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 SEPTEMBER 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 November 13, 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 SEPTEMBER 30, 1998
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets-
As of September 30, 1998 (unaudited) and December 31, 1997
Condensed Consolidated Statements of Operations-
For the three months and nine months ended September 30, 1998 and 1997
(unaudited)
Condensed Consolidated Statements of Stockholders' Equity
For the three months and nine months ended September 30, 1998 and 1997
(unaudited)
Condensed Consolidated Statements of Cash Flows-
For the nine months ended September 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)
SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
September 30, December 31,
1998 1997
ASSETS (Unaudited)
Rental Properties:
Land $ 41,307 $ 40,764
Building and improvements 103,670 83,889
Land held for development 2,372 1,394
Construction in progress 2,375 394
-------- --------
149,724 126,441
Accumulated depreciation (9,272) (7,191)
-------- --------
Rental properties, net 140,452 119,250
Cash and cash equivalents 4,665 2,598
Restricted cash 200
Accounts and other receivables, net 1,141 892
Securities available for sale 1,655 45
Deposits 1,675 1,339
Prepaid and other assets 1,213 1,252
Deferred expenses, net 1,034 1,527
-------- --------
Total assets $ 152,035 $ 126,903
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 62,611 $ 71,004
Accounts payable and accrued expenses 5,151 1,281
Put option liability 2,127
Deposit on rental property held for sale 200
Tenants' security deposits 934 764
Deferred rental income 458 274
-------- --------
Total liabilities 71,481 73,323
-------- --------
Stockholders' equity:
Common stock 102 69
Additional paid-in capital 80,535 55,036
Notes receivable from stock sales (1,525)
Net unrealized holding loss on securities available for sale (83)
Retained earnings
-------- --------
Total stockholders' equity 80,554 53,580
-------- --------
Total liabilities and stockholders' equity $ 152,035 $ 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 SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited)
REVENUES:
Rental income $ 5,688 $ 4,927 $ 16,855 $ 14,288
Investment revenue 146 260 310 572
------- ------- -------- --------
Total revenues 5,834 5,187 17,165 14,860
------- ------- -------- --------
COSTS AND EXPENSES:
Operating expenses 1,410 1,237 4,133 3,631
Depreciation and amortization 763 603 2,118 1,781
Interest 1,123 1,411 4,020 4,350
Put option expense 1,320
General and administrative expenses 447 339 1,108 929
------- ------- -------- --------
Total costs and expenses 3,743 3,590 12,699 10,691
------- ------- -------- --------
NET INCOME $ 2,091 $ 1,597 $ 4,466 $ 4,169
======= ======= ======== ========
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE $ 0.20 $ 0.23 $ 0.52 $ 0.66
======= ======= ======== ========
NUMBER OF SHARES USED IN COMPUTING
BASIC EARNINGS PER SHARE 10,239 6,908 8,555 6,289
======= ======= ======== ========
DILUTED EARNINGS PER SHARE $ 0.20 $ 0.22 $ 0.52 $ 0.61
======= ======= ======== ========
NUMBER OF SHARES USED IN COMPUTING
DILUTED EARNINGS PER SHARE 10,299 7,247 8,616 6,797
======= ======= ======== ========
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 SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
Notes Net Unrealized Total
Additional Receivable Holding Loss Stock-
Common Paid-in From on Securities Retained holders'
Stock Capital Stock Sales Available for Sale Earnings Equity
Three Months Ended September 30, 1998
BALANCE,
JULY 1, 1998 $ 102 $ 81,003 $ 81,105
Net income $ 2,091 2,091
Net unrealized holding loss
on securites available for sale $ (83) (83)
Accrued dividends (468) (2,091) (2,559)
----- ------- ------- ----- ------- -------
BALANCE,
SEPTEMBER 30, 1998 (Unaudited) $ 102 $ 80,535 $ $ (83) $ $ 80,554
----- ------- ------- ----- ------- -------
Three Months Ended September 30, 1997
BALANCE,
JULY 1, 1997 $ 69 $ 54,950 $ (1,525) $ 53,494
Net income $ 1,597 1,597
Dividends paid (216) (1,597) (1,813)
----- ------- ------- ----- ------- -------
BALANCE,
SEPTEMBER 30, 1997 (Unaudited) $ 69 $ 54,734 $ (1,525) $ $ $ 53,278
===== ======= ======= ===== ======= =======
Nine Months Ended September 30, 1998
BALANCE,
JANUARY 1, 1998 $ 69 $ 55,036 $ (1,525) $ 53,580
Net income $ 4,466 4,466
Net unrealized holding loss
on securites available for sale $ (83) (83)
Issuance of common stock 33 34,088 34,121
Stock issuance costs (1,077) (1,077)
Put option liability (807) (807)
Property distributed (4,758) 1,525 (3,233)
Accrued dividends (468) $ (2,091) (2,559)
Dividends paid (1,479) (2,375) (3,854)
----- ------- ------- ----- ------- -------
BALANCE,
SEPTEMBER 30, 1998 (Unaudited) $ 102 $ 80,535 $ $ (83) $ $ 80,554
===== ======= ======= ==== ======= =======
Nine Months Ended September 30, 1997
BALANCE,
JANUARY 1, 1997 $ 58 $ 44,562 $ (1,525) $ 43,095
Net income $ 4,169 4,169
Issuance of common stock 11 10,596 10,607
Dividends paid (424) (4,169) (4,593)
----- ------- ------- ----- ------- -------
BALANCE,
SEPTEMBER 30, 1997 (Unaudited) $ 69 $ 54,734 $ (1,525) $ $ $53,278
===== ======= ======= ==== ======= =======
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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
Nine Months Ended
September 30,
1998 1997
(Unaudited)
OPERATING ACTIVITIES:
Net income $ 4,466 $ 4,169
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,287 1,965
Provision for losses on accounts receivable 42 32
Gain on sales of securities (56)
Put option liability 1,320
Changes in assets and liabilities :
Restricted cash (200)
Accounts and other receivables (243) (417)
Deposits (736) (1,248)
Prepaid and other assets (47) (161)
Accounts payable and accrued expenses 1,674 1,559
Deposit on rental property held for sale 200
Tenants' security deposits 170 84
Deferred rental income 184 17
-------- --------
Net cash provided by operating activities 9,117 5,944
-------- --------
INVESTING ACTIVITIES:
Acquisition of rental property (22,252) (16,934)
Improvements to rental property (2,283) (679)
Construction costs incurred (1,981)
Purchases of securities (1,714) (5,246)
Sales and prepayments of securities 21 6,582
Change in deposits for acquisition of rental property 400
-------- --------
Net cash used in investing activities (27,809) (16,277)
-------- --------
FINANCING ACTIVITIES:
Repayments of mortgage notes payable (16,093) (18,479)
Borrowings under mortgage notes payable 7,700 23,148
Cash dividends paid to stockholders (3,854) (4,593)
Stock subscription and issuance 34,121 10,607
Stock issuance costs (853)
Deferred financing expenses, net (262) (194)
-------- --------
Net cash provided by financing activities 20,759 10,489
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,067 156
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,598 1,951
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,665 $ 2,107
======== ========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest, net of amount capitalized $ 3,259 $ 4,082
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES:
Accrued dividends $ 2,559
========
Change in unrealized depreciation in securities available for sale $ (83)
========
Put option liability charged to stockholders' equity $ 807
========
Property and notes receivable from stock sales distributed $ 4,758
========
See accompanying notes to the condensed consolidated financial statements.
6
EQUITY ONE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 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 September 30, 1998
and 1997 and for the nine 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 September 30, 1998 and
1997 and for the nine 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 the
Company's 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 nine months ended
September 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
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.
4. SUBSEQUENT EVENTS
On October 30, 1998, the Company sold Parker Towne Center, located in Plano,
Texas for approximately $6.85 million to an unrelated third party. The
Company intends to treat this sale as a like-kind exchange for tax purposes.
To date, the Company has not identified replacement property.
Additionally, on October 30, 1998, the Company entered into a 20 year loan
agreement with a life insurance company for $5.0 million at an interest rate
of 6.85% and secured by Atlantic Village shopping center located in
Jacksonville, Florida.
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 SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Total revenues increased by approximately $647,000, or 12.5%, to $5.8 million
for the three months ended September 30, 1998 from $5.2 million for the
comparable period of 1997. The increase resulted primarily from the Company's
acquisition of (i) a new supermarket anchored shopping center located in
Lantana, Florida in January, 1998 ("Lantana Village"), (ii) a new free-standing
restaurant property located in Miami Beach, Florida in April, 1998 ("El
Novillo"), (iii) a new drug store anchored shopping center located in
Jacksonville, Florida in May, 1998 ("Beauclerc Village"), (iv) a new supermarket
anchored shopping center located in Fort Myers, Florida in June, 1998
("Summerlin Square"), (v) a new supermarket anchored shopping center located in
Jacksonville, Florida in January, 1997 ("Monument Pointe"), and (vi) a
redevelopment property located in North Miami Beach, Florida in August, 1997
("Sky Lake").
Operating expenses increased by approximately $173,000, or 14.0%, to $1.4
million for the three months ended September 30, 1998, from $1.2 million for the
comparable period of 1997. The increase is primarily the result of an increase
in real estate taxes of $123,000, an increase in insurance costs of $20,000, and
an increase in other property operating expenses of $30,000 related to the
Company's acquisitions of Lantana Village, El Novillo, Beauclerc Village,
Summerlin Square, Monument Pointe and Sky Lake.
Depreciation and amortization expense increased by approximately $160,000, or
26.7%, to $763,000 for the three months ended September 30, 1998, from $603,000
for the comparable period of 1997. The increase resulted primarily from the
acquisitions of Lantana Village, El Novillo, Beauclerc Village, Summerlin
Square, Monument Pointe and Sky Lake.
Interest expense decreased by approximately $288,000, or 20.5%, to $1.1 million
for the three months ended September 30, 1998, from $1.4 million for the
comparable period of 1997. The decrease resulted primarily from the Company's
use of proceeds from its initial public offering of common stock consummated in
May 1998 (the "IPO") to reduce mortgage indebtedness.
General and administrative expenses increased by $108,000, or 31.8%, to $447,000
for the three months ended September 30, 1998 from $339,000 for the comparable
period of 1997. The increase resulted primarily from an increase in professional
fees of $52,000 and an increase in bad debt expenses of $56,000.
As a result of the foregoing, net income increased by approximately $494,000, or
31.0%, to $2.1 million for the three months ended September 30, 1998, compared
to $1.6 million for the comparable period of 1997.
9
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Total revenues increased by approximately $2.3 million, or 15.5%, to $17.2
million for the nine months ended September 30, 1998 from $14.9 million for the
comparable period of 1997. The increase resulted primarily from the acquisitions
of Lantana Village, El Novillo, Beauclerc Village, Summerlin Square, Monument
Pointe and Sky Lake.
Operating expenses increased by approximately $502,000, or 13.8%, to $4.1
million for the nine months ended September 30, 1998, from $3.6 million for the
comparable period of 1997. The increase is primarily the result of an increase
in real estate tax escrows of $274,000, an increase in insurance costs of
$40,000, an increase in payroll costs of $61,000, an increase in repairs of
$30,000 and an increase in other property operating expenses of $97,000 related
to the Company's acquisition of Lantana Village, El Novillo, Beauclerc
Village, Summerlin Square, Monument Pointe and Sky Lake.
Depreciation and amortization expense increased by approximately $337,000, or
18.9%, to $2.1 million for the nine months ended September 30, 1998, from $1.8
million for the comparable period of 1997. The increase resulted primarily from
the acquisition of Lantana Village, El Novillo, Beauclerc Village, Summerlin
Square, Monument Pointe and Sky Lake.
Interest expense decreased by approximately $330,000, or 7.6%, to $4.0 million
for the nine months ended September 30, 1998 from $4.3 million for the
comparable period of 1997, primarily as a result of the Company's use of
proceeds from its issuance of capital stock during 1998 and 1997 to reduce
mortgage indebtedness.
General and administrative expenses increased by approximately $179,000, or
19.3% to $1.1 million for the nine months ended September 30, 1998 from $929,000
for the comparable period of 1997. The increase resulted primarily from an
increase in professional and consulting fees of $135,000 and an increase in bad
debt expenses of $42,000.
The put option expense of approximately $1.3 million, in the nine months ended
September 30, 1998, resulted from the Company granting Dan Overseas (the Selling
Stockholder in the Company's initial public offering of Common Stock) an option
to put 293,430 Series C warrants to the Company at a price of $7.25 per warrant
which resulted in a one time expense of approximately $1.3 million. Excluding
this put option expense, net income would have been approximately $5.7 million
for the nine months ended September 30, 1998, and basic and diluted earnings per
share would have been $0.67 and $0.67 for the nine months ended September 30,
1998, respectively.
As a result of the foregoing, net income increased by approximately $297,000, or
7.1%, to $4.5 million for the nine months ended September 30, 1998, compared to
$4.2 million for the comparable period of 1997.
10
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 REITs, and accordingly, may not be comparable to such other
REITs. 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.
The following table illustrates the calculation of FFO for the three months and
nine months ended September 30, 1998 and 1997:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited)
Net income $ 2,091 $ 1,597 $ 4,466 $ 4,169
Depreciation of real estate assets 745 590 2,075 1,743
Amortization of leasing costs 12 10 37 29
Loan pre-payment penalties 119 21
Put option expense 1,320
Write-off of unamortized loan costs related
to repayment of mortgage indebtedness 88 102
Lease termination fees (4) (15) (450) (34)
------- ------- ------- -------
FUNDS FROM OPERATIONS $ 2,844 $ 2,182 $ 7,655 $ 6,030
======= ======= ======= =======
FUNDS FROM OPERATIONS PER SHARE (Diluted) $ 0.28 $ 0.30 $ 0.89 $ 0.89
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING (Diluted) 10,299 7,247 8,616 6,797
======= ======= ======= =======
11
FFO increased by approximately $662,000 or 30.3%, to $2.8 million for the three
months ended September 30, 1998, from $2.2 million for the comparable period of
1997. FFO increased by approximately $1.6 million, or 27.0% to $7.7 million for
the nine months ended September 30, 1998 from $6.0 million for the comparable
period of 1997. The increase is primarily the result of the acquisitions of
additional properties and the reduction of the Company's mortgage indebtedness.
PRO FORMA RESULTS OF OPERATIONS
The Company completed an initial public offering of an aggregate of 4,700,000
shares of common stock, par value $0.01 per share, 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 nine months ended
September 30, 1998 and 1997, and the actual results of operations for the three
months ended September 30, 1998, and the pro forma results of operations for the
three months September 30, 1997, respectively, gives effect to the initial
public 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
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.
The nine months ended September 30, 1998 and 1997 and the three months ended
September 30, 1997 pro forma results of operations would have been as follows:
Three
Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997
(Unaudited) (Unaudited)
REVENUES:
Rental income $ 5,383 $ 17,613 $ 15,656
Investment revenue 309 376 645
------- -------- --------
Total revenues 5,692 17,989 16,301
------- -------- --------
COSTS AND EXPENSES:
Operating expenses 1,335 4,263 3,925
Depreciation and amortization 674 2,237 1,994
Interest 1,220 3,445 3,775
General and administrative expenses 339 1,108 929
------- -------- --------
Total costs and expenses 3,568 11,053 10,623
------- -------- --------
NET INCOME $ 2,124 $ 6,936 $ 5,678
======= ======== ========
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE $ 0.21 $ 0.68 $ 0.59
======= ======== ========
NUMBER OF SHARES USED IN COMPUTING
BASIC EARNINGS PER SHARE 10,239 10,239 9,619
======= ======== ========
DILUTED EARNINGS PER SHARE $ 0.20 $ 0.67 $ 0.56
======= ======== ========
NUMBER OF SHARES USED IN COMPUTING
DILUTED EARNINGS PER SHARE 10,577 10,299 10,128
======= ======== ========
12
The following table illustrates the calculation of pro forma FFO for the nine
months ended September 30, 1998 and 1997 and the three months ended
September 30, 1997:
Three
Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997
(Unaudited) (Unaudited)
Net income $ 2,124 $ 6,936 $ 5,678
Depreciation of real estate assets 661 2,194 1,956
Amortization of leasing costs 10 37 29
Loan pre-payment penalties 21
Write-off of unamortized loan costs related
to repayment of mortgage indebtedness 102
Lease termination fees (15) (450) (34)
------- ------- -------
FUNDS FROM OPERATIONS $ 2,780 $ 8,717 $ 7,752
======= ======= =======
FUNDS FROM OPERATIONS PER SHARE (Diluted) $ 0.26 $ 0.84 $ 0.77
======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING (Diluted) 10,577 10,299 10,128
======= ======= =======
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.
As of September 30, 1998, the Company had total mortgage indebtedness of
approximately $62.6 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 September 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 September 30, 1998, no amounts were outstanding under the Line of Credit.
The Company has received a commitment for a $15.0 million revolving line of
credit from the same financial institution providing the Line of Credit, which
will be used to fund property acquisitions and development activities (the
"Acquisition Line of Credit") and 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. This Line of Credit will be increased
up to $35.0 million, subject to the financial institution obtaining participants
and the Company contributing additional properties, acceptable to the financial
institution and its participants.
13
The Company has determined at this time not to pursue obtaining a previously
announced commitment with respect to a $60.0 million revolving line of credit
facility from a different financial institution.
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. It is anticipated that
future funding required for this project is estimated to be $15.0 million and
will come from the proposed Acquisition Line of Credit and other sources of cash
including obtaining permanent debt on certain unencumbered existing properties.
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 initial public 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 initial
public 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.
During the three months ended September 30, 1998, the Company declared a cash
dividend of $0.25 per outstanding share of Common Stock. This dividend was paid
on October 6, 1998 to stockholders of record on September 22, 1998.
YEAR 2000 COSTS
The Company has undertaken a study of its functional application systems to
determine their compliance with year 2000 issues and, to the extent of
noncompliance, the required remediation. As a result of such study, the Company
believes the majority of its systems are year 2000 compliant. To date, the
expenses incurred by the Company in order to become year 2000 compliant,
including computer software costs, have been approximately $25,000. Costs other
than software have been expensed as incurred.
An assessment of the readiness of year 2000 compliance of third party entities
with which the Company has relationships, such as its banking institutions,
tenants and others is ongoing. The Company has inquired, or is in the process of
inquiring, of the significant aforementioned third party entities as to their
readiness with respect to year 2000 compliance and to date has received
indications that many of them are either compliant or in the process of
remediation. The Company will continue to monitor these third party entities to
determine the impact on the business of the Company and the actions the Company
must take, if any, in the event of non-compliance by any of these third parties.
The Company's initial assessment of compliance by third party entities is that
there is not a material business risk to the Company posed by any such
noncompliance and, as such, the Company has not yet developed any related
contingency plans.
14
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.
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.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported in the Company's Quarterly Report on
Form 10-Q for the three and six months ended June 30, 1998
(the "Prior Report"), Albertsons, Inc. ("Albertsons") filed
a complaint in the Circuit Court for the Eleventh Judicial
District in and for Miami-Dade County, Florida against a
subsidiary of the Company seeking injunctive relief and
amounts representing lost profits arising from an alleged
breach by the subsidiary of a letter agreement between
Albertsons and such subsidiary. As reported in the Prior
Report, the court dismissed with prejudice Albertsons' claim
for specific performance and deferred until a later date a
ruling on the remaining issues raised in Albertsons'
complaint. Although the Company believes that it has
meritorious defenses to the remaining claims and intends to
defend the action fully and vigorously, no assurance can be
given with respect to the outcome of this action or its effect
on the Company. No material developments have occurred with
respect to this action during the three months ended September
30, 1998.
Item 2. Changes in Securities and Use of Proceeds
The Company consummated its initial public offering of an
aggregate of 4,700,000 shares of Common Stock on May 13,
1998. 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, the Company received net proceeds of approximately
$33.0 million. Of the $5.4 million of proceeds available as of
July 1, 1998, the following proceeds were used during the
three months ended September 30, 1988: (i) acquired certain
real estate properties for $1.0 million, and (ii) paid $1.1
million for construction costs and improvements to existing
properties.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
16
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
10.1 - Agreement for Purchase and Sale, dated August
19, 1998, between Equity (Parker Towne Center),
Inc. and Dunhill Partners
10.2 - Promissory Note, dated October 30, 1998, in the
amount of $5.0 million from Equity One
(Atlantic Village), Inc. to Southern Farm
Bureau Life Insurance Company
10.3 - Mortgage, Security Agreement and Assignment of
Leases, dated October 30, 1998, between Equity
One (Atlantic Village), Inc. and Southern Farm
Bureau Life Insurance Company
27.1 - Financial Data Schedule
(B) Report on Form 8-K
None
17
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: November 16, 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)
18
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Agreement for Purchase and Sale, dated August 19, 1998
Between Equity (Parker Towne Center), Inc. and Dunhill
Partners
10.2 Promissory Note, dated October 30, 1998 issued by Equity One
(Atlantic Village), Inc. to Southern Farm Bureau Life
Insurance Company
10.3 Mortgage Security Agreement and Assignment of Leases, dated
October 30, 1998 between Equity One (Atlantic Village), Inc.
and Southern Farm Bureau Life Insurance Company
27.1 Financial Data Schedule