<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________.
Commission file number 001-12844
----------------
JDN REALTY CORPORATION
----------------------
(Exact name of registrant as specified in its charter)
Maryland 58-1468053
------------------------------- ----------
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
359 East Paces Ferry Road, NE, Suite 400, Atlanta, GA 30305
------------------------------------------------------------
(Address of principal executive offices - zip code)
(404) 262-3252
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year, if
changed since last report)
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
------ --------
As of October 31, 2000, 32,752,354 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
<PAGE>
FORWARD-LOOKING STATEMENTS IN FORM 10-Q
Management has included herein certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. When used,
statements which are not historical in nature including the words "anticipate,"
"estimate," "should," "expect," "believe," "intend" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements
include, for example, statements regarding JDN Realty Corporation's liquidity,
the availability of capital resources, capital expenditures, continuing
relationships with tenants and vendors, and litigation. Forward-looking
statements are, by their nature, subject to known and unknown risks and
uncertainties. Among the factors that could cause actual results to differ
materially from those anticipated are the following: changes in the composition
of senior management and the Board of Directors described in this report and in
JDN Realty Corporation's Annual Report on Form 10-K for the year ended December
31, 1999; any additional future changes in the composition of senior management
and the Board of Directors; a decrease in the number of development assignments
from Wal-Mart and Lowe's; the ability to attract and retain key employees; the
impact of restated financial statements in JDN Realty Corporation's Annual
Report on Form 10-K for the year ended December 31, 1999; any future default
under any of JDN Realty Corporation's or JDN Development Company, Inc.'s bank
credit facilities and the impact of special terms and conditions of such
facilities, including the reduced availability and increased interest costs
thereunder; business conditions and the general economy, especially as they
affect interest rates and value-oriented retailers; the federal, state and local
regulatory environment; the ability to refinance maturing debt obligations on
acceptable terms; the availability of debt and equity capital with acceptable
terms and conditions including, without limitation, the availability of bank
credit to fund development activities; the ability to sell operating shopping
center properties and parcels of land on schedule and upon economically
favorable terms; the availability of partners for joint venture projects and the
ability to negotiate favorable joint venture terms; the availability of new
development opportunities; changes in the financial condition or corporate
strategy of or business relations with primary retail tenants, in particular
those of Wal-Mart and Lowe's; the outcome and costs of pending litigation and
investigations; the ability to fund, complete and lease existing development and
redevelopment projects on schedule and within budget; tax legislation affecting
the development business of JDN Realty Corporation and JDN Development Company,
Inc.; and the ability of JDN Realty Corporation to maintain its qualification as
a REIT. Other risks, uncertainties and factors that could cause actual results
to differ materially from those projected are detailed from time to time in
press releases and reports filed by JDN Realty Corporation with the Securities
and Exchange Commission, including Forms 8-K, 10-Q and 10-K. For example, see
"Risk Factors" under Item 1 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
1
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Condensed Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income - Three Months Ended September 30, 2000
and 1999 4
Condensed Consolidated Statements of Income - Nine Months Ended September 30, 2000
and 1999 5
Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30,
2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
</TABLE>
2
<PAGE>
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Shopping center properties held for use in operations, at cost:
Land $ 199,818 $189,506
Buildings and improvements 603,515 644,089
---------- ----------
803,333 833,595
Less: accumulated depreciation and amortization (73,260) (69,321)
---------- ----------
Shopping center properties held for use in operations, net 730,073 764,274
Shopping center properties under development 56,343 104,609
Shopping center properties held for sale 44,995 22,463
---------- ----------
Total shopping center properties 831,411 891,346
Cash and cash equivalents 2,301 2,076
Proceeds receivable from deferred exchange - 40,476
Rents receivable 9,111 10,272
Investments in and advances to unconsolidated entities 231,355 154,438
Deferred costs, net of amortization 6,657 5,099
Other assets 13,942 13,088
---------- ----------
$1,094,777 $1,116,795
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unsecured notes payable $ 234,682 $234,635
Lines of credit and term loan 232,000 235,000
Mortgage notes payable 98,405 101,247
Accounts payable and accrued expenses 9,953 16,328
Other liabilities 5,943 9,500
---------- ----------
Total liabilities 580,983 596,710
---------- ----------
Third party investors' interest 3,504 4,256
Shareholders' Equity
Preferred stock, par value $.01 per share -
authorized 20,000,000 shares: 9 3/8% Series A
Cumulative Redeemable Preferred Stock,
liquidation preference $25 per share, issued and
outstanding 2,000,000 shares in 2000 and 1999,
respectively 20 20
Common stock, par value $.01 per share -
authorized 150,000,000 shares, issued and
outstanding 32,840,659 and 33,401,468 shares
in 2000 and 1999, respectively 328 334
Paid-in capital 512,445 518,504
Accumulated deficit (2,503) (3,029)
---------- ----------
510,290 515,829
---------- ----------
$1,094,777 $1,116,795
========== ==========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
------------ ------------
(restated)
(In thousands)
Revenues:
<S> <C> <C>
Minimum and percentage rents $23,045 $23,633
Recoveries from tenants 2,845 2,977
Other revenue 1,905 46
------- -------
Total revenues 27,795 26,656
Operating expenses:
Operating and maintenance 1,992 2,065
Real estate taxes 1,538 1,564
General and administrative 1,901 1,878
Corporate investigation and legal costs 479 -
Severance expense 3,376 -
Depreciation and amortization 5,200 5,651
------- -------
Total operating expenses 14,486 11,158
------- -------
Income from operations 13,309 15,498
Other income (expense):
Interest expense, net (6,100) (4,866)
Other income, net 716 728
Equity in net income of unconsolidated entities 319 1,013
------- -------
Income before minority interest in net income of consolidated
subsidiaries and net gain on real estate sales 8,244 12,373
Minority interest in net income of consolidated subsidiaries (42) (55)
------- -------
Income before net gain on real estate sales 8,202 12,318
Net gain on real estate sales 3,821 6,283
------- -------
Net income 12,023 18,601
Dividends to preferred shareholders (1,172) (1,172)
------- -------
Net income attributable to common shareholders $10,851 $17,429
======= =======
Net income per common share
Basic $ 0.34 $ 0.53
------- -------
Diluted $ 0.34 $ 0.52
------- -------
Dividends per common share $ 0.300 $ 0.395
======= =======
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
-------- ----------
(restated)
(In thousands)
Revenues:
<S> <C> <C>
Minimum and percentage rents $ 69,528 $ 68,900
Recoveries from tenants 8,792 9,322
Other revenue 1,907 64
-------- --------
Total revenues 80,227 78,286
Operating expenses:
Operating and maintenance 6,129 6,128
Real estate taxes 4,611 4,942
General and administrative 5,769 5,918
Corporate investigation and legal costs 2,729 -
Severance expense 3,711 -
Impairment losses on shopping centers held for sale 1,289 -
Depreciation and amortization 16,157 16,428
-------- --------
Total operating expenses 40,395 33,416
-------- --------
Income from operations 39,832 44,870
Other income (expense):
Interest expense, net (18,738) (12,983)
Other income, net 1,225 1,496
Equity in net income of unconsolidated entities 2,196 3,126
-------- --------
Income before minority interest in net income of consolidated
subsidiaries and net gain on real estate sales 24,515 36,509
Minority interest in net income of consolidated subsidiaries (180) (160)
-------- --------
Income before net gain on real estate sales 24,335 36,349
Net gain on real estate sales 12,350 6,283
-------- --------
Net income 36,685 42,632
Dividends to preferred shareholders (3,516) (3,516)
-------- --------
Net income attributable to common shareholders $ 33,169 $ 39,116
======== ========
Net income per common share:
Basic $ 1.03 $ 1.18
======== ========
Diluted $ 1.02 $ 1.16
======== ========
Dividends per common share $ 0.995 $ 1.150
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
--------- --------
(In thousands)
<S> <C> <C>
Net cash provided by operating activities $ 39,038 $ 40,844
Cash flows from investing activities:
Development of shopping center properties (27,955) (140,314)
Improvements to shopping center properties (4,328) (937)
Investments in and advances to unconsolidated entities (75,473) (16,619)
Proceeds from real estate sales 79,796 27,837
Other (1,276) 953
--------- ---------
Net cash used in investing activities (29,236) (129,080)
Cash flows from financing activities:
Proceeds from lines of credit 151,996 529,041
Proceeds from mortgages and notes payable - 39,454
Principal payments on lines of credit (154,996) (442,559)
Principal payments on mortgages and notes payable (2,269) (1,099)
Proceeds from issuance of common shares, net of
underwriting commissions and offering expenses - 11,238
Repurchases of common stock (6,843) -
Distributions paid to preferred shareholders (3,516) (3,516)
Distributions paid to common shareholders (32,644) (38,464)
Proceeds from deferred exchange of properties 40,476 -
Other (1,781) (2,487)
--------- ---------
Net cash (used in) provided by financing activities (9,577) 91,608
--------- ---------
Increase in cash and cash equivalents 225 3,372
Cash and cash equivalents, beginning of period 2,076 -
--------- ---------
Cash and cash equivalents, end of period $ 2,301 $ 3,372
========= =========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
JDN REALTY CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2000
1. THE COMPANY
JDN Realty Corporation (the "Company") is a real estate company engaged in
the development and asset management of retail shopping centers. As of
September 30, 2000, the Company's operating shopping centers and development
projects were located in 20 states. The Company has elected to be taxed as a
real estate investment trust ("REIT").
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The consolidated balance sheet at December 31, 1999 has been
derived from the audited consolidated financial statements at that date.
Operating results for the three and nine month periods ended September 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000 or any other interim period. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition. On June 26, 2000, the Securities and Exchange
Commission (the "SEC") released Staff Accounting Bulletin No. 101B which
deferred the effective date of Staff Accounting Bulletin No. 101 ("SAB 101"),
Revenue Recognition, until the fourth quarter of 2000. Among other things, SAB
101 requires that lessors cannot recognize contingent rent, such as percentage
rent, as income until the contingency is resolved. The Company presently
records percentage rent during the periods earned, in some cases before the date
on which certain sales thresholds are met and the contingencies are resolved.
The Company will record a cumulative effect adjustment of approximately $400,000
in the fourth quarter of 2000 upon adoption of SAB 101.
Derivative Instruments and Hedging Activities. In June 1998, the Financial
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities ("Statement
No. 133"). Statement No. 133 was amended by SFAS No. 137 and SFAS No. 138, and
is required to be adopted for fiscal years beginning after June 15, 2000.
Statement No. 133 will require the Company to recognize all derivatives on the
balance sheet at fair value. For derivatives designated as hedges, the change in
the fair value of the derivative will either be offset against the change in the
fair value of the hedged asset, liability, or firm commitment through earnings
or recognized in other comprehensive income until the hedged item is recognized
in earnings. Derivatives that are not hedges must be adjusted to fair value
through income. Management does not currently believe that the implementation
of Statement No. 133 will have a material impact on the Company's financial
position or results of operations.
Income Taxes. The Company has elected to be taxed as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"). As a result, the
Company will not be subject to federal income taxes to the extent that it
distributes annually at least 95% (90% after December 31, 2000) of its taxable
7
<PAGE>
income to its shareholders and satisfies certain other requirements defined in
the Code. To the extent that the Company sells property owned prior to
converting to REIT status, the Company will be obligated to pay income taxes on
any gains (in excess of any accumulated losses) realized on these sales,
provided that the actual gain is in excess of the "built-in-gain" assigned at
the time of REIT conversion. In the third quarter of 2000, the Company sold one
such property and has established a provision for income taxes associated with
this sale which has been netted against gain on real estate sales. No other
provision has been made for federal income taxes in the accompanying condensed
consolidated financial statements for the periods presented.
Reclassifications. Certain amounts as previously reported have been
reclassified to conform to the current period's presentation.
4. SPECIAL COMMITTEE INVESTIGATION
In February 2000, the Company announced that it had discovered undisclosed
compensation arrangements with two executive officers of the Company, both of
whom were also officers of JDN Development Company, Inc. ("JDN Development"),
additional unauthorized benefits to these same two executive officers, and
undisclosed related party transactions involving these two officers and the
former Chairman and Chief Executive Officer of the Company. As a result of this
discovery, a special committee of the Board of Directors (the "Special
Committee") was formed to, among other things, conduct an inquiry into these
matters.
The undisclosed compensation arrangements and unauthorized benefits were
not recorded or disclosed in the Company's or JDN Development's accounting
records and previously issued financial statements as of and for the years ended
December 31, 1994 through 1998. As a result, the Company restated its financial
statements for the years ended December 31, 1994 through 1998. In addition, the
Company restated its quarterly results for each quarter in 1998 and for the
first three quarters of 1999. The restatements reflect additional expenses of
the Company or JDN Development at the time of the compensation or unauthorized
benefit. These amounts also changed the gains or losses on subsequent sales at
the projects involved; such changes are included in the restated financial
statements.
A summary of the findings of the Special Committee, which has concluded its
investigation, is included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
The costs of the investigation and other related litigation are being
expensed as incurred. The Company and JDN Development have expensed $479,000
and $110,000, respectively for the three months ended September 30, 2000, and
$2.7 million and $776,000, respectively, in the nine months ended September 30,
2000.
See Note 5 for discussion of the related impact to the Company's credit
agreements.
8
<PAGE>
The following is a reconciliation of net income previously reported to
restated net income.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1999 September 30, 1999
------------------ ------------------
(In thousands)
<S> <C> <C>
Net income as previously reported $18,817 $43,293
Adjustment to equity in net income of:
JDN Development Company, Inc. (43) (161)
Other (173) (500)
------- -------
Net income - restated 18,601 42,632
Dividends to preferred shareholders (1,172) (3,516)
------- -------
Net income attributable to common
shareholders - restated $17,429 $39,116
======= =======
Income per share - basic
Net income as previously reported $ 0.53 $ 1.20
Effect of restated net income (0.01) (0.02)
------- -------
Net income attributable to common
shareholders - restated $ 0.52 $ 1.18
------- -------
Income per share - diluted
Net income as previously reported $ 0.52 $ 1.18
Effect of restated net income - (0.02)
------- -------
Net income attributable to common
shareholders - restated $ 0.52 $ 1.16
======= =======
</TABLE>
5. CREDIT AGREEMENTS
As a result of the unrecorded and undisclosed transactions discussed in
Note 4 above, it was determined that the Company had breached certain non-
financial and non-operating covenants contained in its $200.0 million unsecured
line of credit (the "Revolving Line of Credit") and $100.0 million term loan
(the "Term Loan") (collectively the "Credit Agreements"). On March 2, 2000, the
Company entered into a Continued Funding Agreement and an Interim Agreement with
the bank groups which suspended the breach of these covenants and permitted the
Company to access credit on an unsecured basis under the Revolving Line of
Credit from February 14, 2000 until these agreements expired on April 14, 2000.
The Company's $20.0 million swing line of credit was terminated effective April
14, 2000. The Company incurred fees of $531,000 in the first quarter of 2000
related to the Continued Funding Agreement and the Interim Agreement and
recorded these fees as deferred loan costs. These fees were amortized in the
first and second quarters of 2000.
From April 15, 2000 to May 23, 2000, the Company was in default under the
Credit Agreements and incurred interest at the default rate, which ranged from
11.0% to 11.5% during that period. On May 23, 2000, the Company entered into a
Second Amended and Restated Credit Agreement (the "Secured Line of Credit") and
an Amended and Restated Term Loan Agreement (the "Secured Term Loan"), each
effective as of May 19, 2000 (the Secured Line of Credit and the Secured Term
Loan collectively referred to herein as the "Secured Credit Agreements").
Significant changes in the Secured Line of Credit as compared to the Revolving
Line of Credit include the following:
. Reduced maximum borrowings allowed from $200.0 million to $175.0 million;
. Changed the maturity date from May 2002 to June 2001;
. Changed the facility from unsecured to secured;
. Increased the borrowing rate from LIBOR plus 1.15% to LIBOR plus 2.50%;
9
<PAGE>
. Increased the facility fee payable quarterly from .15% to .35% of the
maximum loan amount;
. Increased the limit on the ratio of Consolidated Liabilities to Gross
Asset Value from 55% to 60%, and deleted the covenants limiting the
ratios of Unencumbered Assets to Total Unsecured Funded Debt and
Unsecured NOI to Unsecured Interest Expense, all as defined; and
. Further restricted the Company's ability to pay distributions to
shareholders.
The Secured Term Loan amended the Term Loan to, among other things,
increase the borrowing rate from LIBOR plus 1.40% to LIBOR plus 2.50%, to change
the maturity date from February 2002 to June 2001 and to change the facility
from unsecured to secured.
The Secured Credit Agreements provide that the loans thereunder will be
secured by first priority security interests in the Borrowing Base Properties,
as defined in the Secured Credit Agreements. The Borrowing Base Properties
consist of 50 properties with a book value before accumulated depreciation of
approximately $434.0 million at September 30, 2000. Generally, each Borrowing
Base Property must maintain occupancy and leasing percentages of 80% or higher
and in the aggregate 60% of the value of the Borrowing Base Properties (based
upon a 10% capitalization rate on annualized Net Operating Income, as defined)
must be equal to or exceed the Commitments, as defined in the Secured Credit
Agreements.
The Company has agreed in the Secured Credit Agreements not to repurchase
or finance the repurchase of debt securities, or to make any voluntary
prepayment of such debt securities other than with proceeds of the sale of
shopping center properties not included in the Borrowing Base Properties. The
Company has also agreed in the Secured Credit Agreements not to purchase,
redeem, retire or acquire any shares of its common or preferred equity
securities (except as allowed in accordance with the definition of Restricted
Payments). In addition, the Secured Credit Agreements restrict the amount of
distributions to common and preferred shareholders to 100% of REIT taxable
income, as defined in the Code, for the year ended December 31, 2000 and to 95%
of REIT taxable income for the year ended December 31, 2001. In the second
quarter, the Company paid the banks up-front fees of $1.8 million in connection
with the Secured Credit Agreements. To date the Company has also incurred
approximately $1.5 million in costs to secure the Borrowing Base Properties,
$1.0 million of which were incurred in the third quarter of 2000. These fees and
costs were recorded as deferred financing costs with the related amortization to
be recorded over the life of the Secured Credit Facilities. In addition, during
the nine months ended September 30, 2000, the Company wrote off $159,000 in
unamortized deferred financing costs related to the Revolving Line of Credit as
a result of the modifications.
In the fourth quarter of 2000, the Company executed a Consent and First
Amendment to the Second Amended and Restated Credit Agreement for the Secured
Line of Credit and a similar Amendment for the Term Loan (the "Amendments")
effective September 30, 2000. The Amendments modified the Secured Credit
Agreements as follows:
. Reduced the borrowing rate from LIBOR plus 2.50% to LIBOR plus 2.25%;
. Modified the definition of Secured Debt to include all debt secured by
real property; and
. Modified the provisions for Replacement Properties.
6. INTEREST RATE CAP AGREEMENT
On August 21, 2000, the Company entered into a two-year forward interest
rate cap on $100.0 million of its floating rate debt. The cap effectively
limits the floating one-month LIBOR rate on its Term Loan to 7.25% or less over
a two-year period.
10
<PAGE>
7. SHOPPING CENTER DISPOSITIONS
During the third quarter of 2000, the Company sold the following assets:
<TABLE>
<CAPTION>
Disposition Company GLA
Location Date (square feet) Sales Price
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Newnan, Georgia (1) 7/11/2000 204,170 $13,743,777
Wilmington, North Carolina 8/23/2000 169,437 8,900,000
Wilmington, North Carolina 9/8/2000 - (2) 800,000
------- -----------
373,607 $23,443,777
======= ===========
</TABLE>
(1) Sale of only the Wal-Mart at this location
(2) Sale of vacant land only.
8. CONTINGENCIES
Since the Company's announcement of the undisclosed compensation
arrangements and unauthorized transactions described in Note 4, a number of
lawsuits have been filed against the Company. One or more of these suits also
names as defendants JDN Development and certain current and former officers and
directors of JDN Development and/or the Company.
Certain class actions filed in federal court allege violations of the
federal securities laws asserting that by failing to report the undisclosed
compensation, unauthorized benefits and related party transactions to the public
in the Company's financial statements, public filings, and otherwise, the
defendants made or participated in making material misstatements or omissions
which caused the plaintiffs to purchase the Company's stock at artificially
inflated prices. The plaintiffs in these lawsuits seek compensatory damages of
an indeterminate amount, interest, attorneys' fees, experts' fees and other
costs and disbursements. These federal class actions (the "Consolidated Class
Actions") have now been consolidated and are pending in the United States
District Court for the Northern District of Georgia.
A class action lawsuit was also filed by the Company's shareholders against
the Company, JDN Development, and four former officers and directors of these
companies in the Superior Court of Fulton County, Georgia. The complaint
contains substantially the same factual allegations asserted in the federal
class actions, but purports to seek relief under state law. The complaint
contains claims of common law fraud, conversion and purported violations of
Georgia's Racketeer Influenced and Corrupt Organizations Act. In that action,
the plaintiffs seek compensatory and punitive damages, attorneys' fees and
expenses, interest and equitable relief. The case has been removed to federal
court, and the Company and JDN Development have moved to consolidate the case
with the other class actions. The plaintiffs have moved to remand the case to
state court, and are opposing consolidation.
Another class action lawsuit has been filed in the Northern District of
Georgia naming J. Donald Nichols, Elizabeth Nichols, the Company, and certain
underwriters involved in a preferred stock offering by the Company in 1998. The
lawsuit raises allegations similar to those raised in the Consolidated Class
Actions, but it is based on purposed misrepresentations or omissions in the
Company's registration statement and prospectus in connection with the 1998
offering.
Lawsuits have also been filed against the Company as a nominal defendant,
as well as individual defendants J. Donald Nichols, Elizabeth L. Nichols, Craig
Macnab, Philip G. Satre, William G. Byrnes, Haywood D. Cochrane, Jr., William B.
Greene, Jeb L. Hughes, C. Sheldon Whittelsey, IV and William J. Kerley in the
United States District Court for the Northern District of Georgia, Atlanta
Division and in Fulton County Superior Court. Each of the named individuals are
current or former executives or directors of the Company or JDN Development. The
plaintiffs purport to bring these suits as derivative actions. The complaints
allege that the individual defendants, from 1994 through 1999, violated certain
duties in connection with the previously undisclosed compensation arrangements.
The complaints also allege claims
11
<PAGE>
for breach of fiduciary duty, abuse of control, waste of corporate assets,
unjust enrichment and gross mismanagement. The plaintiffs, on behalf of the
Company, seek injunctive relief, compensatory and punitive damages and
disgorgement of all profits and gains by the individual defendants.
The Company believes that it has meritorious defenses to the claims brought
in the lawsuits described above, but there can be no assurance that such
defenses will be successful or that the lawsuits will not have a material
adverse effect on the Company's financial position, results of operations and
cash flows. In addition, the timing of the final resolution of these
proceedings is uncertain.
The Company is also subject to a formal order of investigation initiated by
the SEC as of 8/2/00. The Company has voluntarily produced certain documents
and other information regarding the compensation arrangements, unauthorized
benefits and related party transactions discussed in Part 1 of this request.
Regulatory agencies and self-regulatory organizations such as the SEC, the New
York Stock Exchange, the Internal Revenue Service and state tax authorities may
seek to impose fines, penalties or other remedies against the Company. The
imposition of any such fines, penalties or other remedies could have a material
adverse impact on the Company.
In an unrelated lawsuit, on February 2, 2000, Dogwood Drive L.L.C.,
("Dogwood") filed suit against the Company and WHF, Inc. ("WHF"), a wholly-owned
subsidiary of JDN Development, which, until April 1999, owned a 72% interest in
Dogwood and served as the operating member of the entity. The suit was filed in
the Superior Court of Gwinnett County, Georgia. The complaint asserts, among
other things, breach of fiduciary duty against WHF and improper receipt of funds
by the Company. The Company believes that it and WHF have meritorious defenses
to the claims and intends to vigorously defend the suit.
On April 28, 2000, Lake Lucerne Estates Civic Club, Inc., a nonprofit
homeowners association located in Gwinnett County, Georgia, and a number of
individual plaintiffs, filed suit against JDN Development, Lowe's Companies,
Inc., and Haygood Contracting, Inc. The suit was filed in the Superior Court of
Fulton County, Georgia. The complaint asserts trespass, nuisance and negligence
against JDN Development in connection with the development of a shopping center
anchored by Lowe's. JDN Development has filed defensive pleadings denying
liability, and discovery is now being conducted by both sides.
The Company is from time to time a party to other legal proceedings which
arise in the ordinary course of its business. The Company is not currently
involved in any litigation in addition to the lawsuits described above the
outcome of which would, in management's judgement based on information currently
available, have a material adverse effect on the results of operations or
financial condition of the Company, nor is management aware of any such
litigation threatened against the Company.
12
<PAGE>
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
(restated) (restated)
<S> <C> <C> <C> <C>
Numerator:
Net income $12,023 $18,601 $36,685 $42,632
Dividends to preferred shareholders (1,172) (1,172) (3,516) (3,516)
------- ------- ------- -------
Net income attributable to
common shareholders $10,851 $17,429 $33,169 $39,116
======= ======= ======= =======
Denominator:
Weighted-average shares outstanding 32,797 33,489 32,835 33,296
Unvested restricted stock outstanding (427) (325) (522) (170)
------- ------- ------- -------
Denominator for basic earnings
per share 32,370 33,164 32,313 33,126
Dilutive effect of stock options and
unvested restricted stock 21 483 57 498
------- ------- ------- -------
Denominator for diluted earnings
per share 32,391 33,647 32,370 33,624
======= ======= ======= =======
Net income per common share:
Basic $ 0.34 $ 0.53 $ 1.03 $ 1.18
======= ======= ======= =======
Diluted $ 0.34 $ 0.52 $ 1.02 $ 1.16
======= ======= ======= =======
</TABLE>
Of total options outstanding, options to purchase 828,209 and 93,000 shares
of common stock for the three months ended September 30, 2000 and 1999,
respectively, were outstanding but were not included in the computation of
diluted earnings per share because the options' exercise prices were higher than
the average market price of the common shares for the applicable periods.
Therefore, the effect of these options on earnings per share would be
antidilutive.
The Company is the general partner in a limited partnership that issued
limited partnership units initially valued at $3.0 million in a limited
partnership formed to own and operate a shopping center in Milwaukee, Wisconsin.
Subject to certain conditions, the limited partnership units are exchangeable
for cash or 139,535 shares of the Company's common stock. As of September 30,
2000, none of the limited partnership units have been exchanged for shares.
Using the "if-converted" method, the dilutive effect of these units is
immaterial.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
JDN Realty Corporation is a real estate company engaged in the development
and asset management of retail shopping centers. When referred to herein, the
term "Company" represents JDN Realty Corporation and its wholly owned or
majority-owned subsidiaries. As of September 30, 2000, the Company and JDN
Development Company, Inc. ("JDN Development") owned and operated, either
directly or indirectly through affiliated entities, 111 shopping center
properties containing approximately 12.0 million square feet of gross leasable
area ("Company GLA") located in 19 states, with the highest concentrations in
Georgia, North Carolina, Tennessee and Wisconsin. The principal tenants of the
Company's and JDN Development's properties include Lowe's, Wal-Mart, TJX
Companies and Kroger. As of September 30, 2000, no single property accounted
for 10% or more of the combined total assets or total revenues of the Company
and JDN Development. As of September 30, 2000, the Company and JDN Development,
either directly or indirectly through affiliated entities or joint ventures, had
30 projects under construction. The Company was incorporated under Maryland law
in 1993 and has elected to be treated as a real estate investment trust ("REIT")
for federal income tax purposes.
JDN Development was formed in December 1994 to engage primarily in the
development of shopping center properties. JDN Development is structured such
that the Company owns 99% of the economic interest while W. Fred Williams, the
former President of JDN Development, owns the remaining 1% of the economic
interest and controls JDN Development's operations and activities through his
voting common stock ownership.
Because it is not a REIT, JDN Development may engage in certain activities
in which the Company cannot engage, such as sales of all or portions of
development projects and third-party fee development. Because of recent
legislation amending the tax laws applicable to REITs, the ownership structure
of JDN Development is expected to change effective in the first quarter of 2001.
See "Federal Income Tax Legislative Developments" below. Upon such change in
ownership, the Company expects to change its accounting for JDN Development from
the equity method to the consolidated method.
As of September 30, 2000, the Company had invested $4.0 million in JDN
Development in the form of equity capital, $129.8 million in the form of secured
notes receivable and $52.1 million in the form of unsecured advances. As of
September 30, 2000, the Company guaranteed one loan of JDN Development in the
amount of approximately $3.4 million. The loan is secured by property owned by
JDN Development and matures in September 2001.
Results of Operations
Comparison of the Three Months Ended September 30, 2000 to the Three Months
Ended September 30, 1999
During 2000 and 1999, the Company began operations at 37 properties which
it developed totaling 3.1 million square feet (the "Development Properties").
During 2000 and 1999, the Company disposed of 13 properties totaling 3.1 million
square feet (the "Disposition Properties"). As indicated below, the Company's
results of operations were affected by the Development Properties and the
Disposition Properties.
Minimum and percentage rents decreased $588,000 or 2.5% to $23.0 million
for the three months ended September 30, 2000 from $23.6 million for the same
period in 1999. Minimum and percentage rents increased by $3.1 million as a
result of the Development Properties. This increase is offset by a $3.8 million
decrease related to the Disposition Properties. The remaining increase relates
to an increase in minimum and percentage rents at existing properties.
Recoveries from tenants decreased $132,000 or 4.4% to $2.8 million for the
three months ended September 30, 2000 from $3.0 million for the same period in
1999. Recoveries from tenants increased
14
<PAGE>
by $238,000 as a result of the Development Properties. This increase is offset
by a $406,000 decrease related to the Disposition Properties. The remaining
increase relates to net increases in recoveries from tenants at existing
properties caused by net increases in recoverable expenses.
Other revenue increased $1.9 million to $1.9 million for the three months
ended September 30, 2000 from $46,000 for the same period in 1999. Other
revenue increased as a result of two one-time lease termination fees at two of
the Company's operating properties.
Operating and maintenance expenses decreased $73,000 or 3.5% to $2.0
million for the three months ended September 30, 2000 from $2.1 million for the
same period in 1999. Operating and maintenance expenses increased by $192,000
as a result of the Development Properties. This increase is offset by a
$209,000 decrease related to the Disposition Properties. The remaining
decreases are a result of decreased operating and maintenance expenses at
existing properties.
Real estate taxes decreased $26,000 or 1.7% to $1.5 million for the three
months ended September 30, 2000 from $1.6 million for the same period in 1999.
Real estate taxes increased by $178,000 as a result of the Development
Properties. This increase is offset by a $232,000 decrease related to the
Disposition Properties. The remaining increase relates to real estate taxes at
existing properties.
General and administrative expenses increased $23,000 or 1.2% for the three
months ended September 30, 2000 over the same period in 1999. General and
administrative expenses as a percent of minimum and percentage rents increased
to 8.2% for the three months ended September 30, 2000 from 7.9% for the same
period in 1999. The increase in general and administrative expenses as a
percentage of minimum and percentage rents is primarily a result of a reduction
in capitalized compensation and other costs related to development projects.
Corporate investigation and legal costs incurred during the three months
ended September 30, 2000 of $479,000 represent the professional fees incurred by
the Company primarily as a result of the Special Committee investigation (see
Note 4 in Part I, Item 1 of this report), the investigation by the Securities
and Exchange Commission (the "SEC") (see Note 8 in Part I, Item 1 of this
report) and the class action lawsuits (see Note 8 in Part I, Item 1 of this
report).
Severance expense incurred during the three months ended September 30, 2000
of $3.4 million relates to the resignation of Elizabeth L. Nichols, former
President of the Company. For further information regarding severance expense,
see "Separation Agreements" below.
Depreciation and amortization expense decreased $451,000 or 8.0% to $5.2
million for the three months ended September 30, 2000 from $5.7 million for the
same period in 1999. Depreciation and amortization increased by $673,000 as a
result of the Development Properties. This increase is offset by a $1.0 million
decrease related to the Disposition Properties. The remaining decrease
primarily relates to the reclassification of depreciation recognized in previous
quarters.
Interest expense, net of capitalized amounts, increased $1.2 million or
25.4% to $6.1 million for the three months ended September 30, 2000 from $4.7
million for the same period in 1999. This increase results from an increase in
average debt balances between 2000 and 1999, an increase in interest rates on
the Company's lines of credit and term loan and an increase in amortization of
deferred loan costs (see Note 5 in Part I, Item 1 of this report).
Other income, net decreased $12,000 or 1.6% to $716,000 for the three
months ended September 30, 2000 from $728,000 for the same period in 1999. This
decrease results primarily from a decrease in interest income recorded by the
Company.
Equity in net income of unconsolidated entities decreased $694,000 or 68.5%
to $319,000 for the three months ended September 30, 2000 from $1.0 million for
the same period in 1999. This decrease results primarily from the following:
(1) a decrease in rental revenues as a result of the sale of two operating
assets, (2) a decrease in brokerage and development fees, (3) a reduction in
land sales, and (4) an increase in carrying costs associated with land held for
sale or future development.
Minority interest in net income of consolidated subsidiary decreased
$13,000 or 23.6% to $42,000 for the three months ended September 30, 2000 from
$55,000 for the same period in 1999. This
15
<PAGE>
decrease results from a decrease in net income allocated to the third-party
investors in a consolidated limited partnership.
Net gain on real estate sales for the three months ended September 30, 2000
of $3.8 million represents a net gain on the sales of two shopping center
properties and a vacant parcel of land. Net gain on real estate sales for the
three months ended September 30, 1999 of $6.3 million represents a net gain on
the sales of two shopping center properties.
Comparison of the Nine Months Ended September 30, 2000 to the Nine Months Ended
September 30, 1999
Minimum and percentage rents increased $628,000 or 1.0% to $69.5 million
for the nine months ended September 30, 2000 from $68.9 million for the same
period in 1999. Minimum and percentage rents increased by $10.7 million as a
result of the Development Properties. This increase is offset by a $9.4 million
decrease related to the Disposition Properties. The remaining decrease relates
primarily to adjustments to the allowance for doubtful accounts made in the nine
months ended September 30, 1999 which had the effect of decreasing minimum and
percentage rents during that period.
Recoveries from tenants decreased $530,000 or 5.7% to $8.8 million for the
nine months ended September 30, 2000 from $9.3 million for the same period in
1999. Recoveries from tenants increased by $693,000 as a result of the
Development Properties. This increase is offset by a $1.1 million decrease
related to the Disposition Properties. The remaining decrease relates to net
decreases in recoveries from tenants at existing properties caused by net
decreases in recoverable expenses.
Other revenue increased $1.8 million to $1.9 million for the nine months
ended September 30, 2000 from $64,000 for the same period in 1999. Other
revenue increased primarily as a result of two one-time lease termination fees
at two of the Company's operating properties.
Operating and maintenance expenses remained relatively flat at $6.1 million
for the nine months ended September 30, 2000 and 1999. Operating and
maintenance expenses increased by $529,000 as a result of the Development
Properties. This increase is offset by a $490,000 decrease related to the
Disposition Properties. The remaining decreases are a result of decreased
operating and maintenance expenses at existing properties.
Real estate taxes decreased $331,000 or 6.7% to $4.6 million for the nine
months ended September 30, 2000 from $4.9 million for the same period in 1999.
Real estate taxes increased by $400,000 as a result of the Development
Properties. This increase is offset by a $732,000 decrease related to the
Disposition Properties. The remaining decrease relates to reductions in real
estate taxes at existing properties.
General and administrative expenses decreased $149,000 or 2.5% for the nine
months ended September 30, 2000 over the same period in 1999. General and
administrative expenses as a percent of minimum and percentage rents decreased
to 8.3% for the nine months ended September 30, 2000 from 8.6% for the nine
months ended September 30, 1999. This decrease is a result of certain cost
containing programs initiated at the Company and the reversal of previously
expensed amounts associated with the resignation of two executive officers,
offset by a reduction in capitalized compensation and other costs related to
development projects.
Corporate investigation and legal costs incurred during the nine months
ended September 30, 2000 of $2.7 million represent the professional fees
incurred by the Company primarily as a result of the Special Committee
investigation (see Note 4 in Part I, Item 1 of this report), the investigation
by the SEC (see Note 8 in Part I, Item 1 of this report) and the class action
lawsuits (see Note 8 in Part I, Item 1 of this report).
Severance expense incurred during the nine months ended September 30, 2000
of $3.7 million represents payments to certain former executive officers of the
Company. For further information regarding severance expense, see "Separation
Agreements" below.
16
<PAGE>
Impairment losses on shopping centers held for sale for the nine months
ended September 30, 2000 of $1.3 million represent charges to reduce the basis
of shopping centers held for sale to their estimated fair value less costs to
sell.
Depreciation and amortization expense decreased $271,000 or 1.6% to $16.2
million for the nine months ended September 30, 2000 from $16.4 million for the
same period in 1999. Depreciation and amortization increased by $2.2 million as
a result of the Development Properties. This increase is offset by a $2.5
million decrease related to the Disposition Properties.
Interest expense, net of capitalized amounts, increased $5.8 million or
44.3% to $18.7 million for the nine months ended September 30, 2000 from $13.0
million for the same period in 1999. This increase results from an increase in
average debt balances between 2000 and 1999, an increase in interest rates on
the Company's lines of credit and term loan and an increase in amortization of
deferred loan costs (see Note 5 in Part I, Item 1 of this report).
Other income, net decreased $271,000 or 18.1% to $1.2 million for the nine
months ended September 30, 2000 from $1.5 million for the same period in 1999.
This decrease results from the write-off of certain deferred costs related to
the modification of the Company's Credit Agreements (see Note 5 in Item 1 of
this report) and a decrease in interest income recorded by the Company.
Equity in net income of unconsolidated entities decreased $930,000 or 29.8%
to $2.2 million for the nine months ended September 30, 2000 from $3.1 million
for the same period in 1999. This decrease results primarily from the
following: (1) a decrease in rental revenues as a result of the sale of two
operating assets, (2) a decrease in brokerage and development fees, (3) a
reduction in land sales, (4) an increase in carrying costs associated with land
held for sale or future development, (5) $1.2 million in impairment losses, and
(6) $774,000 in costs related to the Special Committee's investigation and
lawsuits. These amounts are offset by income of $929,000 recognized in
connection with Separation Agreements with four executive officers.
Minority interest in net income of consolidated subsidiary increased
$20,000 or 12.5% to $180,000 for the nine months ended September 30, 2000 from
$160,000 for the same period in 1999. This increase results from an increase in
net income allocated to the third-party investors in a consolidated limited
partnership.
Net gain on real estate sales for the nine months ended September 30, 2000
of $12.4 million represents a net gain on the sales of eight shopping center
properties and a vacant parcel of land. Net gain on real estate sales for the
nine months ended September 30, 1999 of $6.3 million represents a net gain on
the sales of two shopping center properties.
Separation Agreements
During the third quarter of 2000, the Company entered into a separation
agreement with Elizabeth L. Nichols related to her resignation as President and
a director of the Company. The Company recorded expenses associated with this
separation agreement in the amount of approximately $3.4 million in the third
quarter of 2000. These expenses included cash payments of approximately $2.0
million in cash and 137,318 shares of restricted stock, valued at $1.4 million,
which vested upon her resignation. In addition, the Company recorded a reduction
to general and administrative expenses of approximately $379,000 for previously
expensed amounts associated with the restricted stock.
Funds From Operations
Funds from operations ("FFO") is defined by the National Association of
Real Estate Investment Trusts, Inc. ("NAREIT") to mean net income, computed in
accordance with generally accepted accounting principles ("GAAP"), excluding
gains or losses from debt restructuring and sales of property, plus depreciation
and amortization of real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes that FFO is helpful to
investors as a measure of the performance of an equity REIT because, along with
cash provided by operating activities, investing
17
<PAGE>
activities and financing activities, it provides investors with an indication of
the Company's ability to make capital expenditures, to incur and service debt,
and to fund other cash needs. The Company's method of calculating FFO may be
different from methods used by other REITs and, accordingly, may not be
comparable to such other REITs. FFO does not represent cash provided by
operating activities as defined by GAAP, should not be considered an alternative
to net income (determined in accordance with GAAP) as an indication of operating
performance and is not indicative of cash available to fund all cash flow needs,
including the Company's ability to make cash distributions.
The Company has presented below the calculation of FFO for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended September 30,
<S> <C> <C>
(In thousands) 2000 1999
--------- ----------
(restated)
Net income attributable to common shareholders $ 10,851 $17,429
Depreciation of real estate assets 4,799 5,315
Amortization of tenant allowances and tenant improvements 74 56
Amortization of deferred leasing commissions 144 136
Net gain on real estate sales (3,821) (6,283)
Adjustments related to activities in unconsolidated entities 106 180
-------- -------
FFO $ 12,153 $16,833
======== =======
Nine Months Ended September 30,
2000 1999
--------- ----------
(restated)
Net income attributable to common shareholders $ 33,169 $39,116
Depreciation of real estate assets 15,033 15,471
Amortization of tenant allowances and tenant improvements 190 160
Amortization of deferred leasing commissions 395 386
Impairment losses on shopping centers held for sale 1,289 -
Net gain on real estate sales (12,350) (6,283)
Adjustments related to activities in unconsolidated entities (1,852) 616
-------- -------
FFO $ 35,874 $49,466
======== =======
</TABLE>
In October 1999, NAREIT approved the recommendations of its Best Financial
Practices Council with respect to clarifying the definition of FFO. According
to these recommendations, effective January 1, 2000, FFO should include all
operating results, both recurring and non-recurring, except those results
defined as "extraordinary items" under GAAP and gains and losses from sales of
depreciable operating property. Examples of non-recurring items include, but
are not limited to, the following:
. gains and losses on derivative and hedging arrangements;
. costs of abandoned transactions;
. provisions for potential losses, other than those related to depreciable
operating property;
. merger integration and REIT conversion costs;
. costs of unusual compensation or severance arrangements; and
. debt restructuring costs (except those defined as "extraordinary" under
GAAP).
The Company has historically calculated FFO in a manner, which it believes
is consistent with the new definition of FFO. Therefore, the Company does not
expect the new definition of FFO to have a material effect on its historical or
prospective reporting of FFO.
18
<PAGE>
Leasing and Property Information
As of September 30, 2000, Lowe's, Wal-Mart, TJX Companies and Kroger
represented 17.7%, 6.2%, 3.2% and 3.0%, respectively, of the combined annualized
base rent of the Company, JDN Development and affiliated entities (collectively,
"Combined Annualized Base Rent"). In addition, at that date, anchor tenants
represented 42.8% of Combined Annualized Base Rent and national and regional
tenants represented 85.0% of Combined Annualized Base Rent. As of September 30,
2000, properties owned and operated by the Company, JDN Development and
affiliated entities were 95.9% leased.
As of September 30, 2000, the Company, JDN Development and affiliated
entities operated shopping center properties in 19 states. Shopping center
properties located in Georgia, Tennessee, North Carolina and Wisconsin
represented 39.5%, 12.0%, 7.7% and 6.5% respectively, of Combined Annualized
Base Rent.
The Company derives the majority of its rental income and development
activities from the retail industry and, as such, is exposed to adverse trends
or events affecting segments of the retail industry. As of September 30, 2000,
the Company, JDN Development and affiliated entities were exposed to the
following segments of the retail industry:
Percentage of
Annualized Base
Type Rent
---------------------------------------------------------------------
Home Improvement 17.9%
Supermarket 13.8%
Discount 9.0%
Restaurant 8.1%
Discount Department Stores 4.3%
Apparel 3.9%
Home Goods 3.6%
Theatre 3.2%
Office Supplies 2.9%
Drug Store 2.3%
The Theatre segment is currently experiencing the adverse effects
resulting from aggressive expansion of new, multi-screen facilities. Recently,
several companies operating theatres have filed for protection under Chapter 11
of the United States Bankruptcy Code. Of the Company's six leases with theatre
companies, three are with companies who have filed for Chapter 11 protection
representing 2.5% of Annualized Base Rent. While none of the Company's leases
have been rejected to date by the bankruptcy court, the Company expects that one
or more of these leases will either be rejected or will be modified to provide
for a rental rate reduction. Rejection of one or more of these leases or
modification resulting in rental rate reductions could have an adverse effect on
the Company's results of operations in future periods.
New Development Activities
As a result of the Company's increased cost of capital, management changes
and changing relations with its retail customers, the Company expects that the
volume of new development projects will decrease over the next 12 to 18 months.
This reduction in activity may cause the rate of historical growth in revenues
to decrease and income from land sales and development fees at JDN Development
19
<PAGE>
to decrease. A decrease in revenue growth could affect the Company's ability to
increase its dividends to holders of its common stock from its current level.
Liquidity and Capital Resources
Sources and Uses of Funds
-------------------------
Historically, the Company's primary sources of funds have been cash
provided by operating activities and proceeds from lines of credit, term debt,
secured mortgage notes payable, debt offerings, equity offerings and selected
shopping center sales. The Company's primary uses of funds have historically
been development, redevelopment and acquisition of shopping center properties,
distributions to shareholders, repayment of outstanding indebtedness, repurchase
of common stock, scheduled debt amortization and capital improvements to its
existing shopping center properties. The Company generally has used cash
provided by operating activities to fund its distributions to shareholders,
capital improvements to existing properties and scheduled debt amortization.
The Company has used proceeds from its lines of credit, term debt, secured
mortgage notes payable, debt and equity offerings and shopping center sales to
repay outstanding indebtedness, to repurchase common stock and to fund its
ongoing development, redevelopment and acquisition activities.
During the first nine months of 2000, the Company incurred $28.0 million in
development costs and advanced $75.5 million to JDN Development and
unconsolidated development partnerships to fund their development activities.
To fund this development activity, the Company sold all or portions of eight
shopping centers and one vacant parcel of land for net proceeds of approximately
$79.8 million. In addition, the Company utilized approximately $40.5 million of
the proceeds held by the qualified intermediary in connection with a Section
1031 tax-free deferred exchange in 1999 to fund its development activities.
During the first quarter of 2000, the Company repurchased a total of
423,500 shares of its common stock for approximately $6.8 million at an average
price of approximately $16.13 per share under a share repurchase program that
has since been discontinued.
20
<PAGE>
Indebtedness
------------
As of September 30, 2000, the Company's indebtedness consisted of the
following:
<TABLE>
<CAPTION>
Effective Percent
Principal Interest Maturity of Total Months to
Balance Rate Date Indebtedness Maturity
-------------- --------- -------- ------------ ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Fixed Rate
----------
Mortgage note payable - Denver, Colorado $ 22,005 6.81% 17-Jul-01 3.8% 10
MandatOry Par Put Remarketed Securities ("MOPPRS")(1) 75,000 6.67%(2) 31-Mar-03 13.3% 30
Mortgage note payable - Richmond, Kentucky 6,028 7.75%(3) 01-Dec-03 1.1% 38
Seven Year Notes 74,864 7.10%(2) 01-Aug-04 13.2% 46
Ten Year Notes 84,818 7.23%(2) 01-Aug-07 15.0% 82
Mortgage note payable - Milwaukee, Wisconsin 4,561 7.75% 01-Aug-09 0.8% 106
Mortgage note payable - Jackson, Mississippi 6,740 9.25%(4) 01-Mar-17 1.2% 197
Mortgage note payable - Marietta, Georgia 10,813 7.66%(2) 15-Nov-17 1.9% 206
Mortgage note payable - Lilburn, Georgia 12,515 6.70%(2) 10-Feb-18 2.2% 209
Mortgage note payable - Woodstock, Georgia 11,770 6.55%(2) 15-Apr-18 2.1% 211
Mortgage note payable - Hendersonville, Tennessee 10,615 7.66%(2) 15-Jan-19 1.9% 220
Mortgage note payable - Alpharetta, Georgia 13,358 6.62%(2) 15-Apr-19 2.4% 223
-------- ----- ----- ---
333,087 7.09% 58.9% 83
Floating Rate (7)
-------------
Swing Line of Credit 2,000 9.50%(5) 14-Jun-01 0.4% 8
Term Loan 100,000 10.59%(6) 14-Jun-01 17.7% 8
Revolving Line of Credit 130,000 11.07%(6) 14-Jun-01 23.0% 8
-------- ----- ----- ---
232,000 10.85% 41.1% 8
-------- ----- ----- ---
$565,087 8.63% 100.0% 52
======== ===== ===== ===
</TABLE>
(1) Represents notes payable with a stated rate of 6.918% and a stated maturity
date of March 31, 2013. These notes are subject to mandatory tender on
March 31, 2003.
(2) Represents stated rate plus amortization of deferred loan costs.
(3) The interest rate on this note is adjusted on December 1 of each year.
(4) The note can be prepaid after March 1, 2002 with 90 days written notice to
the Lender. The Company will not incur any prepayment penalties in
association with the loan prepayment after this date.
(5) Represents stated rate of Prime.
(6) Represents stated rate of LIBOR plus 2.50% plus amortization of deferred
loan costs. Effective September 30, 2000, the stated rate decreased to
LIBOR plus 2.25% plus amortization of deferred loan costs.
(7) Floating rate debt exposure is limited through investment in financial
derivatives. As of September 30, 2000, $150 million of the $232 million was
hedged with a LIBOR cap at 7.25% on $100 million which expires on August
21, 2002 and a $50 million swap with a fixed rate of 6.485% which expires
on January 1, 2001.
As a result of the unrecorded and undisclosed transactions described in
Note 4 to Part I, Item 1 of this report, it was determined that the Company had
breached certain non-financial and non-operating covenants contained in the
Revolving Line of Credit and the Term Loan (collectively the "Credit
Agreements"). On March 2, 2000, the Company entered into a Continued Funding
Agreement and an Interim Agreement with the bank groups which suspended the
breach of these covenants and permitted the Company to access credit on an
unsecured basis under the Revolving Line of Credit from February 14, 2000 until
these agreements expired on April 14, 2000.
From April 15, 2000 to May 23, 2000, the Company was in default under the
Credit Agreements and incurred interest at the default rate, which ranged from
11.0% to 11.5% during that period. On May 23, 2000, the Company closed a Second
Amended and Restated Credit Agreement (the "Secured Line of Credit") and an
Amended and Restated Term Loan Agreement (the "Secured Term Loan"), each
effective as of May 19, 2000 (the Secured Line of Credit and the Secured Term
Loan collectively referred to herein as the "Secured Credit Agreements").
Significant changes in the Secured Line of Credit as compared to the Revolving
Line of Credit include the following:
. Reduced maximum borrowings allowed from $200.0 million to $175.0
million;
. Changed the maturity date from May 2002 to June 2001;
. Changed the facility from unsecured to secured;
. Increased the borrowing rate from LIBOR plus 1.15% to LIBOR plus 2.50%;
. Increased the facility fee payable quarterly from .15% to .35% of the
maximum loan amount;
. Increased the limit on the ratio of Consolidated Liabilities to Gross
Asset Value from 55% to 60%, and deleted the covenants limiting the
ratios of Unencumbered Assets to Total Unsecured Funded Debt and
Unsecured NOI to Unsecured Interest Expense; and
. Further restricted the Company's ability to pay distributions to
shareholders.
21
<PAGE>
The Secured Term Loan amended the Term Loan to, among other things,
increase the borrowing rate from LIBOR plus 1.40% to LIBOR plus 2.50%, change
the maturity date from February 2002 to June 2001 and change the facility from
unsecured to secured.
The Secured Credit Agreements provide that the loans thereunder will be
secured by first priority security interests in the Borrowing Base Properties,
as defined in the Secured Credit Agreements. The Borrowing Base Properties
consist of 50 properties valued at approximately $467.0 million. Generally,
each Borrowing Base Property must maintain occupancy and leasing percentages of
80% or higher and in the aggregate 60% of the value of the Borrowing Base
Properties (based upon a 10% capitalization rate on annualized Net Operating
Income, as defined) must be equal to or exceed the "Commitments", as defined in
the Secured Credit Agreements.
The Company has agreed in the Secured Credit Agreements not to repurchase or
finance the repurchase of debt securities, or to make any voluntary prepayment
of such debt securities other than with proceeds of the sale of shopping center
properties not included in the Borrowing Base Properties. The Company has also
agreed in the Secured Credit Agreements not to purchase, redeem, retire or
acquire any shares of its common or preferred equity securities (except as
allowed in accordance with the definition of restricted payments). In addition,
the Secured Credit Agreements restrict the amount of distributions to common and
preferred shareholders to 100% of REIT taxable income, as defined in the Code,
for the year ended December 31, 2000 and to 95% of REIT taxable income for the
year ended December 31, 2001. In the second quarter, the Company paid the banks
up-front fees of $1.8 million in connection with the Secured Credit Agreements
and to date, the Company has incurred approximately $1.5 million in costs to
secure the Borrowing Base Properties.
In the fourth quarter of 2000, the Company executed a Consent and First
Amendment to the Second Amended and Restated Credit Agreement for the Secured
Line of Credit and a similar Amendment for the Term Loan (the "Amendments")
effective September 30, 2000. The Amendments modified the Secured Credit
Agreements as follows:
. Reduced the borrowing rate from LIBOR plus 2.50% to LIBOR plus 2.25%;
. Modified the definition of Secured Debt to include all debt secured by
real property; and
. Modified the provisions for Replacement Properties.
On August 21, 2000, the Company entered into a two-year forward interest
rate cap on $100.0 million of its floating rate debt. The cap effectively
limits the floating one-month LIBOR rate on its Term Loan to 7.25% or less over
a two-year period.
Future Sources and Uses of Funds
--------------------------------
The Company believes that cash provided by operating activities will be
sufficient to fund its required distributions to shareholders (95% of taxable
income for the year ended December 31, 2000 and 90% of taxable income for each
year thereafter). In addition, management believes that cash provided by
operating activities will be adequate to fund improvements to the Company's
operating shopping centers, leasing costs and scheduled debt amortization.
The most significant expected use of capital for the Company is its
development activities. As of September 30, 2000, the Company, JDN Development
and affiliated entities had 30 projects under construction and intend to
commence construction during 2001 on approximately six additional projects. The
Company expects that the capital required to fund the future costs of these 36
projects, net of estimated construction reimbursements and expected land sales
to retailers who will build and own their space in these projects, is
approximately $190.6 million. These future costs are expected to be incurred
during the remainder of 2000, in 2001 and 2002. This projected requirement
includes a number of assumptions including commitments by secondary anchor
tenants. If some or all of these tenants do not execute leases, the amount
required will be less.
Another potential future use of capital is the satisfaction of any
liabilities arising out of pending litigation and governmental proceedings. As
noted elsewhere (see Note 8 in Part I, Item I of this report), the Company is
subject to
22
<PAGE>
legal and government regulatory proceedings and may become subject to additional
proceedings in the future. These proceedings may result in liabilities, fines,
penalties or other remedies that, if material, could adversely affect future
results of operations and liquidity.
The Company is currently constrained in its ability to generate capital
necessary to fund its expected and potential uses of funds. For example, the
Company has historically utilized the public debt and equity markets to help
fund its capital needs. However, the Company believes that it will be unable to
issue unsecured debt, common stock or preferred stock as a result of, among
other things, unfavorable capital markets for the foreseeable future. Also,
because of the delay in filing the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, and the delay in filing the Company's quarterly
report on Form 10-Q for the three months ended March 31, 2000, the Company is
not currently eligible to issue securities under its existing shelf registration
statement on Form S-3 or to utilize Form S-3 for any future securities issuances
until it has made timely filings of periodic reports with the SEC for at least
twelve calendar months after August 2000. Therefore, even if capital markets
were to become more favorable for the issuance of securities, public issuances
of debt or equity securities would be more costly and require additional time to
consummate.
Furthermore, the Company is limited on the amount of debt that may be
outstanding at any given time. Under the applicable indentures for its MOPPRS,
Seven Year Notes and Ten Year Notes, the Company is limited in the amount of
secured debt it may have outstanding to 40% of its Adjusted Total Assets, as
defined. As of September 30, 2000, the Company's ratio of Secured Debt to
Adjusted Total Assets was 27.7%. Under the Secured Credit Facilities, the
Company is limited in the amount of total debt it may have outstanding to 60% of
Gross Asset Value, as defined. As of September 30, 2000, the Company's ratio of
debt to Gross Asset Value was 48.8%. Therefore, the Company has only a limited
ability to fund its development projects with proceeds from additional
indebtedness.
In addition, under the terms of its Secured Credit Agreements, each
Borrowing Base Property must, among other qualifications, maintain occupancy and
leasing percentages of 80% or higher in order to be included in the Borrowing
Base. If any Borrowing Base Property becomes ineligible for inclusion in the
Borrowing Base, for example, as a result of an anchor tenant vacating the
premises while still paying rent, the Company's ability to borrow funds under
the Secured Line of Credit and the Secured Term Loan may be limited or reduced.
Therefore, the Company's ability to utilize its Secured Credit Agreements to
fund its capital needs may be constrained in the future.
The Company and JDN Development expect the sale of all or portions of
operating shopping center properties in addition to the sale of various parcels
of land adjacent to its operating properties to be the primary source of capital
for the Company to fund its development needs and other needs noted above.
During October 2000, the Company closed the sale of three shopping center
properties for gross proceeds of approximately $14.5 million. As of October 31,
2000, the Company and JDN Development have been negotiating the sale of all or
portions of seven shopping centers with an aggregate net book value of
approximately $42.8 million for estimated aggregate proceeds of approximately
$46.6 million. Five of these properties include the sale of a Wal-Mart
Supercenter, a Lowe's store or both. The Company expects these properties to be
sold in the fourth quarter of 2000 and first quarter of 2001. The Company
expects to begin marketing for the sale of additional shopping centers that are
expected to close after the first quarter of 2001. Management believes that the
proceeds from these asset sales will provide the additional funding necessary to
complete its current development pipeline. The closing of these dispositions is
dependent upon, among other things, completion of due diligence and the ability
of some of the purchasers to successfully obtain financing. Therefore, there can
be no assurance that any of these transactions will close when expected or at
all, and there can be no assurance that, if closed, the disposition transactions
will produce sufficient liquidity to enable the Company to fund its planned
development projects. See "Federal Income Tax and ERISA Considerations" filed as
an exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 for information related to potential tax consequences of
dispositions by the Company.
23
<PAGE>
The Company has engaged a financial advisor to assist in the identification
of alternative sources of capital to fund its capital needs. These alternative
means could include, for example, the formation of joint ventures with
institutional investors or other partners with available capital at attractive
rates.
If the Company is unsuccessful in raising capital adequate to fund its
development activities, it would be required to discontinue the funding of some
or all of its projects and would be required to liquidate some or all of its
projects on potentially unfavorable terms. These unfavorable terms could result
in significant losses upon liquidation and would have an adverse impact on
future rental income, FFO and the Company's ability to continue the level of its
current dividend payment to holders of the Company's common stock.
In order for the Company to continue to qualify as a REIT, it must annually
distribute to its shareholders at least 95% (or 90% after December 31, 2000) of
its taxable income (excluding net capital gains). Management believes that the
Company will be able to meet this requirement in 2000 with cash provided by
operating activities. In addition, management believes that cash provided by
operating activities will be adequate to fund improvements to the Company's
shopping center properties, leasing costs and scheduled debt amortization in
2000.
As of September 30, 2000, the Company's debt requires the following
payments in the future:
Percent of Debt
Year Total Expiring
-------------------------------------------------------------------------------
2000 $ 792 0.1%
2001 254,682 45.1%
2002 859 0.1%
2003 81,132 14.4%
2004 75,591 13.4%
2005 780 0.1%
2006 839 0.1%
2007 85,720 15.2%
2008 972 0.2%
2009 863 0.1%
2010 928 0.2%
Thereafter 61,929 11.0%
-------- -----
$565,087 100.0%
======== =====
A significant portion of the Company's debt matures in June 2001.
Management has begun the process for refinancing these obligations and expects
to complete this refinancing in the first quarter of 2001. With respect to its
other maturing obligations, management will evaluate various alternatives and
select the best available options based on market conditions at the time. There
can be no assurance, however, that the debt or equity capital markets will be
favorable or available in the future, and unfavorable or unavailable markets
could limit the Company's ability to continue to operate its business as it has
in the past, complete development projects or repay or refinance maturing debt.
Derivatives and Market Risk
---------------------------
The Company is exposed to market risk from changes in interest rates on its
indebtedness, which could impact its financial condition and results of
operations. The Company manages its exposure to these market risks through its
regular operating and financing activities. The Company manages its ratio of
fixed to floating rate debt with the objective of achieving a mix that
management believes is appropriate. The Company has and may from time to time
in the future enter into interest rate swap
24
<PAGE>
agreements or interest rate cap agreements in an attempt to hedge its exposure
to increasing interest rates. Management does not foresee or expect any
significant changes in its exposure to interest rate fluctuations or in how such
exposure will be managed in the near future. The Company intends to use
derivative financial instruments as risk management tools and not for
speculative or trading purposes.
As of September 30, 2000, the Company had one interest rate swap agreement
and one interest rate cap agreement as described below:
<TABLE>
<CAPTION>
Effective Termination
Description of Agreement Notional Amount Strike Price Date
------------------------ --------------- ------------ --------- -----------
(in thousands)
<S> <C> <C> <C> <C>
LIBOR, 30-day "Rate Cap" $100,000 7.250% 8/20/00(1) 8/21/02
LIBOR, 30-day "Rate Swap" $ 50,000 6.485% 2/11/97 1/1/01
</TABLE>
(1) The Company paid a one-time $396,000 fee.
The Company's future earnings, cash flows and fair values of financial
instruments are primarily dependent upon market rates of interest such as LIBOR.
Contingencies
See Part II, Item 1 "Legal Proceedings" of this report for a discussion of
contingencies related to ongoing legal proceedings involving the Company.
The Company expects to incur legal and professional fees during the year
ended December 31, 2000 in amounts significantly in excess of those incurred in
previous years as a result of the litigation and investigations noted above and
as a result of the Special Committee's investigation. The Company records these
expenses as they are incurred. During the nine months ended September 30, 2000,
the Company and JDN Development have expensed approximately $3.5 million in
legal and professional fees related to the Special Committee's investigation,
the SEC investigation and the class action lawsuits. The Company cannot
reasonably predict, with any degree of certainty, the additional legal and
professional fees which will be incurred related to the litigation, the Special
Committee's investigation, the SEC investigation or any other related
investigation by the New York Stock Exchange, Internal Revenue Service or any
other regulatory body.
Federal Income Tax Legislative Developments
The Ticket to Work and Work Incentives Improvement Act of 1999, which
included the Tax Relief Extension Act of 1999 (the "Act"), was recently enacted
and contains several provisions affecting REITs. The new provisions are
generally not effective until January 1, 2001 and significantly modify the REIT-
related provisions of the Code. In addition to the provisions that may directly
affect the Company (discussed below), the Act also contains provisions related
to the following: (i) special foreclosure rules for healthcare REITs; (ii)
clarification of the definition of independent contractors; and (iii)
modification of the earnings and profits rules.
See "Federal Income Tax and ERISA Considerations" filed as an Exhibit to
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Investment Limitations
----------------------
The Act modifies the REIT asset test by adding a requirement that except
for (i) "Safe Harbor Debt," (ii) the ownership of stock in "taxable REIT
subsidiaries," and (iii) certain arrangments in place on July 12, 1999 a REIT
cannot own more than 10 percent of the total value of the securities of any
corporation. "Safe Harbor Debt" is non-contingent, non-convertible debt
("straight debt") which satisfies one of the following three requirements: (a)
the straight debt is issued by an individual, (b) all of the securities of the
issuer owned by the REIT is "straight debt" or (c) the issuer is a partnership
in which the REIT owns at least 20% of the partnership's profits.
25
<PAGE>
Taxable REIT Subsidiaries
-------------------------
A REIT will be permitted to operate a "taxable REIT subsidiary" which can
provide services to tenants and other customers of the REIT (even if such
services were not considered customarily furnished in connection with the rental
of real property) and can manage or operate properties, generally for third
parties, without causing the rents received by the REIT from such parties not to
be treated as rent from real properties. Many REITs, including the Company,
currently own interests in subsidiaries which conduct such activities. The new
provisions prohibit new investments in such subsidiaries by limiting a REIT's
ownership in these subsidiaries to 10% of voting securities and 10% of the value
of the subsidiaries. Grandfather protection is provided with respect to the 10%
value test for securities of a corporation held by a REIT on July 12, 1999.
However, such protection would cease to apply to securities of a corporation if
such corporation after July 12, 1999 engages in a substantial new line of
business or acquires any substantial asset, other than in a reorganization or in
a transaction qualifying under Section 1031 or 1033 of the Code, and also ceases
to apply after the acquisition of additional securities of the corporation by
the REIT after July 12, 1999. The Act provides a three-year period, beginning
January 1, 2001, during which an existing grandfathered subsidiary may be
converted, tax-free, into a taxable REIT subsidiary.
The value of the securities of all taxable REIT subsidiaries, as well as
any grandfathered subsidiaries, cannot exceed 20% of the total value of the
REIT's assets. In addition, interest paid by a taxable REIT subsidiary to the
related REIT is subject to the earnings stripping rules contained in Section
163(j) of the Code and therefore the taxable REIT subsidiary cannot deduct
interest in any year that would exceed 50% of the subsidiary's adjusted gross
income. If any amount of interest, rent, or other deductions of the taxable REIT
subsidiary to be paid to the REIT is determined not to be at arm's length, an
excise tax of 100% is imposed on the portion that is determined to be excessive.
However, rent received by a REIT will not fail to qualify as rents from real
property by reason of the fact that all or any portion of such rent is
predetermined for purposes of the excise tax.
After considering the new investment limitations, the grandfather rules,
and the taxable REIT subsidiary provisions of the Act, management intends to
work together with JDN Development to cause JDN Development to become a taxable
REIT subsidiary of the Company during the first quarter of 2001. In addition,
the Company expects to acquire W. Fred Williams' stock in JDN Development during
the first quarter of 2001. Once the Company acquires 100% of the outstanding
stock of JDN Development, the Company will consolidate JDN Development's
operations in its financial statements.
Distribution Requirements
-------------------------
Currently, in order to continue to maintain its qualification as a REIT, a
REIT is required to distribute annually 95% of its REIT taxable income
(excluding net capital gain). The Act reduces the required distribution from 95%
to 90% effective for taxable years beginning after December 31, 2000. The
Secured Credit Agreements restrict the Company's ability to pay cash
distributions.
Rents from Personal Property
----------------------------
A REIT may treat rent from personal property as rent from real property so
long as the rent from personal property does not exceed 15% of the total rent
from both real and personal property for the taxable year. This rule is
currently determined by comparing the basis of the personal property to the
total basis of the real and personal property. The Act provides that this
determination will be made by comparing the fair market value of the personal
property to the fair market value of the real and personal property.
Budget Proposals
----------------
In February 2000, the Clinton Administration announced its proposals for
the fiscal year 2001 federal budget. The REIT provisions of the proposed budget
would (i) provide an additional requirement that an entity will not qualify as a
REIT if one person, including an entity, directly or constructively
26
<PAGE>
owns stock possessing 50% or more of the voting power or value of the REIT's
stocks, and (ii) generally extend the 4% excise tax on delayed distributions by
REITs to cases where the REIT timely distributes less than 98% of its ordinary
income or capital gain net income for a taxable year. The excise tax does not
currently apply if the REIT timely distributes at least 85% of its ordinary
income and 95% of its capital gain net income.
It cannot be predicted whether, when, in what form, or with what effective
dates other legislative proposals applicable to the Company or its shareholders
will become law.
Inflation
The Company's leases generally contain provisions designed to mitigate the
adverse impact of inflation on net income. These provisions include clauses
enabling the Company to pass through to tenants certain operating costs,
including real estate taxes, common area maintenance, utilities and insurance,
thereby reducing the Company's exposure to increases in costs and operating
expenses resulting from inflation. Certain of the Company's leases contain
clauses enabling the Company to receive percentage rents based on tenants' gross
sales, which generally increase as prices rise, and, in certain cases,
escalation clauses, which generally increase rental rates during the terms of
the leases. In addition, many of the Company's non-anchor leases are for terms
of less than ten years, which permits the Company to seek increased rents upon
re-leasing at higher market rates.
27
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the nine months ended September 30, 2000, two interest rate caps,
one with a notional amount of $50.0 million and the other with a notional amount
of $100.0 million and both with strike prices of 6.50%, expired. The Company
subsequently entered into a two-year forward interest rate cap on $100.0 million
of its floating rate debt, that effectively limits the floating one-month LIBOR
rate on its Term Loan to 7.25% or less over a two-year period.
28
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Litigation
On February 14, 2000, the Company announced that it had discovered certain
undisclosed compensation arrangements and related party transactions, which were
not accurately recorded in the accounting records of JDN Development and the
Company and were not accurately recorded or disclosed in the audited financial
statements of the Company as of and for the years ended December 31, 1994
through 1998.
Since the Company's announcement on February 14, 2000, a number of lawsuits
have been filed against the Company in federal and state court. One or more of
these suits also names as defendants JDN Development and certain current and
former officers and directors of JDN Development and/or the Company, including
Jeb L. Hughes, C. Sheldon Whittelsey, IV, J. Donald Nichols, Elizabeth L.
Nichols, William J. Kerley, Leilani L. Jones, Craig Macnab, Haywood D. Cochrane,
Jr., Philip G. Satre, William G. Byrnes, and William B. Greene.
Certain class actions filed in federal court allege violations of the
federal securities laws and allege that, by failing to report the undisclosed
compensation, unauthorized benefits and related party transactions to the public
in the Company's financial statements, public filings, and otherwise, the
defendants made or participated in making material misstatements or omissions
which caused the plaintiffs to purchase the Company's stock at an artificially
inflated price. The plaintiffs in these lawsuits seek compensatory damages of an
indeterminate amount, interest, attorneys' fees, experts' fees and other costs
and disbursements. These federal class actions (the "Consolidated Class
Actions") have now been consolidated and are pending in the United States
District Court for the Northern District of Georgia.
A class action lawsuit was also filed by the Company's shareholders against
the Company, JDN Development and four former officers and directors of these
companies (Jeb L. Hughes, C. Sheldon Whittelsey, IV, J. Donald Nichols and
William J. Kerley) in the Superior Court of Gwinnett County, Georgia. The
complaint contains substantially the same factual allegations asserted in the
federal class actions, but purports to seek relief under state law. The
complaint contains claims of common law fraud, conversion and purported
violations of Georgia's Racketeer Influenced and Corrupt Organizations Act. In
that action, the plaintiffs seek compensatory and punitive damages, attorneys'
fees and expenses, interest and equitable relief. The case has now been removed
to federal court, and the Company and JDN Development have moved to consolidate
the case with the other class actions. The plaintiffs have moved to remand the
case to state court, and are opposing consolidation.
Another class action lawsuit originally filed by several individual
purchasers of the Company's preferred stock against J. Donald Nichols and
Elizabeth L. Nichols, in the Middle District of Tennessee, alleging violations
of the federal securities laws has been transferred to the Northern District of
Georgia. Elizabeth Nichols was voluntarily dismissed from the lawsuit by the
plaintiffs prior to the transfer. The claims raised in the lawsuit are similar
to those raised in the Consolidated Class Actions, but are based on purported
misrepresentations or omissions in the Company's registration statement and
prospectus in connection with a 1998 offering of preferred stock. The Company
and JDN Development have not been named as defendants in this lawsuit, but a
similar lawsuit has now been filed in the Northern District of Georgia bringing
identical claims, but adding the Company and certain underwriters involved in
preferred stock offering as defendants, and re-naming Elizabeth Nichols as a
defendant.
Lawsuits have also been filed against the Company as a nominal defendant,
as well as individual defendants J. Donald Nichols, Elizabeth L. Nichols, Craig
Macnab, Philip G. Satre, William G. Byrnes, Haywood D. Cochrane, Jr., William B.
Greene, Jeb L. Hughes, C. Sheldon Whittelsey, IV and William J. Kerley in the
United States District Court for the Northern District of Georgia, Atlanta
Division and in Fulton County Superior Court. Each of the named individuals are
current or former executives or directors of the Company or JDN Development. The
Plaintiffs purport to bring the suit as derivative actions. The complaints
29
<PAGE>
allege that the individual defendants, from 1994 through 1999, violated certain
duties in connection with the previously undisclosed compensation arrangements.
The complaints also allege claims for breach of fiduciary duty, abuse of
control, waste of corporate assets, unjust enrichment and gross mismanagement.
The plaintiffs, on behalf of the Company, seek injunctive relief, compensatory
and punitive damages and disgorgement of all profits and gains by the individual
defendants.
The Company believes that it has meritorious defenses to the claims brought
against it, but there can be no assurance that such defenses will be successful
or that the lawsuits will not have a material adverse effect on the Company's
financial position, results of operations and cash flows. In addition, the
timing of the final resolution of these proceedings is uncertain.
The Company is also subject to a formal order of investigation initiated by
the SEC as of 8/2/00. The Company has cooperated with the SEC in responding to
requests for production of documents and other information. Regulatory agencies
and self-regulatory organizations such as the SEC, the New York Stock Exchange,
the Internal Revenue Service and state tax authorities may seek to impose fines,
penalties or other remedies against the Company. The imposition of any such
fines, penalties or other remedies could have a material adverse impact on the
Company.
In an unrelated lawsuit, on February 2, 2000, Dogwood Drive LLC,
("Dogwood") filed suit against the Company and WHF, Inc. ("WHF"), a wholly-owned
subsidiary of JDN Development which, until April 1999, owned a 72% interest in
Dogwood and served as the operating member of the entity. The suit was filed in
the Superior Court of Gwinnett County, Georgia. The complaint asserts, among
other things, breach of fiduciary duty against WHF and improper receipt of funds
by the Company. The Company believes that it and WHF have meritorious defenses
to the claims and intends to vigorously defend the suit.
On April 28, 2000, Lake Lucerne Estates Civic Club, Inc., a nonprofit
homeowners association located in Gwinnett County, Georgia, and a number of
individual plaintiffs, filed suit against JDN Development, Lowe's Companies,
Inc. and Haygood Contracting, Inc. The suit was filed in the Superior Court of
Fulton County, Georgia. The complaint asserts trespass, nuisance and negligence
against JDN Development in connection with the development of a shopping center
anchored by Lowe's. JDN Development has filed defensive pleadings denying
liability, and discovery is now being conducted by both sides.
The Company is from time to time a party to other legal proceedings which
arise in the ordinary course of its business. The Company is not currently
involved in any litigation in addition to the lawsuits described above, the
outcome of which would, in management's judgement based on information currently
available, have a material adverse effect on the results of operations or
financial condition of the Company nor is management aware of any such
litigation threatened against the Company.
The Company's forward-looking statements relating to the above described
litigation reflect management's best judgement of the status of the litigation
to date and facts currently known to the Company and its management and, as a
result, involve a number of risks and uncertainties, including the possible
disclosure of new facts and information adverse to the Company in the discovery
process and the inherent uncertainties associated with litigation.
Indemnification and Advances
The Company's Charter provides that the Company shall indemnify and advance
expenses to its officers and directors to the fullest extent permitted by law
for any liability arising from claims against them in their capacities as such
unless (a) the indemnitee is adjudged to be liable to the Company in a
proceeding by or in the right of the Company, (b) the indemnitee is charged with
receipt of improper personal benefit, whether or not involving action in the
indemnitee's official capacity, and the indemnitee is adjudged to be liable on
the basis that personal benefit was improperly received, or (c) it is
established that (i) the act or omission of the indemnitee was material to the
matter giving rise to the proceeding and the act or omission was committed in
bad faith or was the result of active and deliberate dishonesty, or (ii) the
indemnitee actually received an improper personal benefit in money, property or
services. In addition to the rights provided pursuant to state law and the
Company's Charter, certain current and former officers and directors of the
Company have contractual rights to indemnification and advancement of expenses
which are
30
<PAGE>
identical to the rights provided by state law and the Company's Charter,
pursuant to indemnification agreements between each of these individuals and the
Company. Each such indemnification agreement provides that the Company shall
advance expenses to the indemnitee in advance of the final disposition of a
lawsuit upon receipt of a written undertaking by or on behalf of the indemnitee
to repay any such amount if it is ultimately determined that the indemnitee is
not entitled to indemnification under the terms of the Agreement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 29, 2000, the Company held its annual meeting of
shareholders. The following were the results of the meeting:
(1) The shareholders elected Craig Macnab and Philip G. Satre as
Class III directors until the annual meeting of shareholders in
2003 or until their successors are elected and shall have
qualified.
The votes were as follows:
Craig Philip G.
Macnab Satre
---------- ----------
Votes Cast For 26,974,252 26,983,688
Votes Cast Against -0- -0-
Votes Withheld/Broker
Non-Votes 235,618 226,182
(2) The shareholders ratified the appointment of Ernst & Young LLP as
independent auditors of the Company for the year ending December
31, 2000.
The votes were as follows:
Votes Cast For 26,933,768
Votes Cast Against 211,170
Votes Withheld/Broker
Non-Votes 64,932
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31
<PAGE>
10.1 JDN Realty Corporation 1993 Non-Employee Director Stock
Option Plan, as amended (1)
10.2 Amendment No. 2 to JDN Realty Corporation 1993 Non-Employee
Director Stock Option Plan
12 Statement re: Computation of Ratio of Earnings to Fixed
Charges
27 Financial Data Schedule
(1) Filed as Exhibit 10.2 to the Company's Annual Report on
Report on Form 10-K for the year ended December 31, 1999
and hereby incorporated by reference.
(b) Reports on Form 8-K
During the three months ended September 30, 2000, the Company
filed the following report on Form 8-K:
Form 8-K dated July 25, 2000 relating to the Company's
quarterly earnings press release and conference call for
the quarter ended March 31, 2000.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 14, 2000 /s/ Craig Macnab
----------------- -----------------------
(Date) Craig Macnab
Chief Executive Officer
November 14, 2000 /s/ John D. Harris, Jr.
----------------- -----------------------
(Date) John D. Harris, Jr.
Senior Vice President and
Chief Financial Officer
33
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
------ -------
10.1 JDN Realty Corporation 1993 Non-Employee Director Stock Plan, as
amended (1)
10.2 Amendment No. 2 to JDN Realty Corporation 1993 Non-Employee Director
Stock Option Plan
12 Statement re: Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(1) Filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 and hereby incorporated by
reference.
34
