UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 1998
Commission File No. 0001042810
EQUITY ONE, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
1600 N.E. MIAMI GARDENS DRIVE, SUITE 200
N. MIAMI BEACH, FLORIDA 33179
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(Address of Principal Executive Offices)
(305) 947-1664
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(Issuer's Telephone Number, Including Area Code)
MARYLAND 52-1794271
- ------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of the close of business on August 11, 1998, 10,238,528 shares of the
Company's common stock, par value $0.01 per share, were issued and outstanding.
EQUITY ONE, INC.
INDEX TO FORM 10-Q
QUARTER ENDED JUNE 30, 1998
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets-
As of June 30, 1998 (unaudited) and December 31, 1997
Condensed Consolidated Statements of Operations-
For the three months and six months ended June 30, 1998 and 1997
(unaudited)
Condensed Consolidated Statements of Stockholders' Equity
For the three months and six months ended June 30, 1998 and 1997
(unaudited)
Condensed Consolidated Statements of Cash Flows-
For the six months ended June 30, 1998 and 1997 (unaudited)
Notes to the Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
ASSETS JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
Rental Properties:
Land $ 40,978 $ 40,764
Building and improvements 102,553 83,889
Land held for development 2,334 1,394
Construction in progress 1,581 394
-------------- --------------
147,446 126,441
Accumulated depreciation (8,521) (7,191)
-------------- --------------
Rental properties, net 138,925 119,250
Cash and cash equivalents 5,357 2,598
Accounts and other receivables, net 1,198 892
Securities available for sale 874 45
Deposits 1,225 1,339
Prepaid and other assets 1,316 1,252
Deferred expenses, net 995 1,527
-------------- --------------
Total assets 149,890 126,903
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 63,058 $ 71,004
Accounts payable and accrued expenses 2,418 1,281
Put option liability 2,127
Tenants' security deposits 893 764
Deferred rental income 289 274
-------------- --------------
Total liabilities 68,785 73,323
-------------- --------------
Stockholders' equity:
Common stock 102 69
Additional paid-in capital 81,003 55,036
Notes receivable from stock sales (1,525)
Retained earnings
-------------- --------------
Total stockholders' equity 81,105 53,580
-------------- --------------
Total liabilities and stockholders' equity 149,890 126,903
============== ==============
See accompanying notes to the condensed consolidated financial statements.
3
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED)
REVENUES:
Rental income $ 5,845 $ 4,682 $ 11,167 $ 9,361
Investment revenue 92 185 164 312
------- ------- -------- -------
Total revenues 5,937 4,867 11,331 9,673
------- ------- -------- -------
COSTS AND EXPENSES:
Operating expenses 1,282 1,092 2,459 2,182
Depreciation and amortization 697 594 1,355 1,178
Interest 1,412 1,446 2,897 2,939
Put option expense 1,320 1,320
General and administrative expenses 491 328 925 802
------- ------- -------- -------
Total costs and expenses 5,202 3,460 8,956 7,101
------- ------- -------- -------
NET INCOME $ 735 $ 1,407 $ 2,375 $ 2,572
======= ======= ======== =======
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE $ 0.09 $ 0.23 $ 0.31 $ 0.43
======= ======= ======= =======
NUMBER OF SHARES USED IN COMPUTING
BASIC EARNINGS PER SHARE 8,482 6,178 7,699 5,974
====== ====== ====== =====
DILUTED EARNINGS PER SHARE $ 0.08 $ 0.20 $ 0.30 $ 0.38
======= ======= ======= ======
NUMBER OF SHARES USED IN COMPUTING
DILUTED EARNINGS PER SHARE 8,678 6,958 7,896 6,778
====== ====== ====== =====
See accompanying notes to the condensed consolidated financial statements.
4
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
NOTES TOTAL
ADDITIONAL RECEIVABLE STOCK-
COMMON PAID-IN FROM RETAINED HOLDERS'
STOCK CAPITAL STOCK SALES EARNINGS EQUITY
THREE MONTHS ENDED JUNE 30, 1998
BALANCE,
APRIL 1, 1998 $ 69 $ 54,949 $ (1,525) $ 53,493
Net income $ 735 735
Issuance of common stock 33 34,088 34,121
Transaction costs (1,077) (1,077)
Put option liability (807) (807)
Property distributed (4,758) 1,525 (3,233)
Dividends paid (1,392) (735) (2,127)
---- -------- -------- ------ -------
BALANCE,
JUNE 30, 1998 (Unaudited) $ 102 $ 81,003 $ $ $ 81,105
===== ======== ======== ======= ========
THREE MONTHS ENDED JUNE 30, 1997
BALANCE,
APRIL 1, 1997 $ 58 $ 44,487 $ (1,525) $ 43,020
Net income $ 1,407 1,407
Issuance of common stock 11 10,596 10,607
Dividends paid (133) (1,407) (1,540)
---- -------- -------- ------ -------
BALANCE,
JUNE 30, 1998 (Unaudited) $ 69 $ 54,950 $ (1,525) $ $ 53,494
==== ======== ======== ======== ========
SIX MONTHS ENDED JUNE 30, 1998
BALANCE,
JANUARY 1 1998 $ 69 $ 55,036 $ (1,525) $ 53,580
Net income $ 2,375 2,375
Issuance of common stock 33 34,088 34,121
Transaction costs (1,077) (1,077)
Put option liability (807) (807)
Property distributed (4,758) 1,525 (3,233)
Dividends paid (1,479) (2,375) (3,854)
---- -------- -------- ------ -------
BALANCE,
JUNE 30, 1998 (Unaudited) $ 102 $ 81,003 $ $ $ 81,105
==== ======= ======== ======== =======
SIX MONTHS ENDED JUNE 30, 1997
BALANCE,
JANUARY 1 1997 $ 58 $ 44,562 $ (1,525) $ 43,095
Net income $ 2,572 2,572
Issuance of common stock 11 10,596 10,607
Dividends paid (208) (2,572) (2,780)
---- ------- -------- ------- -------
BALANCE,
JUNE 30, 1997 (Unaudited) $ 69 $ 54,950 $ (1,525) $ $ 53,494
==== ======== ======== ======= ========
See accompanying notes to the condensed consolidated financial statements.
5
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1998 1997
(UNAUDITED)
OPERATING ACTIVITIES:
Net income $ 2,375 $ 2,572
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,504 1,335
Provision for losses on accounts receivable 38 23
Loss on sales of securities 5
Put option liability 1,320
Changes in assets and liabilities :
Accounts and other receivables (304) (54)
Deposits (336) (892)
Prepaid and other assets (129) (63)
Accounts payable and accrued expenses 647 729
Tenants' security deposits 129 13
Deferred rental income 15 (176)
----- -----
Net cash provided by operating activities 5,259 3,492
----- -----
INVESTING ACTIVITIES:
Acquisition of rental property (21,080) (5,204)
Improvements to rental property (1,971) (496)
Construction costs incurred (1,187)
Purchases of securities (840) (3,950)
Sales and prepayments of securities 11 2,884
Change in deposits for acquisition of rental property 450
----- -----
Net cash used in investing activities (24,617) (6,766)
----- -----
FINANCING ACTIVITIES:
Repayments of mortgage notes payable (15,646) (18,063)
Borrowings under mortgage notes payable 7,700 16,148
Cash dividends paid to stockholders (3,854) (2,780)
Stock subscription and issuance 34,121 10,607
Deferred expenses, net (204) (31)
----- -----
Net cash provided by financing activities 22,117 5,881
----- -----
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,759 2,607
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,598 1,951
----- -----
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,357 $ 4,558
======== =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest, net of amount capitalized $ 2,637 $ 2,755
======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES:
Put option liability charged to stockholders' equity $ 807
=====
Accrued stock issuance costs $ 490
=====
See accompanying notes to the condensed consolidated financial statements.
6
EQUITY ONE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997(UNAUDITED)
AND DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Equity
One, Inc. and Subsidiaries ( collectively, the "Company") as of June
30, 1998 and 1997 and for the six months and three months then ended,
have been prepared by the Company which is responsible for their
integrity and objectivity and should be read in conjunction with the
Company's December 31, 1997 annual consolidated financial statements
and the related notes.
To the best of management's knowledge and belief, the statements and
related information were prepared in conformity with generally accepted
accounting principles and are based on recorded transactions and
management's best estimates and judgments. The interim results of
operations are not necessarily indicative of the results which may be
expected for the full year.
The condensed consolidated financial statements as of June 30, 1998 and
1997 and for the six months and three months then ended, include, in
the opinion of management, all adjustments (which are normal recurring
adjustments) necessary for a fair presentation of the financial
condition and results of operations of the Company for the periods
indicated.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies applied in the preparation of the
condensed consolidated financial statements are identical to those applied
in the preparation of the most recent annual consolidated financial
statements.
PUT OPTION EXPENSE - The Company has granted a former stockholder an option
to put 293,430 shares of common stock issuable upon exercise of Series C
Warrants to the Company at a price of $15.50 per share or to put the Series
C Warrants to the Company at a price of $7.25 per Warrant, which equals the
put option price of $15.50 per Warrant less the Series C Warrant exercise
price of $8.25 per Warrant. The put option is exercisable in whole or in
part by the former stockholder from December 1, 1999 until December 15,
1999. The put option would involve a maximum net expenditure of $2.1
million if the shares of common stock are not sold by the former
stockholder prior to the exercise of such option. For the three months
ended June 30, 1998, the Company has recognized $1.3 million as a current
period expense and approximately $807,000 as a reduction of paid-in capital
related to the Company's initial public offering.
7
3. EARNINGS PER SHARE
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" which requires a dual presentation of basic and diluted earnings per
share on the face of the statement of operations. The Company adopted SFAS
No. 128 during the year ended December 31, 1997. Basic earnings per share
is computed by dividing earnings attributable to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company. Earnings per share for all
prior periods presented has been restated to conform with SFAS No. 128.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following should be read in conjunction with the Company's
Condensed Consolidated Financial Statements, including the notes thereto, which
are included elsewhere herein.
(1) RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Total revenues increased by approximately $1.1 million, or 22.0%, to
$5.9 million for the three months ended June 30, 1998 from $4.8 million for the
comparable period of 1997. The increase resulted primarily from the acquisition
of a new supermarket anchored shopping center located in Lantana, Florida in
January, 1998 ("Lantana Village"), a new free-standing restaurant property
located in Miami Beach, Florida in April, 1998 ("El Novillo"), a new drug store
anchored shopping center located in Jacksonville, Florida in May, 1998
("Beauclerc Village"), a new supermarket anchored shopping center located in
Fort Myers, Florida in June, 1998 ("Summerlin Square"), a new supermarket
anchored shopping center located in Jacksonville, Florida in January, 1997
("Monument Pointe"), and a redevelopment property located in North Miami Beach,
Florida in August, 1997 ("Sky Lake").
Operating expenses increased by approximately $190,000, or 17.4%, to
$1.3 million for the three months ended June 30, 1998, from $1.1 million for the
comparable period of 1997. The increase is primarily the result of an increase
in real estate taxes of $83,000, an increase in insurance costs of $21,000, an
increase in utility costs of $18,000 and an increase in other property operating
expenses of $68,000 related to the Company's acquisition of Lantana Village in
January, 1998, El Novillo in April, 1998, Beauclerc Village in May, 1998,
Summerlin Square in June, 1998, Monument Pointe in January, 1997 and Sky Lake in
August, 1997.
Depreciation and amortization expense increased by approximately
$103,000, or 17.3%, to $697,000 for the three months ended June 30, 1998, from
$594,000 for the comparable period of 1997. The increase resulted primarily from
the Company's acquisition of Lantana Village in January, 1998, El Novillo in
April, 1998, Beauclerc Village in May, 1998, Summerlin Square in June, 1998,
Monument Pointe in January, 1997 and Sky Lake in August, 1997.
9
Interest expense decreased by approximately $34,000, or 2.4%, during
the three months ended June 30, 1998, compared to the three months ended June
30, 1997, primarily as a result of the Company's use of proceeds from its
issuances of securities during 1998 and 1997 to reduce mortgage indebtedness.
General and administrative expenses increased by approximately
$163,000, or 49.7%, to $491,000 for the three months ended June 30, 1998, from
$328,000 for the comparable period of 1997. The increase resulted primarily from
an increase in professional and consulting fees of $126,000 and an increase in
payroll costs of $37,000.
During the three months ended June 30, 1998, the Company recognized a
one time expense of $1.3 million relating to the put option granted to a former
stockholder of the Company in connection with the Company's Offering of Common
Stock in May, 1998. Excluding this put option expense, net income would have
been approximately $2.1 million for the three months ended June 30, 1998 and
basic and diluted earnings per share would have been $0.24 and $0.24 for the
three months ended June 30, 1998, respectively.
As a result of the foregoing, net income decreased by approximately
$672,000, or 47.8%, to $735,000 for the three months ended June 30, 1998,
compared to $1.4 million for the comparable period of 1997.
10
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Total revenues increased by approximately $1.6 million, or 17.1%, to
$11.3 million for the six months ended June 30, 1998 from $9.7 million for the
comparable period of 1997. The increase resulted primarily from the Company's
acquisition in January, 1998 of Lantana Village, El Novillo in April, 1998,
Beauclerc Village in May 1998, Summerlin Square in June, 1998, Monument Pointe
in January, 1997, and Sky Lake in August, 1997.
Operating expenses increased by approximately $277,000, or 12.7%, to
$2.5 million for the six months ended June 30, 1998, from $2.2 million for the
comparable period of 1997. The increase is primarily the result of an increase
in real estate taxes of $151,000, an increase in insurance costs of $29,000, an
increase in utility costs of $30,000 and an increase in other property operating
expenses of $67,000 related to the Company's acquisition of Lantana Village in
January, 1998, El Novillo in April, 1998, Beauclerc Village in May, 1998,
Summerlin Square in June, 1998, Monument Pointe in January, 1997 and Sky Lake in
August, 1997.
Depreciation and amortization expense increased by approximately
$177,000, or 15.0%, to $1.4 million for the six months ended June 30, 1998, from
$1.2 million for the comparable period of 1997. The increase resulted primarily
from the Company's acquisition of Lantana Village in January, 1998, El Novillo
in April, 1998, Beauclerc Village in May, 1998, Summerlin Square in June, 1998,
Monument Pointe in January, 1997 and Sky Lake in August, 1997.
11
Interest expense decreased by approximately $42,000, or 1.4%, during
the six months ended June 30, 1998, compared to the six months ended June 30,
1997 primarily as a result of the Company's use of proceeds from its issuances
of securities during 1998 and 1997 to reduce mortgage indebtedness.
General and administrative expenses increased by $123,000, or 15.3% to
$925,000 for the six months ended June 30, 1998 from $802,000 for the comparable
period of 1997. The increase resulted primarily from an increase in professional
and consulting fees of $105,000 and an increase in payroll costs of $18,000.
During the six months ended June 30, 1998, the Company recognized a one
time expense of $1.3 million relating to the put option granted to a former
stockholder of the Company in connection with the Company's Offering of Common
Stock in May, 1998. Excluding this put option expense, net income would have
been approximately $3.7 million for the six months ended June 30, 1998, and
basic and diluted earnings per share would have been $0.48 and $0.47 for the six
months ended June 30, 1998, respectively.
As a result of the foregoing, net income decreased by approximately
$197,000, or 7.7%, to $2.4 million for the six months ended June 30, 1998,
compared to $2.6 million for the comparable period of 1997.
FUNDS FROM OPERATIONS
In March, 1995, the National Association of Real Estate Investment
Trusts ("NAREIT") adopted the NAREIT White Paper on Funds from Operations (the
"White Paper") which provided additional guidance on the calculation of funds
from operations. The White Paper defines funds from operations as net income
(loss) (computed in accordance with generally accepted accounting principles
("GAAP")), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures ("FFO").
Management believes FFO is a helpful measure of the performance of an equity
real estate investment trust ("REIT") because, along with cash flows from
operating activities, investing activities and financing activities, it provides
an understanding of the ability of the Company to incur and service debt and
make capital expenditures. The Company computes FFO in accordance with standards
established by the White Paper, which may differ from the methodology for
calculating FFO utilized by other REIT's, and accordingly, may not be comparable
to such other REIT's. Further, FFO does not represent amounts available for
management's discretionary use because of needed capital replacement or
expansion, debt service obligations, or other commitments and uncertainties. The
Company believes that in order to facilitate a clear understanding of the
consolidated historical operating results of the Company, FFO should be examined
in conjunction with the net income as presented in the condensed consolidated
financial statements and information included elsewhere herein. FFO should not
be considered as an alternative to net income (determined in accordance with
GAAP) as an indication of the Company's financial performance or to cash flows
from operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make distributions.
12
The following table illustrates the calculation of FFO for the three months and
six months ended June 30, 1998 and 1997:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED)
Net income $ 735 $ 1,407 $ 2,375 $ 2,572
Depreciation of real estate assets 684 581 1,330 1,153
Amortization of leasing costs 12 10 25 19
Loan pre-payment penalties 119 - 119 21
Put option expense 1,320 - 1,320 -
Write-off of unamortized loan costs related
to repayment of mortgage indebtedness 88 26 88 102
Lease termination fees (412) (9) (446) (19)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
FUNDS FROM OPERATIONS $ 2,546 $ 2,015 $ 4,811 $ 3,848
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
FUNDS FROM OPERATIONS PER SHARE $ 0.29 $ 0.29 $ 0.61 $ 0.57
- -------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING (Diluted) 8,678 6,958 7,896 6,778
- -------------------------------------------------------------------------------------------------------------------
FFO increased by approximately $531,000, or 26.4%, to $2.5 million for the three
months ended June 30, 1998, from $2.0 million for the comparable period of 1997.
FFO increased by approximately $963,000, or 25.0%, to $4.8 million for the six
months ended June 30, 1998 from $3.8 million for the comparable period of 1997.
The increase is primarily the result of the Company's acquisitions of additional
properties and the reduction of the Company's mortgage indebtedness during such
periods.
PRO FORMA RESULTS OF OPERATIONS
The Company completed its Offering of an aggregate of 4,700,000 shares
of Common Stock on May 19, 1998. Of the 4,700,000 shares of Common Stock sold in
the offering, 3,330,398 shares, generating net proceeds of approximately $33.0
million, were sold by the Company and 1,369,602 shares were sold by a
stockholder of the Company.
The following pro forma results of operations for the three months and
six months ended June 30, 1998 and 1997, respectively, gives effect to the
Offering as if it had occurred at the beginning of each period. Pro forma
adjustments assume application of the net proceeds of the Offering to purchase
rental properties, retire mortgage indebtedness and other related adjustments
and exclude the non-recurring put option expense. The following pro forma
financial information is not necessarily indicative of the results of operations
which would have been reported if the Offering had occurred on the dates or for
the periods indicated.
13
The three months and six months ended June 30, 1998 and 1997 pro forma results
of operations would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED)
REVENUES:
Rental income $ 6,147 $ 5,138 $ 11,925 $ 10,273
Investment revenue 113 197 230 336
-------- -------- --------- ---------
Total revenues 6,260 5,335 12,155 10,609
-------- -------- --------- ---------
COSTS AND EXPENSES:
Operating expenses 1,317 1,190 2,589 2,378
Depreciation and amortization 745 665 1,474 1,320
Interest 1,080 1,269 2,322 2,555
General and administrative expenses 491 328 925 802
-------- -------- --------- ---------
Total costs and expenses 3,633 3,452 7,310 7,055
-------- -------- --------- ---------
NET INCOME $ 2,627 $ 1,883 $ 4,845 $ 3,554
======== ======== ========= =========
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE $ 0.26 $ 0.20 $ 0.47 $ 0.38
======== ======== ========= =========
NUMBER OF SHARES USED IN COMPUTING
BASIC EARNINGS PER SHARE 10,238 9,500 10,238 9,300
======== ======== ========= =========
DILUTED EARNINGS PER SHARE $ 0.25 $ 0.19 $ 0.46 $ 0.36
======== ======== ========= =========
NUMBER OF SHARES USED IN COMPUTING
DILUTED EARNINGS PER SHARE 10,435 9,999 10,435 9,821
======== ======== ========= =========
14
The following table illustrates the calculation of pro forma FFO for the three
months and six months ended June 30, 1998, and 1997:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
(UNAUDITED) (UNAUDITED)
Net income $ 2,627 $ 1,883 $ 4,845 $ 3,554
Depreciation of real estate assets 732 652 1,449 1,295
Amortization of leasing costs 12 10 25 19
Loan pre-payment penalties 21
Write-off of unamortized loan costs related
to repayment of mortgage indebtedness -- -- 102
Lease termination fees (412) (9) (446) (19)
- ------------------------------------------------------------------------------------------------------------------------------------
FUNDS FROM OPERATIONS $ 2,959 $ 2,562 $ 5,873 $ 4,972
- ------------------------------------------------------------------------------------------------------------------------------------
FUNDS FROM OPERATIONS PER SHARE $ 0.28 $ 0.26 $ 0.56 $ 0.51
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING (DILUTED) 10,435 9,999 10,435 9,821
- ------------------------------------------------------------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Historically, the principal sources of funding for the Company's
operations, including the renovation, expansion, development and acquisition of
shopping centers, have been operating cash flows, the issuance of securities and
mortgage loans. The Company's principal demands for liquidity are maintenance,
repair and tenant improvements of existing properties, acquisitions and
development activities, debt service and repayment obligations and distributions
to its stockholders.
15
As of June 30, 1998, the Company had total mortgage indebtedness of
approximately 63.0 million, all of which was fixed rate mortgage indebtedness
bearing interest at a weighted average rate of 7.95% and collateralized by 13 of
the Company's existing properties. Future scheduled annual maturities of
mortgage notes payable for the periods ending June 30 are as follows: 1999 -
$1.2 million, 2000 - $0, 2001 - $2.6 million, 2002 - $2.1 million and 2003 -
$5.9 million. The Company also has provided a $1.5 million letter of credit to
secure certain obligations in connection with the acquisition of one of the
Company's properties. This letter of credit is collateralized by a mixed-use
property located in West Palm Beach, Florida.
The Company has a $2.5 million line of credit (the "Line of Credit")
with a financial institution which is currently due on demand and is
collateralized by the Company's principal office building located in Miami
Beach, Florida. The Line of Credit bears interest at 0.50% over the Citibank,
N.A. prime rate. The purpose of the line of credit is to provide working capital
to the Company. As of June 30, 1998 no amounts were outstanding under the Line
of Credit.
The Company has received a commitment for a $35.0 million revolving
line of credit from the same financial institution providing the Line of Credit,
which would be used to fund property acquisitions and development activities
(the "Acquisition Line of Credit"). The Acquisition Line of Credit will be
secured by certain of the Company's unencumbered properties. Advances under the
Acquisition Line of Credit will bear interest at 225 basis points over LIBOR and
will mature three years after the execution of a definitive loan agreement.
The Company has also received a commitment for a $60.0 million
revolving line of credit from a financial institution, which will also be used
to fund property acquisitions and development activities (the "Additional
Acquisition Line of Credit"). The Additional Acquisition Line of Credit will be
secured by certain of the Company's unencumbered properties. Advances under the
Additional Acquisition Line of Credit will bear interest at 170 basis points
over LIBOR and will mature three years after the execution of a definitive loan
agreement. The execution of definitive documentation respecting the Additional
Acquisition Line of Credit is subject to the financial institution's
satisfactory completion of due diligence.
The Company has one major redevelopment project under construction that
will add an additional 240,000 square feet of retail space to the Company's
portfolio. This project is expected to be completed during 1999. Future funding
required for this project is estimated to be $15.0 million and will come from
the proposed Acquisition Line of Credit or the proposed Additional Acquisition
Line of Credit. Management expects this development to have a positive effect on
cash generated by operating activities and Funds from Operations.
The Company believes, based on currently proposed plans and assumptions
relating to its operations, that the proceeds from its Offering and the
Company's existing financial arrangements, together with cash flows from
operations will be sufficient to satisfy its cash requirements for a period of
at least 12 months. In the event that the Company's plans change, its
assumptions change or prove to be innacurate or the proceeds from the Offering
or available financing arrangements prove to be insufficient to fund the
Company's expansion and development efforts, the Company would be required to
seek additional sources of financing. There can be no assurance that any
additional financing will be available to the Company on acceptable terms, or at
all. If adequate funds are not available, the Company's business operations
could be materially adversely affected.
16
During the three months ended June 30, 1998, the Company declared
dividends of $0.13 and $0.12. These dividends were paid on May 18, 1998 and June
30, 1998 to stockholders of record on May 18,1998 and June 29, 1998,
respectively.
YEAR 2000 COSTS
The Company will be required to modify certain portions of its software
so that it will function properly in the year 2000. Maintenance or modification
costs will be expensed as incurred, while the costs of any new software will be
capitalized and amortized over the software's useful life. Management believes
these "year 2000" costs will be immaterial.
INFLATION
Most of the Company's leases contain provisions designed to partially
mitigate the adverse impact of inflation. Such provisions include clauses
enabling the Company to receive percentage rents based on tenant's gross sales
above predetermined levels, which rents generally increase as prices rise, or
escalation clauses which are typically related to increases in the Consumer
Price Index or similar inflation indices. Most of the Company's leases require
the tenant to pay its share of operating expenses, including common area
maintenance. real estate taxes and insurance, thereby reducing the Company's
exposure to increases in costs and operating expenses resulting from inflation.
The Company's financial results are affected by general economic
conditions in the markets in which its properties are located. An economic
recession, or other adverse changes in general or local economic conditions,
could result in the inability of some existing tenants of the Company to meet
their lease obligations and could otherwise adversely affect the Company's
ability to attract or retain tenants. The properties are typically anchored by
supermarkets, drug stores and other consumer necessity and service retailers
which typically offer day-to-day necessities rather than luxury items. These
types of tenants, in the experience of the Company, generally maintain more
consistent sales performance during periods of adverse economic conditions.
17
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which represent the Company's expectations or beliefs concerning
future events, including, but not limited to, statements regarding growth in
rental revenues and sufficiency of the Company's cash flow for its future
liquidity and capital resource needs. These forward looking statements are
further qualified by important factors that could cause actual events to differ
materially from those in such forward looking statements. These factors include,
without limitation, increased competition, dependence on key tenants, geographic
concentration, lack of development experience, reliance on key personnel and
maintaining its REIT status. Results actually achieved may differ materially
from expected results included in these forward looking statements as a result
of these or other factors.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In June, 1998, Albertsons, Inc.("Albertsons") filed an Amended
Complaint against a subsidiary of the Company ("Subsidiary")
seeking compensatory and other damages in the sum of
$250,000.00 and other relief in connection with an alleged
breach of a letter agreement between Albertsons and the
Subsidiary of the Company. The Amended Complaint omitted all
of the other counts and claims contained in the original
action which was filed on February 26, 1998 in the Circuit
Court for the Eleventh Judicial District in and for Miami-Dade
County, Florida, and alleges breach of a letter agreement and
sought injunctive relief and the payment of damages in excess
of $10,000,000 representing lost profits and other damages.
This action was commenced in response to the Subsidiary's
entering into a lease agreement with Publix Supermarkets
Inc.("Publix") respecting Publix's lease of anchor space at
Sky Lake. The complaint alleged that Albertsons and the
Subsidiary entered into a letter agreemenet which the parties
intended to be memorialized into a formal lease agreement and
as to which the parties intended to be bound. The complaint
further alleged that representatives of the Subsidiary had on
several occasions verbally assured Albertsons that they had an
agreement with respect to the lease of space at Sky Lake and
that the Subsidiary was not negotiating with any other
prospective tenant for the lease of the space to be occupied
by Albertsons. The complaint also alleged that Albertsons
incurred considerable expenses in connection with, among other
things, the preparation of site evaluations, construction
plans and surveys of the subject property. On March 18, 1998,
the Company filed a motion to dismiss the complaint based upon
various procedural grounds (the "Motion"). As set forth in the
Motion, the Subsidiary asserted that it did not execute any
lease agreement and that although the parties engaged in a
series of negotiations there was never an offer and acceptance
or a "meeting of the minds" respecting the lease of space at
Sky Lake. At a hearing on the Motion held on March 26, 1998,
the court dismissed with prejudice Albertsons' claim for
specific performance upon finding that no written lease
existed which could be specifically enforced. A ruling on the
remaining issues raised in the Motion was deferred until a
future date. The Amended Complaint omitted the claim for
specific performance, which claim had been previously
dismissed by the court, and its claim for lost profits which
included the $10,000,000 of lost profits referred to above.
The Company believes it has meritorious defenses to the
remaining claims and intends to defend the action fully and
vigorously. However, no assurance can be given with respect to
the outcome of this action or its effect on the Company.
Item 2. Changes in Securities and Use of Proceeds
The Company commenced its Offering of Common Stock on May 13,
1998 pursuant to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-11 (the
"Registration Statement"), which Registration Statement was
declared effective by the Securities and Exchange Commission
on May 13, 1998. The representatives of the several
underwriters of the Offering were Credit Suisse First Boston,
Morgan Keegan & Company, Inc. and The Robinson - Humphrey
Company. Of the 4,700,000 shares of Common Stock sold in the
Offering, 3,330,398 shares generating proceeds of
approximately $36.6 million, were sold by the Company. After
the payment of approximately $3.6 million in Offering related
expenses (including approximately $2.1 million for
underwriting discounts and commissions) the Company received
net proceeds of approximately $33.0 million. The net proceeds
from the Offering were used to (i) repay certain mortgage
indebtedness on its properties in the amount of approximately
$12.9 million, including prepayment penalties and costs of
approximately $119,000, (ii) repay amounts outstanding under
the Company's then existing line of credit in the amount of
approximately $2.0 million, (iii) acquire certain real estate
properties for approximately $12.7 million, and (iv) establish
working capital reserves of approximately $5.4 million, which
reserves will be used to fund the Company's development
activities at Sky Lake and otherwise fund the Company's
operations.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
In connection with the Company's Offering of Common Stock in
April, 1998, stockholders approved certain amendments to the
Company's Articles of Incorporation and Bylaws. Such vote of
stockholders occurred prior to the consummation of the
Offering.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
10.1 - Summerlin Square - Agreement to Purchase and Sale
10.2 - Summerlin Square - Bill of Sale
10.3 - Escrow Agreement
27.1 - Financial Data Schedule
(B) Report on Form 8-K
None
19
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.
Equity One, Inc.
Date: August 11, 1998 /S/ CHAIM KATZMAN
--------------------------
Chaim Katzman
Chief Executive Officer
(Principal Executive Officer)
/S/ DAVID N. BOOKMAN
-------------------------
David N. Bookman
Vice President and Chief Financial Officer
(Principal Accounting Financial Officer)
20
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Agreement for Purchase and Sale Between Equity One (Gamma)
Inc. and Sunrise Limited Partnership, dated March 12, 1998.
(Summerlin Square)
10.2 Bill of Sale Between Sunrise Limited Partnership and Equity
One (Summerlin) Inc., dated June 5, 1998 (Summerlin Square)
10.3 Escrow Agreement Between Sunrise Limited Partnership and
Equity One (Gamma) Inc., dated March 12, 1998 (Summerlin
Square)
27.1 Financial Data Schedule