<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 March 31, 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________ No X
---------
As of June 30, 2000, 32,568,417 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: management changes
described in JDN Realty Corporation's Annual Report on Form 10-K for the year
ended December 31, 1999; any additional future management changes; 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
included in this report and 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 noted
in this report; 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
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Condensed Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income - Three Months Ended March 31, 2000
and 1999 4
Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31,
2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
</TABLE>
2
<PAGE>
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------- ---------------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Shopping center properties held for use in operations, at cost:
Land $ 184,288 $ 189,506
Buildings and improvements 567,415 644,089
-------------- ---------------
751,703 833,595
Less: accumulated depreciation and amortization (66,018) (69,321)
-------------- ----------------
Shopping center properties held for use in operations, net 685,685 764,274
Shopping center properties under development 111,074 104,609
Shopping center properties held for sale 105,310 22,463
-------------- ---------------
Total shopping center properties 902,069 891,346
Cash and cash equivalents - 2,076
Proceeds receivable from deferred exchange 2,024 40,476
Rents receivable 12,331 10,272
Investments in and advances to unconsolidated entities 175,926 154,438
Deferred costs, net of amortization 5,027 5,099
Other assets 13,817 13,088
-------------- ---------------
$ 1,111,194 $ 1,116,795
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unsecured notes payable $ 234,651 $ 234,635
Lines of credit and term loan 240,220 235,000
Mortgage notes payable 100,254 101,247
Accounts payable and accrued expenses 15,636 16,328
Other liabilities 8,205 9,500
-------------- ---------------
Total liabilities 598,966 596,710
Third party investors' interest 3,505 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 32,963,660 and 33,401,468 shares
in 2000 and 1999, respectively 330 334
Paid-in capital 511,402 518,504
Accumulated deficit (3,029) (3,029)
-------------- ---------------
508,723 515,829
-------------- ---------------
$ 1,111,194 $ 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 March 31,
2000 1999
---------------- ----------------
(restated)
(In thousands)
<S> <C> <C>
Revenues:
Minimum and percentage rents $ 23,062 $ 22,468
Recoveries from tenants 3,094 3,212
Other revenue - 10
--------------- ---------------
Total revenues 26,156 25,690
Operating expenses:
Operating and maintenance 2,206 2,156
Real estate taxes 1,541 1,637
General and administrative 2,092 2,167
Corporate investigation costs 1,490 -
Impairment losses on shopping centers held for sale 1,289 -
Depreciation and amortization 5,403 5,279
--------------- ---------------
Total operating expenses 14,021 11,239
--------------- ---------------
Income from operations 12,135 14,451
Other income (expense):
Interest expense, net (5,742) (3,977)
Other income, net 257 420
Equity in net income of unconsolidated entities 667 1,088
--------------- ---------------
Income before minority interest in net income of consolidated
subsidiary and net gain on real estate sales 7,317 11,982
Minority interest in net income of consolidated subsidiaries (96) (50)
--------------- ---------------
Income before net gain on real estate sales 7,221 11,932
Net gain on real estate sales 6,838 -
--------------- ---------------
Net income 14,059 11,932
Dividends to preferred shareholders (1,172) (1,172)
--------------- ---------------
Net income attributable to common shareholders $ 12,887 $ 10,760
=============== ===============
Net income per common share:
Basic $ 0.40 $ 0.33
=============== ===============
Diluted $ 0.40 $ 0.32
=============== ===============
Dividends per common share $ 0.395 $ 0.360
=============== ===============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
JDN REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
--------------------- ------------------
(In thousands)
<S> <C> <C>
Net cash provided by operating activities $ 12,247 $ 11,158
Cash flows from investing activities:
Development of shopping center properties (42,892) (35,386)
Improvements to shopping center properties (103) (277)
Investments in and advances to unconsolidated entities (21,573) (20,948)
Proceeds from real estate sales 29,168 -
Other 58 1,049
--------------------- ------------------
Net cash used in investing activities (35,342) (55,562)
Cash flows from financing activities:
Proceeds from unsecured lines of credit 83,216 353,540
Proceeds from mortgages and notes payable - 26,454
Principal payments on unsecured lines of credit (77,996) (332,157)
Principal payments on mortgages and notes payable (663) (195)
Proceeds from issuance of common shares, net of
underwriting commissions and offering expenses - 11,055
Repurchases of common stock (6,843) -
Distributions paid to preferred shareholders (1,172) (1,172)
Distributions paid to common shareholders (13,025) (11,963)
Proceeds from deferred exchange of properties 38,452 -
Other (950) (1,158)
--------------------- ------------------
Net cash provided by financing activities 21,019 44,404
--------------------- ------------------
Increase in cash and cash equivalents (2,076) -
Cash and cash equivalents, beginning of period 2,076 -
--------------------- ------------------
Cash and cash equivalents, end of period $ - $ -
===================== ==================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
JDN REALTY CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2000
1. THE COMPANY
JDN Realty Corporation (the "Company") is a real estate company which
specializes in the development and asset management of retail shopping centers
anchored by value-oriented, necessity item retailers. As of March 31, 2000, the
Company's operating shopping centers and development projects are 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 month period ended March 31, 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
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% of its taxable income to its shareholders and satisfies
certain other requirements defined in the Code. Accordingly, no provision has
been made for federal income taxes in the accompanying condensed consolidated
financial statements for the periods presented.
Earnings Per Share. Basic and diluted earnings per share were computed in
accordance with the requirements of Statement of Financial Accounting Standards
No. 128.
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 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, J. Donald Nichols. In most of the transactions, the compensation
or benefits were paid or otherwise transferred to ALA Associates, Inc. ("ALA"),
an entity owned by Jeb L. Hughes, former Senior Vice President of JDN
Development and C. Sheldon Whittelsey, IV, former Vice President of the Company
and JDN Development. As a result of this discovery, a special committee of the
Board of
6
<PAGE>
Directors (the "Special Committee") was formed to, among other things, conduct
an inquiry into these matters.
The undisclosed compensation arrangements and unauthorized benefits
described below 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 has restated its financial statements for the years ended December 31,
1994 through 1998. In addition, the Company has restated its quarterly results
for each quarter in 1998 and for the first three quarters of 1999. The
restatements reflect additional expenses in 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.
As a result of the above investigation, Mr. Nichols, Mr. Hughes, Mr.
Whittelsey and the Company's Chief Financial Officer resigned in 2000. Amounts
related to the severance arrangements of these four individuals, which include
recovery of a portion of the amounts related to the unauthorized benefits
discussed above, will be recognized in the second quarter of 2000. During the
first quarter of 2000, the Company and JDN Development recorded the forfeiture
of unvested restricted stock of Mr. Hughes and Mr. Whittelsey effective on their
termination dates.
The costs of the investigation are being expensed as incurred.
See Note 5 for discussion of the related impact to the Company's credit
agreements.
The following is a reconciliation of net income previously reported to
restated net income.
<TABLE>
<CAPTION>
Three months ended
March 31, 1999
-------------------------
(In thousands)
<S> <C>
Net income as previously reported $ 12,151
Adjustment to equity in net income of:
JDN Development Company, Inc. (59)
Other (160)
----------------
Net income - restated 11,932
Dividends to preferred shareholders (1,172)
----------------
Net income attributable to common
shareholders - restated $ 10,760
================
Income per share - basic
Income before extrordinary items (net of
preferred dividend) as previously reported $ 0.33
Effect of restated net income 0.00
----------------
Net income attributable to common
shareholders - restated $ 0.33
================
Income per share - diluted
Income before extrordinary items (net of
preferred dividend) as previously reported $ 0.33
Effect of restated net income (0.01)
----------------
Net income attributable to common
shareholders - restated $ 0.32
================
</TABLE> 7
<PAGE>
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 $531,000 in fees related to the Continued Funding
Agreement and the Interim Agreement and recorded them as deferred loan costs.
During the first quarter of 2000, the Company amortized $265,500 of these fees
into interest incurred and the remainder will be amortized in the second quarter
of 2000.
From April 15, 2000 to May 23, 2000, the Company was in default of 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%
once certain post-closing conditions are met, and LIBOR plus 2.25%
thereafter;
. 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% (adjusted
to LIBOR plus 2.25% once certain post-closing conditions are met), 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 $446.3 million at March 31, 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 purchase or
finance the purchase of its common or preferred equity securities (except, in
the case of its common stock, as may be required to fund employee benefit plans
in the ordinary course of business or to satisfy the requirements of stock
option plans) or 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. In addition, the
Secured Credit Agreements restrict the amount of distributions to
8
<PAGE>
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. The Company paid the banks up-front fees of $1.8
million in connection with the Secured Credit Agreements. These fees will be
recorded as deferred financing costs in the second quarter of 2000 with the
related amortization recorded as an adjustment to interest incurred over the
life of the Secured Credit Facilities. In addition, in the second quarter of
2000, the Company will write off unamortized deferred financing costs related to
the Credit Agreements as a result of the modifications.
6. SHOPPING CENTER DISPOSITIONS
During the first quarter of 2000, the Company sold the following shopping
center properties:
<TABLE>
<CAPTION>
Disposition Company GLA
Location Date (square feet) Sales Price
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cordele, Georgia (1) 1/19/00 149,704 $ 9,653,075
Gallipolis, Ohio (1) 1/19/00 179,958 13,128,872
Wallace, North Carolina 2/10/00 118,993 4,230,000
Cheraw, South Carolina 2/10/00 45,100 2,520,000
---------- ------------
493,755 $ 29,531,947
========== ============
</TABLE>
(1) Sale of only the Wal-Mart at this location.
7. CONTINGENCIES
Since the Company's announcement of the undisclosed compensation
arrangements and unauthorized transactions described in Note 4, a number of
class action 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.
The 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 seek compensatory damages of an indeterminate
amount, interest, attorneys' fees, experts' fees and other costs and
disbursements. The federal class actions are pending in the United States
District Court for the Northern District of Georgia and are expected to be
consolidated.
A class action lawsuit has also been 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 the state court
class action, the plaintiffs seek compensatory and punitive damages, attorneys'
fees and expenses, interest and equitable relief.
The Company believes that it has meritorious defenses to the claims brought
in the federal and state class action lawsuits, 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 may also be subject to regulatory proceedings initiated by the
Securities and Exchange Commission (the "SEC") or other regulatory agencies. The
SEC has contacted the Company and has requested the voluntary production of
certain documents and other information regarding the
9
<PAGE>
compensation arrangements, unauthorized benefits and related party transactions
discussed in Note 4 and the Company is cooperating with the SEC in responding to
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 believes that it has meritorious defenses to
the claims and intends to vigorously defend the suit.
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.
10
<PAGE>
8. 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 March 31,
2000 1999
-----------------------------------------------------------------------------------
(restated)
<S> <C> <C>
Numerator:
Net income $ 14,059 $ 11,932
Dividends to preferred shareholders (1,172) (1,172)
------------ --------
Net income attributable to
common shareholders $ 12,887 $ 10,760
============ ========
Denominator:
Weighted-average shares outstanding 32,970 33,157
Unvested restricted stock outstanding (619) (102)
------------ --------
Denominator for basic earnings
per share 32,351 33,055
Dilutive effect of stock options and
unvested restricted stock 31 488
------------ --------
Denominator for diluted earnings
per share 32,382 33,543
============ ========
Net income per common share:
Basic $ 0.40 $ 0.33
============ ========
Diluted $ 0.40 $ 0.32
============ ========
</TABLE>
Of total options outstanding, options to purchase 2,807,470 and 93,000
shares of common stock for the three months ended March 31, 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. 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 March 31, 2000,
none of the limited partnership units have been exchanged for shares. Using the
"if-converted" method, the effect of these units is antidilutive; therefore,
they have been excluded from the computation of earnings per share.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
JDN Realty Corporation is a real estate company which specializes in the
development and asset management of retail shopping centers anchored by value-
oriented, necessity item retailers. When referred to herein, the term "Company"
represents JDN Realty Corporation and its wholly owned or majority-owned
subsidiaries. As of March 31, 2000, the Company and JDN Development Company,
Inc. ("JDN Development") owned and operated, either directly or indirectly
through affiliated entities, 114 shopping center properties containing
approximately 12.8 million square feet of gross leasable area ("Company GLA")
located in 17 states, with the highest concentrations in Georgia, North
Carolina, and Tennessee. The principal tenants of the Company's and JDN
Development's properties include Wal-Mart, Lowe's, and Kroger. As of March 31,
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 March 31, 2000, the
Company and JDN Development, either directly or indirectly through affiliated
entities or joint ventures, had 33 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 was initially
structured such that the Company owned 99% of the economic interest while J.
Donald Nichols, the Company's former Chief Executive Officer, owned the
remaining 1% of the economic interest and controlled JDN Development's
operations and activities through his voting common stock ownership. On May 19,
2000, Mr. Nichols sold his voting common stock in JDN Development to W. Fred
Williams, President of JDN Development.
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 and the manner in which the Company conducts its development
business may change significantly before April 30, 2001. See "Federal Income Tax
Legislative Developments" below.
As of March 31, 2000, the Company had invested $4.0 million in JDN
Development in the form of equity capital, $96.4 million in the form of secured
notes receivable and $27.5 million in the form of unsecured advances. As of
March 31, 2000, the Company guaranteed all or portions of two loans of JDN
Development in the aggregate amount of approximately $16.2 million. The loans
were secured by property owned by JDN Development and are due in 2000. In June
2000, JDN Development satisfied one of these loans in full and reduced the
balance on the remaining loan to $3.5 million.
Results of Operations
Comparison of the Three Months Ended March 31, 2000 to the Three Months Ended
March 31, 1999
During 2000 and 1999, the Company began operations at 31 properties which
it developed totaling 2.6 million square feet (the "Development Properties").
During 2000 and 1999, the Company disposed of nine properties totaling 1.7
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 increased $594,000 or 2.6% to $23.1 million
for the three months ended March 31, 2000 from $22.5 million for the same period
in 1999. Minimum and percentage rents increased by $3.7 million as a result of
the Development Properties. This increase is offset by a $3.0 million decrease
related to the Disposition Properties. The remaining decrease relates to a
decrease in minimum and percentage rents at existing properties.
12
<PAGE>
Recoveries from tenants decreased $118,000 or 3.7% to $3.1 million for the
three months ended March 31, 2000 from $3.2 million for the same period in 1999.
Recoveries from tenants increased by $190,000 as a result of the Development
Properties. This increase is offset by a $280,000 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 decreased to a minimal dollar amount for the three months
ended March 31, 2000 from $10,000 for the same period in 1999. The decrease is
the result of the Company eliminating its third-party management and leasing
activities.
Operating and maintenance expenses increased $50,000 or 2.3% to $2.2
million for the three months ended March 31, 2000 from $2.2 million for the same
period in 1999. Operating and maintenance expense increased by $200,000 as a
result of the Development Properties. This increase is offset by a $128,000
decrease related to the Disposition Properties. The remaining increases are a
result of increased operating and maintenance expenses at existing properties.
Real estate taxes decreased $96,000 or 5.8% to $1.5 million for the three
months ended March 31, 2000 from $1.6 million for the same period in 1999. Real
estate taxes increased by $64,000 as a result of the Development Properties.
This increase is offset by a $166,000 decrease related to the Disposition
Properties.
General and administrative expenses decreased $75,000 or 3.4% for the three
months ended March 31, 2000 over the same period in 1999. General and
administrative expenses as a percent of minimum and percentage rents decreased
to 9.1% for the three months ended March 31, 2000 from 9.6% for the same period
in 1999. The decrease in general and administrative expenses as a percentage of
minimum and percentage rents is a result of certain cost containing programs
initiated at the Company.
Corporate investigation costs incurred during the three months ended March
31, 2000 of $1.5 million represent the accounting and legal costs incurred by
the Company as a result of the Special Committee investigation. For more
information regarding the investigation by the Special Committee, see Note 4 in
Item 1 of this report.
Impairment losses on shopping centers held for sale for the three months
ended March 31, 2000 of $1.3 million represent charges to record shopping
centers held for sale to their estimated fair value less costs to sell.
Depreciation and amortization expense increased $124,000 or 2.4% to $5.4
million for the three months ended March 31, 2000 from $5.3 million for the same
period in 1999. Depreciation and amortization increased by $738,000 as a result
of the Development Properties. This increase is offset by a $750,000 decrease
related to the Disposition Properties. The remaining increase primarily relates
to the depreciation of furniture and fixtures at the Company's corporate
offices.
Interest expense, net of capitalized amounts, increased $1.8 million or
44.3% to $5.7 million for the three months ended March 31, 2000 from $4.0
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 Item 1 of this report).
Other income, net decreased $163,000 or 38.8% to $257,000 for the three
months ended March 31, 2000 from $420,000 for the same period in 1999. This
decrease results primarily from an increase in franchise taxes incurred in 2000.
Equity in net income of unconsolidated entities decreased $421,000 or 38.7%
to $667,000 for the three months ended March 31, 2000 from $1.1 million for the
same period in 1999. This decrease results primarily from a decrease in net
gains on land sales by JDN Development Company.
Minority interest in net income of consolidated subsidiary increased
$46,000 or 90.6% to $96,000 for the three months ended March 31, 2000 from
$50,000 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.
13
<PAGE>
Net gain on real estate sales for the three months ended March 31, 2000 of
$6.8 million represents a gain on the sale of the following four shopping center
properties: one located in each of Cordele, Georgia; Wallace, North Carolina;
Gallipolis, Ohio; and Cheraw, South Carolina.
Tenant Settlement
In April 2000, the Company announced the discovery of discrepancies in cost
and other information underlying certain leases and real estate sales agreements
with the Company's two largest tenants, Wal-Mart and Lowe's (collectively, the
"Major Anchor Tenants"). The Company determined that these discrepancies may
have affected the negotiation of rental rates and purchase prices paid by the
Major Anchor Tenants on transactions with the Company and JDN Development. After
further investigation and discussions with the Major Anchor Tenants, the
Company, JDN Development and the Major Anchor Tenants entered into an Estoppel
and Release on May 23, 2000 (the "Settlement Agreement") which settled potential
claims resulting from these discrepancies. Material terms of the Settlement
Agreement include the following:
. The Company, JDN Development and the Major Anchor Tenants reaffirmed
the terms of all existing leases without modification, restatement or
adjustment;
. The Company, JDN Development and the Major Anchor Tenants reaffirmed
all previously consummated real estate sales transactions without
modification, restatement or adjustment; and
. The Company and JDN Development agreed to pay the Major Anchor Tenants
an aggregate of $10.0 million, $5.0 million to each of the Major
Anchor Tenants.
As an inducement to enter into the Settlement Agreement, JDN Development
agreed to pay an additional $350,000 to Lowe's. As a further inducement to enter
into the Settlement Agreement, the Company and JDN Development agreed to reduce
the aggregate selling price by $2.75 million of three Supercenters which the
Company and JDN Development intend to sell to Wal-Mart. Two of these Supercenter
sales closed on June 6, 2000 and the third closed on June 28, 2000.
On May 23, 2000, the Company and JDN Development paid $10.4 million in cash
to the Major Anchor Tenants as a result of the Settlement Agreement.
The Company and JDN Development accrued and expensed the costs associated
with the Settlement Agreement in the fourth quarter of 1999. Of the $13.1
million in costs of the Settlement Agreement, the Company incurred $5.6 million,
which was included in settlement expenses on the Company's statement of income,
and JDN Development incurred $7.5 million before income tax effect, which was
included in equity in net income of unconsolidated entities on the Company's
statement of income.
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 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
14
<PAGE>
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 March 31,
2000 1999
------------------ ------------------
(restated)
(In thousands)
<S> <C> <C>
Net income attributable to common shareholders $ 12,887 $ 10,760
Depreciation of real estate assets 5,079 4,973
Amortization of tenant allowances and tenant improvements 59 51
Amortization of deferred leasing commissions 120 123
Impairment losses on shopping centers held for sale 1,289 -
Net gain on real estate sales (6,838) -
Adjustments related to activities in unconsolidated entities 186 239
------------------ ------------------
FFO $ 12,782 $ 16,146
================== ==================
</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 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.
Leasing and Property Information
As of March 31, 2000, Lowe's, Wal-Mart and Kroger represented 17.4%, 12.1%
and 3.1%, respectively, of the combined annualized base rent of the Company,
Development Company and affiliated entities (collectively, "Combined Annualized
Base Rent"). In addition, at that date, anchor tenants represented 48.8% of
Combined Annualized Base Rent and national and regional tenants represented
86.9% of Combined Annualized Base Rent. As of March 31, 2000, properties owned
and operated by the Company, Development Company and affiliated entities were
96.3% leased.
As of March 31, 2000, the Company, Development Company and affiliated
entities operated in 17 states. Shopping center properties located in Georgia,
North Carolina and Tennessee represented 42.5%, 7.8%, and 11.8%, respectively,
of Combined Annualized Base Rent.
15
<PAGE>
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 and redevelopment activities.
During the first quarter of 2000, the Company incurred $42.9 million in
development costs and advanced $21.6 million to JDN Development and other
unconsolidated development partnerships to fund their development and
redevelopment activities. To fund this development activity, the Company sold
all or portions of four shopping centers for net proceeds of approximately $29.2
million. These shopping centers had an aggregate net book value of approximately
$22.5 million at the time of the sales. In addition, the Company utilized
approximately $38.5 million of the proceeds being held by the qualified
intermediary for the deferred exchange it established in 1999 which qualifies
under section 1031 of the Internal Revenue Code of 1986, as amended, to fund its
development activities.
In November 1999, the Company announced that its Board of Directors had
authorized the repurchase of up to 3.0 million shares of its outstanding common
stock. The Company has, however, discontinued this common stock repurchase
program (see discussion of the Secured Credit Agreements below). During the
first quarter of 2000, the Company repurchased a total of 423,500 shares for
approximately $6.8 million or an average price of approximately $16.13 per share
under this program before it was discontinued.
16
<PAGE>
Indebtedness
------------
As of March 31, 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)
Fixed Rate
----------
<S> <C> <C> <C> <C> <C>
Mortgage note payable - Denver, Colorado $ 22,735 6.81% 17-Jul-01 3.9% 16
MandatOry Par Put Remarketed Securities
("MOPPRS")(1) 75,000 6.58% (2) 31-Mar-03 13.0% 36
Mortgage note payable - Richmond, Kentucky 6,102 7.75% (3) 01-Dec-03 1.1% 44
Seven Year Notes 74,847 7.10% (2) 01-Aug-04 13.0% 52
Ten Year Notes 84,804 7.23% (2) 01-Aug-07 14.7% 88
Mortgage note payable - Milwaukee, Wisconsin 4,736 7.75% 01-Aug-09 0.8% 112
Mortgage note payable - Jackson, Mississippi 6,825 9.25% (4) 01-Mar-17 1.2% 203
Mortgage note payable - Marietta, Georgia 10,937 7.66% (2) 15-Nov-17 1.9% 212
Mortgage note payable - Lilburn, Georgia 12,702 6.70% (2) 10-Feb-18 2.2% 215
Mortgage note payable - Woodstock, Georgia 11,943 6.55% (2) 15-Apr-18 2.1% 217
Mortgage note payable - Hendersonville, Tennessee 10,738 7.66% (2) 15-Jan-19 1.9% 226
Mortgage note payable - Alpharetta, Georgia 13,536 6.62% (2) 15-Apr-19 2.4% 229
------------ ----------- ------------ ------------
334,905 7.07% 58.2% 89
Floating Rate
Swing Line of Credit 2,220 8.89% (5) 31-Aug-00 0.4% 5
Term Loan 100,000 9.19% (5) 15-Feb-02 (6) 17.4% 23
Revolving Line of Credit 138,000 9.47% (5) 22-May-02 (6) 24.0% 26
------------ ----------- ------------ ------------
240,220 9.36% 41.8% 24
------------ ----------- ------------ ------------
$ 575,125 8.03% 100.0% 62
============ =========== ============ ============
</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 may 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 Prime Rate plus amortization of deferred loan costs.
(6) Maturity date changed to June 14, 2001 as a result of bank amendments in May
2000 described below.
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. As a result of the unrecorded and undisclosed transactions, it was
determined that the Company had breached certain non-financial and non-operating
covenants contained in the Revolving Line of Credit, the Swing 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.
The Swing Line of Credit was terminated effective 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;
17
<PAGE>
. Increased the borrowing rate from LIBOR plus 1.15% to LIBOR plus 2.50%
once certain post-closing conditions are met, and LIBOR plus 2.25%
thereafter;
. 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 0.55:1.00 to 0.60:1.00, 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.
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% (reduces
to LIBOR plus 2.25% once certain post-closing conditions are met), 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 $450.6 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 purchase or
finance the purchase of its common or preferred equity securities (except, in
the case of its common stock, as may be required to fund employee benefit plans
in the ordinary course of business or to satisfy the requirements of stock
option plans) or 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. 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. The Company paid the banks up-front fees of $1.8
million in connection with the Secured Credit Agreements.
Future Sources and Uses of Funds
--------------------------------
As of June 30, 2000, the Company, JDN Development and affiliated entities
had 33 projects under construction. In addition, the Company and JDN
Development intend to commence construction during the remainder of 2000 on
approximately eight additional projects. The Company expects that the capital
required to fund the future costs of these 41 projects, net of construction
reimbursements and land sales to retailers who will build and own their own
space in these shopping centers, is approximately $118.7 million. As of June
30, 2000, the Company had $22.0 million available under its Secured Line of
Credit.
The Company believes that for the foreseeable future it will be unable to
fund any of these remaining costs with issuances of unsecured debt, public
issuances of common stock or preferred stock as a result of, among other things,
unfavorable capital markets. 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 this report on Form 10-Q, 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 Securities and Exchange Commission for at
least twelve months. In addition, the Company's medium-term note program has
been terminated. 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 secured debt
outstanding at any given time to 40% of its Adjusted Total Assets, as defined in
the applicable indenture. On a pro forma basis, assuming that amounts
outstanding under the Swing Line of Credit, Term Loan and Revolving Line of
Credit were secured, as of March 31, 2000, the Company's ratio of secured debt
to Adjusted Total Assets
18
<PAGE>
was 29.1%. Therefore, the Company has only a limited ability to fund its
development projects with proceeds from secured indebtedness.
The Company and JDN Development expect to fund the majority of the
remaining amounts of their development projects from the sale of all or portions
of operating shopping center properties. During the second quarter of 2000, the
Company sold two Wal-Mart Supercenters and one additional shopping center
property with an aggregate net book value of approximately $28.0 million for
gross proceeds of approximately $28.6 million. As of June 30, 2000, the Company
and JDN Development have been negotiating the sale of all or portions of ten
shopping centers with an aggregate net book value of approximately $86.6 million
for estimated aggregate proceeds of approximately $101.2 million. Eight of
these properties include the sale of a Wal-Mart Supercenter, a Lowe's store or
both. On July 11, 2000, the Company closed the sale of one of these Wal-Mart
Supercenters for gross proceeds of approximately $13.7 million. The Company
expects the remaining properties to be sold in the third and fourth quarters of
2000. The closing of these properties 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, nor can there be any
assurance that, if closed, the transactions will produce sufficient liquidity to
fund the remaining amounts of its 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.
The Company is in the process of engaging a financial advisor to assist in
the identification of alternative sources of capital to fund its development
projects. 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, funds from operations 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 any net capital gain). 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 a result of the undisclosed compensation and the related party
transactions described in this report, the Company is subject to, and may become
subject to additional, legal proceedings, and may also become the subject of
governmental regulatory proceedings. These proceedings may result in
liabilities, fines, penalties or other remedies that, if material in amount,
could adversely affect the Company's liquidity and reduce its capital resources.
On a pro forma basis, after reflecting the change in the maturity dates of
the Secured Line of Credit and Secured Term Loan, as of March 31, 2000, the
Company's debt requires the following payments in the future:
19
<PAGE>
(Dollars in thousands)
Percent of Debt
Year Total Expiring
-----------------------------------------------------------------------------
2000 $ 1,911 0.3%
2001 264,734 46.0%
2002 2,081 0.4%
2003 82,429 14.3%
2004 76,975 13.4%
2005 2,283 0.4%
2006 2,457 0.4%
2007 87,448 15.2%
2008 2,850 0.5%
2009 2,823 0.5%
2010 2,723 0.5%
Thereafter 46,411 8.1%
----------------- ----------------
$ 575,125 100.0%
================== ================
A significant portion of the Company's debt matures in June 2001.
Management anticipates beginning the process for refinancing these obligations
in the second half of 2000. 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 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 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 is 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 March 31, 2000, the Company had one interest rate swap agreement and
two-interest rate cap agreements as described below:
20
<PAGE>
<TABLE>
<CAPTION>
Effective Termination
Description of Agreement Notional Amount Strike Price Date Date
------------------------ --------------- ------------ --------- ---------
<S> <C> <C> <C> <C>
LIBOR, 30-day "Rate Cap" $ 50,000,000 6.500% 11/10/99 (1) 5/22/00
LIBOR, 30-day "Rate Cap" $ 100,000,000 6.500% 8/21/99 (2) 8/21/00
LIBOR, 30-day "Rate Swap" $ 50,000,000 6.485% 2/11/97 1/1/01
</TABLE>
(1) The Company paid a one-time $20,000 fee.
(2) The Company paid a one-time $88,000 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 litigation of 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 noted above and as a result of the
special committee's investigation. The Company records these expenses as they
are incurred. For the period from January 1, 2000 to June 30, 2000, the Company
and JDN Development have expensed approximately $2.4 million in legal and
professional fees related to the special investigation. The Company cannot
reasonably predict, with any degree of certainty, the additional legal and
professional fees which will be incurred related to the class action litigation,
the special committee's investigation, or any other related investigation by the
Securities and Exchange Commission, 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.
Investment Limitations
----------------------
The Act modifies the REIT asset test by adding a requirement that except
for (i) "Safe Harbor Debt" and (ii) the ownership of stock in "taxable REIT
subsidiaries," 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.
Taxable REIT Subsidiaries
-------------------------
A REIT will be permitted to operate a "taxable REIT subsidiary" which can
provide a limited amount of 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
21
<PAGE>
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.
The Company has made no decision at this time with regard to any actions it
may take relating to the investment limitations and taxable REIT subsidiary
provisions of the Act. However, because the Company currently has an economic
interest in JDN Development which is more than 10% of JDN Development's value,
the Company will have to restructure the ownership of JDN Development or JDN
Development must elect to be a taxable REIT subsidiary of the Company on or
before April 30, 2001.
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 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.
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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.
23
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
During the three months ended March 31, 2000, there were no material
changes to the quantitative and qualitative disclosures about market risks
presented in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
24
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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 class
action 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 and Haywood D.
Cochrane, Jr.
The 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 seek compensatory damages of an indeterminate
amount, interest, attorneys' fees, experts' fees and other costs and
disbursements. The federal class actions are pending in the United States
District Court for the Northern District of Georgia and are expected to be
consolidated.
A class action lawsuit has also been 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 purposed
violations of Georgia's Racketeer Influenced and Corrupt Organizations Act. In
the state court class action, the plaintiffs seek compensatory and punitive
damages, attorneys' fees and expenses, interest and equitable relief.
Another class action lawsuit has been filed by several individual holders
of the Company's preferred stock against J. Donald Nichols and Elizabeth L.
Nichols, alleging violations of the federal securities laws. The Company and
JDN Development have not been named as defendants in this lawsuit, which is
pending in the United States District Court for the Middle District of
Tennessee.
The Company believes that it has meritorious defenses to the claims brought
against it in the federal and state class action lawsuits, 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 may also be subject to regulatory proceedings initiated by the
SEC or other regulatory agencies. The SEC has contacted the Company and has
requested the voluntary production of certain documents and other information
regarding the compensation arrangements, unauthorized benefits and related party
transactions discussed in Part 1 of this report, and the Company is cooperating
with the SEC in responding to 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 LLC,
("Dogwood") filed suit against the Company and WHF, Inc. ("WHF"), a wholly-owned
subsidiary of JDN Development which, until April
25
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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 believes that it has meritorious defenses
to the claims and intends to vigorously defend this suit.
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 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
See Note 5 in Part I, Item 1 of this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
26
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Agreement for Continued Funding dated March 2, 2000, but
effective as of February 14, 2000, by and among JDN Realty
Corporation, JDN Development Company, Inc., the Banks
parties thereto and Wachovia Bank, N.A., as Agent (1)
10.2 Interim Agreement dated as of March 2, 2000, but effective
as of February 14, 2000, by and among JDN Realty
Corporation, JDN Development Company, Inc. the Banks
parties thereto and Wachovia Bank, N.A., as Agent (2)
10.3 Employment Agreement by and between W. Fred Williams, Jr.
and JDN Development Company, Inc. dated as of March 8,
2000 and related Performance Share Agreement dated as of
March 7, 2000 (2)
12 Statement re: Computation of Ratio of Earnings to Fixed
Charges
27 Financial Data Schedule
(1) Filed as an exhibit to the Company's Current Report on
Form 8-K dated March 7, 2000 and hereby incorporated by
reference.
(2) Filed as an exhibit to the Company's Annual 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 March 31, 2000, the Company filed
the following reports on Form 8-K:
(i) Form 8-K dated February 14, 2000 containing a press
release related to the resignation of J. Donald Nichols as
Chief Executive Officer, a delay in the reporting of the
Company's 1999 earnings, and the findings of a special
committee of the Board of Directors on unrecorded
compensation and related party transactions.
(ii) Form 8-K dated February 15, 2000 containing the script for
the Company's 10:30 a.m. EST teleconference on Monday,
February 14, 2000
(iii) Form 8-K dated March 7, 2000 containing (1) Agreement for
Continued Funding dated March 2, 2000 (but effective
February 14, 2000) between the Company and Wachovia Bank,
N.A., as agent for the bank group and (2) a press release
related thereto.
27
<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.
July 24, 2000 /s/ Craig Macnab
------------------------ -----------------------------
(Date) Craig Macnab
Chief Executive Officer
July 24, 2000 /s/ John D. Harris, Jr.
------------------------ -----------------------------
(Date) John D. Harris, Jr.
Vice President and Interim
Chief Financial Officer
28
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INDEX TO EXHIBITS
Exhibit
Number Exhibit
------ -------
10.1 Agreement for Continued Funding dated March 2, 2000, but
effective as of February 14, 2000, by and among JDN Realty
Corporation, JDN Development Company, Inc., the Banks parties
thereto and Wachovia Bank, N.A., as Agent (1)
10.2 Interim Agreement dated as of March 2, 2000, but effective as of
February 14, 2000, by and among JDN Realty Corporation, JDN
Development Company, Inc. the Banks parties thereto and Wachovia
Bank, N.A., as Agent (2)
10.3 Employment Agreement by and between W. Fred Williams, Jr. and JDN
Development Company, Inc. dated as of March 8, 2000 and related
Performance Share Agreement dated as of March 7, 2000 (2)
12 Statement re: Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(1) Filed as an exhibit to the Company's Current Report on Form 8-K dated March
7, 2000 and hereby incorporated by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 and hereby incorporated by reference.
29
