares
Outstanding 14,283,566 14,283,566 14,283,566
2. APPROVAL TO SELL 21,052,631 SHARES OF COMMON STOCK FOR $200
MILLION OR $9.50 PER SHARE TO PROMETHEUS SOUTHEAST RETAIL, LLC
("PSR"), AN AFFILIATE OF LAZARD FRERES REAL ESTATE INVESTORS,
LLC.
The transaction was approved as follows:
For 7,899,146 66.2
Against 777,972 6.5
Abstentions 68,011 0.6
------------------------ -----------------------
Total Voted 8,745,129 73.3%
------------------------ -----------------------
Total Shares Outstanding (1) 11,933,566
======================== =======================
(1) Excludes 2,350,000 shares owned by PSR as of the date of the
Annual Meeting.
3. APPROVAL TO CHANGE THE COMPANY'S NAME TO "KONOVER PROPERTY TRUST,
INC." THE CHANGE WAS APPROVED AS FOLLOWS:
For 8,292,518 58.1
Against 270,284 1.9
Abstentions 114,315 0.8
------------------------ -----------------------
Total Voted 8,677,117 60.8%
------------------------ -----------------------
Total Shares Outstanding 14,283,566
======================== =======================
4. APPROVAL TO INCREASE THE NUMBER OF SHARES AUTHORIZED FOR ISSUANCE
FROM 75 MILLION TO 130 MILLION.
The increase was approved as follows:
For 12,049,436 84.3
Against 1,010,414 7.1
Abstentions 85,125 .6
------------------------ -----------------------
Total Voted 13,144,975 92.0%
------------------------ -----------------------
Total Shares Outstanding 14,283,566
======================== =======================
5. APPROVAL TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK
RESERVED FOR ISSUANCE UNDER THE COMPANY'S 1993 EMPLOYEE STOCK
INCENTIVE PLAN FROM 1.1 MILLION TO 2.8 MILLION.
For 7,274,051 50.9
Against 1,301,302 9.1
Abstentions 101,765 0.7
------------------------ -----------------------
Total Voted 8,677,118 60.7%
------------------------ -----------------------
Total Shares Outstanding 14,283,566
======================== =======================
</TABLE>
6. APPROVAL TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK
RESERVED FOR ISSUANCE UNDER THE COMPANY'S 1995 OUTSIDE DIRECTOR'S
21
<PAGE>
The increase was approved as follows:
For 7,793,513 54.6
Against 734,043 5.1
Abstentions 149,561 1.0
------------------------ ---------------------
Total Voted 8,677,117 60.7%
------------------------ ---------------------
Total Shares Outstanding 14,283,566
======================== =====================
ITEM X - EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
current executive officers of the Company.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NAME AGE POSITION
C. Cammack Morton 47 President and Chief Executive Officer
Patrick M. Miniutti 51 Executive Vice President and Chief Financial
Officer
William H. Neville 54 Executive Vice President and Chief Operating
Officer
Christopher G. Gavrelis 45 Executive Vice President, Management and
Administration
Connell L. Radcliff 44 Executive Vice President, Development
Fred P. Steinmark 51 Executive Vice President
Senior Vice President - General Counsel and
Robin Malphrus 38 Secretary
Linda M. Swearingen 34 Senior Vice President - Finance/Investor Relations
Sona A. Thorburn 33 Vice President and Chief Accounting Officer
</TABLE>
C. Cammack Morton joined the Company in December 1995 as Chief Operating
Officer and was elected President and a Director in January 1996. Effective
January 1, 1997, Mr. Morton became the Company's Chief Executive Officer. Prior
to his affiliation with the Company, Mr. Morton served as Managing Director of
Rothschild Realty, Inc. ("Rothschild") and President and Chief Executive Officer
of the Charter Oak Group, Ltd. (the "Charter Oak Group"), a subsidiary of
Rothschild engaged in the development and management of factory outlet centers.
He joined Rothschild in 1987 as Vice President, was promoted to Senior Vice
President in 1989 and to Managing Director in 1991.
Patrick M. Miniutti joined the Company as Executive Vice President,
Chief Financial Officer and Director in August 1996. Prior to his affiliation
with the Company, Mr. Miniutti served for three years as Executive Vice
President, Chief Financial Officer and Trustee of Crown American Realty Trust, a
public REIT that owns regional shopping malls. Prior thereto, Mr. Miniutti held
senior financial positions for a combined 12 years with New Market Companies,
Inc., Western Development Corporation (predecessor to The Mills Corporation) and
Cadillac Fairview Corporation Limited, which was preceded by ten years in public
accounting, principally with national firms. Mr. Miniutti is a member of the
American Institute of Certified Public Accountants and a former member of its
Real Estate Accounting Committee, which was responsible for promulgating most of
the real estate accounting rules in practice today.
William H. Neville, has served as Executive Vice President and Chief
Operating Officer since September 1997. Before joining the Company, Mr. Neville
was Regional President of Horizon Group Realty, a real estate investment trust
specializing in outlet centers, from January 1996 to July 1997. Prior to joining
Horizon, Mr. Neville held various positions with Charter Oak Partners, a
privately held outlet center developer, from January 1993 to December 1995, at
which time he was the President of the company.
Christopher G. Gavrelis joined the Company in December 1995. Mr.
Gavrelis was named Senior Vice President in January 1996 and promoted to
Executive Vice President in January 1998. Prior to his affiliation with
22
<PAGE>
the Company, Mr. Gavrelis was Vice President - Property Management of the
Charter Oak Group for approximately four years. From 1989 to 1991, Mr. Gavrelis
served as regional property manager for McArthur/Glen Realty Corp. (now HGI
Realty, Inc.), a company engaged in the development and operation of factory
outlet centers. Mr. Gavrelis is responsible for the Company's management and
administration activities.
Connell L. Radcliff has served as Senior Vice President of Development
since its organization in April 1993. Mr. Radcliff joined North-South Management
Corporation (a predecessor company) as Vice President - Leasing in 1989. From
1987 to 1989, Mr. Radcliff was a real estate broker for The Shopping Center
Group, a real estate brokerage firm specializing in national tenant
representation. Mr. Radcliff is responsible for the Company's development
activities.
Fred P. Steinmark was named Executive Vice President in July 1998 in
connection with the Company's acquisition of Konover & Associates South, of
which he served, as its president since 1990. The acquisition agreement for
Konover & Associates South provided for Mr. Steinmark's appointment as Executive
Vice President.
Linda M. Swearingen was promoted from Vice President to Senior Vice
President of Finance/Investor Relations in January 1998. Prior to being named
Vice President in May 1996, Ms. Swearingen was Director of Leasing for the
Company, a position she had held since July 1993. From 1990 to 1993, Ms.
Swearingen served as Assistant Vice President Commercial Real Estate for Bank
One Dayton.
Robin W. Malphrus was promoted from Vice President, Secretary and
General Counsel to Senior Vice President, Secretary and General Counsel in
January 1999. Prior to being named Vice President, Secretary and General Counsel
in August, 1998, Ms. Malphrus was Vice President and Secretary, a position she
held since June 1996. Ms. Malphrus joined the Company in August 1994 as
Corporate Counsel, and prior to joining the Company, Ms. Malphrus was Corporate
Counsel for North Hills, Inc. for five years.
Sona A. Thorburn has served as Vice President and Chief Accounting
Officer since joining the Company in 1997. Prior to joining the Company, Ms.
Thorburn was a manager with the accounting firm of Ernst & Young LLP, where she
was employed for eight years. At Ernst & Young, Ms. Thorburn supervised audits
for a variety of clients, including the Company.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock began trading on the NYSE, under the symbol "FAC" and
subsequently changed its symbol to "KPT" on August 10, 1998 following a
shareholder vote approval of the name change on August 5, 1998. As of March 25,
1999, there were approximately 497 stockholders of record.
The following table sets forth the quarterly high and low sales prices
of the Common Stock and dividends paid per share for 1998 and 1997:
<TABLE>
<CAPTION>
- - ---------------- -------------------------------------- --------------------------------------
<S> <C> <C>
1998 1997
- - ---------------- ------------ ------------ ------------ ------------ ------------ ------------
High Low Dividends High Low Dividends
First Quarter $10 $ 7 1/8 $ 0.00 $ 6 7/8 $5 3/8 $ 0.00
Second Quarter $10 7 3/4 0.00 7 5 1/8 0.00
Third Quarter 8 11/16 6 5/8 0.00 8 7/16 6 0.00
Fourth Quarter 7 1/2 6 0.00 8 1/2 6 1/2 0.00
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
DISTRIBUTIONS
In November of 1998, the Company announced its intent to pay an annual
dividend of $0.50 per common share, payable at the rate of $0.125 per quarter.
The first payment will be made to shareholders of record as of March 15, 1999
and will be paid on March 31, 1999. A portion of the dividend payment will be a
return of capital, as the Company expects to utilize its tax net loss carryover
in 1999. The dividend will represent a payout ratio of less than 50% of the
Company's funds from operations (FFO).
23
<PAGE>
The Company will continue to make a determination regarding its dividend
distributions annually following review of the Company's year-end financial
results. The Company's policy is to declare dividends in amounts at least equal
to 95% of the Company's taxable income which is the minimum dividend required to
maintain REIT status. Based upon previous losses, the Company will have
approximately $11.5 million of net operating loss carry forwards for 1999 which
could result in no dividend payment requirement to maintain its REIT status. See
"Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity."
The Company provides a Dividend Reinvestment Plan for stockholders of
record. Information on the Plan can be obtained from the Company's transfer
agent and registrar, First Union National Bank at (800) 829-8432.
ITEM 6 - SELECTED FINANCIAL DATA
The following information should be read in conjunction with the
consolidated financial statements and notes thereto included in Item 8 of this
report and "Management's Discussion and Analysis of Results of Operations and
Financial Condition" included in Item 7 of this report.
Industry analysts generally consider Funds from Operations ("FFO") an
appropriate measure of performance for an equity REIT. FFO means net income
(computed in accordance with generally accepted accounting principles) excluding
gains or losses from debt restructuring and sales of property plus depreciation
and amortization and adjustments for unusual items. Management believes that
FFO, as defined herein, is an appropriate measure of the Company's operating
performance because reductions for depreciation and amortization charges are not
meaningful in evaluating the operating results of the Properties which have
historically been appreciating assets.
Beginning in 1996 the Company adopted a change in the definition of FFO
as promulgated by the National Association of Real Estate Investment Trusts
(NAREIT). Under the new definition, amortization of deferred financing costs and
depreciation of non-real estate assets, as defined, are not included in the
calculation of FFO. All prior period FFO results have been retroactively
restated.
"EBITDA" is defined as revenues less operating costs, including general
and administrative expenses, before interest, depreciation and amortization and
unusual items. As a REIT, the Company is generally not subject to Federal income
taxes. Management believes that EBITDA provides a meaningful indicator of
operating performance for the following reasons: (i) it is industry practice to
evaluate the performance of real estate properties based on net operating income
("NOI"), which is generally equivalent to EBITDA; and (ii) both NOI and EBITDA
are unaffected by the debt and equity structure of the property owner.
FFO and EBITDA (i) do not represent cash flow from operations as defined
by generally accepted accounting principles, (ii) are not necessarily indicative
of cash available to fund all cash flow needs and (iii) should not be considered
as an alternative to net income for purposes of evaluating the Company's
operating performance or as an alternative to cash flow as a measure of
liquidity.
Other data that management believes is important in understanding trends
in its business and properties are also included in the following table (in
thousands, except per share data).
The earnings per share amounts prior to 1997, have been restated as
required to comply with Statement of Financial Accounting Standards No. 128
"Earnings Per Share." For further discussion of earnings per share and the
impact of Statement No. 128, see Note 2 to the consolidated financial
statements.
24
<PAGE>
<TABLE>
<CAPTION>
------------ ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
------------ ------------- -------------- ------------ ------------
OPERATING DATA:
Rental revenues $ 69,542 $ 53,726 $47,170 $47,129 $ 42,077
Property operating costs 20,625 15,671 13,975 13,648 10,454
------------ ------------- -------------- ------------ ------------
48,917 38,055 33,195 33,481 31,623
Depreciation and amortization 18,515 15,652 13,802 11,900 8,511
General and administrative 7,004 6,397 6,199 15,279 5,567
Interest 19,772 16,436 14,175 10,903 4,435
Loss (gain) on sale of real 512 - - - -
estate
Minority interest in Operating 86 - - - -
Partnership
Adjustment to carrying value of - - (5,000) (8,500) -
assets
Extraordinary (loss) on early
extinguishment of debt - (986) (103) - (884)
------------ ------------- -------------- ------------ ------------
Net income (loss) $ 3,028 $ (1,416) $ (6,084) $(13,101) $ 12,226
============ ============= ============== ============ ============
Income (loss) before $ 3,028 $ (430) $ (5,981) $(13,101) $ 13,110
extraordinary item
Preferred stock dividends - - (368) - -
------------ ------------- -------------- ------------ ------------
Income (loss) before
extraordinary item $ 3,028 (430) (6,349) (13,101) 13,110
applicable to common stockholders
Extraordinary loss on early
extinguishment - (986) (103) - (884)
of debt
------------ ------------- -------------- ------------ ------------
Income (loss) applicable to
common shareholders $ 3,028 $ (1,416) $ (6,452) $(13,101) $ 12,226
============ ============= ============== ============ ============
BASIC INCOME (LOSS) PER COMMON
SHARE: $ 0.16 $ (0.04) $ (0.54) $ (1.11) $ 1.11
Income (loss) before
extraordinary item
applicable to common stockholders
Extraordinary item - (0.08) (0.01) - (0.07)
------------ ------------- -------------- ------------ ------------
Net income (loss) applicable to $ 0.16 $ (0.12) $ (0.55) $ (1.11) $ 1.04
common stockholders
============ ============= ============== ============ ============
Weighted average common shares 18,693 11,824 11,817 11,814 11,811
outstanding
============ ============= ============== ============ ============
DILUTED INCOME (LOSS) PER COMMON
SHARE:
Income (loss) before extraordinary
item applicable to common $ 0.14 $ (0.04) $ (0.54) $ (1.11) $ 1.11
stockholders
Extraordinary item - (0.08) (0.01) - (0.07)
------------ ------------- -------------- ------------ ------------
Net income (loss) applicable to $ 0.14 $ (0.12) $ (0.55) $ (1.11) $ 1.04
common stockholders
============ ============= ============== ============ ============
Weighted average common shares 21,878 11,824 11,817 11,814 11,811
outstanding - diluted (a)
============ ============= ============== ============ ============
1998 1997 1996 1995 1994
------------------------------------- ----------- ---------- --------- ---------- ---------
OTHER DATA:
EBITDA:
Net income (loss) $ 3,028 $(1,416) $(6,084) $(13,101) $12,226
Adjustments:
Interest 19,772 16,436 14,175 10,903 4,435
Depreciation and amortization 18,515 15,652 13,802 11,900 8,511
Compensation under stock plans 1,419 537 392 - -
Loss (gain) on sale of assets 512 - (37) (345) -
Non-recurring administrative 519 250 927 6,500 -
costs
Minority interest 86 - - - -
Merger termination costs - 1,250 - - -
Adjustment to fair value of - - 5,000 8,500 -
assets
Extraordinary loss on early
extinguishment of debt - 986 103 - 884
=========== ========== ========= ========== =========
$ 43,851 $ 33,695 $ 28,278 $ 24,357 $26,056
=========== ========== ========= ========== =========
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
FUNDS FROM OPERATIONS:
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 3,028 $ (1,416) $(6,084) $(13,101) $ 12,226
Adjustments:
Straight line rent 512 (619) 383 (626) (922)
Depreciation and amortization 17,814 15,254 13,513 11,722 8,428
Interest on exchangeable notes - - 553 - -
Compensation under restricted 1,419 537 392 - -
stock award
Loss (gain) on sale of assets 512 - (37) (345) -
Minority interest 86 - - - -
Unusual items:
Non-recurring 519 250 927 6,500 -
administrative costs
Merger termination costs - 1,250 - - -
Adjustment to carrying - - 5,000 8,500 -
value of assets
Extraordinary loss on early
extinguishment of debt - 986 103 - 884
=========== ========== ========= ========== =========
$ 23,890 $ 16,242 $ 14,750 $ 12,650 $20,616
=========== ========== ========= ========== =========
WEIGHTED AVERAGE SHARES
OUTSTANDING-DILUTED (A) 21,878 14,158 13,399 11,814 11,811
=========== ========== ========= ========== =========
FUNDS AVAILABLE FOR
DISTRIBUTION/REINVESTMENT:
Funds from Operations $ 23,890 $ 16,242 $ 14,750 $ 12,650 $20,616
=========== ========== ========= ========== =========
Adjustments:
Non-recurring (519) (250) (927) (6,500) -
administrative costs
Merger termination costs - (1,250) - - -
Capitalized tenant (4,259) (1,418) (316) (1,380) (1,340)
allowances
Capitalized leasing costs (2,258) (1,054) (549) (407) (402)
Recurring capital (599) (845) (312) (796) (1,314)
expenditures
=========== ========== ========= ========== =========
$ 16,255 $ 11,425 $12,646 $ 3,567 $17,560
=========== ========== ========= ========== =========
DIVIDENDS DECLARED ON ANNUAL $ 0.00 $ 0.00 $10,142 $ 24,101 $22,681
EARNINGS
=========== ========== ========= ========== =========
DIVIDENDS DECLARED ON ANNUAL
EARNINGS PER SHARE $ 0.00 $ 0.00 $ 0.75 $ 2.04 $ 1.92
=========== ========== ========= ========== =========
CASH FLOWS:
Cash flows from operating activities $ 18,235 $ 12,962 $ 7,649 $ 22,078 $20,674
Cash flows from investing (69,867) (62,185) (17,288) (50,854) (84,719)
activities
Cash flows from financing 121,749 47,061 15,018 29,134 59,750
activities
=========== ========== ========= ========== =========
Net (decrease) increase in cash
and cash equivalents $ 70,117 $ (2,162) $ 5,379 $ 358 $(4,295)
=========== ========== ========= ========== =========
BALANCE SHEET DATA:
Income-producing properties (before
depreciation and amortization) $ 579,533 $ 395,325 $354,029 $357,034 $321,088
Total assets 682,449 403,626 358,612 355,095 326,270
Debt on income properties 304,783 232,575 173,695 170,067 101,193
Total liabilities 320,862 240,699 194,020 194,609 122,930
Minority interest 12,246 - - - -
Total stockholders' equity 349,341 162,927 164,592 160,486 203,340
PORTFOLIO PROPERTY DATA:
Total GLA (at end of period) 8,148 5,503 4,865 4,626 4,234
Weighted average GLA 7,179 5,341 4,674 4,336 3,768
Number of properties (at end of period) 59 41 36 36 35
Occupancy (at end of year):
Operating 92% 93.4% 91.4% 92.3% 92.9%
Development 0.0% 0.0% 69.1% 52.1% -
Held for sale 51.4% 50.4% 42.9% 66.3% -
</TABLE>
(a) The following table sets forth the computation of the denominator to be used
in calculating the weighted-average shares outstanding based on Statement of
Financial Accounting Standard No. 128, "Earnings Per Share":
<TABLE>
<CAPTION>
DENOMINATOR:
<S> <C> <C> <C> <C> <C>
Denominator- weighted average shares 18,693 11,824 11,817 11,814 11,811
Effect of dilutive securities:
Preferred stock 2,222 2,222 1,582 - -
Employee stock options 33 69 - - -
Restricted stock 328 43 - - -
Operating Partnership 602 - - - -
Units
----------- ----------- --------- --------- ---------
Dilutive potential common shares 3,185 2,334 1,582 - -
----------- ----------- --------- --------- ---------
Denominator- adjusted weighted
average shares and assumed 21,878 14,158 13,399 11,814 11,811
conversions
=========== =========== ========= ========= =========
</TABLE>
26
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the selected
financial data included in Item 6 of this report, and the consolidated financial
statements and notes thereto included in Item 8 of this report. Certain
comparisons between the periods have been made on a percentage basis and on a
weighted average square foot basis, which adjusts for square footage added at
different times during the year.
Certain statements under this caption, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," constitute
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). See "Forward-Looking Statements" included under this
section.
GENERAL DEVELOPMENT OF BUSINESS
Konover Property Trust, Inc. (the "Company"), formerly FAC Realty Trust,
Inc., was incorporated on March 31, 1993 as a self-administrated and
self-managed real estate investment trust (REIT). The Company is principally
engaged in the acquisition, development, operation, and ownership of retail
shopping centers. The Company's revenues are primarily derived under real estate
leases with national, regional and local retailing companies.
Over the past five years, the Company has grown from an owner of retail
outlet shopping centers with an aggregate square footage of 4.2 million to an
owner of approximately 8.1 million square feet of diversified retail space
consisting of:
1. 47 community shopping centers in 17 states aggregating approximately
5,871,000 square feet;
2. 10 outlet centers in 9 states aggregating approximately 2,110,000 square
feet;
3. two centers aggregating approximately 167,000 square feet that are held
for sale; and
4. approximately 124 acres of outparcel land located near or adjacent to
certain of the Company's centers and which are being marketed for lease
or sale.
SIGNIFICANT TRANSACTIONS AND ACQUISITIONS
UPREIT CONVERSION
On December 17, 1997, following shareholder approval, the Company changed
its domicile from the State of Delaware to the State of Maryland. The
reincorporation was accomplished through the merger of FAC Realty, Inc. into its
Maryland subsidiary, Konover Property Trust, Inc. (formerly FAC Realty Trust,
Inc.). Following the reincorporation on December 18, 1997, the Company
reorganized as an umbrella partnership real estate investment trust (an
"UPREIT"). The Company then contributed to KPT Properties, L.P. (formerly FAC
Properties, L.P.), a Delaware limited partnership (the "Operating Partnership"),
all of its assets and liabilities. In exchange for the Company's assets, the
Company received limited partnership interests ("Units") in the Operating
Partnership in an amount and designation that corresponded to the number and
designation of outstanding shares of capital stock of the Company at the time.
The Company is the sole general partner of the Operating Partnership. As
additional limited partners are admitted to the Operating Partnership in
exchange for the contribution of properties, the Company's percentage ownership
in the Operating Partnership will decline. As the Company issues additional
shares of capital stock, it will contribute the proceeds for that capital stock
to the Operating Partnership in exchange for a number of Units equal to the
number of shares that the Company issues. The Company conducts all of its
business and owns all of its assets through the Operating Partnership (either
directly or through subsidiaries) such that a Unit is economically equivalent to
a share of the Company's common stock.
An UPREIT may allow the Company to offer Units in the Operating Partnership
in exchange for ownership interests from tax-motivated sellers. Under certain
circumstances, the exchange of Units for a seller's ownership interest will
enable the Operating Partnership to acquire assets while allowing the seller to
defer the tax liability associated with the sale of such assets. Effectively,
this allows the Company to use Units instead of stock to acquire properties,
which provides an advantage over many other potential buyers of property.
27
<PAGE>
NORTH HILLS PORTFOLIO
In March 1997 the Company purchased five community shopping centers located
in the Raleigh, North Carolina area for $32.4 million from an unrelated third
party. The centers total approximately 606,000 square feet and feature anchor
tenants such as Winn-Dixie, Food Lion, Inc., K-Mart Corporation and Eckerd Drug.
The acquisition was funded from the Company's line of credit facility. As a
result of the acquisition, the Company ended 1997 with 41 shopping centers
containing an aggregate of approximately 5.5 million square feet of GLA. More
importantly, the transaction marked the beginning of the Company's
diversification strategy. See - "Business Strategy - Acquisition and Portfolio
Diversification."
RODWELL/KANE TRANSACTION
On March 30, March 31, and May 14, 1998, the Company concluded the
acquisition of eight community shopping centers located in North Carolina and
Virginia from Roy O. Rodwell, Chairman and co-founder of Atlantic Real Estate
Corporation ("ARC"), Mr. John N. Kane, Chairman of Kane Realty Corporation, and
their affiliates. The acquired centers encompass approximately 950,000 square
feet and are, in the aggregate, 94% leased.
The aggregate purchase price for the acquired shopping centers was $57.1
million, consisting of the assumption of $44.3 million of fixed-rate
indebtedness, the payment of $3.5 million in cash and the issuance of 974,347
limited partnership Units of the Operating Partnership. Of the purchase price,
292,447 Units and $0.8 million in cash will be issued or paid on a delayed or
contingent basis. The contingencies include the attainment of certain property
performance thresholds and the sale, lease or development of certain outparcels.
The purchase price for the acquisition was determined as a result of arms-length
negotiation between the Company and the sellers, with the Units being valued at
$9.50 per share.
The ninth and final center covered by the Rodwell/Kane acquisition agreement
will be managed by the Company and is expected to be acquired in the year 2000.
Its acquisition prior to the year 2000 would trigger an onerous loan assumption
fee.
KONOVER & ASSOCIATES SOUTH TRANSACTION
On February 24, 1998, the Company entered into definitive agreements with
affiliates of Konover & Associates South, a privately held real estate
development firm based in Boca Raton, Florida, to acquire eleven community
shopping centers. The Company acquired nine of the Konover & Associates South
community shopping centers for a total purchase price of $85.4 million
consisting of $55.2 million in debt assumption, $26.8 million in cash and
369,000 of Operating Partnership Units, valued at $9.50 per share. Of the
original eleven community centers, the remaining two will continue to be managed
by the Company, but will not be acquired.
For financial reporting purposes, the nine Konover properties were recorded
effective April 1, 1998, since the risks and rewards of ownership had passed to
the Company and there were no significant conditions outstanding. All of the
acquired properties are held directly or indirectly, by KPT Properties, L.P.
In December 1997, the Company issued a note receivable of $8.5 million to
Davie Plaza Limited Partnership, a Florida limited partnership of which Simon
Konover, Chairman of the Company, is a 49% owner. The loan is secured by a first
mortgage position on a 299,778-square foot retail shopping center located in
Davie, Florida. In January, 1999, the Company received a $2 million paydown. The
outstanding balance is now $6.5 million and carries interest at 8.0% payable
monthly and matures on June 30, 1999.
The initial loan was made in anticipation of the Company's acquisition of
the center as part of the Konover & Associates South transaction and to take
advantage of the ability to repay the previous debt instrument at a discount.
The center was ultimately not acquired by the Company.
On August 10, 1998, following stockholder approval, the Company began
operating under the name "Konover Property Trust." The Company remains listed on
the New York Stock Exchange and changed its ticker symbol from FAC to KPT. The
Company will continue to operate an office in Boca Raton, Florida due to its
strategic location in the Southeast.
28
<PAGE>
Simon Konover, founder of both Konover & Associates South and Konover &
Associates, Inc., a $500 million plus real estate company headquartered in West
Hartford, Connecticut, was elected as a non-executive Chairman of the Board of
the Company in connection with the acquisition.
LAZARD FRERES TRANSACTION
On August 5, 1998, the stockholders approved a Stock Purchase Agreement
between Prometheus Southeast Retail, LLC (including its assignee, "PSR"), a real
estate investment affiliate of Lazard Freres Real Estate Investors, LLC,
("Lazard") and the Company pursuant to which PSR made a $200 million purchase of
shares of Common Stock of the Company at a purchase price of $9.50 per share
(the "Lazard transaction"). The investment was made in stages, at the Company's
option, through September 29, 1998, allowing the Company to obtain capital to
fund its future acquisition and development plans as well as retire debt. Upon
completion of funding, PSR owned an equity interest in the Company of
approximately 58%, on a diluted basis. As a result of subsequent stock
repurchases by the Company, PSR's ownership interest in the Company is 61%,
assuming conversion of outstanding preferred stock and units into shares. Under
the terms of the Lazard transaction agreements, for as long as PSR's investment
in the Company is $50 million or more, PSR has the right to participate in
future equity issuances to preserve its ownership interest.
As part of the Lazard transaction, and as approved by the stockholders,
three representatives of Lazard were elected to the Company's Board of
Directors, which currently has a total of nine directors. With three members of
the Board, PSR is able to prevent any action requiring super-majority board
approval, such as: (i) significant acquisitions and sales, (ii) the incurrence
of additional indebtedness beyond a stated level, (iii) significant issuances of
capital stock and other securities, (iv) amendments to the character of bylaws
of the Company in a manner that would be materially adverse to PSR, and (v)
transactions that would result in any person, other than PSR, holding more than
15% of the voting power of the Company.
Pursuant to the Contingent Value Rights Agreement, if PSR has not doubled
its investment (through stock appreciation and dividends) by January 1, 2004,
the Company will pay PSR, in cash or stock, an amount necessary to achieve such
a return, subject to a maximum payment of 4,500,000 shares or the cash value
thereof.
JOINT VENTURES
ATLANTIC REAL ESTATE CORPORATION (ARC). As a result of the Company's
relationship with Roy Rodwell, on September 22, 1997, the Company and ARC formed
a limited liability company known as Atlantic Realty, LLC to develop and manage
retail community and neighborhood shopping centers in North Carolina. The joint
venture plans to develop one million square feet.
WAKEFIELD. Much like the Company's alliance with ARC, this strategic
alliance known as Wakefield Investment, Inc., was formed primarily to develop
community shopping centers. The retail centers will be located on 65 acres
within a 500-acre parcel of land zoned for commercial use known as Wakefield in
Wake Forest, North Carolina. The Company will perform all leasing, property
management and marketing functions for the venture. The Company will hold a 50%
interest in the venture.
The Wakefield development is an exclusive community expected to include
a Wake County public school campus, public library, city park and an 18-hole TPC
golf course. Wakefield's residential community is a 2,200-acre upscale,
mixed-use development of 3,400 homes priced from $225,000 to $1 million; 75% of
the community has been pre-sold to nationally recognized builders.
MOUNT PLEASANT. The Company has entered into a strategic venture, known
as Mount Pleasant, LLC, with a local Charleston, South Carolina developer, AJS
Group. The venture will develop a 425,000 square foot retail/entertainment
shopping center in Mt. Pleasant, South Carolina. Construction on the center, to
be named Mt. Pleasant Towne Centre, began in May 1998, with opening targeted for
Summer 1999. Belk Department Store, Barnes and Noble, Bed, Bath and Beyond and
The Gap will be the primary anchors for the center.
29
<PAGE>
A summary of the Company's investment in venture companies at December 31,
1998 and 1997, is as follows (all investments are accounted for under the equity
method, in thousands):
<TABLE>
<CAPTION>
Amounts Invested
(in thousands)
--------------------------
December 31,
Location Ownership % 1998 1997
-------- -------------- --------------------------
<S> <C> <C> <C>
Atlantic Realty North Carolina 50% $ 7,442 $ 2,803
Mount Pleasant KPT Mount Pleasant, SC 50% 18,759 1,480
Wakefield Investment Wake Forest, NC 95% 570 -
Falls KPT Raleigh, NC 50% 5,472 -
------------- ------------
$32,243 $ 4,283
============= ============
</TABLE>
At December 31, 1998, a majority of the properties owned by the ventures
were under development and had no operations with the exception of a center in
Pembroke, North Carolina which is a project with Atlantic Realty. The operations
of the Pembroke center were immaterial during 1998. The acquisition and
development of the above properties are subject to, among other things,
completion of due diligence and various contingencies, including those inherent
in development projects, such as zoning, leasing and financing. There can be no
assurance that all of the above transactions will be consummated. All debt
incurred by the ventures is non-recourse to the Company and is secured by their
respective properties and guaranteed by the Company's respective venture
partners.
During 1998, the Company made advances in the form of notes receivable to a
venture totaling $10.6 million, which includes the Company's interest in the
Lake Carmel, New York development site. Of this amount, $7.2 million carries
interest at 11% per annum plus participation in profits and matures August 2001.
The remaining $3.4 million carries interest at 15% and matures March 28, 1999.
ACQUISITION SUMMARY
(IN THOUSANDS)
<TABLE>
<CAPTION>
OP UNITS
STATE SQUARE PURCHASE ($9.50
LOCATION DATE FEET PRICE DEBT ASSUMED CASH PER SHARE)
-------------- --------- ---------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 TO DATE
Roberson Corners SC 1/6/99 48 $ 3,900 $ - $ 3,900 -
Dukes Plaza VA 3/1/99 140 6,500 4,100 2,400 -
--------- ---------- ----------- ------------ ------------ ----------
TOTAL 188 10,400 4,100 6,300 -
1998
Waverly Place NC 12/14/98 181 12,800 10,700 2,100 -
University Shoppes SC 8/31/98 54 4,700 3,200 1,500 -
Konover (portfolio) FL, NC, VA, AL 4/1/98 1,518 85,400 55,200 26,700 369
Kane (portfolio) NC, VA 3/31/98 955 57,100 44,300 3,500 974 (1)
Market Square VA 1/7/98 56 3,100 2,300 800 -
-------------- --------- ---------- ----------- ------------ ------------ ----------
TOTAL 2,764 163,100 115,700 34,600 1,343
1997
North Hills NC 3/31/97 606 32,300 - 32,300 -
(portfolio)
1996
N/A - - - - -
========== =========== ============ ============ ==========
TOTAL 3,558 $ 205,800 $119,800 $ 73,200 1,343
========== =========== ============ ============ ==========
</TABLE>
(1) Includes 292 units to be issued upon the completion of certain
contingencies contained in the acquisition agreement.
RECENT DEVELOPMENTS
RMC REALTY COMPANIES, LTD. The Company entered into an agreement on
March 18, 1999 to acquire the operations of RMC Realty Companies, Inc., in
Tampa, Florida. The acquisition is part of the Company's growth
30
<PAGE>
strategy in the Southeast and involves the acquisition of management and leasing
contracts in excess of 7.2 million square feet in the state of Florida.
The operation will carry the name RMC/Konover Property Trust, LLC and
will operate as a separate business unit. The transaction is proposed to be
effective April 1, 1999.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997.
NET INCOME (LOSS)
The Company reported a net income of $3.0 million, or $0.16 per common
share, for the year ended December 31, 1998. The same period in 1997 saw a net
loss of $1.4 million, or ($0.12) per common share. The elements having a
material impact on the change are discussed below:
> The Company's net operating income (NOI), exclusive of straight-line rent,
increased by $12.0 million, or 32%, to $49.4 million from $37.4 million for
the same period in 1997. This increase was partly attributable to the 1998
acquisitions below:
Impact on NOI for the
Year Ended
December 31, 1998
(in millions)
-------------------------------
Konover & Associates South $ 7.6
Rodwell/Kane Properties 5.4
-------------
$ 13.0
=============
> Including the effect of straight-line rent adjustment, ($1.1 million) NOI
increased by $10.9 million. The Company's' acquisition activity required
higher borrowing levels resulting in increased interest expenses of $3.3
million, increased depreciation and amortization of $2.9 million and
increased general and administrative expenses of $0.6 million. The sale of a
California property in April 1998, an outparcel and a Kentucky property in
December 1998 resulted in a loss of approximately $0.5 million, while a $1.0
million extraordinary loss on extinguishment of debt was incurred in 1997.
During 1998, minority interest in the Operating Partnership totaled $0.1
million. The combination of the above items provide a $4.5 million increase
in net income for the year ended December 31, 1998 over the same period in
1997.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION AND FUNDS FROM
OPERATIONS
EBITDA was $43.9 million for the year ended December 31, 1998, an
increase of $10.2 million or 30%, from $33.7 million for the same period in
1997. The increase was due to increased NOI of $10.9 million over 1997,
including adjustment for straight line rent (as described above) offset by an
increase in general and administrative expenses of $0.7 million exclusive of
compensation under stock plan award and non-recurring administrative as well as
merger costs incurred in 1997.
Funds from Operations ("FFO") for the year ended December 31, 1998
increased $7.7 million or 47% to $23.9 million. The Company's FFO for the same
period in 1997 was $16.2 million. FFO increased primarily as a result of the
$12.0 million increase in NOI, exclusive of straight-line rent, as described
above. This increase in NOI is offset by: (1) increase in general and
administrative expenses (exclusive of compensation under stock awards and
non-recurring administrative expenses) of $0.7 million; (2) the increase in
interest expense of $3.3 million and (3) a slight increase in non-real estate
depreciation of $0.3 million.
TENANT AND OTHER INCOME
Base rent increased to $49.7 million for the year ended December 31,
1998 from $38.5 million for the same period in 1997. Base rent before the
adjustment for straight line rent increased $12.3 million, or 32%, to $50.2
million for the year ended December 31, 1998 when compared to 1997. Base rent
for the year ended December 31, 1998 attributable to the Konover and
Rodwell/Kane properties was $7.4 million and $4.6 million, respectively.
31
<PAGE>
During this same period, the Company's weighted-average square feet of gross
leasable area in operation increased 34%. Gross leasable area in operation
increased by 2.6 million square feet, primarily because of the acquisition of
the Konover properties with 1.6 million in gross leasable area and Rodwell/Kane
properties with 1.0 million in gross leasable area. These described increases
were partially offset by the sales of the California and Kentucky properties of
0.2 million in gross leasable area.
Recoveries from tenants increased for the year ended December 31, 1998
to $15.8 million compared to $12.7 million in the same period of 1997. These
recoveries represent contractual reimbursements from tenants of certain common
area maintenance, real estate taxes, and insurance costs. On a weighted-average
square-foot basis, recoveries decreased 5% to $2.20 for the year ended December
31, 1998 when compared to $2.31 for the same period in 1997. But the average
recovery of property operating expenses, exclusive of marketing and other
non-recoverable operating costs, increased to 90% in 1998 from 89% in 1997. With
respect to approximately 15% of the leased gross leasable area, the Company is
obligated to pay all utilities and operating expenses.
Other income increased $1.4 million to $3.2 million in 1998 compared to
$1.7 million in 1997 primarily as a result of increased third-party management
fee income of $1.6 million. As of December 31, 1998, the Company manages nine
centers versus one center for the same period in 1997. In addition, prior to the
closing on the eight Rodwell/Kane properties, the Company managed the community
centers and will continue to manage the one remaining Rodwell/Kane community
center.
PROPERTY OPERATING EXPENSES
Property operating costs increased $5.0 million, or 32%, to $20.6
million in 1998 from $15.7 million in the same period of 1997. The increase in
operating costs was principally due to the increase in the weighted-average
square feet in operation in 1998, which rose 34% to 7.2 million square feet in
1998 from 5.3 million square feet in 1997. On a weighted-average square-foot
basis, operating expenses increased to $2.87 per weighted average square foot,
up 3% from the same period in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the year ended December 31, 1998
increased $0.6 million, or 9%, to $7.0 million in 1998 from $6.4 million in
1997. General and administrative expenses in 1998 include $1.4 million in
compensation under stock plan awards and $0.5 million of other non-recurring
charges. General and administrative expenses in 1997 include a charge of $1.3
million related to the settlement of the termination of agreements entered into
in 1995 to acquire the factory outlet centers owned by Public Employees
Retirement System of Ohio (OPERS), $0.3 million in non-recurring administrative
charges and $0.5 million in compensation under stock awards. Exclusive of the
charges in 1998 and 1997, general and administrative expenses as a percentage of
revenues decreased by 1%.
DEPRECIATION
Depreciation increased to $18.5 million for the year ended December 31,
1998 compared to $15.7 million in the same period of 1997. The increase is due
primarily to the Rodwell/Kane and Konover acquisitions. Absent the impact of
these acquisitions, depreciation increased $0.3 million due to acquisitions in
Danville, Virginia; Conway, South Carolina and the purchase of computer
equipment throughout 1998. In 1998, the Company changed its estimated useful
life for buildings and improvements from 31.5 years to 39 years. This change in
estimate, resulted in a decrease in depreciation of $0.6 million. Amortization
of deferred leasing and other charges remained consistent at $2.7 million. On a
weighted-average square-foot basis, depreciation and amortization decreased to
$2.58 in 1998 from $2.84 in 1997.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1998, net of interest
income of $5.8 million, increased by $3.4 million, or 21%, to $19.8 million
compared to $16.4 million, net of interest income of $0.6 million, in 1997. This
increase resulted primarily from higher borrowing levels in the first part of
1998 due to the investment in and acquisition of income-producing properties.
Upon completion of the Lazard transaction, the Company paid down debt of $57.7
million in September 1998. The remaining proceeds from the Lazard transaction of
$62.1 million at year-end is generating interest income at a rate of
approximately 5%. On a weighted-average basis, in the first nine
32
<PAGE>
months of 1998, debt outstanding was $299.0 million, and the average interest
rate was 7.9%. This compares to $218.0 million of outstanding debt and a 7.9%
average interest rate in 1997. The Company capitalized $1.0 million of interest
costs associated with its development projects in 1998 compared to $1.5 million
in the same period of 1997.
PROPERTIES HELD FOR SALE
For the year ended December 31, 1998, the properties held for sale
contributed approximately $0.4 million of revenue. After deducting related
interest expense on the debt associated with those properties and the $0.4
million loss on the sale of one property, the properties held for sale incurred
a loss of $0.9 million. For the year ended December 31, 1997, the properties
held for sale contributed approximately $1.1 million of revenue and incurred a
loss of $1.1 million after deducting related interest expenses. On April 30,
1998, the Company sold the California property it was holding for sale for $5.7
million resulting in a loss of $0.4 million.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996.
The Company reported a net loss of $1.4 million, or $0.12 per common
share, for the year ended December 31, 1997 compared to a net loss of $6.1
million, or $0.55 per common share, for the comparable period in 1996. The loss
for 1997 resulted primarily from the following factors:
> An increase in depreciation and amortization of $1.9 million as described
below.
> Increased interest expense of $2.2 million, as a result of higher borrowing
levels.
> The Company incurred an extraordinary loss on the early extinguishment of
debt of $1.0 million in 1997 compared to $0.1 million in 1996.
> Increase in NOI of $4.9 million including adjustment for straight-line rent.
The North Hills acquisition accounted for $3.2 million of this NOI increase.
> In 1996, the Company recorded a $5 million charge to operations as a result
of an adjustment to the carrying value of a certain property as described
below.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION AND FUNDS FROM
OPERATIONS
Earnings before interest, taxes, depreciation and amortization (EBITDA)
was $33.7 million for the year ended December 31, 1997, an increase of $5.4
million or 19%, from $28.3 million for the same period in 1996. The increase was
due to the increase in NOI of $4.9 million, including adjustment for straight
line rent, $3.2 million of which is attributable to the North Hills acquisition
and a decrease of $0.5 million in the general and administrative expenses from
1996 exclusive of compensation under restricted stock awards and non-recurring
administrative and merger termination costs, described below.
FFO for the year ended December 31, 1997 increased $1.4 million, or 9.5%,
to $16.2 million from $14.8 million for the same period in 1996. The factors
that had a positive impact on 1997 FFO were an increase in NOI of $3.9 million
before the adjustment for straight-line rent (net $1.0 million) and a $0.5
million decrease in general and administrative expenses exclusive of
compensation under restricted stock awards and non-recurring administrative and
merger termination costs, as described below. The factor that had a negative
impact on 1997 FFO was $2.8 million in higher interest expense due to higher
average borrowing levels, net of interest on exchangeable notes of $0.6 million
in 1996.
33
<PAGE>
TENANT AND OTHER INCOME
Base rent increased to $38.5 million for the year ended December 31,
1997 from $34.1 million for the same period in 1996. The North Hills acquisition
resulted in a base rent increase for 1997 of $3.4 million. Base rent before the
adjustment for straight line rent increased $3.4 million to $37.9 million for
the year ended December 31, 1997 when compared to 1996 attributable to the North
Hills acquisition, while the Company's weighted average square feet of GLA in
operation increased 13%. The increase in base rents resulted from increased GLA
in operation and from increased occupancy at the operating and development
centers and was offset by declining rents on renewals at certain properties.
Base rental revenue in each of the years ending December 31, 1997 and 1996
included a charge to the reserve for uncollectible tenant accounts of $0.5
million.
Percentage rent increased 33% to $0.8 million in 1997 from $0.6 million
in 1996. The increase is due primarily to the percentage rent attributable to
the community centers acquired in March 1997 of $0.1 million.
Recoveries from tenants, representing contractual reimbursements from
tenants of certain common area maintenance, real estate taxes and insurance
costs, increased in the year ended December 31, 1997 to $12.7 million from $11.8
million in the same period in 1996. On a weighted average square-foot basis,
recoveries from tenants decreased 6% to $2.38 in 1997 from $2.52 in 1996. The
average recovery of property operating expenses for the year ended December 31,
1997 decreased to 81% from 84% for the same period in 1996. With respect to
approximately 21% of the leased GLA, the Company is obligated to pay all
utilities and operating expenses of the applicable center.
Total tenant retail sales at the Company's centers increased 4.9% for the
year ended December 31, 1997 compared to the same period in 1996. Tenant sales
on a comparative store basis increased approximately 1.2% in 1997 compared to
1996.
Other income increased $1.0 million to $1.7 million in 1997 compared to
1996 primarily as a result of increased tenant lease buyouts of $0.7 million and
third party property management fee income of $0.3 million.
PROPERTY OPERATING EXPENSES
Operating expenses increased $1.7 million, or 12%, to $15.7 million in
1997 from $14.0 million in 1996. The increase in operating expenses was
principally due to the increase in the weighted average square feet in operation
in 1997, which rose 13% to 5.3 million square feet in 1997 from 4.7 million
square feet in 1996. On a weighted-average square-foot basis, operating expenses
decreased 1% to $2.96 in 1997 from $2.98 in 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the year ended December 31, 1997
included a charge of $1.3 million related to the settlement of the termination
of agreements entered into in 1995 to acquire the factory outlet centers owned
by Public Employees Retirement System of Ohio (OPERS), $0.3 million in other
non-recurring charges and $0.5 million in compensation under restricted stock
awards. General and administrative expenses in 1996 included $0.9 million in
non-recurring administrative expenses and $0.4 million in compensation under
restricted stock awards. Exclusive of these charges in 1997 and 1996, general
and administrative expense decreased $0.5 million, or 10% to $4.4 million in
1997 from $4.9 million in 1996.
DEPRECIATION
Depreciation increased $1.7 million in 1997 primarily as a result of the
completion in 1996 of the center in Branson, Missouri, the expansions of the
Company's properties in Story City, Iowa; Nebraska City, Nebraska; Smithfield,
North Carolina and Tupelo, Mississippi, and the acquisition in March 1997 of the
five community shopping centers. Amortization of deferred leasing and other
charges increased $0.1 million in 1997 primarily as a result of increased tenant
improvements. On a weighted average square-foot basis, depreciation and
amortization of income-producing properties decreased 1% to $2.86 in 1997 from
$2.89 in 1996.
34
<PAGE>
INTEREST EXPENSE
Interest expense for the year ended December 31, 1997, net of interest
income of $0.6 million, increased by $2.2 million or 15%, to $16.4 million
compared to $14.2 million, net of interest income of $0.6 million, in 1996. This
increase resulted from higher borrowing levels in 1997 compared to 1996. On a
weighted average basis, debt outstanding and the average interest cost were
approximately $211 million and 8.0%, respectively, in 1997 compared to $180.0
million and 8.2%, respectively, in 1996. Amortization of deferred financing
costs amounted to $1.6 million in 1997 and $1.4 million in 1996. The Company
capitalized interest cost associated with its development projects of $1.5
million in 1997 and $2.0 million in 1996. In conjunction with the early
extinguishment of debt, the Company expensed the related unamortized loan costs
of $1.0 million in 1997 as compared to $0.1 million in 1996, which has been
classified as an extraordinary item in the Consolidated Statements of
Operations.
PROPERTIES HELD FOR SALE
As part of the Company's ongoing strategic evaluation of its portfolio of
assets, the Company determined in 1995 to pursue the sale of certain properties
that currently are not fully consistent with or essential to the Company's
long-term strategies. Accordingly, in 1995 and 1996 the Company recorded an $8.5
and $5.0 million adjustment to the carrying value of three assets ultimately
held for disposition.
After recording the $13.5 million total valuation adjustment described
above, the net carrying value of such assets at December 31, 1997 is $12.5
million. There is also $12.3 million of debt secured by the properties which is
expected to be retired primarily from the sale proceeds. For the year ended
December 31, 1997, these properties contributed approximately $1.1 million of
revenue and incurred a loss of $1.1 million after deducting related interest
expense on the debt associated with the properties. For the year ended December
31, 1996, such properties contributed approximately $2.1 million of revenue and
incurred a loss of $1.0 million after deducting related interest expense. The
reduction in the performance is principally due to the lower average occupancy
level in 1997 as compared to 1996.
As of December 31, 1997, two of these properties were under contract.
Management periodically evaluates income producing properties for potential
impairment when circumstances indicate that the carrying amount of such assets
may not be recoverable.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The Company's cash and cash equivalents balance at December 31, 1998 was
$75 million. Restricted cash, as reported in the financial statements, as of
such date, was $3.3 million. In connection with the Company's $95 million
rated-debt securitization in 1996, the Company was required to escrow a portion
of the loan proceeds. The escrow was required to fund certain environmental and
engineering work and to make certain lease-related payments that may be required
in connection with the renewal or termination of certain leases by a tenant at
most of the factory outlet centers.
Net cash provided by operating activities was $18.2 million for the year
ended December 31,1998. Net cash used in investing activities was $69.9 million
in that same period. The primary use of these funds included:
(1) $19.8 million of cash to acquire the Rodwell/Kane and Konover portfolios and
the properties in Danville, Virginia ,Conway, South Carolina and Cary, North
Carolina;
(2) $29.1 million invested in ventures; and
(3) $14.1 million of advances the Company has made to ventures.
Net cash provided by financing activities was $121.8 million for the
year ended December 31, 1998. The source of such funds was $82.7 million from
new borrowings in March 1998 and the proceeds of the sale of common stock to PSR
of $195.4 million, both as described below. Funds generated through financing
activities were offset by debt repayments of $142.5 million and stock
repurchases totaling $12.3 million.
35
<PAGE>
CURRENT AND FUTURE CASH NEEDS
The Company's management anticipates that cash generated from operations
will provide the necessary funds for operating expenses, interest expense on
outstanding indebtedness, dividends and distributions in accordance with REIT
federal income tax requirements, and funding re-tenanting and lease renewal
tenant improvement costs, as well as capital expenditures to maintain the
quality of its existing centers. The Company also believes that it has capital
and access to capital resources, including additional borrowings and issuances
of debt or equity securities, sufficient to pursue its strategic plans.
LAZARD TRANSACTION
On August 5, 1998, stockholders approved the Lazard transaction
involving PSR's $200 million purchase of the Company's Common Stock at $9.50 per
share. The investment was made in stages, as follows:
SALE DATE SHARES SOLD PURCHASE PRICE
March 23, 1998 2,350,000 $ 22,325,000
August 10, 1998 2,913,157 $ 27,675,000
August 28, 1998 5,263,158 $ 50,000,000
September 29, 1998 10,526,316 $ 100,000,000
---------- -------------
21,052,631 $ 200,000,000
========== =============
As of December 31, 1998, these funds have retired debt of $57.7 million
and the remaining capital has been and will be used to fund acquisitions and
development projects.
As part of the Lazard transaction, the Company signed a Contingent Value
Rights Agreement with PSR. Under this the Contingent Value Rights Agreement, if
PSR has not essentially doubled its investment (through stock appreciation and
dividends) by January 1, 2004, the Company will pay PSR, in cash or stock, an
amount necessary to achieve such a return, subject to a maximum payment of
4,500,000 shares or the cash value thereof.
FINANCING ACTIVITIES
In December 1998, the Company completed a substitution and
recollateralization of its REMIC facility. This $95 million facility was
originally issued in May 1995 and secured by 18 properties. The substitution was
the first step in an effort by the Company to gain greater flexibility in the
purchase of assets and the sale of assets that may no longer meet the Company's
ongoing strategy. The REMIC balance as of December 31, 1998 was $89.9 million
and is now secured by 24 properties. The Company is currently in the process of
obtaining bondholder approval for ongoing substitution rights based upon
predetermined criteria.
An acquisition line of credit was put in place in early 1997 for $150
million. The availability under this line is based upon a predetermined formula
on the Net Operating Income of the properties which secure the facility. The
line originally was secured by 21 properties plus an assignment of the excess
cashflow of the REMIC facility referenced above. During 1998, the security on
the portfolio was reduced to only 5 properties plus the excess cash flow of the
REMIC in conjunction with both a permanent facility transaction, as described
below, and a paydown. The paydown of $31 million was funded from the issuance of
shares to PSR. The line was renewed for $150 million during the first quarter of
1999 through February 2000. The primary use of the line will be to fund future
acquisitions and developments. The addition of newly acquired properties to the
line would result in increased availability.
On March 11, 1998, the Company closed on a $75 million, 15-year
permanent credit facility. The loan has an effective rate of 7.73% and is
amortized on a 338 month basis. Eleven properties previously securing the $150
million revolving credit facility secure this new facility. The proceeds were
used to pay down borrowings outstanding on the $150 million credit facility.
DIVIDENDS
There were no accrued dividends as of December 31, 1998 and 1997.
In November of 1998, the Company announced its intent to pay an annual
dividend of $0.50 per common share, payable at the rate of $0.125 per quarter.
The first payment will be made to shareholders of record as of March 15, 1999
and will be paid on March 31, 1999. A portion of the dividend payment will be a
return of capital, as the Company expects to utilize its tax net loss carryover
in 1999. The dividend will represent a payout ratio of less
36
<PAGE>
than 50% of the Company's funds from operations (FFO).
37
<PAGE>
SHARE REPURCHASE
Subsequent to December 31, 1998 and through March 19, 1999, the Company
repurchased an additional 413,200 shares of its common stock at an average share
price of $5.96 for a total of $2.5 million. As of March 19, 1999, the Company
had repurchased 2,161,800 shares at an average price of $6.93 under its stock
repurchase program. The Company is currently authorized to purchase an
additional 1,838,200 shares.
IMPACT OF YEAR 2000 ISSUE
GENERAL. The Year 2000 compliance issue concerns the inability of
computer systems to accurately calculate, store or use a date after 1999. This
could result in a system failure or miscalculation causing disruptions of
operations. The Year 2000 issue affects virtually all companies and all
organizations.
The Year 2000 issue, if not corrected, could result in the failure of
the information technology ("IT") systems that the Company uses in its business
operations, such as computer programs related to property management, leasing,
financial reporting and employee benefits. In addition, computerized systems and
microprocessors are embedded in a variety of products used in the Company's
operations and properties, such as HVAC controls, thermostats, lights,
elevators, alarms, smoke detectors, sprinklers and phones.
STATE OF READINESS. The Company has completed an assessment of its
computer information technology systems and is now taking the further necessary
steps to make such systems Year 2000 compliant. In addition, the Company has
completed an evaluation and assessment on its non-IT systems which include
embedded technology such as microcontrollers.
The Company's primary use of software systems is its corporate
accounting system. The Company's corporate accounting system is widely used in
the real estate industry; however, it is not fully Year 2000 compliant. The
Company is replacing its current corporate accounting system with a new software
system, which is Year 2000 compliant. This new software is also widely used in
the real estate industry. The implementation of the essential components of the
new software system is complete, with planned enhancements to the system
proceeding on schedule. The Company had previously planned the system
conversion, and such changes would have been undertaken without regard to Year
2000 remediation issues. Accordingly, the Company has not deferred any planned
information or software projects due to such Year 2000 projects. With respect to
the Company's IT systems, overall, the Company is 75% complete (in terms of
labor) with the renovation and validation phases of its remediation plan.
Completion of the plan is expected by August 1, 1999. With respect to non-IT
systems, the Company has completed all three phases (assessment, renovation and
validation) of its remediation plan.
As discussed above at "--Recent Developments," the Company has agreed to
acquire RMC Realty Companies, a management and leasing company in Tampa,
Florida. In connection with its due diligence, the Company has completed its
assessment of RMC's Year 2000 issues. Renovation and validation is expected to
be completed during the second quarter of 1999.
With respect to Year 2000 issues relating to third parties with which we
have a material relationship, we have sought representations from all tenants
representing more than 2% of our annualized revenue. (No tenant is expected to
contribute more than 9% of our annualized revenue in 1999.) Such tenants do not
expect to be materially affected by Year 2000 issues.
With respect to suppliers and vendors, the Company's material purchases
are from those in competitive fields where others will be able to meet any
Company needs unmet by suppliers or vendors with Year 2000 difficulties. Because
of the Company's lack of dependence on any one tenant, supplier or vendor (and
the favorable responses received from our inquires to significant tenants), the
Company has not developed a contingency plan for dealing with third-party Year
2000 failures.
COSTS. To date, the costs directly associated the Company's Year 2000
efforts have not been material, and we estimate our future costs to be
immaterial as well.
RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE. We do not expect Year 2000
failures to have a material adverse effect on our results of operations or
liquidity because:
38
<PAGE>
> We do not rely on a small number of tenants for a significant portion of
our rental revenue and our largest tenants do not expect to be
materially affected by Year 2000 failures.
> We stand ready to switch vendors or suppliers whose Year 2000 failures
adversely affect their products or services; and
> Our remediation plan is expected to be complete prior to the Year 2000.
Nevertheless, this forward-looking statement depends on numerous
factors, such as the continued provision of utility services, and the Company
remains exposed to the risk of Year 2000 failures. See "Disclosure Regarding
Forward-Looking Statements" below.
Various of the Company's disclosures and announcements concerning its
Year 2000 programs are intended to constitute "Year 2000 Readiness Disclosures"
as defined in the recently enacted Year 2000 Information and Readiness
Disclosure Act. The Act provides added protection from liability for certain
public and private statements concerning an entity's Year 2000 readiness and the
Year 2000 readiness of its products and services. The Act also potentially
provides added protection from liability for certain types of Year 2000
disclosures made after January 1, 1996, and before the date of enactment of the
Act.
ECONOMIC CONDITIONS
Inflation has remained relatively low during the past three years with
certain segments of the economy experiencing disinflation, such as apparel
sales. Disinflation in this market segment has slowed the growth of tenant
sales, which adversely affects the Company's revenue due to lower percentage and
overage rents on some properties. Additionally, weakness in the overall retail
environment as it relates to tenant sales volumes may have an impact on the
Company's ability to renew leases at current rental rates or to re-lease space
to other tenants. A decline in sales does not affect base rent, aside from
renewals. But sales declines could result in reduced revenue from percentage
rent tenants, as well as overage rent paid to the Company. Both revenue items
are directly impacted by sales volumes and represented 6% of the Company's total
revenue for the year ended December, 1998. Continuation of this trend may affect
the Company's operating centers' occupancy rate, rental rates, and concessions,
if any, granted on new leases or re-leases of space. This in turn may cause
fluctuations in the cash flow from the operation and performance of the
operating centers.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Some of the information in this Annual Report on Form 10-K may contain
forward-looking statements. Such statements include, in particular, statements
about our plans, strategies and prospects under the headings "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." You can identify forward-looking statements by our use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," "continue," or other similar words. Although we believe that our
plans, intentions and expectations reflected in or suggested by such
forward-looking statements are reasonable, we cannot assure you that our plans,
intentions or expectations will be achieved. When considering such
forward-looking statements, you should keep in mind the following important
factors that could cause our actual results to differ materially from those
contained in any forward-looking statement:
> our markets could suffer unexpected increases in development of retail
properties;
> the financial condition of our tenants could deteriorate;
> the costs of our development projects could exceed our original estimates;
> we may not be able to complete development, acquisition or joint venture
projects as quickly or on as favorable terms as anticipated;
> we may not be able to lease or release space quickly or on as favorable
terms as old leases;
> we may have incorrectly assessed the environmental condition of our
properties;
> an unexpected increase in interest rates would increase our debt service
costs;
> we could lose key executive officers;
> and our markets may suffer decline in economic growth or increase in
unemployment rates.
39
<PAGE>
Given these uncertainties, we caution you not to place undue reliance on
forward-looking statements. We undertake no obligation to release publicly the
results of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances or to reflect the occurrence of
unanticipated events.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
THE EFFECTS OF POTENTIAL CHANGES IN INTEREST RATES ARE DISCUSSED BELOW.
OUR MARKET RISK DISCUSSION INCLUDES "FORWARD-LOOKING STATEMENTS" AND REPRESENTS
AN ESTIMATE OF POSSIBLE CHANGES IN FUTURE EARNINGS THAT WOULD OCCUR ASSUMING
HYPOTHETICAL FUTURE MOVEMENTS IN INTEREST RATES. THESE DISCLOSURES ARE NOT
PRECISE INDICATORS OF EXPECTED FUTURE RESULTS, BUT ONLY INDICATORS OF REASONABLY
POSSIBLE RESULTS. AS A RESULT, ACTUAL FUTURE MAY DIFFER MATERIALLY FROM THOSE
PRESENTED. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS -
LIQUIDITY AND CAPITAL RESOURCES" AND THE NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS FOR A DESCRIPTION OF OUR ACCOUNTING POLICIES AND OTHER INFORMATION
RELATED TO THESE FINANCIAL INSTRUMENTS.
To meet in part our long-term liquidity requirements, we borrow funds at
a combination of fixed and variable rates. In addition, the Company has assumed
fixed rate debt in connection with acquiring properties. Interest rate risk
management objective is to limit the impact of interest rate changes on earnings
and cash flows and to lower our overall borrowing costs. We do not enter into
interest rate hedge contracts. As of December 31, 1998, we had approximately
$31.4 million of variable rate debt outstanding. If the weighted average
interest rate on this variable rate debt is 100 basis points higher or lower in
1999, out interest expense would be increased or decreased approximately $0.3
million for the year ended December 31, 1999. The Company has no fixed rate debt
maturing in 1999.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in a separate section of this
report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section under the heading "Election of Directors" of the Proxy
Statement for the Annual Meeting of Stockholders to be held May 12, 1999 is
incorporated herein by reference for information on directors of the Company.
See ITEM X in Part I hereof for information regarding executive officers of the
Company.
ITEM 11- EXECUTIVE COMPENSATION
The section under the heading "Election of Directors" entitled
"Compensation of Directors" of the Proxy Statement and the section titled
"Executive Compensation" of the Proxy Statement are incorporated herein by
reference.
ITEM 12- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section under the heading "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement is incorporated herein by
reference.
ITEM 13- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section under the heading "Certain Relationships and Related
Transactions" of the Proxy Statement is incorporated herein by reference.
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are filed as part of
the report:
40
<PAGE>
Page
Reports of independent auditors F-2
Consolidated balance sheets as of December 31, 1998 and 1997 F-4
Consolidated statements of operations for the years ended
December 31, 1998, 1997 and 1996 F-5
Consolidated statements of stockholders' equity for years
ended December 31, 1998, 1997 and 1996 F-6
Consolidated statements of cash flows for the years
ended December 31, 1998, 1997 and 1996 F-7
Notes to consolidated financial statements F-8
(a)(2) Included with this report is the following consolidated financial
statement schedule:
Schedule III - Real Estate and Accumulated Depreciation F-23
All other schedules for which provision is made in the applicable
accounting regulations of the SEC are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
(a)(3) Included with this report are the following exhibits:
EXHIBIT LIST
Exhibit # Title
- - --------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws of the Company
4.1 Specimen Common Stock Certificate
4.2 Warrant Agreement between the Company and Blackacre (2)
4.3 Warrant Agreement between the Company and Blackacre (2)
4.4 Warrant Agreement between the Company and National Union Fire Insurance
Company of Pittsburgh (2)
4.5 Warrant Agreement between the Company and Network Fund III, Ltd. (2)
4.6 Indenture by and between FSA Finance, Inc., as issuer, Bank One,
Columbus, National Association, as trustee, and Fleet Management and
Recovery Corporation, as master servicer (3)
4.7 Master Servicing Agreement by and between FSA Finance, Inc., as issuer,
Bank One, Columbus, National Association, as trustee (4) and Fleet
Management and Recovery Corporation, as master servicer (3)
4.8 Specimen copies of the various types of Class A, B, C and R Notes (3)
4.9 Mortgage Note given by FSA Properties, Inc., as maker, in favor of the
Travelers Insurance Company, as payee (3)
41
<PAGE>
4.10 Deed of Trust, Mortgage, Security Agreement, Fixture Filing, Financing
Statement and Assignment of Leases and Rents by and between FSA
Properties, Inc., as mortgagor, and the Travelers Insurance Company as
mortgagee (3)
4.11 First Amendment to Masteer servicing Agreement between FSA Finance,
Inc., as Issuer, Mellon Monrtgage Company, as Master Services, and First
Union National Bank, as Trustee
4.12 Supplement to the Indenture dated as of December 22, 1998 between FSA
Finance, Inc., as issuer, Mellon Mortgage Company, as Master Services,
and First Union National Bank, as Trustees
4.13 Gap Note given by FSA Properties, Inc., as maker, in favor of The
Travelers Insurance Company, as payee (3)
4.14 Mortgage Loan Purchase Agreement by and between The Travelers Insurance
Company, as seller, and FSA Finance, Inc., as purchaser (5)
4.15 Loan Agreement between FAC Mortgage LLC as Borrower and Nomura Asset
Capital Corporation as Lender (6)
4.16 Agreement to Furnish Certain Instruments Defining the Rights of
Long-Term Debt Holders
4.17 Line of Credit Agreement between FAC Realty, Inc. and Capital America
Corporation (fka Nomura Asset Capital Corporation), dated February 19,
1997 (6)
10.1 Employment Agreement between the Company and C. Cammack Morton (6)
10.2 First Amendment to Employment Agreement between the Company and C.
Cammuck Morton
10.3 Employment Agreement between the Company and Patrick M. Miniutti (6)
10.4 First Amendment to Employment Agreement between the Company and Patrick
M. Miniutti
10.5 Employment Agreement between the Company and William H. Neville (6)
10.6 First Amendment to Employment Agreement between the Company and Willian
M. Neville
10.7 Employment Agreement between the Company and Fred P. Steinmark
10.8 First Amendment to Employment Agreement between the Company and Fred P.
Steinmark
10.9 Employment Agreement between the Company and Christopher G. Gavrelis (7)
10.10 Second Amendment to Employment Agreement between the Company and
Christopher G. Gavrelis
10.11 Amended and Restated 1993 Employee Stock Option Plan (5)
10.12 1996 Restricted Stock Plan (5)
10.13 Amended and Restated 1995 Outside Directors Stock Award Plan
10.14 Amended and Restated Agreement of Limited Partnership of the Operating
Partnership (6)
10.15 First Amendment to the Master and Exchange Option Agreement, dated as of
March 16, 1998 by and among the Company, FAC Realty, L.P. and the
Contributors listed therein (7)
10.16 Assignment of Interest in Master Agreement and Exchange Option
Agreement, and Consent of Limited Partners dated December 22, 1997 (7)
10.17 Exchange Option Agreement dated as of October 1, 1997, by and among
Carolina FAC, Limited Partnership, FAC Realty, Inc. and the Owners of
the Properties and Interests listed therein (7)
10.18 Master Agreement, dated as of October 1, 1997, by and among FAC Realty,
Inc., Carolina FAC, Limited Partnership, and the other signatories
listed therein (7)
10.19 Amended and Restated Stock Purchase Agreement, dated as of March 23,
1998, between the Company and the Investor (7)
42
<PAGE>
10.20 Stockholders Agreement, dated February 24, 1998, among the Company and
the Investor (7)
10.21 Registration Rights Agreement, dated February 24, 1998 between the
Company and the Investor (7)
10.22 Contingent Value Right Agreement, dated February 24, 1998, among the
Company and the Investor (7)
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (electronic filing only)
--------------------------------
(1) Incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 (File No. 333-39491)
(2) Incorporated herein by reference to the Company's annual report on Form 10-K
for the year ended December 31, 1995
(3) Incorporated herein by reference to the Company's Current Report on Form 8-K
dated May 23, 1995
(4) Bank One, Columbus, resigned as trustee effective December 10, 1997, and the
issuer has appointed First Union Bank as the successor trustee effective
mber 10, 1997.
(5) Incorporated herein by reference to the Company's annual report on Form 10-K
for the year ended December 31, 1996
(6) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
(7) Incorporated herein by reference to the Company's Current Report on Form 8-K
dated March 23, 1998m as amended on June 3, 1998.
(b) The following reports on Form 8-K were filed during the last quarter of
1998:
1. A Form 8-K dated September 16, 1998 reported the acquisition of
shopping centers under Item 2;
2. A Form 8-K/A dated September 16, 1998 reported further acquisitions
of shopping centers under Item 2, and included financial statements;
and
3. A Form 8-K/A dated March 23, 1998 reported a change of control of the
registrant under Item 1(a).
43
<PAGE>
SIGNATURES
--------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 1999 KONOVER PROPERTY TRUST, INC
By /s/ C. Cammack Morton
-------------------------------------------
C. Cammack Morton
President and Chief Executive Officer
By /s/ Patrick M. Miniutti
-------------------------------------------
Patrick M. Miniutti
Director, Exec. Vice President and
Chief Financial Officer
By /s/ Sona A. Thorburn
-------------------------------------------
Sona A. Thorburn
Vice President and Chief Accounting Officer
By /s/ Simon Konover
-------------------------------------------
Simon Konover
Chairman of the Board of Directors
By /s/ William D. Eberle
-------------------------------------------
William D. Eberle
Board Member
By /s/ J. Richard Futrell, Jr.
-------------------------------------------
J. Richard Futrell, Jr.
Board Member
By /s/ John W. Gildea
-------------------------------------------
John W. Gildea
Board Member
By /s/ Murry N. Gunty
-------------------------------------------
Murry N. Gunty
Board Member
By /s/ Klaus P. Kretschmann
-------------------------------------------
Klaus P. Kretschmann
Board Member
By /s/ Arthur P. Solomon
-------------------------------------------
Arthur P. Solomon
Board Member
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Konover Property Trust, Inc.
Reports of Independent Auditors.......................................2-3
Consolidated Balance Sheets as of December 31, 1998 and 1997............4
Consolidated Statements of Operations for the years ended...............5
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended ....6
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended...............7
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements..............................8
Schedule III - Real Estate and Accumulated Depreciation................21
Konover Property Trust, Inc. Qualified Employee Stock Purchase Plan....
Report of Independent Auditor..........................................24
Statement of Net Assets Available for Plan Benefits....................25
Statement of Changes in Net Assets Available for Plan Benefits.........26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Konover Property Trust, Inc.:
We have audited the accompanying consolidated balance sheets of Konover Property
Trust, Inc. (a Maryland corporation) as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Konover Property
Trust, Inc. as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
Our audit of Konover Property Trust, Inc. was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. Schedule III
included with consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule as of, and for the year ended
December 31, 1998, has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, is fairly stated in
all material respects in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Raleigh, North Carolina,
February 19, 1999.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Konover Property Trust, Inc.
We have audited the consolidated statements of operations, cash flows and
changes in stockholders' equity of Konover Property Trust, Inc. for the year
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations, cash flows and
changes in stockholders' equity of Konover Property Trust, Inc. for the year
ended December 31, 1996 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Raleigh, North Carolina,
January 31, 1997
<PAGE>
KONOVER PROPERTY TRUST, INC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------------------------------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
INCOME PRODUCING PROPERTIES:
Land $ 107,338 $ 81,233
Buildings and improvements 443,626 292,726
Deferred leasing and other charges 28,569 21,366
------------------------------
579,533 395,325
Accumulated depreciation and amortization (67,039) (50,134)
------------------------------
512,494 345,191
Properties under development 6,976 6,456
Properties held for sale 5,956 12,490
Investment in ventures 32,243 4,283
OTHER ASSETS:
Cash and cash equivalents 74,989 4,872
Restricted cash 3,340 3,858
Tenant and other receivables 12,076 7,167
Notes receivable 24,536 10,458
Deferred charges and other assets 9,839 8,851
==============================
$ 682,449 $ 403,626
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Debt on income properties $ 304,783 $ 232,575
Capital lease obligations 774 1,131
Accounts payable and other liabilities 15,305 6,993
------------------------------
320,862 240,699
------------------------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN OPERATING PARTNERSHIP 12,246 -
STOCKHOLDERS' EQUITY:
Convertible preferred stock, Series A, 5,000,000 shares
authorized, 792,000 and 800,000 issued and outstanding at 18,962 19,162
December 31, 1998 and 1997, respectively
Stock purchase warrants 9 9
Common stock, $0.01 par value, 100,000,000 shares authorized and
31,207,457 and 11,904,182 issued and outstanding at December 313 119
31, 1998 and 1997, respectively
Additional paid-in capital 328,705 145,332
Retained earnings (accumulated deficit) 1,612 (1,416)
Deferred compensation - Restricted Stock Plan (260) (279)
------------------------------
349,341 162,927
==============================
$ 682,449 $ 403,626
==============================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
KONOVER PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RENTAL OPERATIONS:
Revenues:
Base rents $ 49,680 $ 38,535 $ 34,099
Percentage rents 886 755 633
Property operating cost recoveries 15,808 12,726 11,757
Other income 3,168 1,710 681
--------------------------------------------
69,542 53,726 47,170
--------------------------------------------
Property operating costs:
Common area maintenance 8,050 6,367 5,864
Utilities 1,453 1,173 1,074
Real estate taxes 7,035 5,621 5,098
Insurance 1,001 616 684
Marketing 1,054 1,294 1,001
Other 2,032 600 254
--------------------------------------------
20,625 15,671 13,975
Depreciation and amortization 18,515 15,652 13,802
--------------------------------------------
39,140 31,323 27,777
--------------------------------------------
30,402 22,403 19,393
--------------------------------------------
OTHER EXPENSES:
General and administrative 7,004 6,397 6,199
Interest 19,772 16,436 14,175
Loss on sale of real estate 512 - -
Adjustment to carrying value of assets - - 5,000
--------------------------------------------
27,288 22,833 25,374
--------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST AND 3,114 (430) (5,981)
EXTRAORDINARY ITEM
Minority interest in Operating Partnership 86 - -
--------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 3,028 (430) (5,981)
Extraordinary loss on early extinguishment of debt - 986 103
--------------------------------------------
NET INCOME (LOSS) $ 3,028 $(1,416) $ (6,084)
============================================
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $ 3,028 $ (430) $ (5,981)
Preferred stock dividends - - (368)
--------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM APPLICABLE TO
COMMON STOCKHOLDERS $ 3,028 $ (430) $ (6,349)
Extraordinary loss on early extinguishment of debt - 986 103
============================================
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 3,028 $(1,416) $ (6,452)
============================================
BASIC INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item applicable $ 0.16 $ (0.04) $ (0.54)
to common stockholders
Extraordinary item - (0.08) (0.01)
--------------------------------------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 0.16 $ (0.12) $ (0.55)
============================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 18,693 11,824 11,817
============================================
DILUTED INCOME PER COMMON SHARE:
Income before extraordinary item applicable to $ 0.14 $ (0.04) $ (0.54)
common stockholders
Extraordinary item - (0.08) (0.01)
--------------------------------------------
Net income applicable to common stockholders $ 0.14 $ (0.12) $ (0.55)
============================================
WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 21,878 11,824 11,817
============================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
KONOVER PROPERY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RETAINED DEFERRED
CONVERTIBLE STOCK ADDITIONAL EARNINGS COMPENSATION
PREFERRED PURCHASE PAID IN (ACCUMULATED RESTRICTED
STOCK WARRANTS COMMON STOCK CAPITAL DEFICIT) STOCK PLAN
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ - $ - $ 118 $ 160,368 $ - $ -
Issuance of 800,000 shares of convertible 19,162 - - - - -
preferred stock
Issuance of 3,152 shares of directors stock - - - 29 - -
Issuance of 372,592 shares of restricted stock - - 4 3,334 - (3,338)
Issuance of 200,000 stock purchase warrants - 9 - - - -
Compensation under stock plans - - - - - 392
Cancellation of 90,000 shares of restricted - - (1) (899) - 900
stock
Net loss - - - - (6,084) -
Preferred dividends declared ($0.46 per share) - - - (368) - -
Common dividends declared ($0.75 per share) - - - (15,118) 6,084 -
------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 19,162 9 121 147,346 - (2,046)
Issuance of 7,300 shares of directors stock - - - 45 - -
Issuance of 384,852 shares of restricted stock - - 3 2,600 - (2,603)
Compensation under stock plans - - - - - 493
Cancellation of 180,000 shares of restricted - - (2) (1,641) - 1,643
stock
Exchange of 390,884 shares of restricted stock
for options to repurchase restricted stock - - (3) (2,641) - 2,234
Repurchase of 17,353 shares common stock - - - (377) - -
Net loss - - - - (1,416) -
------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 19,162 9 119 145,332 (1,416) (279)
Issuance of 17,360 employee stock purchase - - - 83 - -
plan shares
Issuance of 35,339 shares of restricted stock - - 1 275 - (276)
Issuance of 21,052,631 shares of common stock
at $9.50 per share, net of expenses - - 211 195,179 - -
Repurchase of 1,755,093 shares of common stock - - (18) (12,297) - -
Exercise of 7,000 stock options - - - 39 - -
Cancellation of 13,184 shares of restricted - - - (106) - 106
stock
Compensation under stock plans - - - - - 189
Conversion of 8,000 shares of preferred stock (200) - - 200 - -
into 22,222 common shares
Net income - - - - 3,028 -
==============================================================================
BALANCE AT DECEMBER 31, 1998 $ 18,962 $ 9 $ 313 $ 328,705 $ 1,612 $ (260)
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
TOTAL
------------
<S> <C>
BALANCE AT DECEMBER 31, 1995 $ 160,486
Issuance of 800,000 shares of convertible 19,162
preferred stock
Issuance of 3,152 shares of directors stock 29
Issuance of 372,592 shares of restricted stock -
Issuance of 200,000 stock purchase warrants 9
Compensation under stock plans 392
Cancellation of 90,000 shares of restricted -
stock
Net loss (6,084)
Preferred dividends declared ($0.46 per share) (368)
Common dividends declared ($0.75 per share) (9,034)
----------
BALANCE AT DECEMBER 31, 1996 164,592
Issuance of 7,300 shares of directors stock 45
Issuance of 384,852 shares of restricted stock -
Compensation under stock plans 493
Cancellation of 180,000 shares of restricted -
stock
Exchange of 390,884 shares of restricted stock
for options to repurchase restricted stock (410)
Repurchase of 17,353 shares common stock (377)
Net loss (1,416)
----------
BALANCE AT DECEMBER 31, 1997 162,927
Issuance of 17,360 employee stock purchase 83
plan shares
Issuance of 35,339 shares of restricted stock -
Issuance of 21,052,631 shares of common stock
at $9.50 per share, net of expenses 195,390
Repurchase of 1,755,093 shares of common stock (12,315)
Exercise of 7,000 stock options 39
Cancellation of 13,184 shares of restricted -
stock
Compensation under stock plans 189
Conversion of 8,000 shares of preferred stock -
into 22,222 common shares
Net income 3,028
===========
BALANCE AT DECEMBER 31, 1998 $ 349,341
===========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
KONOVER PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,028 $ (1,416) $ (6,084)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Adjustment to carrying value of assets - - 5,000
Minority interest in Operating Partnership 86 - -
Depreciation and amortization 18,515 15,652 13,802
Loss on sale of real estate 512 - -
Extraordinary loss on early extinguishment of debt - 986 103
Amortization of deferred financing costs 820 1,562 1,422
Compensation under stock plans 1,419 493 392
Net changes in:
Tenant and other receivables (4,909) (1,303) (619)
Deferred charges and other assets (998) 139 122
Accounts payable and other liabilities (238) (3,151) (6,489)
------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,235 12,962 7,649
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in income-producing properties (15,349) (15,025) (18,234)
Proceeds from sale of real estate 7,967 - -
Acquisition of income-producing properties, net (19,824) (32,421) -
Investment in ventures (29,101) (4,283) -
Advances under notes receivable, net (14,078) (10,458) -
Change in restricted cash 518 2 946
------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (69,867) (62,185) (17,288)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt on income properties 82,721 135,856 5,061
Repayment of debt on income properties (142,466) - -
Proceeds from exchangeable notes - - 20,000
Proceeds from other debt - - 9,580
Deferred financing charges (1,221) (1,947) (2,289)
Other debt repayments (482) (86,516) (1,936)
Net proceeds from sale of common stock 195,390 - -
Exercise of stock options 39 - -
Issuances of shares under employee stock purchase plan 83 - -
Repurchase of common stock (12,315) (360) -
Distributions to stockholders - - (15,427)
Other - 28 29
------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 121,749 47,061 15,018
------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 70,117 (2,162) 5,379
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,872 7,034 1,655
==========================================
CASH AND CASH EQUIVALENTS AT END OF YEAR $74,989 $ 4,872 $ 7,034
==========================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest (net of
interest capitalized of $987 in 1998, $1,525 in
1997 and $1,974 in 1996) $19,884 $14,505 $15,347
==========================================
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Konover Property Trust, Inc. (the "Company"), formerly FAC Realty Trust,
Inc., was incorporated on March 31, 1993 as a self-administrated and
self-managed real estate investment trust (REIT). The Company is principally
engaged in the acquisition, development, ownership, and operation of retail
shopping centers. The Company's revenues are primarily derived under real estate
leases with national, regional and local retailing companies.
Over the past five years, the Company has grown from an owner of retail
shopping centers with an aggregate square footage of 4.2 million to an owner of
approximately 8.1 million square feet.
On December 31, 1998, the Company-owned properties consisted of:
1. 47 community shopping centers in 17 states aggregating approximately
5,871,000 square feet;
2. 10 outlet centers in nine states aggregating approximately 2,110,000 square
feet;
3. 2 centers aggregating approximately 167,000 square feet that are held for
sale; and
4. approximately 124 acres of outparcel land located near or adjacent to
certain of the Company's centers and which are being marketed for lease or
sale.
The weighted-average square feet of gross leasable area were 7.2 million
square feet for the year ended December 31, 1998 and 5.3 million square feet for
the same period in 1997.
On December 17, 1997, following shareholder approval, the Company changed
its domicile from the State of Delaware to the State of Maryland. The
reincorporation was accomplished through the merger of FAC Realty, Inc. into its
Maryland subsidiary, Konover Property Trust, Inc. (formerly FAC Realty Trust,
Inc.). Following the reincorporation on December 18, 1997, the Company
reorganized as an umbrella partnership real estate investment trust (an
"UPREIT"). The Company then contributed to KPT Properties, L.P. (formerly FAC
Properties, L.P.), a Delaware limited partnership, (the "Operating Partnership")
all of its assets and liabilities. In exchange for the Company's assets, the
Company received limited partnership interests ("Units") in the Operating
Partnership in an amount and designation that corresponded to the number and
designation of outstanding shares of capital stock of the Company at the time.
The Company is the sole general partner of the Operating Partnership and owns a
97% interest as of December 31, 1998. As additional limited partners are
admitted to the Operating Partnership in exchange for the contribution of
properties, the Company's percentage ownership in the Operating Partnership will
decline. As the Company issues additional shares of capital stock, it will
contribute the proceeds for that capital stock to the Operating Partnership in
exchange for a number of Units equal to the number of shares that the Company
issues. The Company conducts all of its business and owns all of its assets
through the Operating Partnership (either directly or through subsidiaries) such
that a Unit is economically equivalent to a share of the Company's common stock.
An UPREIT may allow the Company to offer Units in the Operating Partnership
in exchange for ownership interests from tax-motivated sellers. Under certain
circumstances, the exchange of Units for a seller's ownership interest will
enable the Operating Partnership to acquire assets while allowing the seller to
defer the tax liability associated with the sale of such assets. Effectively,
this allows the Company to use Units instead of stock to acquire properties,
which provides an advantage over non-UPREIT entities.
On August 10, 1998, following stockholder approval, the Company began
operating under the name "Konover Property Trust. " The Company remains listed
on the New York Stock Exchange and changed its ticker symbol from FAC to KPT.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and the Operating Partnership. All significant intercompany balances
have been eliminated in consolidation.
Properties which are wholly-owned or owned less than 100% and are controlled
by the Operating Partnership have been consolidated. Control is demonstrated by
the ability of the general partner to manage day-to-day operations, refinance
debt and sell the assets of the partnership without the consent of the limited
partner and the inability of the limited partner to replace the general partner.
Investments in ventures which represent noncontrolling ownership interests or
where control is deemed temporary are accounted for using the equity method of
accounting. These investments are recorded initially at cost and subsequently
adjusted for net equity in income (loss) and cash contributions and
distributions.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
8
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES
INCOME-PRODUCING PROPERTIES
Income-producing properties are recorded at cost less accumulated
depreciation. Included in such costs are acquisition, development, construction
and tenant improvement expenditures, interest incurred during construction,
certain capitalized improvements and replacements and certain allocated
overhead. Allocated overhead is computed primarily on the basis of time spent by
certain departments in various operations and represents direct costs of the
development department which meet the definition of "indirect costs" in
Statement of Financial Accounting Standards (SFAS) No. 67, "Accounting for Costs
and Initial Rental Operations of Real Estate Projects."
Leasing charges, including tenant construction allowances and direct costs
incurred by the Company to obtain a lease, are deferred and amortized over the
related leases or terms appropriate to the expenditure.
Depreciation is provided utilizing the straight-line method over the
estimated useful life of up to 39 years for buildings and improvements, and 5 to
15 years for land improvements.
Certain improvements and replacements are capitalized when they extend the
useful life, increase capacity, or improve the efficiency of the asset. All
other repair and maintenance items are expensed as incurred.
Substantially all of the income-producing properties have been pledged to
secure the Company's debt.
Properties under development include costs related to new development and
expansions in process totaling approximately $7.0 million and $6.5 million at
December 31, 1998 and 1997, respectively. The pre-construction stage of project
development involves certain costs to secure land and zoning and to complete
other initial tasks which are essential to the development of the project. These
costs are transferred to developments under construction when the
pre-construction tasks are completed. The Company charges operations for the
costs of unsuccessful development projects.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of"; which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cashflows estimated to be generated by those assets are
less than the assets' carrying amount. The impairment loss recognized shall be
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset. The Company periodically reviews its income-producing
properties for potential impairment when circumstances indicate that the
carrying amount of such assets may not be recoverable.
PROPERTIES HELD FOR SALE
As part of the Company's ongoing strategic evaluation of its portfolio of
assets, management has been authorized to pursue the sale of certain properties
that currently are not fully consistent with or essential to the Company's
long-term strategies. Management plans to evaluate all properties on a regular
basis in accordance with its strategy for growth and in the future may identify
other properties for disposition or may decide to defer the pending disposition
of those assets now held for sale. In accordance with SFAS No. 121, assets held
for sale are valued at the lower of carrying value or fair value less selling
costs. Accordingly, in 1996 and 1995, the Company recorded a non-cash $5.0
million and $8.5 million adjustments to the carrying values of the properties
held for sale. On April 30, 1998, the Company sold a property it was holding for
sale for $5.7 million resulting in a loss of $0.4 million. The Company continues
to operate the two other properties held for sale as of December 31, 1998 and is
actively marketing these properties.
After recording the $5.0 million and $8.5 million valuation adjustment in
1996 and 1995, respectively, the net carrying value of assets currently being
marketed for sale at December 31, 1998 and 1997 are $6.0 million and $12.5
million, respectively. Debt associated with these properties held for sale was
less than $0.1 million and $12.3 million at December 31, 1998 and 1997,
respectively.
The following summary financial information pertains to the properties held
for sale for the year ended December 31 (in thousands):
1998 1997 1996
---- ---- ----
Revenues $ 409 $ 1,100 $2,100
Net loss after operating and interest expenses $ (920) $ (1,100) $(1,000)
========== =========== =======
INTEREST COSTS
Interest costs are capitalized to income-producing properties under
construction, to the extent such assets qualify for capitalization. Total
interest capitalized was $1.0 million, $1.5 million and $2.0 million for the
years ended December 31, 1998, 1997 and 1996, respectively. Interest expense
includes amortization of deferred financing costs (see Note 4) and is net of
interest income on cash and escrow deposit balances.
9
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
RESTRICTED CASH
In connection with the sale of a $95 million securitized debt offering in
1995, the lender required a holdback of a portion of the loan proceeds to fund
certain environmental and engineering work and to make certain lease related
payments that may be required in connection with the renewal or termination of
certain leases. Such holdback amounts were approximately $3.3 and $3.9 million
at December 31, 1998 and 1997, respectively.
REVENUE RECOGNITION
The Company, as a lessor, has retained substantially all of the risks and
benefits of ownership and accounts for its leases as operating leases. Minimum
rental income is recognized on a straight-line basis over the term of the lease
and unpaid rents are included in tenant and other receivables in the
accompanying balance sheets. Certain lease agreements contain provisions which
provide for rents based on a percentage of sales that are recognized ratably on
an estimated basis throughout the year. In addition, certain leases provide for
additional rents based on a percentage of sales volume above a specified
breakpoint which are recognized as percentage rents. Also, most leases provide
for the reimbursement of real estate taxes, insurance, advertising, utilities
and certain common area maintenance (CAM) costs which are recognized as property
operating cost recoveries. The percentage rents and property operating cost
recoveries are reflected on the accrual basis. In lease agreements where the
tenant is not required to reimburse the Company for real estate taxes, insurance
and CAM costs, the Company has allocated a portion of base rents to property
operating cost.
Amounts allocated to property operating cost recoveries from base rent were
$4.1 million, $3.8 million and $3.3 million in 1998, 1997 and 1996,
respectively. For tenants who are not obligated to pay directly or reimburse the
Company for utility costs related to their store, the Company has allocated a
portion of their base rents to offset the utility expense in the amounts of $1.1
million, $1.3 million and $1.2 million in 1998, 1997 and 1996, respectively.
The Company's principal financial instrument subject to potential
concentration of credit risk is tenant accounts receivable which are unsecured.
Although the tenants are primarily in the retail industry, the properties are
geographically diverse. The Company's exposure to credit loss in the event that
payment is not received for revenue recognized equals the outstanding accounts
receivable balance. The Company provides an allowance for estimated
uncollectible amounts.
ENVIRONMENTAL MATTERS
Substantially all of the Properties have been subjected to Phase I
environmental audits. Such audits have not revealed nor is management aware of
any environmental liability that management believes would have a material
adverse impact on the Company's financial position or results of operations.
INCOME/(LOSS) PER COMMON SHARE
The Company has adopted the provisions of SFAS No. 128, "Earnings Per
Share". Under SFAS No. 128, basic earnings per share ("EPS") and diluted EPS
replace primary EPS and fully diluted EPS. Basic EPS is calculated by dividing
the income available to common stockholders by the weighted-average number of
shares outstanding. Diluted EPS reflects the potential dilution that could occur
if options or warrants to purchase common shares were exercised and preferred
stock was converted into common shares ("potential common shares"). All prior
periods presented have been restated.
For the year ended December 31, 1998, the denominator for diluted earnings
per share is calculated as follows, (in thousands):
Denominator for basic weighted-average shares outstanding
18,693
Effect of dilutive securities:
Preferred stock 2,222
Employee stock option 33
Restricted stock 328
Operating partnership units 602
------
Dilutive potential shares 3,185
------
Denominator-adjusted-weighted average shares and
assumed conversions 21,878
======
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the years ended December 31, 1997 and 1996, basic and diluted EPS are
computed based on a weighted-average number of shares outstanding of 11,824,000
and 11,817,000, respectively. Potential common shares have been excluded from
diluted EPS for 1997 and 1996 because their inclusion would be antidilutive.
10
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME TAXES
The Company is taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, commencing with the tax year ending
December 31, 1993. As a REIT, the Company generally is not subject to federal
income tax. To maintain qualification as a REIT, the Company must distribute at
least 95% of its REIT taxable income to its stockholders and meet certain other
requirements. If the Company fails to qualify as a REIT in any taxable year, the
Company will be subject to federal income tax on its taxable income at regular
corporate rates. The Company may also be subject to certain state and local
taxes on its income and property and federal income and excise taxes on its
undistributed taxable income.
DIVIDENDS
During 1996, distributions were paid of $0.75 per share. There were no
dividends paid or accrued for the year ended December 31, 1998 and 1997.
In November of 1998, the Company announced its intent to pay an annual
dividend of $0.50 per common share payable at a rate of $0.125 per common share
per quarter. The first quarter 1999 dividend of $0.125 per share is payable on
March 31, 1999 to stockholders of record on March 15, 1999. A portion of the
dividend payment will be a return of capital, as the Company expects to utilize
its tax net loss carryover in 1999.
RECLASSIFICATIONS
Certain amounts from prior years were reclassified to conform with current
year presentation. These reclassifications had no effect on net loss or
stockholders' equity as previously reported.
ACCOUNTING CHANGE
In 1998, the Company has changed from a 31.5 year to a 39 year life for
building depreciation. The change conforms to predominant industry practice and
matches book to tax depreciation. The change has been applied to all current
buildings using a half-year convention and on a prospective basis to assets
acquired after December 31, 1998. The effect of this change for 1998 was to
increase net income by $0.6 million and earnings per share by $0.03.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective for the year ended December 31, 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Standard (SFAS) No. 130,
"REPORTING COMPREHENSIVE INCOME". Comprehensive income includes net income and
all other non-owner changes in equity during a period. All changes in the
Company's equity relate to owners. Therefore, comprehensive income equals net
income for all periods presented.
Effective for 1998 reporting, the Company adopted SFAS No. 131, "DISCLOSURE
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION". Under the provisions
of the new standard, the Company has one reporting segment, Retail Shopping
Centers.
During 1998, the Company adopted Statement of Position No. 98-1, "Accounting for
the Costs of Computer Software Development or Obtained for Internal Use". This
statement provides guidance on accounting for the costs of computer software
developed or obtained for internal use. Implementation of this standard did not
have a material impact on the financial results of the Company.
3. INVESTMENT IN VENTURES
A summary of the Company's investments in ventures at December 31, 1998 and
1997, is as follows (all investments are accounted for under the equity method,
in thousands):
December 31,
Location Ownership % 1998 1997
-------------------
Atlantic Realty North Carolina 50% $ 7,442 $ 2,803
Mount Pleasant KPT Mount Pleasant, SC 50% 18,759 1,480
Wakefield Investment Wake Forest, NC 95% 570 -
Falls KPT Raleigh, NC 50% 5,472 -
--------- ---------
$ 32,243 $ 4,283
========= =========
11
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVESTMENT IN VENTURES (CONTINUED)
At December 31, 1998, the majority of the properties owned by the ventures
are under development and have no operations with the exception of a center in
Pembroke, North Carolina, which is a project with Atlantic Realty. The
operations of the Pembroke center were immaterial during 1998. The acquisition
and development of the venture properties are subject to, among other things,
completion of due diligence and various contingencies, including those inherent
in development projects, such as zoning, leasing and financing. There can be no
assurance that all of the above transactions will be consummated. All debt
incurred by the ventures is non-recourse to the Company and is secured by their
respective properties and guaranteed by the Company's respective venture
partners.
Summary unaudited financial information of ventures accounted for using the
equity method is as follows (in thousands):
DECEMBER 31,
BALANCE SHEETS 1998 1997
---------------- ------------
ASSETS:
Investment properties at cost, net $ 47,672 $4,283
Cash and cash equivalents 112 -
Other assets 39 -
================ ============
TOTAL ASSETS $ 47,823 $4,283
================ ============
LIABILITIES AND VENTURES' EQUITY:
Mortgages and other notes payable $ 11,633 $ -
Accounts payable and other
liabilities 1,883 -
---------------- ------------
Total liabilities 13,516 -
Ventures' equity 34,307 4,283
================ ============
TOTAL LIABILITIES AND VENTURES' EQUITY $ 47,823 $4,283
================ ============
4. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets as of December 31, net of accumulated
amortization of $5,451 and $4,267 at December 31, 1998 and 1997, are summarized
as follows (in thousands):
1998 1997
-----------------------------
Deferred financing costs, net $ 6,312 $ 5,531
Prepaid expenses 676 248
Other assets, net 2,851 3,072
=============================
$ 9,839 $ 8,851
=============================
Deferred financing costs, including fees and costs incurred to obtain
financing, are being amortized on a straight line basis over the terms of the
respective agreements. Unamortized deferred financing costs are charged to
expense when the associated debt is retired before the maturity date.
During 1993, as part of the Company's initial public offering, the Company
acquired a favorable lease agreement for land and buildings which has been
capitalized as an intangible asset. This asset is being amortized over the
remaining life of the lease. The carrying value of the intangible asset,
approximating $2.5 and $2.8 million at December 31, 1998 and 1997, respectively,
is reviewed if the facts and circumstances suggest that it may be impaired. If
such a review indicates that the carrying amount of the asset may not be
recoverable, the Company will reduce the carrying value by the amount of the
impairment.
5. NOTES RECEIVABLE
In December 1997, the Company advanced $8.5 million to Davie Plaza Limited
Partnership which was used to prepay certain debt on a shopping center at a
discount. The Company received a $2.0 million payment on this note in January,
1999. The note receivable is secured by the shopping center and is repayable in
June 1999. (See Related-Party Transactions, Note 15)
On May 22, 1998, the Company issued a promissory note to evidence a loan
made in the amount of $2.5 million to VFP, LLC. The note is secured by a 53.78
acre tract of land near Myrtle Beach, South Carolina.
The note accrues interest at 10% and matures November, 1999.
12
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. NOTES RECEIVABLE (CONTINUED)
During 1998, the Company made advances to a venture, Wakefield Investment,
totaling $10.6. Of this amount $7.2 million accrues interest at 11% per annum
plus participation in profits of the venture and matures August, 2001. The
remaining $3.4 million accrues interest at 15% and matures March 28, 1999. The
carrying values of the Company's notes receivable at December 31, 1998,
approximate fair value.
6. DEBT ON INCOME PROPERTIES
Debt on income properties consists of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Mortgage notes secured by 16 properties with monthly payments ranging
from $2 to $13, interest rates ranging from 7.37% to 10.13 %. Unpaid
principal and accrued interest due from October 2001 to July 2018. $ 108,708 $ -
$150,000 revolving credit facility with Capital America, interest at a
rate of LIBOR plus 2.25% (7.37% at December 31, 1998) (a) (b) 31,439 134,545
$75,000 credit facility with Capital America, monthly principal payments
range from approximately $19 to $146 with entire balance due March, 74,754 -
2013 and effective interest rate of 7.73% (b)
ClassA Mortgage Notes - payable in 85 monthly principal payments ranging from
approximately $140 to $173 determined using various parameters
plus weighted average monthly interest payments at 7.51%. Unpaid 52,882 54,583
principal and accrued interest due June, 2002 (c)
Class B Mortgage Notes - monthly interest payments at 7.87% with entire 20,000 20,000
balance due June, 2002 (c)
Class C Mortgage Notes - monthly interest payments at 8.40% with entire 17,000 17,000
balance due June, 2002 (c)
Note payable to a financial institution with 45 monthly principal and interest
payments of approximately $59 with interest of prime rate
(8.5% at December 31, 1997) plus 2 1/4%. Balance repaid in August, - 5,711
1998 from proceeds from PSR funding (see Note 12)
$2,500 credit facility with a financial institution, interest at prime
rate (7.75 at % December 31, 1998) plus 1/2% - 736
-------------------------
$ 304,783 $ 232,575
=========================
</TABLE>
(a) The Company obtained a $150 million credit facility with Capital America in
February 1997. The credit facility with Capital America is secured by five
of the Company's centers plus an assignment of excess cash flow from the
properties held by KPT REMIC Loan LLC. The Capital America credit facility
was for a term of 2 years with a 1-year renewal option which was exercised
in 1999 and now expires in February, 2000. This new credit facility
contains financial covenants relating to debt to total asset value and net
operating income to debt service coverage. All financial convenants were
satisfactorily met for the year ended December 31, 1998.
(b) On March 11, 1998, the Company closed on a $75 million, 15 year permanent
credit facility secured by 11 properties previously securing the $150
million revolving credit facility. The proceeds from this securitization
were used to pay down certain outstanding amounts on the $150 million
Capital America facility.
(c) In 1995, the Company's wholly owned subsidiary, FSA Finance, Inc. closed a
$95 million rated debt securitization (the "Mortgage Notes"). The monthly
principal payments for the securitization range from approximately from $19
to $146 with the entire balance due June, 2002. The total offering of $95
million consisted of $58 million of Class A Mortgage Notes rated "AA"; $20
million of Class B Mortgage Notes rated "A"; and $17 million of Class C
Mortgage Notes rated "BBB". The Mortgage Notes are secured by a
cross-collateralized mortgage which originally covered 18 centers owned by
KPT REMIC Loan LLC Mortgage Notes are subject to Optional Redemption (as
defined) in whole or in part on any payment date beginning on June 1, 1998.
Any Optional Redemption occurring on or prior to December 1, 2001 is
subject to the payment of a yield maintenance premium. In December 1998,
the Company completed a substitution and recollateralization of its
securitization which now is secured by 24 properties.
Combined aggregate principal maturities of notes payable are as follows (in
thousands):
1999 $ 3,504
2000 35,210
2001 8,500
2002 91,734
2003 11,074
Thereafter 154,761
----------
$ 304,783
==========
6. DEBT ON INCOME PROPERTIES (CONTINUED)
The Company estimates that the fair value of notes payable approximates the
carrying value based upon its effective current borrowing rate for debt with
similar terms and remaining maturities. Disclosure about fair value of financial
instruments is based upon information available to management as of December 31,
1998. Although management is not aware of any factors that would significantly
affect the fair value of amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since December 31, 1998.
13
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. LEASES
The Company leases certain signage and equipment under capital lease
agreements which expire beginning in 1999 through 2009. Amortization of assets
acquired through capital leases is included with depreciation and amortization
expense in the accompanying statements of operations. Rent expense for the year
ended December 31, 1998, 1997 and 1996 was $0.7 million, $0.2 million and $0.2
million, respectively.
Aggregate future minimum lease payments under capital and operating leases
having remaining terms in excess of one year as of December 31, 1998, are as
follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------------------------------
<S> <C> <C>
1999 $ 304 $ 690
2000 280 609
2001 248 610
2002 105 447
2003 17 185
Thereafter - 1,031
-------------------------------
954 $ 3,572
===============
Less amounts representing interest ranging from 8%
to 13% 180
----------------
Present value of minimum lease payments $ 774
================
</TABLE>
8. MINORITY INTEREST
Minority interest in the accompanying consolidated financial statements
relates to limited partnership interests of the Operating Partnership issued in
connection with acquisitions of properties. In connection with the acquisition
of properties for the years ended 1998 and 1997, the Company issued 982,593 and
0 units, respectively. The limited partnership interests outstanding as of
December 31, 1998 have the same economic characteristics as would 982,593 common
shares, inasmuch as they share proportionately in the net income or loss and in
any distributions of the Operating Partnership and such interests are
exchangeable into the same number of common shares of the Trust.
9. CONVERTIBLE PREFERRED STOCK
On April 2, 1996, the Company executed a Note Purchase Agreement and other
related documents (collectively the "Agreements") with Gildea Management Company
("Gildea") and Blackacre Bridge Capital, L.L.C. ("Blackacre"), whereby Gildea
and Blackacre agreed to purchase in a private placement up to $25.0 million of
the Company's Exchangeable Notes (the "Exchangeable Notes"), and $5 million of
its Senior Note, both of which were unsecured. On April 3 and 29, 1996,
Exchangeable Notes with an aggregate principal amount of $10.0 million each were
sold pursuant to the Agreements.
Holders of the Exchangeable Notes, subject to certain conditions, were
required to exchange them for shares of the Company's Series A Convertible
Preferred Stock (the "Series A Preferred") at the rate of one share of Series A
Preferred for each $25 in principal amount of Exchangeable Notes, upon
stockholder approval of necessary amendments to the Company's Certificate of
Incorporation and authorization of the Series A Preferred. Each share of Series
A Preferred is convertible into shares of the Company's Common Stock at a
conversion price equal to the lower of $9 per share or the 30-day average price
of the Company's Common Stock following an announcement by the Company of the
initial funding, subject to certain limitations.
Dividends on the Series A Preferred will be paid quarterly on each Common
Stock dividend payment date in an amount equal to the dividends that would have
been paid on the Common Stock then issuable upon conversion of the Series A
Preferred.
On November 23, 1998, 8,000 shares of the Company's Series A Preferred
Stock were exchanged by the holders into 22,222 shares of common stock.
14
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. CONVERTIBLE PREFERRED STOCK (CONTINUED)
On August 1, 1996, the Company issued holders of the Exchangeable Notes
800,000 shares of the Company's Series A Preferred Stock in exchange for notes
with an aggregate principal amount of $20 million (net of issue cost of
$838,000). The 800,000 shares of the Series A Preferred Stock are convertible,
at the option of the holders, into an aggregate of 2,222,222 shares of the
Company's Common Stock. No dividends were accrued or paid on the Series A
Preferred Stock in 1998 or 1997.
On April 29, 1996, $5 million of the Senior Notes were placed at 97% of
their face amount. On November 12, 1996, $2.5 million of the Senior Notes were
placed at 100% of their face amount. In March 1997, the Company repaid the
Senior Notes at their face amounts from the proceeds of the Capital America
credit facility.
In connection with the issuance of the Exchangeable Notes and the initial
$5 million of Senior Notes, on April 3, 1996 the Company issued the holder
detachable warrants for the purchase of 200,000 shares of Common Stock of the
Company. Each warrant entitles the holder, subject to certain conditions, to
purchase on or before April 3, 2003 one share of Common Stock of the Company at
a price equal to $9.50 per share, subject to adjustment under certain
conditions. The warrants were valued using the Black-Scholes pricing model at an
aggregate value of $6,000 at the issuance date. The $2.5 million of Senior Notes
have detachable warrants for the purchase of 100,000 shares of Common Stock of
the Company that were issued with terms and conditions similar to the existing
Senior Notes, except that each warrant entitles the holder to purchase one share
of Common Stock at a price equal to $8.375 per share. These warrants were valued
at an aggregate value of $3,000 at the issuance date.
10. STOCK OPTION AND COMPENSATION PLANS
EMPLOYEE STOCK INCENTIVE PLAN
The Company has established a stock option plan which provides for the
issuance of 2,800,000 shares through the grant of qualified and nonqualified
options to officers and employees at exercise prices not less than market value
on the date of grant. Generally, options vest proportionately over a period of
four to five years from the date of grant and are exercisable for 10 years from
the date of grant.
A summary of changes in outstanding options is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- -------------------
AVG. AVG.
SHARES PRICE SHARES AVG. PRICE SHARES PRICE
----------- --------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year 743,250 9.29 1,047,500 $ 15.01 432,500 $ 22.72
Options granted, at market 150,000 7.63 645,000 $ 5.78 615,000 $ 23.00
Converted to restricted (735,000) 6.16 (949,250) $ 13.43 - -
stock
Exercised (7,000) 5.63 - - - -
----------- --------- --------- ----------- -------- ---------
Balance, end of year 151,250 21.67 743,250 $ 9.29 1,047,500 $ 15.01
=========== ========= ========= =========== ======== ==========
Exercisable, end of year 147,650 21.68 281,800 $ 13.14 512,820 $ 13.14
=========== ========= ========= =========== ======== ==========
Weighted Average Fair Value
of Options Granted During
the Year $ 2.19 $ 1.66 $ 5.34
=========== ========= ========= =========== ======== ==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS
EXERCISABLE
-------------------------------------- -------------------
Weighted
Average
Remaining
Exercise Contractual
Prices Shares Life in Years Shares
- - ------------------- ------------------ ------------------- -------------------
$ 23.00 123,250 4.5 123,250
$ 21.50 18,000 6.0 14,400
$ 5.63 10,000 8.3 10,000
------------------ -------------------
151,250 147,650
================== ===================
15
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. STOCK OPTION AND COMPENSATION PLANS (CONTINUED)
The fair value of each option granted in 1998, 1997, and 1996 is estimated
using the Black-Scholes option pricing model with the following assumptions:
1998 1997 1996
--------- -------- ----------
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 10.40% 10.40% 10.40%
Risk-free interest rate 6.80% 6.80% 6.99%
Expected life in years 4 5 10
RESTRICTED STOCK PLAN
The Company's shareholders' approved a restricted stock plan in 1996
whereby the Company can award up to 2,250,000 shares of common stock to
employees. Generally, awards under the plan vest at the end of the restriction
period, which is typically three years. The awards are recorded at market value
on the date of grant as unearned compensation expense and amortized over the
restriction periods. Generally, recipients are eligible to receive dividends on
restricted stock issued. Restricted stock and annual expense information is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Restricted shares outstanding at January 1 79,207 42,592 -
Number of restricted shares awarded 35,339 444,852 42,592
Number of restricted shares exchanged for
options to repurchase restricted stock - 390,884 -
Restricted shares repurchased or cancelled 18,877 17,353 -
============ ============ ============
Restricted shares outstanding at December 31 95,669 79,207 42,592
============ ============ ============
Annual expense, net $ 189,000 $493,000 $ 392,000
Award date - average fair value per share $ 8.10 $ 6.62 $ 10.73
</TABLE>
On November 11, 1997, the Company adopted a plan whereby members of the
Company's executive management exchanged a total of 390,884 shares of restricted
stock previously awarded to them for the right to repurchase such shares.
Holders of these repurchase rights have no voting rights, but are entitled to
receive a dividend equivalent, an amount equal to any cash dividends paid to
common stockholders. Recipients of the repurchase rights may exercise their
rights at any time beginning the date the restricted stock subject to the
repurchase right becomes vested and ending 15 years from the date of vesting.
The exercise price is generally 10% of the fair market value of the restricted
stock subject to the repurchase right determined on the date of grant of the
repurchase right. There is no effect on the amount of compensation to be
recorded as a result of the exchange as the effective value of the restricted
stock granted is the same as the value of the discounted repurchase right.
During 1998, the Company converted options to purchase 735,000 shares previously
issued under the Company's Employee Stock Incentive Plan to restricted stock
subject to repurchase rights at the same exercise price as the options. The
Company also issued 302,713 repurchase rights to members of its executive
management with a value of $2.3 million. Compensation expenses related to the
repurchase rights for the years ended December 31, 1998 and 1997 was $1.2
million and $0.4 million, respectively. At December 31, 1998 and 1997, 144,695
and -0- repurchase rights were exercisable, respectively.
During 1997, the Company's Independent Directors, upon the recommendation
of the Executive Compensation Committee, which in turn received recommendations
from an executive compensation consulting firm, approved a long-term incentive
program for two senior executive officers. Pursuant to such program, 270,000
shares of restricted stock with a value of $1,788,750 were awarded to the senior
executive officers replacing 180,000 shares previously awarded in 1996 with a
value of $1,643,000. In 1996, 90,000 shares of restricted stock previously
granted to the former chairman and chief executive officer of the Company,
valued at $900,000, were cancelled upon his resignation.
EMPLOYEE STOCK PURCHASE PLAN
During 1997, the Company adopted an Employee Stock Purchase Plan (ESPP) to
provide all full-time employees an opportunity to purchase shares of its common
stock through payroll deductions over a six-month subscription period. A total
of 50,000 shares are available for award under this plan. The purchase price is
equal to 85% of the fair market value on either the first or last day of the
subscription period, whichever is lower. Stock issuances in connection with this
plan are as follows:
1998 1997
--------------------------- ----------------------
SUBSCRIPTION PERIOD SUBSCRIPTION PERIOD
-------------- ------------ ---------- -----------
JANUARY 1 - JULY 1 - JANUARY 1 JULY 1 -
JUNE 30 DECEMBER 31 - JUNE 30 DECEMBER 31
(1)
-------------- ------------ ---------- -----------
Number shares 7,899 10,830 -0- 6,530
Price per share $6.59 $6.00 -0- $5.21
(1) These shares were issued by the Company in 1999.
10. STOCK OPTION AND COMPENSATION PLANS (CONTINUED)
PRO FORMA INFORMATION
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). In
accordance with the provisions of SFAS No. 123, the Company has elected to apply
APB Opinion No. 25 and related Interpretations in accounting for its stock
16
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
option, restricted stock, and employee stock purchase plan. Had the Company
elected to recognize compensation cost for these plans based on the fair value
at the date of grant, as prescribed by SFAS No. 123, net income (loss) and net
income (loss) per share would have changed by the pro forma amounts indicated in
the table below (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------------------- ----------------------
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
----------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) available to
common stockholders $ 3,028 $ 3,077 $(1,416) $(2,481) $(6,349) $(7,481)
Net income (loss) per share -
basic $ 0.16 $ 0.16 $ (0.12) $ (0.21) $ (0.55) $(0.63)
Net income (loss) per share -
diluted $ 0.14 $ 0.14 $ (0.12) $ (0.21) $ (0.55) $(0.63)
</TABLE>
OTHER PLANS
The Company offers the Konover Property Trust, Inc. 401(k) and Profit
Sharing Plan (the "Plan"), a tax qualified defined contribution plan to its
employees. The Plan covers substantially all employees of the Company who have
attained 21 years of age and completed at least one year of service. Eligible
employees may elect to contribute 1% to 15% of their compensation to the Plan.
The Company may elect to match a certain percentage of each employees
contribution and may also elect to make a profit sharing contribution. For the
years ended December 31, 1998, 1997 and 1996, the Company contributed $136,530,
$102,579 and $64,084, respectively, as a matching contribution and there was no
profit sharing contribution made by the Company.
11. TENANT LEASE AGREEMENTS
The Company is the lessor of retail stores under operating leases with
initial terms that expire from 1999 to 2017. Many leases are renewable for five
years at the lessee's option. Expected future minimum rents to be received from
tenants, excluding renewal options and contingent rentals, under operating
leases in effect at December 31, 1998, are as follows (in thousands):
1999 $ 55,128
2000 46,238
2001 37,264
2002 30,532
2003 22,885
Thereafter 111,901
-----------------
$ 303,948
=================
For the years ended December 31, 1998, 1997 and 1996 rental revenue from a
single major tenant, VF Corporation, comprised approximately 9.5%, 11.0% and
14.0%, respectively, of total rental revenue.
12. ACQUISITIONS AND SIGNIFICANT TRANSACTIONS
On August 5, 1998, the stockholders approved a Stock Purchase Agreement
between Prometheus Southeast Retail, LLC (including its assignee, "PSR"), a real
estate investment affiliate of Lazard Freres Real Estate Investors, LLC,
("Lazard") and the Company pursuant to which PSR made a $200 million purchase of
shares of Common Stock of the Company at a purchase price of $9.50 per share
(the "Transaction"). Upon completion of funding, PSR owned an equity interest in
the Company of approximately 58%, on a diluted basis. As a result of subsequent
stock repurchases by the Company, PSR's ownership interest in the Company is
61%, assuming conversion of outstanding preferred stock and units into shares.
Under the terms of the Transaction agreements, for as long as PSR's investment
in the Company is $50 million or more, PSR has the right to participate in
future equity issuances to preserve its ownership interest.
Pursuant to the Contingent Value Rights Agreement, if PSR has not doubled
its investment (through stock appreciation and dividends) by January 1, 2004,
the Company will pay PSR, in cash or stock, an amount necessary to achieve such
a return, subject to a maximum payment of 4,500,000 shares or the cash value
thereof.
On February 24, 1998, the Company entered into definitive agreements with
affiliates of Konover & Associates South ("Konover"), a privately held
<PAGE>
12. ACQUISITIONS AND SIGNIFICANT TRANSACTIONS (CONTINUED)
real estate development firm based in Boca Raton, Florida, to acquire eleven
community shopping centers. The Company acquired nine of the Konover community
shopping centers for a total purchase price of $85.4 million consisting of $55.2
million in debt assumption, $26.8 million in cash and 369,000 of Operating
Partnership Units, valued at $9.50 per share.
For financial reporting purposes, the nine Konover properties were recorded
effective April 1, 1998, since the risks and rewards of ownership had passed to
the Company and there were no significant conditions outstanding. All of the
acquired properties are held directly or indirectly, by KPT Properties, L.P. Of
the original eleven community centers, the remaining two will continue to be
managed by the Company, but will not be acquired.
On March 30, March 31, and May 14, 1998, the Company concluded the
acquisition of eight community shopping centers located in North Carolina and
Virginia from Roy O. Rodwell and John N. Kane, ("Rodwell/Kane"). The acquired
centers encompass approximately 950,000 square feet and are, in the aggregate,
94% leased.
17
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The aggregate purchase price for the acquired shopping centers was $57.1
million, consisting of the assumption of $44.3 million of fixed-rate
indebtedness, the payment of $3.5 million in cash and the issuance of 974,347
limited partnership Units of the Operating Partnership. Of the purchase price,
292,447 Units and $0.8 million in cash will be issued or paid on a delayed or
contingent basis. The contingencies include the attainment of certain property
performance thresholds and the sale, lease or development of certain outparcels.
The purchase price for the acquisition was determined as a result of arms-length
negotiation between the Company and the sellers, with the Units being valued at
$9.50 per share.
The ninth and final center covered by the Rodwell/Kane acquisition
agreement will be managed by the Company and is expected to be acquired in the
year 2000. Its acquisition prior to the year 2000 would trigger an onerous loan
assumption fee.
In March, 1997, the Company purchased five community shopping centers
("North Hills") located in the Raleigh, North Carolina area for $32.4 million
from an unrelated third party. The centers total approximately 606,000 square
feet and feature anchor tenants such as Winn-Dixie, Food Lion, Inc., K-Mart
Corporation and Eckerd Drug. The acquisition was funded from the Company's line
of credit facility. As a result of the acquisition, the Company ended 1997 with
41 shopping centers containing an aggregate of approximately 5.5 million square
feet of GLA.
On January 7, 1998, the Company completed the purchase of a 55,909-square
foot shopping center located in Danville, VA. This Food Lion anchored center was
purchased for $3.1 million.
13. PROFORMA INFORMATION (UNAUDITED)
Pro forma results of operations for the year ended December 31, 1998 and
1997 are set forth below and assume the Konover, Rodwell/Kane and North Hills
acquisitions discussed above had been completed as of the January 1, 1997. The
pro forma condensed statements of operations are not necessarily indicative of
actual results of operations of the Company assuming such transactions had been
completed as of the beginning of the period, nor do they purport to represent
results of operations of future periods (in thousands, except for per share
data).
<TABLE>
<CAPTION>
ADJUSTMENT
ACTUAL ------------- ------------- PRO FORMA
1998 KONOVER RODWELL/KANE 1998
---- ------- ------------ ----
<S> <C> <C> <C> <C>
Revenues $ 69,542 $ 2,537 $ 1,580 $ 73,659
Property operating costs 20,625 600 302 21,527
Depreciation and amortization 18,515 438 305 19,258
General and administrative 7,004 80 10 7,094
Interest 19,772 1,155 666 21,593
Loss on sale of real estate 512 - - 512
------------ ------------- ------------- -------------
INCOME BEFORE EXTRAORDINARY ITEM AND
MINORITY INTEREST $ 3,114 $ 264 $ 297 $ 3,675
============ ============= ============= =============
INCOME BEFORE EXTRAORDINARY ITEM
PER COMMON SHARE $ 0.16 $ 0.01 $ 0.02 $ 0.20
============ ============= ============= =============
DILUTED INCOME BEFORE EXTRAORDINARY
ITEM PER COMMON SHARE $ 0.14 $ 0.01 $ 0.01 $ 0.17
============ ============= ============= =============
</TABLE>
18
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. PROFORMA INFORMATION (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
ADJUSTMENT
ACTUAL ------------------------------------------- PROFORMA
1997 KONOVER RODWELL/KANE NORTH HILLS 1997
---- ------- ------------ ----------- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 53,726 $ 9,833 $ 6,939 $ 1,293 $71,791
Property operating costs 15,671 2,489 1,189 336 19,685
Depreciation and amortization 15,652 1,752 1,465 202 19,071
General and administrative 6,397 320 200 25 6,942
Interest 16,436 4,619 3,500 626 25,181
------------- -------------- ------------- -------------- -------------
(LOSS) INCOME BEFORE EXTRAORDINARY
ITEM $ (430) $ 653 $ 585 $ 104 $ 912
============= ============== ============= ============== =============
(LOSS) INCOME BEFORE EXTRAORDINARY
ITEM PER COMMON SHARE - BASIC $ (0.09) $ 0.06 $ 0.05 $ 0.01 $ 0.07
============= ============== ============= ============== =============
(LOSS) INCOME BEFORE EXTRAORDINARY
ITEM PER COMMON SHARE - DILUTED $ (0.09) $ 0.05 $ 0.04 $ 0.01 $ 0.06
============= ============== ============= ============== =============
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
The Company is a party to certain legal proceedings relating to its
ownership, management and leasing of the properties, arising in the ordinary
course of business. Management does not expect the resolution of these matters
to have a significant impact on the Company's financial position or results of
operations.
15. RELATED-PARTY TRANSACTIONS
During 1993, the Company acquired a 19-acre tract of land in a non-monetary
transaction from a partnership whose partners include two former executive
officers of the Company. The recorded value of the land was $748,000. In return
for the land, the Company assumed certain outstanding debt and the remaining
purchase price was settled by reducing amounts owed to the Company by a tenant
whose majority owners were also partners in the partnership. A review of this
and other transactions resulted in J. Dixon Fleming, Jr., the Company's former
Chairman and Chief Executive Officer, agreeing to permit the Company to satisfy
certain asset valuation issues by offsetting amounts otherwise owed to Mr.
Fleming pursuant to his employment agreement or by the acceptance from Mr.
Fleming of some other cash or value equivalent. In 1997, the Company entered
into an agreement with Mr. Fleming and sold to him the 19-acre land tract for
the sum of $750,000.
In 1997, J. Dixon Fleming, Jr. resigned as Chairman and Chief Executive
Officer of the Company. Pursuant to his three-year employment agreement entered
into on December 15, 1995, he was entitled to a lump sum distribution of the
value of the remaining term of the agreement. The Company charged $767,000 to
general and administrative expense in 1996 for the remaining value of his
contract.
In December 1997, the Company issued a note receivable of $8.5 million to
Davie Plaza Limited Partnership, a Florida limited partnership of which Simon
Konover, Chairman of the Board of the Company is a 49% owner. The loan is
secured by a first mortgage position on a 299,778 s.f. retail shopping center
located in Davie, Florida. In January, 1999, the Company received a $2 million
paydown. The outstanding balance is now $6.5 million and carries interest at
LIBOR plus 2.5% payable monthly and matures on June 30, 1999.
16. TERMINATED ACQUISITION
On August 25, 1995, the Company executed definitive written agreements
("Agreements") to acquire both the factory outlet centers owned by the Public
Employees Retirement System of Ohio ("OPERS") and the management and business
operations of the Charter Oak Group Ltd., a subsidiary of Rothschild Realty,
Inc., ("RRI"), subject to certain terms and conditions. On December 7, 1995, the
Company reported that RRI had terminated the Agreements and thus, the
acquisitions did not take place.
Subsequent to the termination of the Agreements, RRI for itself and on
behalf of OPERS made a demand for payment with respect to a $5 million
promissory note (the "Note") issued by the Company in connection with its
proposed purchase of the OPERS' centers and the management and business
operations of RRI's Charter Oak Group, Ltd. The Note was payable only upon the
occurrence of certain conditions relating to the termination of the Agreements
and the Company asserted that certain of the required conditions were not met.
After an unsuccessful attempt at mediation of the dispute, RRI filed for binding
arbitration of the matter to settle the dispute. Following the arbitration
hearing held in late April 1997, the Company agreed to pay $2.9 million to RRI
on behalf of related entities of OPERS in settlement of all outstanding issues
between the Company and OPRES/RRI relating to the terminated merger. The Company
recorded a charge of $1.7 million in December 1995 in connection with the
termination. The remaining $1.2 million of the $2.9 million settlement, plus an
estimate for the Company's legal fees was charged to operations in 1997. All
amounts due to OPERS/RRI have been paid.
19
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. QUARTERLY INFORMATION (UNAUDITED)
Selected quarterly financial data for the four quarters in 1998 and 1997 is
as follows (in thousands, except per share data)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Total revenue $ 13,929 $18,404 $ 18,350 $ 18,859
========================================================
Net (loss) income applicable
to common shareholders $ (101) $ (778) $ 197 $ 3,710
========================================================
Basic earnings (loss) per common share:
(Loss) income before extraordinary
items $(0.01) $ (0.05) $ 0.01 $ 0.12
========================================================
Net (loss) income $(0.01) $ (0.05) $ 0.01 $ 0.12
========================================================
Diluted earnings (loss) per common share:
(Loss) income before extraordinary
item $(0.01) $ (0.05) $ 0.01 $ 0.11
========================================================
Net (loss) income $(0.01) $ (0.05) $ 0.01 $ 0.11
========================================================
QUARTER ENDED
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------------------
1997:
Total revenue $ 11,922 $13,475 $ 13,614 $ 14,715
========================================================
Net (loss) income applicable
to common shareholders $ (2,422) $ 119 $ 329 $ 558
========================================================
Basic earnings (loss) per common share:
(Loss) income before extraordinary
items $(0.12) $ 0.01 $ 0.03 $ 0.04
Extraordinary item (0.08) - - -
========================================================
Net (loss) income $(0.20) $ 0.01 $ 0.03 $ 0.04
========================================================
Diluted earnings (loss) per common share:
(Loss) income before extraordinary
item $(0.12) $ 0.01 $ 0.02 $ 0.04
Extraordinary item (0.08) - - -
========================================================
Net (loss) income $(0.20) $ 0.01 $ 0.02 $ 0.04
========================================================
</TABLE>
20
<PAGE>
KONOVER PROPERTY TRUST, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
At December 31, 1998
<TABLE>
<CAPTION>
Cost Capitalized
Initial Cost to Company Subsequent to Acquisition
------------------------------- ----------------------------
Bldg. and Bldg. and
Property Encumbrances Land Impvmts. Land Imprvmts.
- - ------------------------ -------------- --------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Boaz, Al $ 3,284,499 $ 34,998 $ 42,004 $ 4,232 $ 1,490,703
Casa Grande, AZ 54,326 2,220,397 10,557,446 588,713
Mesa, AZ 4,467,023 1,399,858 7,060,705 524,004 3,929,517
Tucson, AZ 1,224,727 772,231 3,572,837 20,215 262,832
Lathrop, CA -- 2,842,636 7,048,844 1,465,246
Vacaville, CA 28,697,605 30,008,142 49,464,506 1,301,833
Graceville, FL 2,313,576 556,765 2,544,654 349,438
Lake Park, GA 2,645,472 1,128,056 4,801,250 107,674
West Frankfort, IL 644,611 471,041 2,130,358 118,776
Story City, IA 2,257,400 601,802 2,737,481 22,653 2,129,742
Carrollton, KY -- 340,190 1,555,641 70,865
Georgetown, KY 7,783,006 937,490 6,510,116 118,599
Hanson, KY 814,869 308,876 1,408,641 77,693
Arcadia, LA 1,925,461 404,864 1,856,173 3,492 1,654,322
Iowa, LA 3,480,871 627,061 2,860,591 2,597,208
Kittery, ME 1,336,716 355,080 2,485,826 113,110
Branson, MO 11,229,609 5,702,365 24,600,479 32,600 860,289
Lebanon, MO 1,945,009 403,915 1,889,710 147,564
Tupelo, MS 1,538,799 430,765 1,956,158 11,484 1,214,117
Nebraska City, NE 1,822,120 400,684 1,813,050 16,225 1,821,029
Las Vegas, NV 5,510,058 7,158,719 18,761,605 465,158
Conway, NH -- 324,652 2,277,122 122,693
Lake George, NY 1,926,723 975,466 4,441,445 337,989
Smithfield, NC 24,140,177 77,667 9,064,651 1,428,124 7,407,577
Crossville, TN 5,092,393 519,239 2,415,619 11,389 4,415,637
Nashville, TN 21,713,971 5,125,939 10,899,810 6,021,700
Tri-Cities, TN -- 353,983 5,648,812 656,818 78,028
Union City, TN 969,014 296,580 1,343,859 2,983 136,815
Corsicana, TX 713,945 336,335 1,533,169 104,926
Hempstead, TX 1,153,189 375,487 1,711,282 (99,997) 71,469
LaMarque, TX 3,661,599 4,066,414 11,864,248 310,620
Livingston, TX 855,856 354,381 1,615,979 114,539
Mineral Wells, TX 875,349 315,944 1,441,675 75,572
Sulphur Springs, TX 2,014,313 512,898 2,326,326 131 443,988
Draper, UT 5,872,997 718,188 4,294,019 56,513 4,798,069
North Bend, WA 12,122,205 8,428,229 12,052,296 41,432 13,931,147
Eastgate, NC -- 688,256 3,153,235 (416,436) 9,376
Tower, NC 2,965,107 659,677 4,459,411 7,087 96,443
Northridge, NC 9,877,639 1,428,493 8,872,975 14,775 187,569
Gateway, NC 4,387,108 816,566 3,246,925 8,628 2,831,507
MacGregor, NC 8,086,910 1,428,513 7,694,110 15,847 204,630
Danville, VA 2,269,715 465,505 2,642,090 6,020 52,033
Celebration, NC 5,743,565 1,436,628 8,140,891 4,442 42,547
Bolling Creek, VA 1,495,461 261,972 1,484,505 5,285 29,946
Shoreside, NC 5,784,119 1,050,654 5,953,703 8,936 50,638
Stanton Square, NC 2,137,469 1,401,330 7,994,574 14,042 56,932
Brookneal, VA 1,096,700 221,968 1,257,819 5,780 33,455
Keysville, VA 1,505,653 321,001 1,819,008 6,550 37,996
University Mall, VA 7,135,096 1,232,027 6,398,674 (99,509) 54,768
Towne Square, VA 15,062,980 2,951,412 15,374,453 (228,226) 64,812
Durham Festival, NC 6,598,779 1,296,071 7,697,319 89,178 180,980
Food Lion Plaza, VA 1,061,600 314,504 1,947,925 22,985 49,045
Lenoir Festival, NC 4,423,485 1,175,381 6,963,471 83,299 169,050
Hollywood Festival, FL 4,592,985 843,578 5,040,436 59,275 120,731
Oakland Park, FL 2,471,402 823,112 4,934,822 58,374 118,264
Lake Point Centre, FL 11,096,793 2,196,485 13,013,873 152,530 297,210
Square One, FL 9,339,110 1,692,011 10,043,077 122,146 237,150
South Cobb, FL -- 74,406 473,390 6,904 19,913
Mobile Festival, AL 19,688,508 4,520,765 27,128,125 317,453 619,759
Conway, SC 3,203,855 708,784 4,030,309 7,581 29,097
Waverly Place, NC 10,671,743 1,944,220 11,017,247 7,039 39,886
$304,783,270 $109,840,656 $399,370,754 $3,012,283 $64,888,934
<CAPTION>
Adjustments to Net Gross Amount at Which
Sale Of Realizable Value Carried at Close of Period
------------------------------- --------------------------------- -------------------------------
Bldg. and Bldg. and Bldg. and
Property Land Imprvmts. Land Imprvmts. Land Imprvmts.
- - ------------------------ --------------- --------------- --------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Boaz, Al $ $ $ $ $ 39,230 $ 1,532,707
Casa Grande, AZ (1,362,190) (6,037,810) 858,207 5,108,349
Mesa, AZ (1,421,115) 1,923,862 9,569,107
Tucson, AZ 792,446 3,835,669
Lathrop, CA (1,694,553) (4,762,173) (1,148,083) (3,751,917) -- --
Vacaville, CA 30,008,142 50,766,339
Graceville, FL 556,765 2,894,092
Lake Park, GA 1,128,056 4,908,924
West Frankfort, IL (137,327) 333,714 2,249,134
Story City, IA 624,455 4,867,223
Carrollton, KY (340,190) (1,626,506) -- --
Georgetown, KY 937,490 6,628,715
Hanson, KY (61,421) 247,455 1,486,334
Arcadia, LA (209,716) 198,640 3,510,495
Iowa, LA (156,119) (34,194) 470,942 5,423,605
Kittery, ME 355,080 2,598,936
Branson, MO 5,734,965 25,460,768
Lebanon, MO 403,915 2,037,274
Tupelo, MS 442,249 3,170,275
Nebraska City, NE 416,909 3,634,079
Las Vegas, NV 7,158,719 19,226,763
Conway, NH (151,997) (1,048,003) 172,655 1,351,812
Lake George, NY 975,466 4,779,434
Smithfield, NC 1,505,791 16,472,228
Crossville, TN (149,542) 381,086 6,831,256
Nashville, TN 5,125,939 16,921,510
Tri-Cities, TN 1,010,801 5,726,840
Union City, TN (157,649) 141,914 1,480,674
Corsicana, TX 336,335 1,638,095
Hempstead, TX 275,490 1,782,751
LaMarque, TX (199,075) 3,867,339 12,174,868
Livingston, TX 354,381 1,730,518
Mineral Wells, TX 315,944 1,517,247
Sulphur Springs, TX 513,029 2,770,314
Draper, UT 774,701 9,092,088
North Bend, WA 8,469,661 25,983,443
Eastgate, NC 271,820 3,162,611
Tower, NC 666,764 4,555,854
Northridge, NC 1,443,268 9,060,544
Gateway, NC 825,194 6,078,432
MacGregor, NC 1,444,360 7,898,740
Danville, VA 471,525 2,694,123
Celebration, NC 1,441,070 8,183,438
Bolling Creek, VA 267,257 1,514,451
Shoreside, NC 1,059,590 6,004,341
Stanton Square, NC 1,415,372 8,051,506
Brookneal, VA 227,748 1,291,274
Keysville, VA 327,551 1,857,004
University Mall, VA 1,132,518 6,453,442
Towne Square, VA 2,723,186 15,439,265
Durham Festival, NC 1,385,249 7,878,299
Food Lion Plaza, VA 337,489 1,996,970
Lenoir Festival, NC 1,258,680 7,132,521
Hollywood Festival, FL 902,853 5,161,167
Oakland Park, FL 881,486 5,053,086
Lake Point Centre, FL 2,349,015 13,311,083
Square One, FL 1,814,157 10,280,227
South Cobb, FL 81,310 493,303
Mobile Festival, AL 4,838,218 27,747,884
Conway, SC 716,365 4,059,406
Waverly Place, NC 1,951,259 11,057,133
-- --
------------ ------------
$ (3,105,592) $ (7,843,988) $ (2,662,270) $ (10,837,730) $107,085,077 $445,577,970
<CAPTION>
Life on which
Depreciation in
latest income
Accumulated Date of Date Statement
Property Total Depreciation Construction Acquired if Computed
- - ------------------------ --------------- -------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Boaz, Al $ 1,571,937 $ 426,146 1993 5-39yrs.
Casa Grande, AZ 5,966,556 1,737,849 1994 5-39yrs.
Mesa, AZ 11,492,969 1,984,590 1993 5-39yrs.
Tucson, AZ 4,628,115 691,825 1993 5-39yrs.
Lathrop, CA -- 1994 5-39yrs.
Vacaville, CA 80,774,481 8,790,108 1993 5-39yrs.
Graceville, FL 3,450,857 510,469 1993 5-39yrs.
Lake Park, GA 6,036,980 2,187,577 1993 5-39yrs.
West Frankfort, IL 2,582,848 407,341 1993 5-39yrs.
Story City, IA 5,491,678 815,332 1993 5-39yrs.
Carrollton, KY -- 1993 5-39yrs.
Georgetown, KY 7,566,205 1,756,782 1993 5-39yrs.
Hanson, KY 1,733,789 259,079 1993 5-39yrs.
Arcadia, LA 3,709,135 735,153 1993 5-39yrs.
Iowa, LA 5,894,547 1,076,422 1993 5-39yrs.
Kittery, ME 2,954,016 377,824 1993 5-39yrs.
Branson, MO 31,195,733 2,803,557 1995 5-39yrs.
Lebanon, MO 2,441,189 364,917 1993 5-39yrs.
Tupelo, MS 3,612,524 562,641 1993 5-39yrs.
Nebraska City, NE 4,050,988 638,185 1993 5-39yrs.
Las Vegas, NV 26,385,482 3,349,426 1993 5-39yrs.
Conway, NH 1,524,467 273,566 1993 5-39yrs.
Lake George, NY 5,754,900 628,865 1993 5-39yrs.
Smithfield, NC 17,978,019 5,047,241 1993 5-39yrs.
Crossville, TN 7,212,342 1,128,918 1993 5-39yrs.
Nashville, TN 22,047,449 3,071,350 1993 5-39yrs.
Tri-Cities, TN 6,737,641 1,732,988 1993 5-39yrs.
Union City, TN 1,622,588 257,335 1993 5-39yrs.
Corsicana, TX 1,974,430 288,432 1993 5-39yrs.
Hempstead, TX 2,058,241 315,005 1993 5-39yrs.
LaMarque, TX 16,042,207 2,151,398 1994 5-39yrs.
Livingston, TX 2,084,899 317,741 1993 5-39yrs.
Mineral Wells, TX 1,833,191 272,536 1993 5-39yrs.
Sulphur Springs, TX 3,283,343 483,691 1993 5-39yrs.
Draper, UT 9,866,789 1,750,630 1993 5-39yrs.
North Bend, WA 34,453,104 4,484,551 1993 5-39yrs.
Eastgate, NC 3,434,431 180,051 1997 5-39yrs.
Tower, NC 5,222,618 255,184 1997 5-39yrs.
Northridge, NC 10,503,812 519,428 1997 5-39yrs.
Gateway, NC 6,903,626 246,242 1997 5-39yrs.
MacGregor, NC 9,343,100 460,211 1997 5-39yrs.
Danville, VA 3,165,648 73,212 1998 5-39yrs.
Celebration, NC 9,624,507 141,960 1998 5-39yrs.
Bolling Creek, VA 1,781,707 30,100 1998 5-39yrs.
Shoreside, NC 7,063,931 120,271 1998 5-39yrs.
Stanton Square, NC 9,466,877 160,924 1998 5-39yrs.
Brookneal, VA 1,519,022 25,586 1998 5-39yrs.
Keysville, VA 2,184,555 36,929 1998 5-39yrs.
University Mall, VA 7,585,960 130,886 1998 5-39yrs.
Towne Square, VA 18,162,451 312,981 1998 5-39yrs.
Durham Festival, NC 9,263,547 151,246 1998 5-39yrs.
Food Lion Plaza, VA 2,334,459 37,194 1998 5-39yrs.
Lenoir Festival, NC 8,391,201 137,164 1998 5-39yrs.
Hollywood Festival, FL 6,064,021 98,516 1998 5-39yrs.
Oakland Park, FL 5,934,572 96,361 1998 5-39yrs.
Lake Point Centre, FL 15,660,099 255,982 1998 5-39yrs.
Square One, FL 12,094,385 197,697 1998 5-39yrs.
South Cobb, FL 574,613 9,222 1998 5-39yrs.
Mobile Festival, AL 32,586,102 530,160 1998 5-39yrs.
Conway, SC 4,775,771 60,010 1998 5-39yrs.
Waverly Place, NC 13,008,393 23,625 1998 5-39yrs.
-- 1998 5-39yrs.
------------ ----------- ---- ----
$552,663,047 $55,970,612
</TABLE>
- - --------------------------------------------------------------------------------
(1)Buildings and improvements are depreciated based on a 15-39 year life.
Tenant improvements are depreciated over the estimated terms of the leases,
which range from 5 to 10 years.
(2)Aggregate cost of the real estate property for federal income tax purposes
is approximately $467,253,431
21
<PAGE>
KONOVER PROPERTY TRUST, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
The changes in total real estate for years ended December 31, 1998, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $380,798,184 $345,890,739 $ 340,166,756
Developed or acquired properties 168,287,524 30,619,827 10,339,504
Improvements 14,526,918 6,550,712 547,694
Adjustment to net realizable value - - (5,000,000)
Sales (10,949,579) (2,263,094) (163,215)
=================================================
Balance, end of period $ 522,663,047 $ 380,798,184 $ 345,890,739
=================================================
</TABLE>
The changes in accumulated depreciation for years ended December 31, 1997, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $42,099,057 $31,198,623 $ 20,386,741
Developed or acquired properties 2,629,203 7,561,802 8,865,743
Improvements 12,152,989 3,684,308 1,946,139
Sales (910,637) (345,676) -
=================================================
Balance, end of period $55,970,612 $42,099,057 $ 31,198,623
=================================================
</TABLE>
22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Executive Compensation Committee of the Board of Directors of
Konover Property Trust, Inc.
We have audited the accompanying statement of net assets available for plan
benefits of Konover Property Trust, Inc. Qualified Employee Stock Purchase Plan
as of December 31, 1998 and 1997, and the related statement of changes in net
assets available for plan benefits for the period from inception (July 1, 1997)
to December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for plan benefits of Konover
Property Trust, Inc. Qualified Employee Stock Purchase Plan at December 31, 1998
and 1997, and the changes in net assets available for plan benefits for the
period from inception (July 1, 1997) to December 31, 1998, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Raleigh, North Carolina,
March 30, 1999.
23
<PAGE>
KONOVER PROPERTY TRUST, INC.
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
EMPLOYEE STOCK PURCHASE PLAN
AT DECEMBER 31,
1998 1997
---- ----
Receivable from Konover Property Trust, Inc. $ 65,657 $ 34,081
=============== ================
=============== ================
Net assets available for plan benefits $ 65,657 $ 34,081
=============== ================
The accompanying notes to financial statements
are an integral part of these statements
24
<PAGE>
KONOVER PROPERTY TRUST, INC.
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
EMPLOYEE STOCK PURCHASE PLAN
<TABLE>
<CAPTION>
YEAR ENDED, FROM
DECEMBER 31, INCEPTION
1998 1997
---- ----
<S> <C> <C>
Employee contributions $ 117,371 $ 34,081
Deductions:
Purchases of Common Stock 86,050 -
Withdrawals (255) -
--------------- ----------------
85,795 -
--------------- ----------------
New increase 31,576 34,081
New assets available for Plan benefits at
beginning of period 34,081 -
--------------- ----------------
Net assets available for Plan benefits at end of
period $ 65,657 $ 34,081
=============== ================
Shares of Common Stock purchased during year 14,429 -
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements
25
<PAGE>
KONOVER PROPERTY TRUST, INC.
QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BASIS OF PRESENTATION
The accompanying financial statements of the Konover Property Trust, Inc.
Qualified Employee Stock Purchase Plan (the Plan) have been prepared on the
accrual basis.
2. PLAN DESCRIPTION AND SUMMARY OF SIGNIFICANT PLAN PROVISIONS
The Board of Directors of Konover Property Trust, Inc. (the "Company") adopted
the Plan on May 29, 1997. The Plan became effective as of July 1, 1997. The
maximum number of shares available under the Plan is 50,000, subject to certain
adjustments, as defined.
The purpose of this Plan is to provide the Company's employees with an
additional opportunity to share in the ownership of the Company. Under terms of
the Plan, all regular full-time employees of the Company may make voluntary
payroll contributions thereby enabling them to purchase Common Stock of the
Company at 85% of the lower of the fair market value as of the beginning or end
of the six-month offering periods, which commence on January 1 and July 1.
Contributions to the Plan are maintained in the Company's cash account until
such time as the participant exercises the option to purchase shares of Common
Stock from his or her available contributions, or withdraws from the account.
Employee contributions, which represent all net Plan assets, are considered
general assets of the Company and may be subject to the claims of creditors.
The Plan is not subject to the provisions of the Employee Retirement Income
Security Act of 1974 (ERISA) and is not qualified under Section 401 (a) of the
Internal Revenue Code of 1986, as amended which relates to qualification of
certain pension, profit-sharing and stock bonus plans.
All costs to administer the Plan are paid by the Company.
3. SUBSEQUENT EVENT
On February 10, 1999, 10,830 shares of common stock of the Company were
purchased by the Plan and such shares were transferred to an independent broker
that holds the shares in the name of the respective employees.
26
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
KONOVER PROPERTY TRUST, INC.
ARTICLE I
STOCKHOLDERS
SECTION 1. MEETINGS OF STOCKHOLDERS.
(A) ANNUAL MEETING. The annual meeting of the stockholders of the
Corporation for the election of directors and the receiving of reports shall be
held at such date and time as shall be determined by the Board of Directors.
Upon due notice, there may also be considered and acted upon at an annual
meeting any matter that could properly be considered and acted upon at a special
meeting.
(B) SPECIAL MEETINGS.
(1) Special meetings of the stockholders of the Corporation for
any purpose may be held on any day when called at any time by the
holders of shares entitling them to exercise a majority of the voting
power of the Corporation entitled to vote at such a meeting, the Board
of Directors, the Chairman of the Board, the President or by a committee
of the Board of Directors that has been duly designated by the Board of
Directors and whose powers and authority, as provided in a resolution of
the Board of Directors, include the power to call such meetings, but
special meetings may not be called by any other person or persons.
(2) In order that the Corporation may determine the stockholders
entitled to request a special meeting, the Board of Directors may fix a
record date to determine the stockholders entitled to make such a
request (the "Request Record Date"). The Request Record Date shall not
precede the date upon which the resolution fixing the Request Record
Date is adopted by the Board of Directors and shall not be more than 10
days after the date upon which the resolution fixing the Request Record
Date is adopted by the Board of Directors. Any stockholder of record
seeking to have stockholders request a special meeting shall, by sending
written notice to the Secretary of the Corporation by certified or
registered mail, return receipt requested, request the Board of
Directors to fix a Request Record Date. The Board of Directors shall
within 10 days after the date on which a valid request to fix a Request
Record Date is received, adopt a resolution fixing the Request Record
Date and shall make a public announcement of such Request Record Date,
the Request Record Date shall be the 10th day after the first date on
which a valid written request to set a Request Record Date is received
by the Secretary. To be valid, such written request shall set forth the
purpose or purposes for which the special meeting is to be held, shall
be signed by one or more stockholders of record (or their duly
authorized proxies or other representatives), shall bear the date of
signature of each such stockholder (or proxy or other representative)
and shall set forth all information relating to such stockholder that is
required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and Rule 14a-11 thereunder.
(3) In order for a stockholder or stockholders to request a
special meeting, a written request or requests for a special meeting by
the holders of record as of the Request Record Date of at least a
majority of the issued and outstanding shares of stock that would be
entitled to vote at such a meeting must be delivered to the Corporation.
To be valid, each written request by a stockholder for a special meeting
shall set forth the specific purpose or purposes for which the special
meeting is to be held (which purpose or purposes shall be limited to the
purpose or purposes set forth in the written request to set a Request
Record Date received by the Corporation pursuant to paragraph (2) of
this Section 1(b)), shall be signed by one or more persons who as of the
Request Record Date are stockholders of record (or their duly authorized
proxies or other representatives),
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shall bear the date of signature of each such stockholder (or proxy or
other representative) and shall set forth the name and address, as they
appear in the Corporation's books, of each stockholder signing such
request and the class and number of shares of the Corporation which are
owned of record and beneficially by each such stockholder, shall be sent
to the Secretary by certified or registered mail, return receipt
requested, and shall be received by the Secretary within 60 days after
the Request Record Date.
(4) The Corporation shall not be required to call a special
meeting upon stockholder request unless, in addition to the documents
required by paragraph (3) of this Section 1(b), the Secretary receives a
written agreement signed by each Soliciting Stockholder (as defined
below), pursuant to which each Soliciting Stockholder, jointly and
severally, agrees to pay the Corporation's costs of holding the special
meeting, including the costs of preparing and mailing proxy materials
for the Corporation's own solicitation, provided that if each of the
resolutions introduced by any Soliciting Stockholder at such meeting is
adopted, and each of the individuals nominated by or on behalf of any
Soliciting Stockholder for election as a director at such meeting is
elected, then the Soliciting Stockholders shall not be required to pay
such costs. For purposes of this paragraph (4), the following terms
shall have the meanings set forth below:
(i) "Affiliate" of any Person (as defined herein) shall mean any
Person controlling, controlled by or under common control with such
first Person.
(ii) "Participant" shall have the meaning assigned to such term
in Rule 14a-11 promulgated under the Exchange Act.
(iii) "Person" shall mean any individual, firm, corporation,
partnership, limited liability company, joint venture, association,
trust, unincorporated organization or other entity.
(iv) "Proxy" shall have the meaning assigned to such term in Rule
14a-1 promulgated under the Exchange Act.
(v) "Solicitation" shall have the meaning assigned to such term
in Rule 14a-11 promulgated under the Exchange Act.
(vi) "Soliciting Stockholder" shall mean, with respect to any
special meeting requested by a stockholder or stockholders, any of the
following Persons:
(a) if the number of stockholders signing the request or
requests of meeting delivered to the Corporation pursuant to
paragraph (3) of this Section 1(b) is 10 or fewer, each
stockholder signing any such request;
(b) if the number of stockholders signing the request or
requests of meeting delivered to the Corporation pursuant to
paragraph (3) of this Section 1(b) is more than 10, each Person
who either (I) was a Participant in any Solicitation of such
request or requests or (II) at the time of the delivery to the
Corporation of the documents described in paragraph (3) of this
Section 1(b) had engaged or intended to engage in any
Solicitation of Proxies for use at such special meeting (other
than a Solicitation of Proxies on behalf of the Corporation); or
(c) any Affiliate of a Soliciting Stockholder, if a
majority of the directors then in office determine that such
Affiliate should be required to sign the written notice described
in paragraph (3) of this Section 1(b) and/or the written
agreement described in this paragraph (4) in order to prevent the
purposes of this Section 1(b) from being evaded.
(5) Except as provided in the following sentence, any special
meeting shall be held at such hour and day as may be designated by
whichever of the Board of Directors, Chairman, President or committee
shall
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have called such meeting. In the case of any special meeting called by
the Chairman or the Secretary upon the request of stockholders (a
"Request Special Meeting"), such meeting shall be held at such hour and
day as may by designated by the Board of Directors; provided, however,
that the date of any Request Special Meeting shall be not more than 60
days after the Meeting Record Date (as defined in Section 2(c)); and
provided further that in the event that the directors then in office
fail to designate an hour and date for a Request Special Meeting within
10 days after the date that valid written requests for such meeting by
the holders of record as of the Request Record Date of at least a
majority of the issued and outstanding shares of stock that would be
entitled to vote at such meeting are delivered to the Corporation (the
"Delivery Date"), then such meeting shall be held at 2:00 p.m. local
time on the 90th day after the Delivery Date or, if such 90th day is not
a Business Day (as defined below), on the first preceding Business Day.
In fixing a meeting date for any special meeting, the Board of
Directors, Chairman, President or committee may consider such factors as
they deem relevant within the good faith exercise of their business
judgment, including, without limitation, the nature of the action
proposed to be taken, the facts and circumstances surrounding any
request of such meeting, and any plan of the Board of Directors to call
an annual meeting or a special meeting for the conduct of related
business.
(6) The Corporation may engage regionally or nationally
recognized independent inspectors of elections to act as an agent of the
Corporation for the purpose of promptly performing a ministerial review
of the validity of any purported written request or requests for a
special meeting received by the Secretary. For the purpose of permitting
the inspectors to perform such review, no purported request shall be
deemed to have been delivered to the Corporation until the earlier of
(i) five Business Days following receipt by the Secretary of such
purported request and (ii) such date as the independent inspectors
certify to the Corporation that the valid requests received by the
Secretary represent at least a majority of the issued and outstanding
shares of stock that would be entitled to vote at such meeting. Nothing
contained in this paragraph (6) shall in any way be construed to suggest
or imply that the Board of Directors or any stockholder shall not be
entitled to contest the validity of any request, whether during or after
such five-Business Day period, or to take any other action (including,
without limitation, the commencement, prosecution or defense of any
litigation with respect thereto, and the seeking of injunctive relief in
such litigation).
(7) For purposes of these by-laws, "Business Day" shall mean any
day other than a Saturday, a Sunday or a day on which banking
institutions in the State of North Carolina are authorized or obligated
by law or executive order to close.
(c) PLACE OF MEETINGS. Any meeting of the stockholders may be held at
such place within or without the State of Maryland as may be determined by the
Board of Directors and stated in the notice of said meeting, provided that if
the Board of Directors does not designate a location, such meeting shall be held
at the executive office of the Corporation in Cary, North Carolina.
(d) NOTICE OF MEETING AND WAIVER OF NOTICE.
(1) NOTICE. Written notice of the place, date and hour of every
meeting of the stockholders, whether annual or special, shall be given
to each stockholder of record entitled to vote at the meeting not less
than 10 nor more than 90 days before the date of the meeting. Every
notice of a special meeting shall state the purpose or purposes thereof.
Such notice shall be given in writing to each stockholder entitled
thereto by mail, addressed to the stockholder at his address as it
appears on the records of the Corporation. Notice shall be deemed to
have been given at the time when it was deposited in the mail.
(2) RECORD HOLDER OF SHARES. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends and to vote as such owner, and to
hold liable for calls and assessments a person registered on its books
as the owner of shares, and shall not be bound to recognize any
equitable or other claims to or interests in such share or shares on the
part of any other person, whether or not the Corporation shall have
express or other notice thereof, except as otherwise provided by the
laws of Maryland.
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(3) WAIVER. Whenever any written notice is required to be given
under the provisions of the Articles of Incorporation, these Bylaws, or
by statute, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice.
Neither the business to be transacted at nor the purpose of any meeting
of the stockholders need be specified in any written waiver of notice of
such meeting. Attendance of a person, either in person or by proxy, at
any meeting, shall constitute a waiver of notice of such meeting, except
where a person attends a meeting for the express purpose of objecting to
the transaction of any business because the meeting was not lawfully
called or convened.
(e) QUORUM, MANNER OF ACTING AND ADJOURNMENT. The holders of record of
shares entitled to cast a majority of the votes entitled to vote at any meeting,
present in person or represented by proxy, shall constitute a quorum for the
transaction of business thereat, except as otherwise provided by statute, by the
Articles of Incorporation, or by these Bylaws. Whether or not a quorum is
present, the holders of shares entitled to cast a majority of the votes present
in person or represented by proxy at the meeting shall have the power to adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At any such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting. When a quorum is present at any meeting, the vote of a
majority of the votes entitled to be cast by the holders of all issued and
outstanding shares present in person or represented by proxy shall decide any
question brought before such meeting, unless the question is one upon which, by
express provision of the applicable statute or the Articles of Incorporation or
these Bylaws, a different vote is required, in which case such express provision
shall govern. Except upon those questions governed by the aforesaid express
provisions, the stockholders present in person or by proxy at a meeting at which
a quorum is at any time present or represented shall have the power to continue
to do business until adjournment, notwithstanding a subsequent reduction in the
number of shares present or represented to leave less than would constitute a
quorum.
(f) ORGANIZATION OF MEETINGS.
(1) PRESIDING OFFICER. Any "executive officer" of the
Corporation, as that term is defined in section 3(f) of Article III of
these Bylaws, may call meetings of the stockholders to order and act as
chairman thereof.
(2) MINUTES. The Secretary of the Corporation, or, in his absence
or by his designation, an Assistant Secretary, or, in the absence of
both, a person appointed by the chairman of the meeting, which person
need not be an officer of the Corporation, shall act as secretary of the
meeting and shall make and keep a record of the proceedings thereat.
(3) STOCKHOLDERS' LIST. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least 10 days
before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting. The list shall be arranged
in alphabetical order showing the address of each stockholder and the
number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder for any purpose
germane to the meeting, during ordinary business hours, for a period of
at least 10 days prior to the meeting either at a place within the city
where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the
time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
(4) VOTING PROCEDURES AND INSPECTORS OF ELECTIONS.
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(A) The Board of Directors shall, in advance of any meeting of
stockholders, appoint one or more inspectors to act at the meeting and
make a written report thereof. The Board of Directors may designate one
or more persons as alternate inspectors to replace any inspector who
fails to act at such meeting. If no inspector or alternate is able to
act at a meeting of stockholders, the chairman of the meeting shall
appoint one or more inspectors to act at the meeting. Each inspector,
before entering upon the discharge of his duties, shall take and sign an
oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his ability.
(B) The inspectors shall (i) determine those stockholders
entitled to vote at the meeting, (ii) ascertain the number of shares
outstanding and the voting power of each, (iii) determine the shares
represented at a meeting and the validity of proxies and ballots, (iv)
count all votes and ballots, (v) determine and retain for a reasonable
period a record of the disposition of any challenges made to any
determination by the inspectors, and (vi) certify their determination of
the number of shares represented at the meeting and their count of all
votes and ballots. The inspectors may appoint or retain other persons or
entities to assist the inspectors in the performance of the duties of
the inspectors.
(C) The date and time of the opening and the closing of the polls
for each matter upon which the stockholders will vote at a meeting shall
be announced at the meeting. No ballot, proxies or votes, nor any
revocations thereof or changes thereto, shall be accepted by the
inspectors after the closing of the polls unless judicially determined
otherwise upon application by a stockholder.
(D) In determining the validity and counting of proxies and
ballots, the inspectors shall be limited to an examination of the
proxies, any envelopes submitted with those proxies, ballots and the
regular books and records of the Corporation, except that the inspector
may consider other reliable information for the limited purpose of
reconciling proxies and ballots submitted by or on behalf of banks,
brokers, their nominees or similar persons which represent more votes
than the holder of proxy is authorized by the record owner to cast or
more votes than the stockholder holds of record. If the inspectors
consider other reliable information for the limited purpose permitted
herein, the inspectors at the time they make their certification
pursuant to clause (B) (vi) of this subsection 1(f) (4) shall specify
the precise information considered by them, including the person or
persons from whom they obtained the information, when the information
was obtained, the means by which the information was obtained and the
basis for the inspectors' belief that such information is accurate and
reliable.
(E) The provisions of subsections 1(f)(4)(A) through (D) of this
Article I shall not apply at any time that the Corporation does not have
a class of voting stock that is (i) listed on a national securities
exchange, (ii) authorized for quotation on an interdealer quotation
system, or (iii) held of record by more than 2,000 stockholders.
(5) ORDER OF BUSINESS. Unless otherwise determined by the Board
of Directors prior to the meeting, the chairman of any meeting of
stockholders shall determine the order of business and shall have the
authority in his discretion to regulate the conduct of any such meeting,
including, without limitation, by imposing restrictions on the persons
(other than stockholders of the Corporation or their duly appointed
proxies) who may attend any such meeting of stockholders, whether any
stockholder or his proxy may be excluded from any stockholders' meeting
based upon any determination by the chairman of the meeting, in his sole
discretion, that any such person has unduly disrupted or is likely to
disrupt the proceedings thereat, and the circumstances in which any
person may make a statement or ask questions at any meeting of
stockholders.
(g) VOTING. Except as otherwise provided by statute or the Articles of
Incorporation, every stockholder entitled to vote shall be entitled to cast the
vote per share to which such share is entitled, in person or by proxy, on each
proposal submitted to the meeting for each share held of record by him on the
record date for the determination of the stockholders entitled to vote at the
meeting. At any meeting at which a quorum is present, all questions and business
that may come before the meeting shall be determined by a majority of votes
cast, except when a greater proportion is required by law, the Articles of
Incorporation, or these Bylaws.
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(h) PROXIES. A person who is entitled to attend a meeting of
stockholders, to vote thereat, and execute consents, waivers and releases, may
be represented at such meeting or vote thereat, and execute consents, waivers
and releases and exercise any of his rights by proxy or proxies appointed by a
legally sufficient writing signed by such person, or by his duly authorized
attorney, as provided by the laws of the State of Maryland.
(i) STOCKHOLDER PROPOSALS. For any stockholder proposal to be presented
in connection with an annual meeting of stockholders of the Corporation,
including any proposal relating to the nomination of a director to be elected to
the Board of Directors of the Corporation, the stockholders must have given
timely written notice thereof in writing to the Secretary of the Corporation. In
order for such notice to be timely, such notice must be received by the
Corporation not less than 90 nor more than 180 days prior to the anniversary of
the previous year's annual meeting; PROVIDED, HOWEVER, THAT IN THE EVENT THAT
THE DATE OF THE ANNUAL MEETING IS ADVANCED BY MORE THAN 30 DAYS OR DELAYED BY
MORE THAN 60 DAYS FROM SUCH ANNIVERSARY DATE OR IF THE CORPORATION HAS NOT
PREVIOUSLY HELD AN ANNUAL MEETING, NOTICE BY THE STOCKHOLDER TO BE TIMELY MUST
BE SO DELIVERED NOT EARLIER THAN THE CLOSE OF BUSINESS ON THE 180TH DAY PRIOR TO
SUCH ANNUAL MEETING AND NOT LATER THAN THE CLOSE OF BUSINESS ON THE LATER OF THE
90TH DAY PRIOR TO SUCH ANNUAL MEETING AND THE TENTH DAY FOLLOWING THE DAY ON
WHICH PUBLIC ANNOUNCEMENT OF THE DATE OF SUCH MEETING IS FIRST MADE BY THE
CORPORATION. IN NO EVENT SHALL THE PUBLIC ANNOUNCEMENT OF A POSTPONEMENT OR
ADJOURNMENT OF AN ANNUAL MEETING TO A LATER DATE OR TIME COMMENCE A NEW TIME
PERIOD FOR THE GIVING OF A STOCKHOLDER'S NOTICE AS DESCRIBED ABOVE. SUCH
STOCKHOLDER'S NOTICE SHALL SET FORTH (I) AS TO EACH PERSON WHOM THE STOCKHOLDER
PROPOSES TO NOMINATE FOR ELECTION OR REELECTION AS A DIRECTOR ALL INFORMATION
RELATING TO SUCH PERSON THAT IS REQUIRED TO BE DISCLOSED IN SOLICITATIONS OF
PROXIES FOR ELECTION OF DIRECTORS IN AN ELECTION CONTEST, OR IS OTHERWISE
REQUIRED, IN EACH CASE PURSUANT TO REGULATION 14A UNDER THE EXCHANGE ACT
(INCLUDING SUCH PERSON'S WRITTEN CONSENT TO BEING NAMED IN THE PROXY STATEMENT
AS A NOMINEE AND TO SERVING AS A DIRECTOR IF ELECTED); (II) AS TO ANY OTHER
BUSINESS THAT THE STOCKHOLDER PROPOSES TO BRING BEFORE THE MEETING, A BRIEF
DESCRIPTION OF THE BUSINESS DESIRED TO BE BROUGHT BEFORE THE MEETING, THE
REASONS FOR CONDUCTING SUCH BUSINESS AT THE MEETING AND ANY MATERIAL INTEREST IN
SUCH BUSINESS OF SUCH STOCKHOLDER AND OF THE BENEFICIAL OWNER, IF ANY, ON WHOSE
BEHALF THE PROPOSAL IS MADE; AND (III) AS TO THE STOCKHOLDER GIVING THE NOTICE
AND THE BENEFICIAL OWNER, IF ANY, ON WHOSE BEHALF THE NOMINATION OR PROPOSAL IS
MADE, (X) THE NAME AND ADDRESS OF SUCH STOCKHOLDER, AS THEY APPEAR ON THE
CORPORATION'S BOOKS, AND OF SUCH BENEFICIAL OWNER AND (Y) THE NUMBER OF SHARES
OF EACH CLASS OF STOCK OF THE CORPORATION WHICH ARE OWNED BENEFICIALLY AND OF
RECORD BY SUCH STOCKHOLDER AND SUCH BENEFICIAL OWNER.
SECTION 2. DETERMINATION OF STOCKHOLDERS OF RECORD.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than 60 or less than 10 days before the date of such meeting, or
more than 60 days prior to any other action. If no record date is fixed:
(a) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action shall be at the close of business on
the day next preceding the day on which notice is given.
(b) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
Notwithstanding anything to the contrary in these Bylaws, in the case of
any Request Special Meeting, (i) the record date for such meeting (the "Meeting
Record Date") shall be no later than the 30th day after the Delivery Date and
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(ii) if the Board of Directors fails to fix the Meeting Record Date within 30
days after the Delivery Date, then the close of business on such 30th day shall
be the Meeting Record Date.
ARTICLE II
DIRECTORS
SECTION 1. DEFINITIONS.
For the purpose of this Article II, capitalized terms not otherwise
defined herein shall have the meaning set forth in the Stockholders Agreement by
and between Prometheus Southeast Retail, LLC and the Corporation dated February
24, 1998 (the "Stockholders Agreement").
SECTION 2. GENERAL POWERS.
The business and affairs, power and authority of the Corporation shall
be exercised, conducted and controlled by the Board of Directors, except where
the law, the Articles of Incorporation, or these Bylaws require any power or
action to be authorized or taken by the stockholders. In addition to the powers
and authorities expressly conferred by these Bylaws, the Board of Directors may
do all such lawful things and acts as are not by statute, the Articles of
Incorporation or these Bylaws directed or required to be done by the
stockholders.
SECTION 3. NUMBER, NOMINATION AND ELECTION OF DIRECTORS.
(a) NUMBER. The Board of Directors shall consist of not more than
fifteen members and, until the Final Threshold Date, not less than nine members.
Until the Preliminary Threshold Date, at least one-third of the Board of
Directors shall be designees (the "Investor Nominees") of Prometheus Southeast
Retail, LLC or its successor or assignee (the "Investor"). From and after the
Preliminary Threshold Date and until the Second Threshold Date, at least
two-ninths of the Board of Directors shall be Investor Nominees. From and after
the Second Threshold Date and until the Final Threshold Date, at least one-ninth
of the Board of Directors shall be Investor Nominees. The Board of Directors may
increase or decrease the number of the members of the Board of Directors within
the limitations set forth above. No reduction in the number of directors shall
of itself have the effect of shortening the term of any incumbent director.
(b) ELECTION. The directors shall be elected at the annual meeting of
stockholders, or if not so elected, at a special meeting of stockholders called
for that purpose. At any meeting of stockholders at which directors are to be
elected (an "Election Meeting"), only persons nominated as candidates shall be
eligible for election, and the candidates receiving the greatest number of votes
entitled to be cast shall be elected.
(c) NOMINATIONS.
(1) QUALIFICATION. Directors of the Corporation need not be
stockholders or residents of Maryland. No person shall be appointed or
elected a director of the Corporation unless:
(A) such person is elected to fill a vacancy in the Board
of Directors pursuant to Section 4(c) of this Article II; or
(B) such person is nominated for election as a director of
the Corporation in accordance with this section.
(2) ELIGIBILITY TO MAKE NOMINATIONS. Nominations of candidates
for election as directors at any Election Meeting may be made by the
Board of Directors or a committee thereof.
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(3) PROCEDURE FOR NOMINATIONS. Nominations shall be made not
fewer than 30 days prior to the date of an Election Meeting. At the
request of the Secretary or, in his absence, an Assistant Secretary,
each proposed nominee shall provide the Corporation with such
information concerning himself as is required under the rules of the
Securities and Exchange Commission (the "Commission") to be included in
the Corporation's proxy statement soliciting proxies for the election of
such nominee as a director.
(4) SUBSTITUTION OF NOMINEES. In the event that a person is
validly designated as a nominee in accordance with these Bylaws and
shall thereafter become unable or unwilling to stand for election to the
Board of Directors, the Board of Directors or a committee thereof may
designate a substitute nominee upon delivery, not fewer than five days
prior to the date of an Election Meeting, of a written notice to the
Secretary setting forth such information regarding such substitute
nominee as would have been required to be delivered to the Secretary
pursuant to these Bylaws had such substitute nominee been initially
proposed as a nominee. Such notice shall include a signed consent to
serve as a director of the Corporation, if elected, of each such
substitute nominee.
(5) INVESTOR NOMINEES. No person shall be named as an Investor
Nominee if (i) such person is not reasonably experienced in business,
financial or real estate matters, (ii) such person has been convicted
of, or pled nolo contendere to, a felony; (iii) the election of such
person would violate any law, or (iv) any event required to be disclosed
pursuant to Item 401(f) of Regulation S-K of the 1934 Act has occurred
with respect to such person. The Board of Directors shall support the
nomination of and the election of each Investor Nominee to the Board of
Directors, and the Board of Directors shall exercise all authority under
applicable law to cause each Investor Nominee to be elected to the Board
of Directors.
(6) COMPLIANCE WITH PROCEDURES. If the chairman of the Election
Meeting determines that a nomination of any candidate for election as a
director was not made in accordance with the applicable provisions of
these Bylaws, he shall so declare to the meeting and such nomination
shall be void.
(d) CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman, if any is elected,
shall, subject to the to the provisions of these Bylaws, preside at all meetings
of the stockholders, of the Board of Directors and of the Executive Committee.
SECTION 4. TERM OF OFFICE OF DIRECTORS.
(A) TERM. Each director shall hold office until the annual meeting next
succeeding his election and until his successor is elected and qualified, or
until his earlier resignation, removal from office or death.
(B) RESIGNATION. Any director of the Corporation may resign at any time
by giving written notice to the Chairman or to the President or the Secretary of
the Corporation. A resignation from the Board of Directors shall be deemed to
take effect immediately or at such other time as the director may specify.
(C) VACANCY. If there shall be any vacancy in the Board of Directors for
any reason, including, but not limited to, death, resignation or as provided by
law, the Articles of Incorporation or these Bylaws (including any increase in
the authorized number of directors), the remaining directors shall constitute
the Board of Directors until such vacancy is filled. The remaining directors may
fill any vacancy in the Board of Directors for the unexpired term. In the event
that any Investor Nominee shall cease to serve as a Director for any reason
other than the fact that Investor no longer has a right to nominate a Director,
the vacancy resulting thereby shall be filled by an Investor Nominee designated
by Investor; provided, however, that any Investor Nominee so designated shall
satisfy the qualification requirements set forth in Section 3(c)(5).
SECTION 5. MEETINGS OF DIRECTORS.
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(a) MEETINGS. Meetings of the Board of Directors may be held at any time
upon call by the Chairman or by the President or by any two directors. Unless
otherwise indicated in the notice thereof, any business may be transacted at any
such meeting.
(b) PLACE OF MEETING. Any meeting of directors may be held at such place
within or without the State of Maryland as may be designated in the notice of
such meeting.
(C) NOTICE OF MEETING AND WAIVER OF NOTICE. No notice of regular
meetings of the Board of Directors need be given. Special meetings of the Board
of Directors may be called by the Chairman, or by the President on notice to
each director, given either in person or by mail, telephone, telegram, telex or
similar medium of communication; special meetings shall be called on like notice
by the Chairman, the President or the Secretary, on the written request of two
directors. At least 24 hours notice of special meetings shall be given to each
director.
SECTION 6. QUORUM AND VOTING.
Except as otherwise provided in the Articles of Incorporation, at any
meeting of directors, not less than one-half (1/2) of the directors then in
office (or, in the event that the directors then in office are an uneven number,
the nearest full number of directors less than one-half (1/2) of such number) is
necessary to constitute a quorum for such meeting, except that any meeting duly
called, whether a quorum is present or otherwise, may, by vote of a majority of
the directors present, be adjourned from time to time. At any meeting at which a
quorum is present, all acts, questions and business which may come before the
meeting shall be determined by a majority of votes cast by the directors present
at such meeting, unless the vote of a greater number is required by statute, the
Articles of Incorporation or these Bylaws.
SECTION 7. ACTION OF BOARD OF DIRECTORS WITHOUT A MEETING.
Any action that may be authorized or taken at a meeting of the Board of
Directors may be authorized or taken without a meeting if approved and
authorized by a writing or writings, signed by all of the directors, which are
filed with the minutes of proceedings of the Board of Directors.
SECTION 8. COMPENSATION.
The Board of Directors is authorized to fix a reasonable salary for
directors or a reasonable fee for attendance at any meeting of the Board of
Directors, the Executive or Audit Committee, or other committees appointed by
the Board of Directors, or any combination of salary and attendance fee. In
addition, directors may be reimbursed for any expenses incurred by them in
traveling to and from such meetings.
SECTION 9. COMMITTEES.
(a) APPOINTMENT. The Board of Directors, by resolution passed by a
majority of the whole Board of Directors, may, from time to time, appoint one or
more of its members to act as a committee of the Board of Directors, provided,
however, that each of the Executive Committee, the compensation committee, the
audit committee, any special committee(s) of the Board of Directors, and any
other Key Committees shall (A) until the Preliminary Threshold Date, be
comprised of members, at least one-third of whom are Investor Nominees, (B)
until the Second Threshold Date, be comprised of members, at least two-ninths of
whom are Investor Nominees, and (C) until the Final Threshold Date, be comprised
of members, at least one-ninth of whom are Investor Nominees. A committee shall
have and exercise the powers of the Board of Directors in the direction of the
management of the business and affairs of the Corporation to the extent provided
in the resolution appointing such committee. Each committee shall have such name
as may be determined by the Board of Directors. A committee shall keep minutes
of its proceedings and shall report its proceedings to the Board of Directors
when required or when requested by a director to do so. Each such committee and
each member thereof shall serve at the pleasure of the Board of Directors.
Vacancies occurring in any such committee may be filled by the Board of
Directors.
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Notwithstanding the foregoing, if none of the Directors who are Investor
Nominees would be considered "independent" of the Company, "disinterested,"
"non-employee directors" and "outside directors" (i) for purposes of any
applicable rule of the New York Stock Exchange or any other securities exchange
or other self-regulating organization (such as the National Association of
Securities Dealers) requiring that members of the audit committee of the Board
of Directors be independent of the Corporation, (ii) for purposes of any law or
regulation that requires in order to obtain or maintain favorable tax,
securities, corporate law or other material legal benefits with respect to any
plan or arrangement for employee compensation or benefits, that the members of
the committee of the Board of Directors charged with responsibility for such
plan or arrangement be "independent" of the Corporation, "disinterested,"
"non-employee directors" or "outside directors," or (iii) for purposes of any
special committee formed in connection with any transaction or potential
transaction involving the Corporation and any of Investor, its Affiliates or any
Group of which Investor is a member or such other transaction or potential
transaction which would involve an actual or potential conflict of interest on
the part of the Directors who are Investor Nominees, then a Director who is an
Investor Nominee shall not be required to be appointed to any such committee;
provided, however, that the committees of the Board of Directors shall be
organized such that, to the extent practicable, the only items to be considered
by a Key Committee on which no Director who is an Investor Nominee may serve
will be those items which prevent the Director who is an Investor Nominee from
serving on such Key Committee. Any members of any Key Committee who are Investor
Nominees shall, in the event of any vacancy in such membership, be replaced by a
Director who is an Investor Nominee elected by a majority of the Directors who
are Investor Nominees.
(b) EXECUTIVE COMMITTEE. Until the Final Threshold Date, there shall be
an Executive Committee of the Board of Directors, the members of which shall
hold office during the pleasure of the Board of Directors, and may be removed at
any time, with or without cause, by action thereof. During the intervals between
meetings of the Board of Directors, the Executive Committee shall possess and
may exercise all of the powers and authority of the Board of Directors in the
management and control of the business and affairs of the Corporation to the
maximum extent permitted by law. All action taken by the Executive Committee
shall be reported to the Board of Directors. Each of the Chairman and the
President shall be a member of the Executive Committee, unless such person is
not a director or shall decline in writing.
(c) COMMITTEE ACTION. Unless otherwise provided by the Board of
Directors, a majority of the members of any committee appointed by the Board of
Directors pursuant to this section shall constitute a quorum at any meeting
thereof, and the act of a majority of the members present at a meeting at which
a quorum is present shall be the act of such committee. Action may also be taken
by any such committee without a meeting by a writing or writings, signed by all
of its members, which is filed with the minutes of proceedings of the committee.
Any such committee shall appoint one of its own number as chairman (provided
that the Chairman or the President, if the Chairman declines or is not a member
of the Executive Committee, shall be the chairman of any Executive Committee),
who shall preside at all meetings and may appoint a Secretary (who need not be a
member of the committee) who shall hold office during the pleasure of such
committee. Meetings of any such committee may be held without notice of the
time, place or purposes thereof and may be held at such times and places within
or without the State of Maryland, as the committee may from time to time
determine, at the call of the chairman of the committee or any two members
thereof. Any such committee may prescribe such other rules as it shall determine
for calling and holding meetings and its method of procedure, subject to any
rules prescribed by the Board of Directors.
SECTION 10. CONFERENCE TELEPHONE MEETINGS.
One or more directors may participate in a meeting of the Board, or of a
committee of the Board of Directors, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in a meeting pursuant to this section
shall constitute presence in person at such meeting.
SECTION 11. SUPERMAJORITY BOARD APPROVAL.
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Until the Approval Rights Termination Date, if any, notwithstanding the
fact that a vote of the Board of Directors or the Executive Committee may not be
required under applicable law, the Corporation shall not, and shall not permit
any of its Subsidiaries without the affirmative vote of over sixty-seven percent
(67%) of all of the Directors ("Supermajority Board Approval") to:
(a) acquire, whether by merger, consolidation, purchase of stock or
assets or other business combination, (i) in a single transaction or group of
related transactions, any business or assets having an aggregate purchase price
in excess of twenty-five percent (25%) of Total Enterprise Value as measured at
the beginning of the fiscal year in which such acquisition is consummated, or
(ii) during any one fiscal year, businesses or assets having an aggregate
purchase price in excess of fifty percent (50%) of Total Enterprise Value as
measured at the beginning of such fiscal year;
(b) sell or dispose of any assets, whether by merger, consolidation,
sale of stock or assets or other business combination, during any one fiscal
year, having an aggregate value in excess of twenty-five percent (25%) of Total
Enterprise Value as measured at the beginning of such fiscal year;
(c) directly or indirectly, create, incur, issue, assume, guarantee or
otherwise become directly or indirectly liable, contingently or otherwise, with
respect to, any indebtedness if, after giving pro forma effect to such
indebtedness, the Corporation's ratio of (i) total indebtedness to (ii) Total
Enterprise Value, expressed as a percentage, would be greater than 65%;
(d) make any payment to, or sell, lease, transfer or otherwise dispose
of any of its properties or assets to, or purchase any property or assets from,
or enter into or make or amend any contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any of its Affiliates;
(e) issue Stock or options, rights or warrants or other commitments to
purchase or securities convertible into (or exchangeable or redeemable for)
shares of Stock, including, without limitation, OP Units (such options, rights,
warrants, other commitments or securities, "Stock Equivalents"); provided,
however, that Supermajority Board Approval shall not be required for any
issuance of Stock or Stock Equivalents as long as the sum of (i) all shares of
Stock issued by the Corporation during the applicable fiscal year and (ii)
shares of Stock into which Stock Equivalents issued by the Corporation and each
of its Subsidiaries during the applicable fiscal year are convertible, does not
exceed fifty percent (50%) of all shares of Stock outstanding, on a Fully
Diluted basis, on the first day of such fiscal year; provided, further, that in
connection with any issuance by the Corporation of Stock or issuance by the
Corporation or any of its Subsidiaries of any Stock Equivalents, Investor shall
be entitled, to the extent so provided in Section 4.1 of the Stock Purchase
Agreement, to a participation right on the terms set forth in Section 4.1 of the
Stock Purchase Agreement. Notwithstanding the first sentence of this Section
11(e), (i) Stock issued to the Corporation or a wholly owned Subsidiary thereof
and (ii) Stock and Stock Equivalents issued to directors or employees of the
Corporation or a Subsidiary of the Corporation in connection with any employee
benefit plan approved by the stockholders of the Corporation, shall not be
subject to Supermajority Board Approval;
(f) change or amend any provision of the Corporation's Charter or bylaws
in a manner that would be materially adverse to Investor;
(g) pursuant to or within the meaning of any bankruptcy law: (i)
commence a voluntary case, (ii) consent to the entry of an order for relief
against it in an involuntary case, (iii) consent to the appointment of a
custodian of it or for all or substantially all of its property; (iv) make a
general assignment for the benefit of its creditors;
(h) in the case of the Corporation, (1) terminate its eligibility for
treatment as a real estate investment trust, as defined in the Code, or (2) take
any action or fail to take any action which would reasonably be expected to,
alone or in conjunction with any other factors, result in the loss of such
eligibility, unless in the case of a failure to take action, such action is
initiated within thirty days and such action is completed within the period
required under the Code in order to maintain such eligibility; or
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(i) subject to the right of the Corporation to terminate the Stock
Purchase Agreement pursuant of Section 9.1(b)(iii) thereof, allow the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above),
other than Investor, becomes the "beneficial owner" (as such term is defined in
Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of
stock having more than 15% of the voting power of the Company.
ARTICLE III
OFFICERS
SECTION 1. GENERAL PROVISIONS.
The Board of Directors at such time as it determines may elect such
executive officers, as defined in Section 3(f) of this Article III, as the Board
of Directors deems necessary. The Board of Directors may assign such additional
titles to one or more of the officers as they shall deem appropriate. Any two or
more executive offices may be held by the same person. Other officers may be
appointed in the manner provided for in these Bylaws. The election or
appointment of an officer for a given term, or a general provision in the
Articles of Incorporation or in these Bylaws with respect to term of office,
shall not be deemed to create any contract rights.
SECTION 2. TERM OF OFFICE, REMOVAL, AND VACANCIES.
(a) TERM. Each officer of the Corporation shall hold office during the
pleasure of the Board of Directors and until his successor is elected and
qualified, unless he sooner dies or resigns or is removed.
(b) REMOVAL. Subject to the terms of any agreement relating to the
employment or service of any officer of the Corporation, the Board of Directors
by a vote of two-thirds of the members present at a meeting at which a quorum is
present may remove any executive officer at any time, with or without cause, and
the Board of Directors by a vote of a majority of its members present at a
meeting at which a quorum is present may remove any other officer at any time,
with or without cause.
(c) VACANCIES. Any vacancy in any executive office may be filled by the
Board of Directors.
SECTION 3. POWERS AND DUTIES.
(a) IN GENERAL. Subject to the specific provisions of these Bylaws, all
officers, as between themselves and the Corporation, shall respectively have
such authority and perform such duties as are customarily incident to their
respective offices, and as may be specified from time to time by the Board of
Directors, regardless of whether such authority and duties are customarily
incident to such office. In the absence of any officer of the Corporation, or
for any other reason the Board of Directors may deem sufficient, the Board of
Directors may delegate from time to time the powers or duties of such officer,
or any of them, to any other officer or to any Director.
(b) PRESIDENT. The President shall, in the absence of the Chairman or
upon the determination of the Board of Directors, preside at all meetings of the
stockholders. The President shall be the chief executive officer of the
Corporation and shall have general supervision over its property, business and
affairs, and shall perform all the duties usually incident to such office,
subject to the direction of the Board of Directors. He may execute all
authorized deeds, mortgages, bonds, contracts and other obligations in the name
of the Corporation and, subject to the provisions of these Bylaws, shall have
such other powers and duties as may be prescribed by the Board of Directors.
(c) VICE PRESIDENTS. The Vice Presidents shall have such powers, duties
and titles as may be prescribed by the Board of Directors or as may be delegated
by the President.
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(d) SECRETARY. The Secretary shall attend and shall keep the minutes of
all meetings of the stockholders and the Board of Directors (and perform similar
duties for the committees of the Board of Directors when required). He shall
keep such books as may be required by the Board of Directors, shall have charge
of the seal, if any, of the Corporation and shall be permitted, subject to the
provisions of these Bylaws, to give notices of stockholders' and directors'
meetings required by law or by these Bylaws, or otherwise, and have such other
powers and duties as may be prescribed by the Board of Directors.
(e) TREASURER. The Treasurer shall receive and have charge of all money,
bills, notes, bonds, stock in other corporations and similar property belonging
to the Corporation, and shall do with the same as shall be ordered by the Board
of Directors. He shall disburse the funds and pledge the credit of the
Corporation as may be directed by the Board of Directors. He shall keep accurate
financial accounts and hold the same open for inspection and examination by the
directors. On the expiration of his term of office, he shall turn over to his
successors, or the Board of Directors, all property, books, papers and money of
the Corporation in his hands, and shall possess such other powers and duties as
may be prescribed by the Board of Directors.
(f) EXECUTIVE OFFICERS. The officers referred to in subparagraphs (b),
(c), (d) and (e) of this section, and such other officers as the Board of
Directors may by resolution identify as such shall be executive officers of the
Corporation and may be referred to as such.
(g) OTHER OFFICERS. The Assistant Vice Presidents, Assistant
Secretaries, Assistant Treasurers, if any, and any other subordinate officers
shall be appointed and removed by the President or the Board of Directors at
whose pleasure each shall serve and shall have such powers and duties as they
may prescribe.
SECTION 4. COMPENSATION.
The Board of Directors is authorized to determine or to provide the
method of determining the compensation of all officers.
SECTION 5. BONDS.
If required by the Board of Directors, any and every officer or agent
shall give the Corporation a bond in a sum and with one or more sureties
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
ARTICLE IV
SECURITIES HELD BY CORPORATION
SECTION 1. TRANSFER OF SECURITIES OWNED BY THE CORPORATION.
All endorsements, assignments, transfers, share powers or other
instruments of transfer of securities standing in the name of the Corporation
shall be executed for and in the name of the Corporation by the President or by
any Vice President, or by the Secretary or Treasurer or by any additional person
or Persons as may be thereunto authorized by the Board of Directors.
SECTION 2. VOTING SECURITIES HELD BY THE CORPORATION.
The President, any Vice President, or the Secretary or Treasurer, in
person or by another person thereunto authorized by the Board of Directors, in
person or by proxy or proxies appointed by him, shall have full power and
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authority on behalf of the Corporation to vote, act and execute consents,
waivers and releases with respect to any securities issued by other corporations
which the Corporation may own.
ARTICLE V
SHARE CERTIFICATES
SECTION 1. TRANSFER AND REGISTRATION OF CERTIFICATES.
The Board of Directors shall have authority to make such rules and
regulations, not inconsistent with law, the Articles of Incorporation or these
Bylaws, as it deems expedient concerning the issuance, transfer and registration
of certificates for shares and the shares represented thereby.
SECTION 2. CERTIFICATES FOR SHARES.
Each holder of shares is entitled to one or more certificates for shares
of the Corporation in such form not inconsistent with law and the Articles of
Incorporation as shall be approved by the Board of Directors. Each such
certificate shall be signed by the President or any Vice President, and by the
Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer of
the Corporation, which certificate shall certify the number and class of shares
held by such stockholder in the Corporation, but no certificates for shares
shall be executed or delivered until such shares are fully paid. Any or all of
the signatures upon such certificate may be a facsimile, engraved or printed. In
case any officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed upon, any share certificate shall have ceased to be
such officer, transfer agent or registrar, before the certificate is issued, it
may be issued with the same effect as if he were such officer, transfer agent or
registrar at the date of its issue.
SECTION 3. TRANSFER AGENTS, REGISTRARS AND DIVIDEND DISBURSING AGENTS.
The Board of Directors may from time to time by resolution appoint one
or more incorporated transfer agents and registrars (which may or may not be the
same corporation) for the shares of the Corporation, and the Board of Directors
from time to time by resolutions may appoint a dividend disbursing agent to
disburse any and all dividends authorized by the Board of Directors payable upon
the shares of the Corporation.
SECTION 4. TRANSFERS.
Subject to restrictions on the transfer of stock, upon surrender to the
Corporation or the duly appointed transfer agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books. No transfer shall
be made which would be inconsistent with the applicable provisions of the
Uniform Commercial Code.
SECTION 5. LOST, STOLEN OR DESTROYED CERTIFICATES.
The Corporation may issue a new certificate for shares in place of any
certificate or certificates heretofore issued by the Corporation alleged to have
been lost, stolen or destroyed upon the making of an affidavit of that fact by
the person claiming the certificate of stock to have been lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates, the
Board of Directors or any duly authorized executive officer may, in its or his
discretion, and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representatives, to attest the same in such manner as it shall require and
to indemnify the Corporation, its directors, officers, employees, agents and
representatives, and in connection therewith to give the Corporation a bond in
such sum and containing such terms as the Board of Directors or such executive
officer may direct, against any claim that may be made against the Corporation
with respect to the certificate or certificates alleged to have been lost,
stolen or destroyed or the issuance of the new certificate.
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SECTION 6. PROTECTION OF THE CORPORATION.
The Corporation may treat a fiduciary as having capacity and authority
to exercise all rights of ownership in respect of shares of record in the name
of the decedent holder, person, firm or corporation in conservation,
receivership or bankruptcy, minor, incompetent person, or person under
disability, as the case may be, for whom he is acting, or a fiduciary acting as
such, and the Corporation, its transfer agent and registrar, upon presentation
of evidence of appointment of such fiduciary shall be under no duty to inquire
as to the powers of such fiduciary and shall not be liable to any firm, person
or corporation for loss caused by any act done or omitted to be done by the
Corporation or its transfer agent or registrar in reliance thereon.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER AUTHORIZED REPRESENTATIVES
SECTION 1. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN THIRD-PARTY
PROCEEDINGS.
The Corporation shall indemnify any person who was or is an "authorized
representative" of the Corporation (which shall mean for purposes of this
Article a director or officer of the Corporation, or a person serving at the
request of the Corporation 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 shall
include, for purposes of this Article, the giving of testimony or similar
involvement) or is threatened to be made a party to any "third-party proceeding"
(which shall mean for purposes of this Article 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 the Corporation) by
reason of the fact that such person was or is an authorized representative of
the Corporation, from and against expenses (which shall include, for purposes of
this Article, attorneys' fees), judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such third-party 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
the Corporation 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 such conduct was unlawful. The termination of any third-party
proceeding by judgment, order, settlement, conviction or upon a 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 which
such person reasonably believed to be in, or not opposed to, the best interests
of the Corporation, and, with respect to any criminal third-party proceeding,
had reasonable cause to believe that such conduct was unlawful.
SECTION 2. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN CORPORATE
PROCEEDINGS.
The Corporation shall indemnify any person who was or is an authorized
representative of the Corporation and who was or is a party or is threatened to
be made a party to any "corporate proceeding" (which shall mean, for purposes of
this Article, any threatened, pending or completed action or suit by or in the
right of the Corporation to procure a judgment in its favor or investigative
proceeding by the Corporation) by reason of the fact that such person was or is
an authorized representative of the Corporation, 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
the Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation 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 the circumstances of
the case, such authorized representative is fairly and reasonably entitled to
indemnity for such expenses that such court shall deem proper.
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SECTION 3. MANDATORY INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES.
To the extent that an authorized representative of the Corporation has
been successful on the merits or otherwise in defense of any third-party or
corporate proceedings or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses actually and reasonably incurred by
such person in connection therewith.
SECTION 4. DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.
Any indemnification under Section 1, 2 or 3 of this Article VI (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the authorized
representative is proper in the circumstances because such person has either met
the applicable standard of conduct set forth in Section 1 or 2 or has been
successful on the merits or otherwise as set forth in Section 3 and that the
amount requested has been actually and reasonably incurred. Such determination
shall be made:
(1) by the Board of Directors by a majority of a quorum consisting of
directors who were not parties to such third-party or corporate proceedings; or
(2) if such a quorum is not obtainable, or, even if obtainable, a
majority vote of such a quorum so directs, by independent legal counsel in a
written opinion; or
(3) by the stockholders.
SECTION 5. ADVANCING EXPENSES.
Expenses actually and reasonably incurred in defending a third-party or
corporate proceeding shall be paid on behalf of an authorized representative by
the Corporation in advance of the final disposition of such third-party or
corporate proceeding upon receipt of an undertaking by or on behalf of the
authorized representative to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the Corporation
as authorized in this Article VI.
SECTION 6. EMPLOYEE BENEFIT PLANS.
For purposes of this Article, the Corporation shall be deemed to have
requested an authorized representative to serve an employee benefit plan where
the performance by such person of duties to the Corporation also imposes duties
on, or otherwise involves services by, such person to the plan or participants
or beneficiaries of the plan; excise taxes assessed on an authorized
representative with respect to an employee benefit plan pursuant to applicable
law shall be deemed "fines"; and action taken or omitted by such person with
respect to an employee benefit plan in the performance of duties for a purpose
reasonably believed to be in the interest of the participants and beneficiaries
of the plan shall be deemed to be for a purpose that is not opposed to the best
interests of the Corporation.
SECTION 7. SCOPE OF ARTICLE.
The indemnification of and the advancement of expenses to authorized
representatives, provided by, or granted pursuant to, this Article, shall (i)
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any statute,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in an official capacity and as to action in other capacities, (ii)
continue as to a person who has ceased to be an authorized representative, and
(iii) inure to the benefit of the heirs, personal representatives, executors,
and administrators of such person.
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SECTION 8. RELIANCE ON PROVISIONS.
Each person who shall act as an authorized representative of the
Corporation shall be deemed to be doing so in reliance upon rights of
indemnification provided by this Article VI.
SECTION 9. INSURANCE.
The Corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee, trustee or
agent of or for the Corporation, or is or was serving at the request or with the
prior approval of the Corporation as a director, officer, employee, trustee or
agent of another corporation, partnership, joint venture, trust or other
enterprise (including employee benefit plans), against any liability asserted
against him and incurred by him in any capacity or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under the provisions of these Bylaws.
ARTICLE VII
GENERAL
SECTION 1. CONTRACTS, CHECKS, ETC.
All contracts, agreements, checks, drafts, notes, bonds, bills of
exchange and orders for the payment of money shall be signed or endorsed by the
persons whom the Board of Directors prescribes therefor.
SECTION 2. FISCAL YEAR.
The fiscal year of the Corporation shall commence on January 1 of each
year and end on December 31 of the following year, unless otherwise determined
by the Board of Directors.
SECTION 3. FORM OF NOTICES.
Whenever notice is required to be given to any director or officer or
stockholder, such notice may be given either in person or by mail, telephone or
telegram, facsimile transmission, telex or similar medium of communication,
except as expressly provided otherwise in these Bylaws. Except as provided in
Article II, Section 4(c), if mailed, the notice will be deemed given when
deposited in the United States mail, postage prepaid, addressed to the
stockholder, officer or director at such address as appears on the books of the
Corporation. If given in person or by telephone, notice will be deemed given
when communicated. If given by telegram, facsimile transmission, telex or
similar medium of communication, notice will be deemed given when properly
dispatched.
SECTION 4. SEAL.
The Corporation may, but shall not be required to, have a corporate
seal, which shall have inscribed thereon the name of the Corporation, the year
of its organization and the words "Incorporated Maryland." The seal may be used
by causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise. The Secretary shall have custody of the corporate seal of the
Corporation and shall have authority to affix the same to any instrument
requiring it and when so affixed, it may be attested by the Secretary's
signature. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by his
signature. Whenever the Corporation is permitted or required to affix its seal
to a document, it shall be sufficient to meet the requirements of any law, rule
or regulation relating to a seal to place the word "(SEAL)" adjacent to the
signature of the person authorized to execute the document on behalf of the
Corporation.
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SECTION 5. CONSISTENCY WITH ARTICLES OF INCORPORATION.
If any provision of these Bylaws shall be inconsistent with the
Corporation's Articles of Incorporation (and as it may be amended from time to
time), the Articles of Incorporation (as so amended at the time) shall govern.
ARTICLE VIII
AMENDMENTS
Except as otherwise provided in the Articles of Incorporation, these
Bylaws may be altered, amended, or repealed or new bylaws may be adopted by the
affirmative vote of the directors of the Corporation or by the affirmative vote
of the holders of a majority of the shares of the Corporation entitled to vote
in the election of directors, voting as one class at any regular meeting of the
stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment, repeal or adoption of new bylaws be contained in the notice of such
special meeting.
ARTICLE IX
APPLICABILITY OF THE MARYLAND CONTROL SHARES ACQUISITION STATUTE
The Maryland Control Shares Acquisition Statute shall not apply to the
voting rights of stock acquired pursuant to the Stock Purchase Agreement by and
between the Corporation and Prometheus Southeast Retail LLC dated as of February
24, 1998, and any amendment thereto.
18
[EXAMPLE OF KONOVER PROPERTY TRUST, INC. CERTIFICATE OF STOCK APPEARS HERE]
FSA FINANCE, INC., as Issuer,
MELLON MORTGAGE COMPANY, as Master Servicer
and
FIRST UNION NATIONAL BANK, as Trustee
------------------------
AMENDMENT
dated as of December 22, 1998
To
MASTER SERVICING AGREEMENT
dated as of May 22, 1995
----------------------
Collateralized Commercial Mortgage
Notes, Classes A, B and C
<PAGE>
THIS AMENDMENT, dated as of December 22, 1998 (the "Amendment"), is
executed by and among FSA FINANCE, INC., as Issuer (the "Issuer"), MELLON
MORTGAGE COMPANY, as Successor Master Servicer (the "Master Servicer"), and
FIRST UNION NATIONAL BANK, as Successor Trustee (the "Trustee") under a Master
Servicing Agreement dated as of May 22, 1995 (the "Master Servicing Agreement"),
by and among the Issuer, Fleet Management and Recovery Corporation, as Master
Servicer, and Bank One, Columbus, NA, as Trustee (capitalized terms used but not
defined herein shall have the respective meanings set forth in the Master
Servicing Agreement).
WHEREAS, the parties entered into the Master Servicing Agreement to
provide for the servicing of a certain Mortgage Loan, which secures Notes issued
pursuant to an Indenture (the "Indenture"), dated as of May 22, 1995, by and
among the Issuer, the Master Servicer and the Trustee;
WHEREAS, the Mortgage Loan is evidenced by a Mortgage Note made by FSA
Properties, Inc. (the "Original Borrower"), which Mortgage Note is, in turn,
secured by certain Mortgaged Properties pursuant to one or more Mortgages under
which the Original Borrower is the mortgagor, grantor and trustor;
WHEREAS, pursuant to deeds and a Bill of Sale, dated as of December 22,
1998, the Original Borrower transferred, sold and conveyed all of its right,
title and interest in and to the Mortgaged Properties (other than two Mortgaged
Properties that, at the request of the Original Borrower and the New Borrower
(as defined herein), are being released from the lien of the Mortgages (the
"Released Properties")) to KPT REMIC Loan LLC (the "New Borrower"), and pursuant
to a Loan Assumption Agreement, dated as of December 22, 1998, all of the
obligations of the Original Borrower under the Mortgage Note and the Mortgages
have been assumed by the New Borrower;
WHEREAS, the New Borrower has entered into a Deed of Trust, Mortgage,
Security Agreement, Fixture Filing, Financing Statement and Assignment of Leases
and Rents, dated as of December 22, 1998 (the "Additional Mortgage"), whereby
the New Borrower granted to the Trustee, for the benefit of the Noteholders, a
lien on and security interest in certain additional Mortgaged Properties (the
"Additional Mortgaged Properties") to secure further the New Borrower's
obligations under the Mortgage Note and the Mortgage Loan;
WHEREAS, the New Borrower also has entered into a Pledge Agreement,
dated as of December 22, 1998 (the "Pledge Agreement"), whereby the New Borrower
pledged to the Trustee, for the benefit of the Noteholders, cash in the amount
of $2,400,000 (the "Cash Collateral") to secure further the New Borrower's
obligations under the Mortgage Note and the Mortgage Loan;
WHEREAS, in consideration for its consent to the release of the Released
Properties from the lien of the Mortgages, the Issuer, as the beneficial owner
of the Mortgage Note and the collateral security therefor, has agreed that the
Additional Mortgaged Properties and the Cash Collateral should be transferred,
pledged and collaterally assigned to the Trustee, as legal holder of the
Mortgage Note and the collateral security therefor, for the benefit of the
Noteholders;
<PAGE>
WHEREAS, the parties have entered into a Supplement of even date
herewith to the Indenture, pursuant to Section 901 of the Indenture, reflecting
the transfer of the Mortgaged Properties to the New Borrower and the Additional
Mortgage, the Pledge Agreement and the collateral pledged thereby to secure the
Mortgage Loan, and the parties desire to make corresponding changes to the
Master Servicing Agreement;
WHEREAS, Section 6.3 of the Master Servicing Agreement provides that the
Issuer, the Master Servicer and the Trustee may at any time enter into an
amendment thereto, provided that, among other things, the amendment does not (i)
materially adversely affect the interests of any Holder, (ii) reduce the
percentage in principal amount of the Outstanding Notes the consent of the
Holders of which is required for any reason under this Agreement (including,
without limitation, any action under Section 4.29 of the Master Servicing
Agreement), or (iii) defer the date or reduce the amount of any payment required
to be made under the Mortgage Loan, without the consent of each Holder affected
thereby;
WHEREAS, the Trustee has determined that such amendment may be properly
entered into pursuant to Section 6.3 of the Master Servicing Agreement.
NOW, THEREFORE, the Issuer, the Master Servicer (at the request of the
Trustee and in reliance upon the consent so given by the Trustee) and the
Trustee hereby agree as follows:
Section 1. Amendments to Master Servicing Agreement.
1.1 Definitions. Article I of the Master Servicing Agreement is hereby
amended and supplemented as follows:
(a) The following new definition shall be inserted immediately following
the definition of "Act:"
"Additional Mortgage" means the Deed of Trust, Mortgage, Security
Agreement, Fixture Filing, Financing Statement and Assignment of
Leases and Rents, dated as of December 22, 1998, between the
Borrower and the Trustee, covering Mortgaged Properties, as may
be amended, modified or supplemented from time to time as
permitted hereby and thereby.
(b) The definition of "Allocated Loan Amount" is hereby deleted in its
entirety and the following is substituted in lieu thereof:
"Allocated Loan Amount" has the meaning set forth in the
Loan Assumption Agreement.
(c) The definition of "Borrower" is hereby deleted in its entirety and
the following is substituted in lieu thereof:
"Borrower" means KPT REMIC Loan LLC, a limited liability company
organized under the laws of the State of Delaware, and its permitted
successors and assigns under the Mortgage.
2
<PAGE>
(d) The definition of "Central Account" is hereby amended by deleting
the words "Bank One, Columbus, NA" and inserting in their place the following
words: "First Union National Bank."
(e) The definition of "Collateral" is hereby amended by deleting the
reference to "(C)" in the eleventh line thereof and inserting a reference to
"(D)" in its place and by adding the following new clause (C):
(C) the cash collateral pledged to and retained by the Trustee
pursuant to the Pledge Agreement,
(f) The following new definition shall be inserted immediately following
the definition of "Liquidation Proceeds:"
"Loan Assumption Agreement" means the Loan Assumption Agreement,
dated as of December 22, 1998, by and among FSA Properties, Inc.,
the Borrower and the Trustee.
(g) The definition of "Master Servicer" is hereby amended by deleting
the words, "Fleet Management and Recovery Corporation, a Rhode Island
corporation" and inserting in their place the words "Mellon Mortgage Company."
(h) The definition of "Mortgage" is hereby deleted in its entirety and
the following is substituted in lieu thereof:
"Mortgage" means, collectively, (i) the Modified and Consolidated
Deed of Trust, Mortgage, Security Agreement, Fixture Filing,
Financing Statement and Assignment of Leases and Rents, dated as
of May 22, 1995, between FSA Properties, Inc. and the Originator,
covering 17 Mortgaged Properties, as the same may be rerecorded
in the County of Salt Lake, Utah, pursuant to the letter of
instructions dated May 22, 1995 by and among FSA Properties,
Inc., the Originator, the Company and the Trustee for the purpose
of subjecting to the lien thereof the Draper Outparcels (as
defined in the Mortgage), the obligations of FSA Properties, Inc.
thereunder having been assumed by the Borrower pursuant to the
Loan Assumption Agreement, (ii) the Modified and Consolidated
Mortgage, Security Agreement, Fixture Filing, Financing Statement
and Assignment of Leases and Rents, dated as May 22, 1995,
between FSA Properties, Inc. and the Originator, covering the
Mortgaged Property located at Lake George, New York, the
obligations of FSA Properties, Inc. thereunder having been
assumed by the Borrower pursuant to the Loan Assumption
Agreement, and (iii) the Additional Mortgage, in each case as
amended, modified or supplemented from time to time as permitted
hereby and thereby.
3
<PAGE>
(i) The definition of "Mortgage Note" is hereby deleted it in its
entirety and the following is substituted in lieu thereof:
"Mortgage Note" means the Consolidated, Amended and Restated
Promissory Note dated as of May 22, 1995 by FSA Properties, Inc.
to the Originator in the actual principal amount of $95,000,000
consisting of the Class A Component, the Class B Component and
the Class C Component, and all amendments or supplements to such
Mortgage Note in accordance with the terms of the Mortgage, the
obligations of FSA Properties, Inc. thereunder having been
assumed by the Borrower pursuant to the Loan Assumption
Agreement.
(j) The following new definition shall be inserted immediately following
the definition of "Person":
"Pledge Agreement" means the Pledge Agreement, dated as of
December 22, 1998, by and between the Borrower and the Trustee.
(k) The definition of "Security Documents" is hereby amended by adding
the following language immediately following the end of such definition:
"Security Documents" shall also include the Additional Mortgage,
the Pledge Agreement, the Loan Assumption Agreement, each other
Loan Document executed in connection therewith, and each
additional document, instrument, certificate or agreement related
thereto or delivered in connection therewith to establish, create
or maintain the security interest of the Trustee in the Mortgaged
Property or other collateral described therein to secure payment
of the Mortgage Note, including all accounts established pursuant
to the Additional Mortgage and all insurance policies required
under the Additional Mortgage.
(l) The definition of "Special Servicing Period" is hereby amended by
inserting in the sixth line thereof immediately following the word "Property"
the following additional language: "or with respect to the collateral pledged
pursuant to the Pledge Agreement."
1.2. Enforcement of Rights of Trustee and Issuer. The following new
Section 6.13 is hereby inserted immediately following Section 6.12:
Section 6.13. Enforcement of Rights of Trustee and Issuer. The
parties acknowledge that the Trustee, as Trustee under the
Indenture and legal holder of the Mortgage Loan, is the
mortgagee, grantee, beneficiary and secured party under the
Additional Mortgage and the pledgee and secured party under the
Pledge Agreement. The parties hereby agree that, notwithstanding
any provision of this Agreement to the contrary, whenever this
Agreement refers to the enforcement or exercise of the rights of
the Issuer under any one or more of the Security Documents, or
the taking of any action or the exercise of any remedy under any
4
<PAGE>
one or more of the Security Documents (including, but not limited
to, the right to foreclose upon or take any other action or
exercise any remedy available under the Mortgage or the Mortgage
Note), such rights, action or remedy shall be deemed to include
the rights, actions or remedies available to the Trustee under
the Additional Mortgage and the Pledge Agreement.
Section 2. Ratification of Master Servicing Agreement.
As supplemented and amended by this Amendment, the Master Servicing
Agreement is in all respects ratified and confirmed, and the Master Servicing
Agreement as so supplemented and amended by this Amendment shall be read, taken
and construed as one and the same instrument.
Section 3. Counterparts.
This Amendment may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original, but all of such
counterparts shall together constitute but one and the same instrument.
Section 4. Governing Law.
This Amendment shall be governed by and construed in accordance with the
laws of the State of New York without reference to the conflict of laws
provisions thereof.
5
<PAGE>
IN WITNESS WHEREOF, the Issuer, the Master Servicer and the Trustee have
caused this Amendment to be duly executed by their respective duly authorized
officers all as of the day and year first above written.
FSA FINANCE, INC.
By:
--------------------------
Title:
--------------------------
MELLON MORTGAGE COMPANY,
as Master Servicer
By:
--------------------------
Title:
--------------------------
FIRST UNION NATIONAL BANK,
as Trustee
By:
--------------------------
Title:
--------------------------
6
FSA FINANCE, INC., as Issuer,
MELLON MORTGAGE COMPANY, as Master Servicer
and
FIRST UNION NATIONAL BANK, as Trustee
------------------------
SUPPLEMENT
dated as of December 22, 1998
To
INDENTURE
dated as of May 22, 1995
----------------------
Collateralized Commercial Mortgage
Notes, Classes A, B and C
<PAGE>
THIS SUPPLEMENT, dated as of December 22, 1998 (the "Supplement"), is
executed by and among FSA FINANCE, INC., as Issuer (the "Issuer"), MELLON
MORTGAGE COMPANY, as Successor Master Servicer (the "Master Servicer"), and
FIRST UNION NATIONAL BANK, as Successor Trustee (the "Trustee") under an
Indenture dated as of May 22, 1995 (the "Indenture"), by and among the Issuer,
Fleet Management and Recovery Corporation, as Master Servicer, and Bank One,
Columbus, NA, as Trustee (capitalized terms used but not defined herein shall
have the respective meanings set forth in the Indenture).
WHEREAS, pursuant to the Indenture, the Notes issued thereunder are
secured by a grant, pledge, assignment and conveyance of all of the Issuer's
right, title and interest in the Trust Estate, which includes the Mortgage Note
made by FSA Properties, Inc. (the "Original Borrower"), which Mortgage Note is,
in turn, secured by certain Mortgaged Properties pursuant to one or more
Mortgages under which the Original Borrower is the mortgagor, grantor and
trustor;
WHEREAS, pursuant to deeds and a Bill of Sale, dated as of December 22,
1998, the Original Borrower transferred, sold and conveyed all of its right,
title and interest in and to the Mortgaged Properties (other than two Mortgaged
Properties that, at the request of the Original Borrower and the New Borrower
(as defined herein), are being released from the lien of the Mortgages (the
"Released Properties")) to KPT REMIC Loan LLC (the "New Borrower"), and pursuant
to a Loan Assumption Agreement, dated as of December 22, 1998, all of the
obligations of the Original Borrower under the Mortgage Note and the Mortgages
have been assumed by the New Borrower;
WHEREAS, the New Borrower has entered into a Deed of Trust, Mortgage,
Security Agreement, Fixture Filing, Financing Statement and Assignment of Leases
and Rents, dated as of December 22, 1998 (the "Additional Mortgage"), whereby
the New Borrower granted to the Trustee, for the benefit of the Noteholders, a
lien on and security interest in certain additional Mortgaged Properties (the
"Additional Mortgaged Properties") to secure further the New Borrower's
obligations under the Mortgage Note and the loan evidenced thereby;
WHEREAS, the New Borrower also has entered into a Pledge Agreement,
dated as of December 22, 1998 (the "Pledge Agreement"), whereby the New Borrower
pledged to the Trustee, for the benefit of the Noteholders, cash in the amount
of $2,400,000 (the "Cash Collateral") to secure further the New Borrower's
obligations under the Mortgage Note and the loan evidenced thereby;
WHEREAS, in consideration for its consent to the release of the Released
Properties from the lien of the Mortgages, the Issuer, as the beneficial owner
of the Mortgage Note and the collateral security therefor, has agreed that the
Additional Mortgaged Properties and the Cash Collateral should be transferred,
pledged and collaterally assigned to the Trustee, as legal holder of the
Mortgage Note and the collateral security therefor, for the benefit of the
Noteholders;
WHEREAS, Section 901 of the Indenture provides that the Issuer, the
Master Servicer and the Trustee may at any time enter into a supplemental
indenture, without the consent of the Holders, to (1) convey, transfer, assign,
mortgage or pledge any property to the Trustee and (2) correct or amplify the
description of any property subject to the lien of the Indenture;
<PAGE>
WHEREAS, the Issuer desires to pledge and grant to the Trustee, for the
benefit of the Noteholders, all of the Issuer's right, title and interest in, to
and under the Additional Mortgage and the Pledge Agreement, to further secure
the Issuer's obligations under Notes, as follows:
GRANTING CLAUSE
NOW, THEREFORE, THIS SUPPLEMENT WITNESSETH that, to secure the
payment of the principal of and interest on the Notes and the
performance of the covenants therein and in the Indenture and this
Supplement, and in consideration of the premises and of the release of
the Released Properties, the Company, by these presents, does grant,
assign, pledge, set over and confirm to the Trustee, and grant to the
Trustee a security interest in, all of the Company's estate, right,
title and interest in, to and under the Additional Mortgage and the
Pledge Agreement (including any and all extensions and modifications
thereof), any and all rights to make claims for, collect and receive any
and all rents, income, revenues, issues, proceeds, profits, security and
other monies payable or receivable thereunder or with respect thereto,
to bring proceedings thereunder or for the specific or other enforcement
thereof or with respect thereto, in the name of the Company or
otherwise, and the right to make all waivers and agreements, to grant or
refuse requests, to give or withhold notices, and to execute and
deliver, in the name and on behalf of the Company, as agent and
attorney-in-fact, any and all instruments in connection therewith and to
do any and all things which the Company is or may be entitled to do
thereunder all as may be limited by and more fully described in the
Additional Mortgage and the Pledge Agreement, but no obligation of the
Company or the Borrower under the provisions of either of the Additional
Mortgage or the Pledge Agreement or with respect thereto shall be
impaired or diminished by virtue thereof, nor shall any such obligation
be imposed upon the Trustee;
HABENDUM
TO HAVE AND TO HOLD all and singular the Additional Mortgage and
the Pledge Agreement unto the Trustee and its successors and assigns
forever, for the benefit of the Holders of the Notes;
GRANT IN TRUST
IN TRUST for the equal and proportionate benefit and security of
the Holders from time to time of all the Notes issued and to be issued
under the Indenture (equally and ratably among the Notes of a class
without any priority or preference of any Note over any other Note of
its class), and for enforcement of the payment of the Notes in
accordance with their terms and of all other sums payable under the
Indenture or on the Notes, and for the performance and observance of and
compliance with the provisions of the Indenture and the Security
Documents, all in accordance with the Indenture.
NOW, THEREFORE, the Issuer, the Master Servicer (at the request of the
Trustee and in reliance upon the consent so given by the Trustee) and the
Trustee hereby agree as follows:
2
<PAGE>
Section 1. Amendments to Indenture.
1.1 Definitions. Article I of the Indenture is hereby amended and
supplemented as follows:
(a) The following new definition shall be inserted immediately following
the definition of "Act:"
"Additional Mortgage" means the Deed of Trust, Mortgage, Security
Agreement, Fixture Filing, Financing Statement and Assignment of
Leases and Rents, dated as of December 22, 1998, between the
Borrower and the Trustee, covering Mortgaged Properties, as may
be amended, modified or supplemented from time to time as
permitted hereby and thereby.
(b) The definition of "Assignment of Leases and Rents" is hereby deleted
in its entirety and the following is substituted in lieu thereof:
"Assignment of Leases and Rents" means, collectively, the two
separate Assignments of Leases and Rents and the New York
Assignment of Leases and Rents, as such terms are defined in the
Mortgage."
(c) The definition of "Borrower" is hereby deleted in its entirety and
the following is substituted in lieu thereof:
"Borrower" means KPT REMIC Loan LLC, a limited liability company
organized under the laws of the State of Delaware, and its
permitted successors and assigns under the Mortgage.
(d) The following new definition shall be inserted immediately following
the definition of "Liquidation Proceeds:"
"Loan Assumption Agreement" means the Loan Assumption Agreement,
dated as of December 22, 1998, by and among FSA Properties, Inc.,
the Borrower and the Trustee.
(e) The definition of "Manager's Consent and Subordination Agreement" is
hereby deleted in its entirety and the following is substituted in lieu thereof:
"Manager's Consent and Subordination Agreement" means the
Manager's Consent and Subordination of Management Agreement dated
as of December 22, 1998 among the Borrower, Konover Property
Trust, Inc. and the Trustee.
(f) The definition of "Master Servicer" is hereby amended by deleting
the words, "Fleet Management and Recovery Corporation, a Rhode Island
corporation" and inserting in their place the words "Mellon Mortgage Company."
3
<PAGE>
(g) The definition of "Mortgage" is hereby deleted in its entirety and the
following is substituted in lieu thereof:
"Mortgage" means, collectively, (i) the Modified and Consolidated
Deed of Trust, Mortgage, Security Agreement, Fixture Filing,
Financing Statement and Assignment of Leases and Rents, dated as
of May 22, 1995, between FSA Properties, Inc. and the Originator,
covering 17 Mortgaged Properties, as the same may be rerecorded
in the County of Salt Lake, Utah, pursuant to the letter of
instructions dated May 22, 1995 by and among FSA Properties,
Inc., the Originator, the Company and the Trustee for the purpose
of subjecting to the lien thereof the Draper Outparcels (as
defined in the Mortgage), the obligations of FSA Properties, Inc.
thereunder having been assumed by the Borrower pursuant to the
Loan Assumption Agreement, (ii) the Modified and Consolidated
Mortgage, Security Agreement, Fixture Filing, Financing Statement
and Assignment of Leases and Rents, dated as May 22, 1995,
between FSA Properties, Inc. and the Originator, covering the
Mortgaged Property located at Lake George, New York, the
obligations of FSA Properties, Inc. thereunder having been
assumed by the Borrower pursuant to the Loan Assumption
Agreement, and (iii) the Additional Mortgage, in each case as
amended, modified or supplemented from time to time as permitted
hereby and thereby.
(h) The definition of "Mortgage Note" is hereby deleted it in its
entirety and the following is substituted in lieu thereof:
"Mortgage Note" means the Consolidated, Amended and Restated
Promissory Note dated as of May 22, 1995 by FSA Properties, Inc.
to the Originator in the actual principal amount of $95,000,000
consisting of the Class A Component, the Class B Component and
the Class C Component, and all amendments or supplements to such
Mortgage Note in accordance with the terms of the Mortgage, the
obligations of FSA Properties, Inc. thereunder having been
assumed by the Borrower pursuant to the Loan Assumption
Agreement.
(i) The definitions of "Paying Agent" and "Principal Paying Agent" are
hereby amended by deleting the words "Bank One, Columbus, NA" in each such
definition and inserting in their place the words "First Union National Bank."
(j) The following new definition shall be inserted immediately following
the definition of "Person":
"Pledge Agreement" means the Pledge Agreement, dated as of
December 22, 1998, by and between the Borrower and the Trustee.
4
<PAGE>
(k) The definition of "Security Documents" is hereby amended by adding
the following language immediately following the end of such definition:
"Security Documents" shall also include the Additional Mortgage,
the Pledge Agreement, the Loan Assumption Agreement, each other
Loan Document executed in connection therewith, and each
additional document, instrument, certificate or agreement related
thereto or delivered in connection therewith to establish, create
or maintain the security interest of the Trustee in the Mortgaged
Property or other collateral described therein to secure payment
of the Mortgage Note, including all accounts established pursuant
to the Additional Mortgage and all insurance policies required
under the Additional Mortgage."
1.2 Enforcement of Rights of Trustee and Issuer. The following new
paragraph is hereby inserted in Section 404 of the Indenture immediately
following the existing paragraph:
The parties acknowledge that the Trustee, as Trustee under this
Indenture and legal holder of the Mortgage Loan, is the
mortgagee, grantee, beneficiary and secured party under the
Additional Mortgage and the pledgee and secured party under the
Pledge Agreement. The parties hereby agree that, notwithstanding
any provision of this Indenture to the contrary, whenever this
Indenture refers to the enforcement or exercise of the rights of
the Issuer under any one or more of the Security Documents, or
the taking of any action or the exercise of any remedy under any
one or more of the Security Documents (including, but not limited
to, the right to foreclose upon or take any other action or
exercise any remedy available under the Mortgage or the Mortgage
Note), such rights, action or remedy shall be deemed to include
the rights, actions or remedies available to the Trustee under
the Additional Mortgage and the Pledge Agreement.
Section 2. Ratification of Indenture.
As supplemented and amended by this Supplement, the Indenture is in all
respects ratified and confirmed, and the Indenture as so supplemented and
amended by this Supplement shall be read, taken and construed as one and the
same instrument.
Section 3. Counterparts.
This Supplement may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original, but all of such
counterparts shall together constitute but one and the same instrument.
5
<PAGE>
Section 4. Governing Law.
This Supplement shall be governed by and construed in accordance with
the laws of the State of New York without reference to the conflict of laws
provisions thereof.
6
<PAGE>
IN WITNESS WHEREOF, the Issuer, the Master Servicer and the Trustee have
caused this Supplement to be duly executed by their respective duly authorized
officers all as of the day and year first above written.
FSA FINANCE, INC.
By:______________________________
Title:___________________________
MELLON MORTGAGE COMPANY,
as Master Servicer
By:______________________________
Title:___________________________
FIRST UNION NATIONAL BANK,
as Trustee
By:______________________________
Title:___________________________
7
EXHIBIT 4.16
Pursuant to item 601(4)(ii)(A) of Regulation S-K, the Company has not
set forth as exhibits instruments with respect to long-term debt where the total
amount of securities authorized thereunder by each instrument individually do
not exceed 10 percent of the total assets of the Company and its subsidiaries on
a consolidated basis, and the Company hereby agrees to furnish a copy of such
instruments to the Commission upon request.
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated this ____ day of
March 1999, effective as of March 1, 1999, by and between KONOVER PROPERTY
TRUST, INC. (formerly FAC Realty Trust, Inc.) (the "Company") and PATRICK M.
MINIUTTI (the "Executive").
RECITALS
A. The Company and the Executive entered into that certain Employment
Agreement with an Effective Date of March 1, 1997 (the "Agreement").
B. The Company and the Executive desire to amend the Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows.
AGREEMENT
1. All capitalized terms shall be deemed to have the meaning ascribed to
them in the Agreement.
2. Section 2(e)(ii) and Section 2(e)(iii) of the Agreement shall be
amended by deleting, in each section "twenty percent (20%)" and substituting
fifty percent (50%) in its place and stead.
3. Except as otherwise noted herein, all other provisions of the
Agreement are hereby ratified and affirmed.
IN WITNESS WHEREOF, the parties hereto set their hand and seal as of the
effective date hereof.
KONOVER PROPERTY TRUST, INC.
By: /s/ C. Cammack Morton
--------------------------------------
C. Cammack Morton
President and Chief Executive Officer
/s/ Patrick M. Miniutti (SEAL)
-----------------------------------------
PATRICK M. MINIUTTI
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated this ____ day of
March 1999, effective as of March 1, 1999, by and between KONOVER PROPERTY
TRUST, INC. (formerly FAC Realty Trust, Inc.) (the "Company") and C. CAMMACK
MORTON (the "Executive").
RECITALS
A. The Company and the Executive entered into that certain Employment
Agreement with an Effective Date of March 1, 1997 (the "Agreement").
B. The Company and the Executive desire to amend the Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows.
AGREEMENT
1. All capitalized terms shall be deemed to have the meaning ascribed to
them in the Agreement.
2. Section 2(e)(ii) and Section 2(e)(iii) of the Agreement shall be
amended by deleting, in each section "twenty percent (20%)" and substituting
fifty percent (50%) in its place and stead.
3. Except as otherwise noted herein, all other provisions of the
Agreement are hereby ratified and affirmed.
IN WITNESS WHEREOF, the parties hereto set their hand and seal as of the
effective date hereof.
KONOVER PROPERTY TRUST, INC.
By: /s/ Patrick M. Miniutti
-------------------------------------
Patrick M. Miniutti
Executive Vice President and
Chief Financial Officer
/s/ C. Cammack Morton (SEAL)
----------------------------------------
C. CAMMACK MORTON
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated this ____ day of
March 1999, effective as of March 1, 1999, by and between KONOVER PROPERTY
TRUST, INC. (formerly FAC Realty Trust, Inc.) (the "Company") and WILLIAM H.
NEVILLE (the "Executive").
RECITALS
A. The Company and the Executive entered into that certain Employment
Agreement with an Effective Date of September 8, 1997 (the "Agreement").
B. The Company and the Executive desire to amend the Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows.
AGREEMENT
1. All capitalized terms shall be deemed to have the meaning ascribed to
them in the Agreement.
2. Section 2(e)(ii) and Section 2(e)(iii) of the Agreement shall be
amended by deleting, in each section "twenty percent (20%)" and substituting
fifty percent (50%) in its place and stead.
3. Except as otherwise noted herein, all other provisions of the
Agreement are hereby ratified and affirmed.
IN WITNESS WHEREOF, the parties hereto set their hand and seal as of the
effective date hereof.
KONOVER PROPERTY TRUST, INC.
By: /c/ C. Cammack Morton
--------------------------------------
C. Cammack Morton
President and Chief Executive Officer
/s/ William H. Neville (SEAL)
-----------------------------------------
WILLIAM H. NEVILLE
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
BETWEEN
FAC REALTY TRUST, INC.
AND
FRED P. STEINMARK
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the 1st day of July,
1998 between FAC REALTY TRUST, INC., a Maryland corporation (the "Company"), and
FRED P. STEINMARK (the "Executive") for employment commencing on the Effective
Date (as hereinafter defined).
W I T N E S S E T H:
WHEREAS, the Company seeks to employ the Executive as its Executive Vice
President of the Company and the Executive agrees to be so employed:
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties agree as follows:
1. Employment.
(a) The Company hereby employs the Executive as Executive Vice
President of the Company and the Executive hereby accepts such employment, on
the terms and subject to the conditions hereinafter set forth.
(b) During the term of his employment under this Employment
Agreement and any extension hereof (all references herein to the term of this
Employment Agreement shall include any extension hereof), the Executive shall be
and have the title of Executive Vice President of the Company and shall devote
his entire business time and all reasonable efforts to his employment and
perform diligently such duties as are customarily performed by executive
vice-presidents of companies similar in size to the Company, together with such
other duties as may be reasonably requested from time to time by the Board of
Directors of the Company, which duties shall be consistent with his position as
set forth above and as provided in Paragraph 2; provided, however, that business
activities by the Executive with respect to passive investments, so long as such
activities do not, alone or in the aggregate, materially interfere with the
Executive's performance of his duties as described in this Paragraph l(b), will
not be deemed inconsistent with the requirements of this Paragraph l(b).
(c) As the Company is headquartered in North Carolina and
Executive will work from the Company's Boca Raton, Florida office for the
Company, the parties agree to work together to mutually accommodate both
Executive and the Company.
2. Term and Positions.
(a) Subject to the provisions for extension or termination
hereinafter stated, the term of this Employment Agreement shall begin as of the
first closing of that transaction described in that document entitled Master
Agreement by and among FAC Realty Trust, Inc., FAC Properties L.P. and the other
signatories to the Master Agreement thereafter contained dated as of February
24, 1998 which is expected to be July 1, 1998 (the "Effective Date") and shall
continue through June 30, 2001 (the "Expiration Date"). As of July 1, 1999 and
each
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<PAGE>
successive anniversary thereof, such term automatically shall be extended
for one (1) additional year, unless; (i) this Employment agreement is terminated
as provided in Paragraph 5 or (ii) either the Company or the Executive shall
give written notice to the other at least thirty (30) days before the first
anniversary of the Effective Date or any subsequent annual anniversary thereof,
that this Employment Agreement shall not be so extended but shall terminate upon
the expiration of the then-existing term (for example, unless such written
notice of non-extension is given on or prior to May 31, 1999, the term of this
Employment Agreement automatically will be extended, effective July 1, 1999,
until June 30, 2002). In the event of a "change of control" (as hereinafter
defined) the term of this Employment Agreement shall automatically be extended
for a term of two (2) years from the then existing termination date.
(b) The Executive shall be entitled to serve as Executive Vice
President of the Company. For service as an officer and employee of the Company,
the Executive shall be entitled to the full protection of the applicable
indemnification provisions of the Restated Certificate of Incorporation and
Bylaws of the Company, as the same may be amended from time to time, which
indemnifications shall remain effective after termination of this Employment
Agreement with respect to Executive's actions and inactions during the term
hereof.
(c) If:
(i) the Company materially changes the Executive's duties
and responsibilities as set forth in Paragraphs l(b) and 2(b) without
his consent;
(ii) the Executive's place of employment is located more
than thirty (30) miles from the geographical center of Boca Raton,
Florida;
(iii) there occurs a material breach by the Company of any
of its obligations under this Employment Agreement, which breach has not
been cured in all material respects within ten (10) days after the
Executive gives notice thereof to the Company;
(iv) there occurs a "change in control" (as hereinafter
defined) of the Company during the term of this Employment Agreement;
then in any such event the Executive shall have the right to terminate his
employment with the Company, but such termination shall not be considered a
voluntary resignation or termination of such employment or of this Employment
Agreement by the Executive but rather a discharge of the Executive by the
Company "without cause" (as defined in Paragraph 5 (a)). The Executive may
exercise such right of termination at any time within three (3) months following
the occurrence of the applicable event described in (i) and (iii) of this
Paragraph 2(c), and within six (6) months following the occurrence of the
applicable event described in (ii) and (iv) of this Paragraph 2(c).
(d) The Executive shall be deemed not to have consented to any
written proposal calling for a material change in his duties and
responsibilities unless he shall give written notice of his consent thereto to
the Board of the Company within fifteen (15) days after
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receipt of such written proposal. If the Executive shall not have given such
consent, the Company shall have the opportunity to withdraw such proposed
material change by written notice to the Executive given within ten (10) days
after the end of said fifteen (15) day period.
(e) The term "change in control" means the first to occur of the
following events but shall specifically exclude any change in control associated
with that Stock Purchase Agreement by and between FAC Realty Trust, Inc. and
Prometheus Southeast Retail, LLC dated as of February 24, 1998 as amended:
(i) any person or group of commonly controlled persons
owns or controls, directly or indirectly, fifty percent (50%) or more
(directly or indirectly, including convertible shares or convertible
partnership units) of the voting control or value of the capital stock
of the Company following the Effective Date;
(ii) any person or group of commonly controlled persons
owning less than five percent (5%) of the voting control or value of the
capital stock of the Company within 30 days following the Effective Date
owns or controls, directly or indirectly, more than twenty percent (20%)
(directly or indirectly, including convertible shares or convertible
partnership units) of the voting control or value of the capital stock
of the Company; or
(iii) following the Effective Date, the stockholders of
the Company approve an agreement to merge or consolidate with another
corporation or other entity resulting (whether separately or in
connection with a series of transactions) in a change in ownership of
twenty percent (20%) or more (directly or indirectly, including
convertible shares or convertible partnership units) of the voting
control or value of the capital stock of the Company, or an agreement to
sell or otherwise dispose of all or substantially all of the Company's
assets (including without limitation, a plan of liquidation or
dissolution), or otherwise approve of a fundamental alteration in the
nature of the Company's business; provided, however, a pledge,
hypothecation or other similar disposition for the purpose of providing
collateral security made at the time the Company enters into a bona fide
financing transaction with a party which at the time of such transaction
is not an affiliate of the Company would not constitute a change in
control.
Notwithstanding the foregoing provisions of this Paragraph 2, the ownership or
acquisition of capital stock by the Executive, C. Cammack Morton, Patrick M.
Miniutti, William H. Neville, and/or their respective affiliates, shall not be
deemed to result in a "change in control" of the Company.
3. Compensation.
During the term of his employment under this Employment Agreement
the Company shall pay or provide, as the case may be, to the Executive the
compensation and other benefits and rights set forth in this Paragraph 3. All
restricted stock given as compensation shall be subject to the Company's 1996
Restricted Stock Plan.
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<PAGE>
(a) The Company shall pay to the Executive a base salary payable
in accordance with the Company's usual pay practices (and in any event no less
frequently than monthly) of (i) cash payments of Two Hundred Twenty-Five
Thousand and No/100 Dollars ($225,000.00) per annum and (ii) such increases (but
not decreases) from time to time (based upon the performance of the Company and
the Executive) as determined by the Board or the Company's Executive
Compensation Committee payable in the form of Common Stock of the Company
similar to (b) below commencing March 1, 1999.
(b) The Company may pay to the Executive bonus compensation on a
calendar year basis pursuant to the terms of the incentive compensation plan
established by the Board from time to time, not later than March 1 following
each calendar year. Such bonus compensation may be payable in the form of cash
or Common Stock of the Company. In the event such bonus is paid in the form of
Common Stock, the determination of shares issued may be based on the cash
equivalent divided by the market price of the Common Stock on or about the date
of determination of the bonus compensation by the Board. Such shares will be
increased by 50% and shall automatically vest on the third anniversary of the
date of issuance (for example, March 1, 2002 for shares issued March 1, 1999)
unless the Executive voluntarily terminates his employment prior to such
anniversary date or his employment is terminated for "cause" (see Paragraph 5
(a) (iii)).
(c) The Company shall provide to the Executive such medical,
hospitalization and dental insurance for himself, his spouse and eligible family
members, as may be available to other officers of the Company and term life
insurance in the amount of not less than $325,000.
(d) The Executive shall participate in all retirement and other
benefit plans of the Company generally available from time to time to officers
of the Company and for which the Executive qualifies under the terms thereof
(and nothing in this Employment Agreement shall or shall be deemed to in any way
affect the Executive's rights and benefits thereunder except as expressly
provided herein).
(e) The Executive shall be entitled to such periods of vacation
and sick leave allowance each year as are determined by the Company's Executive
Compensation Committee for officers generally; provided that Executive shall be
entitled to not less than four weeks (twenty days) of vacation each year.
(f) The Executive shall be entitled to participate in any equity
or other employee benefit plan that is generally available to senior executive
officers, as distinguished from general management, of the Company. The
Executive's participation in and benefits under any such plan shall be on the
terms and subject to the conditions specified in the governing document of the
particular plan.
(g) The Company shall reimburse the Executive or provide him with
an expense allowance during the term of this Employment Agreement for travel,
entertainment and other expenses reasonably and necessarily incurred by the
Executive in connection with the Company's business. The Executive shall furnish
such documentation with respect to reimbursement to be paid hereunder as the
Company shall reasonably request.
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<PAGE>
(h) The Company shall pay to the Executive an annual automobile
allowance of $8,000 payable on a pro rata monthly basis.
4. Payment in the Event of Death or Permanent Disability.
(a) In the event of the Executive's death or "permanent
disability" (as hereinafter defined) during the term of his employment under
this Employment Agreement, the Company shall pay to the Executive (or his
personal representatives, heirs, successors and assigns in the event of his
death) an amount equal to two (2) times the Executive's then effective annual
base salary, as determined under Paragraph 3(a), plus a pro rata portion of the
bonus applicable to the calendar year in which such death or permanent
disability occurs, as such bonus is determined under Paragraph 3(b).
(b) The pro rata portion of the bonus described in Paragraph 4(a)
shall be paid when and as provided in Paragraph 3(b). The remainder of the
benefit to be paid pursuant to Paragraph 4(a) shall be paid within ninety (90)
days after the date of death or permanent disability, as the case may be.
(c) Except as otherwise provided in Paragraphs 2(b), 3(d), 4(a),
4(b) and 8, in the event of the Executive's death or permanent disability, the
Executive's employment hereunder shall terminate and the Executive shall be
entitled to no further compensation or other benefits under this Employment
Agreement, except as to that portion of any unpaid salary and other benefits
accrued and earned by him hereunder up to and including the date of such death
or permanent disability, as the case may be, or pursuant to any agreement
between the Company and the Executive related to any Restricted Shares or Stock
Options held by the Executive.
(d) For purposes of this Employment Agreement, the Executive's
"permanent disability" shall be deemed to have occurred after one hundred twenty
(120) days in the aggregate during any consecutive twelve (12) month period, or
after ninety (90) consecutive days, during which one hundred twenty (120) or
ninety (90) days, as the case may be, the Executive, by reason of his physical
or mental disability or illness, shall have been unable to discharge his duties
under this Employment Agreement. The date of permanent disability shall be such
one hundred twentieth (120th) or ninetieth (90th) day, as the case may be. In
the event either the Company or the Executive, after receipt of notice of the
Executive's permanent disability from the other, dispute that the Executive's
permanent disability shall have occurred, the Executive shall promptly submit to
a physical examination by the chief of medicine of any major accredited hospital
in the Palm Beach County, Florida, area and, unless such physician shall issue
his written statement to the effect that in his opinion, based on his diagnosis,
the Executive is capable of resuming his employment and devoting his full time
and energy to discharging his duties within thirty (30) days after the date of
such statement, such permanent disability shall be deemed to have occurred.
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5. Termination.
(a) The Employment of the Executive under this Employment
Agreement, and the term hereof, may be terminated by the Company:
(i) on the death or permanent disability (as defined
above) of the Executive;
(ii) for "cause" at any time by action of the Board; or
(iii) "without cause" at any time by action of the Board.
For purposes hereof, the term "cause" shall mean:
(A) The Executive's fraud, commission of a felony,
commission of an act or series of repeated acts of dishonesty
which fraud, felony or dishonesty is materially inimical to the
best interests of the Company, or which results in material
injury to the business reputation of the Company, or the
Executive's willful and repeated failure to perform his duties
under this Employment Agreement, which failure has not been cured
within fifteen (15) days after the Company gives notice thereof
to the Executive; or
(B) The Executive's material breach of any material
provision of this Employment Agreement, which breach has not been
cured in all substantial respects within ten (10) days after the
Company gives notice thereof to the Executive.
For purposes hereof, the term "without cause" shall mean any reason
other than those set forth in subparagraphs (a)(i) and (a)(ii) of this Paragraph
5.
The exercise by the Company of its rights of termination under this Paragraph 5
shall be the Company's sole remedy in the event of the Executive's termination,
whether for "cause" or "without cause" the occurrence of the event as a result
of which such right to terminate arises. Upon any termination of this Employment
Agreement, the Executive shall be deemed to have resigned from all offices and
directorships held by the Executive in the Company.
(b) In the event of a termination claimed by the Company to be
for "cause" pursuant to Paragraph 5(a)(ii), the Executive shall have the right
to have the justification for said termination determined by arbitration in
Raleigh, North Carolina. In order to exercise such right, the Executive shall
serve on the Company within thirty (30) days after termination a written request
for arbitration. The Company immediately shall request the appointment of a
single arbitrator by the American Arbitration Association and thereafter the
question of "cause" shall be determined under the rules of the American
Arbitration Association applicable to employment disputes, and the decision of
the arbitrator shall be final and binding on both parties except as otherwise
provided by the arbitrator. The parties shall use all reasonable efforts to
facilitate and expedite the arbitration and shall act to cause the arbitration
to be completed as promptly as
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<PAGE>
possible. During the pendency of the arbitration, the Executive shall continue
to receive all compensation and benefits to which he is entitled hereunder, and
if at any time during the pendency of such arbitration the Company fails to pay
and provide all compensation and benefits to the Executive in a timely manner
the Company shall be deemed to have automatically waived whatever rights it then
may have had to terminate the Executive's employment for cause. Expenses of the
arbitration shall be borne equally by the parties.
(c) In the event of termination pursuant to subparagraph (a)(i)
or (a)(ii) of this Paragraph 5, except as otherwise provided in Paragraphs 2(b),
3(d), 4(a) and 4(b), as applicable, the Executive shall be entitled to no
further compensation or other benefits under this Employment Agreement, except
as to that portion of any unpaid salary and other benefits accrued and earned by
him hereunder up to and including the effective date of such termination.
(d) In the event of termination pursuant to Paragraph 2(c), or
subparagraph (a)(iii) of this paragraph 5, the Executive (in addition to any
rights of the Executive to any restricted shares or stock options pursuant to
the terms of other agreements between the Executive and the Company) shall be
entitled to
(i) severance pay payable within five (5) days of such
termination in a lump sum equal to the sum of (A) the greater of
(x) the total amount of unpaid base salary for the then-unexpired
portion of the term of this Employment Agreement, including any
extended term as provided by Section 2(a) hereof at the
then-effective annual rate of salary, as determined under
Paragraph 3(a) and (y) the amount of one year's base salary at
the then-effective annual rate of salary, and (B) the product of
the number of years (including fractions) representing the
unexpired term of this Employment Agreement (but not less than
one) times an amount equal to the average of the annual bonuses
payable to the Executive under Paragraph 3(b) for the three (3)
full calendar years immediately prior to termination of this
Employment Agreement in which a bonus was payable or such lesser
number of full calendar years during which the Executive was
employed hereunder for which a bonus was payable provided,
however, for purposes of this provision for any period prior for
which a bonus is first payable there shall be an imputed bonus
amount equal to the bonus last determined for the Company's COO,
William H. Neville, except as to the Executive, the same shall be
prorated as applicable,
(ii) during a period equal to the greater of one (1) year
or the unexpired term of this Employment Agreement, all other
benefits to which the Executive would have been entitled during
the term of this Employment Agreement had the Executive's
employment not been terminated,
(iii) during a period equal to the greater of one (1) year
or the unexpired term of this Employment Agreement, the
continuing use of a secretary and office space to be provided by
the Company, in Boca Raton, Florida and
(iv) any other benefits accrued and earned by him
hereunder up to and
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including the effective date of such termination.
(e) In the event of the termination of his employment pursuant to
Paragraph 2(c) or Paragraph 5(a)(iii), the Executive shall have the option to be
released from his obligations under Paragraph 6(a)(i) for the one (1) year
period following the termination of his employment, by releasing the Company
from its obligations under Paragraph 5(d) hereof (other than those provided in
Paragraph 5(d)(iv)). Such option may be exercised by the Executive giving the
Company notice thereof within five (5) days of such termination.
(f) In no event shall the Executive have or be deemed to have any
duty to seek employment or otherwise mitigate damages with respect to any
amounts or benefits due to him upon termination of this Employment Agreement as
provided in this Paragraph 5, nor shall any such amount or benefits be reduced
by reason of any other compensation or benefits which the Executive may earn
following termination of this Employment Agreement.
6. Covenants and Confidential Information.
(a) The Executive acknowledges the Company's reliance and
expectation of the Executive's continued commitment to performance of his duties
and responsibilities during the time when he is employed under this Employment
Agreement. In light of such reliance and expectation on the part of the Company
(but subject to Paragraph 5(d), 5(e) and 5(f) above), during the time when he is
employed under this Employment Agreement and for a period of one (1) year after
the termination of such employment for any reason other than the expiration of
the term hereof in accordance with Paragraph 2(a)(ii) hereof (and, as to clause
(ii) of this subparagraph (a), at any time during and after the term of this
Employment Agreement), the Executive shall not, directly or indirectly, do
either of the following:
(i) Own, manage, control or participate in the ownership,
management, or control of, or be employed or engaged by or otherwise
affiliated or associated as a consultant, independent contractor or
otherwise with, any other corporation, partnership, proprietorship,
firm, association or other business entity primarily engaged in the
business of, or otherwise engage in the business of, acquiring, owning,
developing or managing factory outlet shopping centers in the United
States; provided, however, that the ownership of not more than one
percent (1%) of any class of publicly traded securities of any entity
shall not be deemed a violation of this covenant; or
(ii) Disclose, divulge, discuss, copy or otherwise use or
suffer to be used in any manner, in competition with, or contrary to the
interests of, the Company, any confidential information relating to the
Company's operations, properties or otherwise to its particular business
or other trade secrets of the Company, it being acknowledged by the
Executive that all such information regarding the business of the
Company compiled or obtained by, or furnished to, the Executive while
the Executive shall have been employed by or associated with the Company
is confidential information and the Company's exclusive property;
provided, however, that the foregoing restrictions
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shall not apply to the extent that such information (A) is obtainable in
the public domain or known in the industry generally, (B) becomes
obtainable in the public domain or known in the industry generally,
except by reason of the breach by the Executive of the terms hereof, (c)
was not acquired by the Executive in connection with his employment or
affiliation with the Company, (D) was not acquired by the Executive from
the Company or its representatives, or (E) is required to be disclosed
by rule of law or by order of a court or governmental body or agency.
(b) The Executive agrees and understands that the remedy at law
for any breach by him of this Paragraph 6 may be inadequate and that the damages
following such breach are not readily susceptible to being measured in monetary
terms. Accordingly, it is acknowledged that, upon adequate proof of the
Executive's violation of any legally enforceable provision of this Paragraph 6,
the Company may be entitled to immediate injunctive relief and may obtain a
temporary order restraining any threatened or further breach. Nothing in this
Paragraph 6 shall be deemed to limit the Company's remedies at law or in equity
for any breach by the Executive of any of the provisions of this Paragraph 6
which may be pursued or availed of by the Company.
(c) The Executive has carefully considered the nature and extent
of the restrictions upon him and the rights and remedies conferred upon the
Company under this Paragraph 6, and hereby acknowledges and agrees that the same
are reasonable in time and territory, are designed to eliminate competition
which otherwise would be unfair to the Company, do not stifle the inherent skill
and experience of the Executive, would not operate as a bar to the Executive's
sole means of support, are fully required to protect the legitimate interests of
the Company and do not confer a benefit upon the Company disproportionate to the
detriment to the Executive.
7. Stock Options. The Executive shall receive stock options under the
Company's Amended and Restated 1993 Employee Stock Incentive Plan as more fully
described in that certain Non-Qualified Stock Option Agreement dated July 1,
1998 the terms and conditions of which are incorporated herein by reference.
8. Restricted Stock. The Executive shall receive grants of 20,000 shares
and 7,000 shares (the "Restricted Shares") of restricted common stock of the
Company ("Common Stock") granted under the Company's 1996 Restricted Stock Plan.
Prior to vesting, the Restricted Shares will be registered under the Securities
Act on Form S-8, will be listed on the NYSE and following vesting thereof will
be freely tradable subject to applicable provisions of Rule 144 promulgated
under the Securities Act. With respect to each of said grants, the Company and
the Executive shall enter into Restricted Stock Agreements in a form mutually
agreed upon by the Company and the Executive providing: as to (a) the 20,000
Restricted Shares (i) the 20,000 Restricted Shares shall vest in three (3) equal
installments of thirty three and one-third percent (33.33%) on March 1, 1999 and
each successive anniversary thereof (provided as to each installment that the
Executive continues to be employed by the Company) and as to the 7,000
Restricted Shares the same shall automatically vest on January 1, 2001 unless
the Executive voluntarily terminates his employment prior to such vesting date
or his employment is terminated for "cause" as defined in paragraph 5(a) hereof
and (b) all unvested Restricted Shares
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shall immediately vest upon the Executive's death or permanent disability (as
defined in Paragraph 4(d)) during his employment by the Company; or termination
of the Executive's employment by the Company pursuant to Paragraph 2(c) or
Paragraph 5(a)(iii); or pursuant to Paragraph 5(a)(iii) if such termination
occurs within three (3) months prior to, at the time of, or within one (1) year
following a "change of control" (as defined in Section 2(e) hereof) or provided
that such change is effected, the execution of a definitive agreement therefor
(notwithstanding the requirement of continued employment in subparagraph (a)
above, upon such termination of employment).
9. Tax Adjustment Payments. If all or any portion of the amounts payable
to the Executive under this Employment Agreement (together with all other
payments of cash or property, whether pursuant to this Employment Agreement or
otherwise, including, without limitation, the issuance of common stock of the
Company, or the granting, exercise or termination of options therefor)
constitutes "excess parachute payments" within the meaning of Section 280G of
the Code that are subject to the excise tax imposed by Section 4999 of the Code
(or any similar tax or assessment), the amounts payable hereunder shall be
increased (in the same manner, to the extent applicable, without duplication, as
provided in (i), (ii) and (iii) below) to the extent necessary to place the
Executive in the same after-tax position as he would have been in had no such
tax assessment been imposed on any such payment paid or payable to the Executive
under this Employment Agreement or any other payment that the Executive may
receive in connection therewith. The determination of the amount of any such tax
or assessment and the incremental payment required hereby in connection
therewith shall be made by the accounting firm employed by the Executive within
thirty (30) calendar days after such payment and said incremental payment shall
be made within five (5) calendar days after such determination has been made.
If, after the date upon which the payment required by this Paragraph 9 has been
made, it is determined (pursuant to final regulations or published rulings of
the Internal Revenue Service, final judgment of a court of competent
jurisdiction, Internal Revenue Service audit assessment, or otherwise) that the
amount of excise or other similar taxes or assessments payable by the Executive
is greater than the amount initially so determined, then the Company shall pay
the Executive an amount equal to the sum of: (i) such additional excise or other
taxes, plus (ii) any interest, fines and penalties resulting from such
underpayment, plus (iii) an amount necessary to reimburse the Executive for any
income, excise or other tax assessment payable by the Executive with respect to
the amounts specified in (i) and (ii) above, and the reimbursement provided by
this clause (iii), in the manner described above in this Paragraph 9. Payment
thereof shall be made within five (5) calendar days after the date upon which
such subsequent determination is made.
10. Representations and Warranties of the Company.
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland and has all
requisite corporate power and authority to enter into, execute and deliver this
Employment Agreement, fulfill its obligations hereunder and consummate the
transactions contemplated hereby.
(b) The execution and delivery of, performance of obligations
under, and consummation of the transactions contemplated by, this Employment
Agreement have been duly
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authorized and approved by all requisite corporate action by or in respect of
the Company, and this Employment Agreement constitutes the legally valid and
binding obligation of the Company, enforceable by the Executive in accordance
with its terms.
(c) No provision of the Company's governing documents or any
agreement to which it is a party or by which it is bound or of any material law
or regulation of the kind usually applicable and binding upon the Company
prohibits or limits its ability to enter into, execute and deliver this
Employment Agreement, fulfill its respective obligations hereunder and
consummate the transactions contemplated hereby.
11. Miscellaneous.
(a) The Executive represents and warrants that he is not a party
to any agreement, contract or understanding, whether employment or otherwise,
which would restrict or prohibit him from undertaking or performing employment
in accordance with the terms and conditions of this Employment Agreement.
(b) The provisions of this Employment Agreement are severable and
if any one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions and any partially
unenforceable provision to the extent enforceable nevertheless shall be binding
and enforceable.
(c) The rights and obligations of the Company under this
Employment Agreement shall inure to the benefit of, and shall be binding on, the
Company and its successors and assigns, and the rights and obligations of the
Executive under this Employment Agreement shall inure to the benefit of, and
shall be binding upon, the Executive (other than obligations to perform services
and to refrain from competition and disclosure of confidential information) and
his heirs, personal representatives and assigns.
(d) Any controversy or claim arising out of or relating to this
Employment Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the Rules of the American Arbitration Association applicable to
employment disputes then pertaining in the City of Raleigh, North Carolina, and
judgment upon the award rendered by the arbitrator or arbitrators may be entered
in any court having jurisdiction thereof. The arbitrator or arbitrators shall be
deemed to possess the powers to issue mandatory orders and restraining orders in
connection with such arbitration; provided, however, that nothing in this
Paragraph 11(d) shall be construed so as to deny the Company the right and power
to seek and obtain injunctive relief in a court of equity for any breach or
threatened breach by the Executive of any of his covenants contained in
Paragraph 6 hereof.
(e) Any notice to be given under this Employment Agreement shall
be personally delivered in writing or shall have been deemed duly given when
received after it is posted in the United States mail, postage prepaid,
registered or certified return receipt requested, and if mailed to the Company,
shall be addressed to its principal place of business, attention: President, and
if mailed to the Executive, shall be addressed to him at his home address last
known on the records of the Company, or at such other address or addresses as
either the
12
<PAGE>
Company or the Executive may hereafter designate in writing to the
other. All notices provided for hereunder to the parties shall be accompanied by
simultaneous copy of such notice sent to the attorneys for such parties, as
follows:
If to the Executive: Fred P. Steinmark
3757 N.W. 52nd Street
Boca Raton, Florida 33496
If to the Company: FAC Realty, Inc.
11000 Regency Parkway,
Third Floor East Tower
Cary, North Carolina 27511
Attention: President
Notices sent by Federal Express or similar overnight delivery service or by
facsimile transmissions shall also constitute due notice under this paragraph
11(e), effective upon receipt thereof.
(f) The failure of either party to enforce any provision or
provisions of this Employment Agreement shall not in any way be construed as a
waiver of any such provision or provisions as to any future violations thereof,
nor prevent that party thereafter from enforcing each and every other provision
of this Employment Agreement. The rights granted the parties herein are
cumulative and the waiver of any single remedy shall not constitute a waiver of
such party's right to assert all other legal remedies available to it under the
circumstances.
(g) This Employment Agreement supersedes all prior agreements and
understandings between the parties made prior to the date hereof and may not be
modified or terminated orally. No modification, termination or attempted waiver
shall be valid unless in writing and signed by the party against whom the same
is sought to be enforced.
(h) This Employment Agreement shall be governed by and construed
according to the laws of the State of North Carolina.
(i) Captions and paragraph headings used herein are for
convenience and are not a part of this Employment Agreement and shall not be
used in construing it.
(j) Where necessary or appropriate to the mean hereof, the
singular and plural shall be deemed to include each other, and the masculine,
feminine and neuter shall be deemed to include each other.
(k) This Employment Agreement may be executed in multiple
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument. This Employment Agreement
may be executed by facsimile signature.
13
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment Agreement on the
day and year first set forth above.
FAC REALTY TRUST, INC.
a Maryland corporation
Attest:______________________
(Corporate Seal)
By:____________________________________
C. Cammack Morton
President
Chief Executive Officer
_________________________________(SEAL)
FRED P. STEINMARK
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated this ____ day of
March 1999, effective as of March 1, 1999, by and between KONOVER PROPERTY
TRUST, INC. (formerly FAC Realty Trust, Inc.) (the "Company") and FRED P.
STEINMARK (the "Executive").
RECITALS
A. The Company and the Executive entered into that certain Employment
Agreement dated as of July 1, 1998 (the "Agreement").
B. The Company and the Executive desire to amend the Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows.
AGREEMENT
1. All capitalized terms shall be deemed to have the meaning ascribed to
them in the Agreement.
2. Section 2(e)(ii) and Section 2(e)(iii) of the Agreement shall be
amended by deleting, in each section "twenty percent (20%)" and substituting
fifty percent (50%) in its place and stead.
3. Except as otherwise noted herein, all other provisions of the
Agreement are hereby ratified and affirmed.
IN WITNESS WHEREOF, the parties hereto set their hand and seal as of the
effective date hereof.
KONOVER PROPERTY TRUST, INC.
By: /s/ C. Cammack Morton
--------------------------------------
C. Cammack Morton
President and Chief Executive Officer
/s/ Fred P. Steinmark (SEAL)
-----------------------------------------
FRED P. STEINMARK
EXHIBIT 10.10
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT dated this ____ day of
March 1999, effective as of March 1, 1999, by and between KONOVER PROPERTY
TRUST, INC. (formerly FAC Realty Trust, Inc.) (the "Company") and CHRISTOPHER G.
GAVRELIS (the "Executive").
RECITALS
A. The Company and the Executive entered into that certain Employment
Agreement with an Effective Date of December 15, 1995 (the "Agreement") which
was amended by a First Amendment to Employment Agreement dated as of May 30,
1997.
B. The Company and the Executive desire to amend the Agreement, to,
among other things, extend the term thereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows.
AGREEMENT
1. All capitalized terms shall be deemed to have the meaning ascribed to
them in the Agreement.
2. Section 2(a) of the Agreement is hereby deleted and is replaced by
the following: "Subject to the provisions for extension or termination
hereinafter stated, the term of this Employment Agreement shall begin on
December 15, 1995 (the "Effective Date") and shall continue through February 28,
2002 (the "Expiration Date"). As of March 1, 2000 and each successive
anniversary thereof, such term automatically shall be extended for one (1)
additional year unless this Employment Agreement is terminated as provided in
Paragraph 5(ii) either the Company or the Executive shall give written notice to
the other at least thirty (30) days before the first anniversary thereof, that
this Employment Agreement shall not be so extended but shall terminate upon the
expiration of the then existing term (for example, unless such written notice of
non-extension is given on or prior to January 28, 2000, the term of this
Employment Agreement automatically will be extended, effective March 1, 2000,
until February 28, 2003). In the event of a "change of control" (as hereinafter
defined) the term of this Employment Agreement shall automatically be extended
for a term of two (2) years from the then existing Termination Date".
3. Section 2(e)(ii) and Section 2(e)(iii) of the Agreement shall be
amended by deleting, in each section "twenty percent (20%)" and substituting
fifty percent (50%) in its place and stead.
4. Except as otherwise noted herein, all other provisions of the
Agreement are hereby ratified and affirmed.
IN WITNESS WHEREOF, the parties hereto set their hand and seal as of the
effective date hereof.
KONOVER PROPERTY TRUST, INC.
By: -----------------------------
C. Cammack Morton
President and Chief Executive Officer
---------------------------------
CHRISTOPHER G. GAVRELIS
- - --------------------------------------------------------------------------------
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING
SECURITIES THAT HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
- - --------------------------------------------------------------------------------
KONOVER PROPERTY TRUST, INC.
AMENDED AND RESTATED
1995 OUTSIDE DIRECTORS' STOCK AWARD PLAN
Konover Property Trust, Inc. hereby amends and restates, as of March 23,
1999, its 1995 Outside Directors' Stock Award Plan for the benefit of certain
members of the Board of Directors of the Company, subject to the following
provisions:
SECTION 1. PURPOSES. The purposes of the Plan are to secure for the
Company and its stockholders the benefits of the incentive inherent in increased
Common Stock ownership by the Outside Directors and to provide the Outside
Directors with the opportunity to increase their proprietary interest in the
Company.
SECTION 2. DEFINITIONS. For the purposes of this Plan and any Award, the
following words shall have the meanings indicated, unless the context clearly
requires otherwise:
"AWARD" means an Option or a grant of shares of Common Stock, in
either case pursuant to the terms and conditions of the Plan.
"AWARDEE" means an Outside Director granted an Award under the
Plan.
"BOARD" means the Board of Directors of the Company.
"COMMITTEE" means the Executive Compensation Committee of the
Board.
"COMMON STOCK" means the common stock of the Company, par value
$0.01 per share, subject to the right of the Company to change the
authorized number of shares of such class and to provide no par or a
change in par value for such stock.
"COMPANY" means Konover Property Trust, Inc., a Maryland
corporation.
"DIRECTOR" means a member of the Board.
"EFFECTIVE DATE" means the date on which the Plan is adopted by
the Company, subject to approval by the stockholders of the Company.
"FAIR MARKET VALUE" means, with respect to shares of Common
Stock, the closing price of the Common Stock on the New York Stock
Exchange or such
<PAGE>
other securities exchange which the Common Stock is listed on the
relevant date.
"OPTION" means a stock option that is not qualified under Section
422 of the Internal Revenue Code of 1986, as amended.
"OUTSIDE DIRECTOR" means any Director who is not an officer or
employee of the Company or any Subsidiary.
"PLAN" means the Konover Property Trust, Inc. Amended and
Restated 1995 Outside Directors' Stock Award Plan, as amended from time
to time in accordance herewith.
"PURCHASE PERIOD" shall mean either the period of six (6) months
commencing on January 1st and concluding on June 30th of each year, or
the period of six (6) months commencing on July 1st and concluding on
December 31st of each year.
"RETAINER FEE" means the annual retainer fee earned by each
Outside Director.
"SUBSIDIARY" means any corporation (other than the Company),
partnership, joint venture, organization or other entity of which 50
percent or more of the total combined voting power of all classes of
equity of such entity or 50 percent or more of the capital account or
profit interest of such entity is owned, directly or indirectly, by the
Company or a Subsidiary, whether or not such entity now exists or is
hereafter organized or acquired by the Company or a Subsidiary.
SECTION 3. ADMINISTRATION. The Plan shall be administered by the
Committee. The Committee shall have the powers vested in it by the terms of the
Plan, such powers to include authority (within the limitations described herein)
to establish the form, terms and conditions of Awards and of Award agreements,
if any, embodying Awards made under the Plan. Subject to the provisions of the
Plan, the Committee shall have the power to construe the Plan, to determine all
questions arising thereunder and to adopt and amend such rules and regulations
for the administration of the plan as it may deem desirable. Any decision of the
Committee in the administration of the Plan, as described herein, shall be final
and conclusive. The Committee may act only by a majority of its members in
office, except that the members thereof may authorize any one or more of their
number or the Secretary or any other officer of the Company to execute and
deliver documents on behalf of the Committee. No member of the Committee shall
be liable for anything done or omitted to be done by such member or by any other
member of the Board in connection with the Plan except for such member's own
willful misconduct or as expressly provided by statute. The members of the
Committee serve for one-year terms, and they may be removed by majority vote of
the Board. However, pursuant to the Stockholders Agreement (the "Agreement")
entered into with Prometheus Southeast Retail, LLC (the "Investor"), dated
February 24, 1998, one member of the Committee shall be an Investor Nominee (as
defined in the Agreement).
<PAGE>
SECTION 4. AMOUNT OF STOCK. The stock which may be issued and sold under
the Plan will be the Common Stock, of a total number not exceeding one hundred
fifty thousand (150,000) shares, subject to adjustment as provided in Section 8.
The stock to be issued may be either authorized and unissued shares or issued
shares acquired by the Company. All or any shares of Common Stock subject to an
Award which for any reason are not issued or are reacquired under the Award may
again be made subject to an Award under the Plan.
SECTION 5. ELIGIBILITY. Each Outside Director shall receive Awards in
accordance with Section 6.
SECTION 6. AWARDS. The Committee may provide for Awards to Outside
Directors in consideration for their service to the Company. The Committee shall
determine to which Outside Directors any such Awards shall be granted hereunder.
The Committee shall specify the number of shares of Common Stock subject to each
Award provided for under this Section 6, or the formula pursuant to which such
number shall be determined, the Outside Director(s) to receive any such Award,
the date or triggering event of any such Award and the vesting and expiration
terms applicable to such Award. Awards shall be issued on the first day of
January and the first day of July for the preceding six months.
SECTION 7. TERMS AND CONDITIONS OF AWARDS. Awards granted pursuant to
the Plan need not be identical, but each Award shall be subject to the following
general terms and conditions:
(a) Terms and Restrictions Upon Shares: The Committee may provide
that the shares of Common Stock issued upon exercise of an Option or
receipt of a stock grant shall be subject to such further conditions,
restrictions or agreements as the Committee in its discretion may
specify prior to the exercise of such Option or receipt of such stock
grant, including without limitation, deferrals on issuance, conditions
on vesting or transferability, and forfeiture or repurchase provisions.
The Committee may waive conditions to and/or accelerate exercisability
of an Option or stock grant, either automatically upon the occurrence of
specified events (including in connection with a change of control of
the Company) or otherwise in its discretion.
(b) Transferability of Option: Unless otherwise provided by the
Committee, each Option shall be transferable only by will or the laws of
descent and distribution.
(c) Option Price: The exercise price for each Option shall be
established by the Committee or under a formula established by the
Committee. The exercise price shall not be less than 85% of the lower of
the Fair Market Value of the stock on the first or last day of the
applicable Purchase Period, except that in the event that receipt of
Options is conditioned on the Outside Director electing before the
<PAGE>
period for which the retainer is earned to forego his or her right to
all or any part of his or her cash retainer or other fees, the aggregate
exercise price of such Options shall not be less than 85% of the lower
of the Fair Market Value of the number of shares of Common Stock subject
to such options on first or last day of the applicable Purchase Period,
with that amount then further reduced by the amount of retainer or other
fees such Outside Director has elected to forego.
(d) Stock Grant Terms: Stock grants under the Plan may, in the
sole discretion of the Committee, but need not, be conditioned upon the
Outside Director paying cash or cash-equivalent consideration or
agreeing to forego other compensation for the Common Stock covered by
the stock grant. Stock grants under the Plan may be subject to such
conditions, restrictions or other vesting terms as are established in
the sole discretion of the Committee. The conditions, restrictions or
vesting terms may be contingent upon the passage of time, continued
service or achievement of Company or individual performance goals, as
specified by the Committee. If a stock grant is conditioned upon the
Outside Director paying cash or cash-equivalent consideration or
agreeing to forego other compensation for the Common Stock covered by
such grant, the price of such shares shall not be less than 85% of the
lower of the Fair Market Value of the number of shares subject to such
grant on the first or last day of the applicable Purchase Period, with
that amount further reduced by the amount of retainer or other fees the
Outside Director has elected to forego.
(e) Award Agreements: The Committee may require any Awardee to
enter into an Award agreement with the Company in a form specified by
the Committee agreeing to the terms and conditions of the Award and such
other matters consistent with the Plan as the Committee in its sole
discretion shall determine. Certificates representing Award shares
granted subject to restriction shall bear a legend in such form as may
be prescribed by the Committee.
SECTION 8. EFFECT OF CERTAIN TRANSACTIONS. The number of shares of
Common Stock reserved for issuance under the Plan shall be appropriately
adjusted by the Committee, whose determination shall be conclusive, to reflect
any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, a consolidation of shares, the payment of a stock
dividend, or any other capital adjustment affecting the number of issued shares
of Common Stock. In the event that the outstanding shares of Common Stock shall
be changed into or exchanged for a different number or kind of shares of stock
or other securities of the Company or another corporation, whether through
reorganization, recapitalization, merger, consolidation, or otherwise, then
there shall be substituted for each share of Common Stock reserved for issuance
under the Plan, but not yet awarded under the Plan, the number and kind of
shares of stock or other securities into which each outstanding share of Common
Stock shall be so changed or for which each such share shall be exchanged.
SECTION 9. AMENDMENT OR DISCONTINUANCE. The Plan may be amended at any
time and from time to time by the Board as the Board shall deem advisable
including, but
<PAGE>
not limited to, amendments necessary to qualify for any exemption or to comply
with applicable law or regulations; provided, however, that any such amendment
shall be subject to further approval by the stockholders of the company to the
extent required by law, the New York Stock Exchange or as deemed advisable by
the Board. No amendment of the Plan shall materially and adversely affect any
right of any Awardee with respect to any Award theretofore granted, without such
Awardee's written consent. Any such action to amend or discontinue the Plan
shall be adopted by formal action of the Board and executed by an officer or
persons authorized to act on behalf of the Company.
SECTION 10. TERMINATION. This Plan shall terminate upon the earlier of
the following dates or events to occur:
(a) upon the adoption of a resolution of the Board terminating
the Plan; or
(b) May 14, 2005 (which date is ten years from the date the Plan
was initially approved and adopted by the stockholders of the Company).
Any action under Section 10(a) to terminate the Plan shall be adopted by
formal action of the Board and executed by an officer or person authorized to
act on behalf of the Company.
SECTION 11. MISCELLANEOUS PROVISIONS.
(a) Except as expressly provided for in the Plan, no Outside
Director or other person shall have any claim or right to be granted an
Award under the Plan. Neither the Plan nor any action taken thereunder
shall be construed as giving any Outside Director any right to be
retained in the service of the Company.
(b) An Awardee's right and interest under the Plan may not be
assigned or transferred in whole or in part either directly or by
operation of law or otherwise (except in the event of an Awardee's
death, by will or the laws of descent and distribution), including, but
not by way of limitation, execution, levy, garnishment, attachment,
pledge, bankruptcy, or in any other manner, and no such right or
interest of any participant in the Plan shall be subject to any
obligation or liability of such participant.
(c) No shares of Common Stock shall be issued hereunder unless
counsel for the Company shall be satisfied that (i) such issuance will
be in compliance with applicable federal and state securities laws,
including, but not limited to, listing requirements and New York Stock
Exchange requirements, and any other laws or regulations applicable to
the delivery of such shares, and (ii) the certificates representing
shares of Common Stock awarded bear any and all legends necessary in
order to comply with such laws and regulations.
(d) It shall be a condition to the obligation of the Company to
issue an Award, that the Awardee pay to the Company, upon its demand,
such amount as
<PAGE>
may be requested by the Company for the purpose of satisfying any
liability to withhold federal, state, or local income or other taxes. If
the amount requested is not paid, the Company may refuse to issue an
Award.
(e) The expenses of the Plan shall be borne by the Company.
(f) The Plan shall be unfunded. The Company shall not be required
to establish any special or separate fund or to make any other
segregation of assets to assure the issuance of Awards under the Plan
and the issuance of Awards shall be subordinate to the claims of the
Company's general creditors.
(g) By accepting any Award or other benefit under the Plan, each
Awardee and each person claiming under or through such person shall be
conclusively deemed to have indicated his or her acceptance and
ratification of, and consent to, any action taken under the Plan by the
Company or the Board.
(h) All section references herein refer to sections of this Plan
unless specifically noted otherwise.
(i) Any notice or other communication provided for herein shall
be given in writing by registered or certified mail, return receipt
requested, or by facsimile, telecopy, or other means of electronic
communication, reasonably calculated in any instance to be received by
the receiving party or his, her or its authorized agent at the receiving
party's last-known address. The notice or communication shall be deemed
as delivered when it arrives at such address.
Name State of Formation
KPT Outparcels, Inc. DE
KPT Properties Holding Corp. MD
FSA Finance, Inc. DE
Factory Stores Management, Inc. DE
KPT Properties, L.P. DE
KPT REMIC Loan, Inc. DE
FAC Mortgage Formation, Inc. DE
FAC Tampa Formation, Inc. DE
Mobile KPT Formation, Inc. DE
RVA One Formation, Inc. NC
RVA Two Formation, Inc. NC
Square One KPT Formation, Inc. DE
Atlantic Realty LLc DE
Celebration KPT LLC DE
DPKPT LLC DE
Falls KPT LLC DE
KPT Mortgage LLC DE
KPT NON-REMIC Loan LLC DE
KPT REMIC Loan LLC DE
Mobile KPT LLC DE
Mount Pleasant KPT LLC DE
Park Place KPT LLC DE
RVA One, LLC VA
RVA Two, LLC VA
Square One KPT LLC DE
WPKPTLLC DE
Wakefield Investment, Inc. DE
RMC/Konover Property Trust, Inc. MD
Carolina FAC LP DE
Lenoir FAC LLC DE
Lenoir FAC II LLC DE
Tampa KPT LLC DE
Tampa Formation, Inc. DE
Dukes KPT LLC DE
Waverly Place KPT, LLC DE
Wakefield Commercial, LLC NC
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-03240 and Form S-8 No. 33-29491 both amended on March 11, 1998)
pertaining to the Konover Property Trust, Inc. Amended and Restated 1993
Employee Stock Incentive Plan, the Konover Property Trust, Inc. 1995 Outside
Directors' Stock Award Plan, the Konover Property Trust, Inc. 1996 Restricted
Stock Plan and the Konover Property Trust, Inc. 1997 Qualified Employee Stock
Purchase Plan 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. for the year ended December 31, 1996,
included in this Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
March 25, 1999
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Form S-8, Nos. 333-3240 and 333-29491) and related Prospectuses of Konover
Properties Trust, Inc. of our report dated February 19, 1999, with respect to
the consolidated financial statements and schedule of Konover Properties Trust,
Inc. included in the Annual Report of Form 10-K for the year ended December 31,
1998.
/s/ Arthur Andersen LLP
Raleigh, North Carolina
March 31, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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0
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