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 March 31, 1999
Commission File No. 0001042810
EQUITY ONE, INC.
- --------------------------------------------------------------------------------
(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
Incorporation or Organization) Identification No.)
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 March 31, 1999, 10,574,320 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 MARCH 31, 1999
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets- As of March 31, 1999
(unaudited) and December 31, 1998
Condensed Consolidated Statements of Operations- For the three months
ended March 31, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Stockholders' Equity For the
three months ended March 31, 1999 and 1998 (unaudited)
Condensed Consolidated Statements of Cash Flows- For the three months
ended March 31, 1999 and 1998 (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)
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
ASSETS
Rental Properties:
Land, building and equipment ......................... $ 149,480 $ 134,330
Building improvements ................................ 6,634 6,580
Land held for development ............................ 2,725 2,680
Construction in progress ............................. 7,666 4,497
--------- ---------
166,505 148,087
Accumulated depreciation ............................. (10,255) (9,464)
--------- ---------
Rental properties, net ............................. 156,250 138,623
Cash and cash equivalents ............................ 1,002 1,594
Restricted cash ...................................... -- 6,780
Accounts and other receivables, net .................. 832 1,142
Securities available for sale ........................ 1,740 1,633
Deposits ............................................. 1,087 529
Prepaid and other assets ............................. 1,259 1,454
Deferred expenses, net ............................... 1,294 1,200
--------- ---------
Total assets ..................................... $ 163,464 $ 152,955
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable ............................... $ 74,441 $ 67,145
Note payable ......................................... 585 560
Accounts payable and accrued expenses ................ 1,443 868
Put option liability ................................. 2,127 2,127
Tenants' security deposits ........................... 939 885
Deferred rental income ............................... 190 152
Minority interest in equity of consolidated
subsidiary.......................................... 988 --
--------- ---------
Total liabilities ................................ 80,713 71,737
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock ......................................... 105 102
Additional paid-in capital ........................... 82,785 81,214
Accumulated other comprehensive income ............... (139) (98)
Retained earnings .................................... -- --
--------- ---------
Total stockholders' equity ....................... 82,751 81,218
--------- ---------
Total liabilities and stockholders' equity ............. $ 163,464 $ 152,955
========= =========
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 MARCH 31, 1999 AND 1998 (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
-------- -------
(UNAUDITED)
REVENUES:
Rental income .............................................. $ 5,985 $ 5,322
Investment revenue ......................................... 110 72
------- -------
Total revenues ........................................... 6,095 5,394
------- -------
COSTS AND EXPENSES:
Operating expenses ......................................... 1,591 1,377
Depreciation and amortization .............................. 797 658
Interest ................................................... 1,072 1,485
General and administrative expenses ........................ 412 234
Minority interest in earnings of consolidated subsidiary ... 23 --
------- -------
Total costs and expenses ................................. 3,895 3,754
------- -------
Net income ................................................... $ 2,200 $ 1,640
======= =======
EARNINGS PER SHARE:
Basic earnings per share ..................................... $ 0.21 $ 0.24
======= =======
Number of shares used in computing basic earnings per share .. 10,298 6,908
======= =======
Diluted earnings per share ................................... $ 0.21 $ 0.23
======= =======
Number of shares used in computing diluted earnings per share 10,433 7,247
======= =======
See accompanying notes to the condensed consolidated financial statements.
4
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------
1999 1998
------- -------
(UNAUDITED)
Net income ........................................... $ 2,200 $ 1,640
------- -------
Other comprehensive income:
Net unrealized holding loss on securities
available for sale ............................... (41)
------- -------
Comprehensive income ................................. $ 2,159 $ 1,640
======= =======
See accompanying notes to the consolidated financial statements.
5
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTES
RECEIVABLE ACCUMULATED
ADDITIONAL FROM OTHER TOTAL
COMMON PAID-IN STOCK COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK CAPITAL SALES INCOME EARNINGS EQUITY
-------- ---------- ---------- ------------- -------- -------------
THREE MONTHS ENDED MARCH 31, 1999
Balance, January 1, 1999 ..................... $ 102 $ 81,214 $ -- $ (98) $ -- $ 81,218
Net income ................................. -- -- -- -- 2,200 2,200
Net unrealized holding loss
on securities available for sale ......... -- -- -- (41) -- (41)
Issuance of common stock ................... 3 1,991 -- -- -- 1,994
Dividends .................................. -- (420) -- -- (2,200) (2,620)
-------- -------- -------- -------- -------- --------
Balance, March 31, 1999 (Unaudited) .......... $ 105 $ 82,785 $ -- $ (139) $ -- $ 82,751
======== ======== ======== ======== ======== ========
THREE MONTHS ENDED MARCH 31, 1998
Balance, January 1, 1998 ..................... $ 69 $ 55,036 $ (1,525) $ -- $ -- $ 53,580
Net income ................................. -- -- -- -- 1,640 1,640
Dividends paid ............................. -- (87) -- -- (1,640) (1,727)
-------- -------- -------- -------- -------- --------
Balance, March 31, 1998 (Unaudited) .......... $ 69 $ 54,949 $ (1,525) $ -- $ -- $ 53,493
======== ======== ======== ======== ======== ========
See accompanying notes to the condensed consolidated financial statements.
6
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- --------
(UNAUDITED)
OPERATING ACTIVITIES:
Net income ................................................................. $ 2,200 $ 1,640
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................................ 828 690
Provision for losses on accounts receivable .............................. 16 --
Minority interest in earnings of consolidated
subsidiary ............................................................. 23 --
Changes in assets and liabilities:
Restricted cash ........................................................ 6,780 --
Accounts and other receivables ......................................... 294 222
Deposits ............................................................... (466) (269)
Prepaid and other assets ............................................... 150 (37)
Accounts payable and accrued expenses .................................. 575 (33)
Tenants' security deposits ............................................. -- 34
Deferred rental income ................................................. 38 (105)
Due from related parties ............................................... 32 15
-------- --------
Net cash provided by operating activities .............................. 10,470 2,157
-------- --------
INVESTING ACTIVITIES:
Acquisition of land held for development ................................... (45) --
Acquisition of rental property ............................................. (15,150) (6,768)
Improvements to rental property ............................................ (54) (1,710)
Construction costs incurred ................................................ (3,169) (444)
Purchases of securities .................................................... (155) --
Sales and prepayments of securities ........................................ 7 7
Change in deposits for acquisition of rental property ...................... (38) 450
-------- --------
Net cash used in investing activities .................................. (18,604) (8,465)
-------- --------
FINANCING ACTIVITIES:
Repayments of mortgage notes payable ....................................... (540) (2,438)
Borrowings under mortgage notes payable .................................... 7,836 7,700
Borrowings under note payable .............................................. 25 2,000
Cash dividends paid to stockholders ........................................ (2,620) (1,727)
Stock subscription and issuance ............................................ 1,994 --
Deferred financing expenses, net ........................................... (118) (169)
Change in minority interest ................................................ 965 --
-------- --------
Net cash provided by financing activities .............................. 7,542 5,366
-------- --------
Net Decrease in Cash and Cash Equivalents .................................... (592) (942)
Cash and Cash Equivalents, Beginning of Period ............................... 1,594 2,598
-------- --------
Cash and Cash Equivalents, End of Period ..................................... $ 1,002 $ 1,656
======== ========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest, net of amount capitalized .......................... $ 1,021 $ 1,429
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Change in unrealized depreciation in securities available for sale ........... $ (41) $ --
======== ========
See accompanying notes to the condensed consolidated financial statements.
7
EQUITY ONE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED) AND DECEMBER 31, 1998 (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 March 31,
1999 and 1998 and for the 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, 1998
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 March 31, 1999 and
1998 and for the 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.
Reclassifications - Certain March 31, 1998 amounts have been
reclassified to conform to the March 31, 1999 presentation.
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. During 1998, the Company
recognized $1.3 million as an expense and approximately $807,000 as a
reduction of paid-in capital related to the Company's initial public
offering.
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.
8
4. MINORITY INTEREST
On January 1, 1999, a wholly owned subsidiary of the Company, Equity One
(Walden Woods) Inc., entered into a limited partnership as a general
partner. The limited partners contributed an income producing shopping
center (Walden Woods Village) and the Company contributed 93,656 shares
of common stock to the limited partnership at an agreed upon price of
$10.30 per share. Based on this per share price and the net value of
property contributed by the limited partners, each of the partners
received 93,656 limited partnership units. The Company and the limited
partners have entered into a Redemption Agreement whereby the limited
partners can request that the Company purchase back all or part of the
common stock at $10.30 per share no earlier than two years nor later
than fifteen years after the exchange date of January 1, 1999. As a
result of the Redemption Agreement, the minority interest has been
presented as a liability. In addition, under the terms of the limited
partnership agreement, the minority interest does not have an interest
in the common stock of the Company except to the extent of dividends
declared on such common stock. Accordingly, a preference in earnings has
been allocated to the minority interest to the extent of the dividends
declared. The shares of the Company held by the consolidated limited
partnership are not considered outstanding in the condensed consolidated
financial statements.
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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Total revenues increased by approximately $701,000, or 13.0%, to $6.1
million for the three months ended March 31, 1999 from $5.4 million for the
comparable period of 1998. The increase resulted primarily from the Company's
acquisition of (i) a new supermarket anchored shopping center located in
Orlando, Florida in February, 1999 ("Park Promenade"), (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
Plant City, Florida in January, 1999 ("Walden Woods") and the Winn-Dixie
expansion at Commonwealth Shopping Center. During the fourth quarter of 1998,
the Company sold Parker Towne Shopping Center located in Planto, Texas.
Operating expenses increased by approximately $214,000 or 15.5% to $1.6
million for the three months ended March 31, 1999 from $1.4 million in the
comparable period of 1998. The primary cause for the increase was $194,000
attributed to the net increase in properties mentioned above.
Depreciation and amortization expense increased by approximately
$139,000, or 21.1%, to $797,000 for the three months ended March 31, 1999, from
$658,000 for the comparable period of 1998. The increase resulted primarily from
the acquisitions mentioned above and the Winn-Dixie expansion.
Interest expense decreased by approximately $413,000, or 27.8%, to $1.1
million for the three months ended March 31, 1999 from $1.5 million for the
comparable period of 1998. 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 $178,000, or 76.1%, to
$412,000 for the three months ended March 31, 1999 from $234,000 for the
comparable period of 1998. The increased resulted primarily from an increase in
compensation cost of $104,000 and approximately $54,000 of expenses related to
the Company becoming publicly traded.
9
As a result of the foregoing, net income increased by approximately
$560,000, or 34.1%, to $2.2 million for the three months ended March 31, 1999,
compared to $1.6 million for the comparable period of 1998.
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 ended March 31, 1999 and 1998:
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
------- -------
(UNAUDITED)
Net income ............................................. $ 2,200 $ 1,640
Depreciation of real estate assets ..................... 776 646
Amortization of leasing costs .......................... 8 13
Lease termination fee .................................. 112 --
Minority interest ...................................... 23 --
------- -------
FUNDS FROM OPERATIONS .................................. $ 3,119 $ 2,299
======= =======
FUNDS FROM OPERATIONS PER SHARE (DILUTED) .............. $ 0.30 $ 0.32
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING (DILUTED) .......... 10,433 7,247
======= =======
FFO increased by approximately $820,000 or 35.7%, to $3.1 million for
the three months ended March 31,1999, from $2.3 million for the comparable
period of 1998. 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 IPO 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,
10
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 reports actual results of operations for three months
ended March 31, 1999, and the pro forma results of operations for the three
months ended March 31, 1998. The pro forma results give effect to the initial
public offering as if it had occurred on January 1, 1998. Pro forma adjustments
assume application of the net proceeds of the offering to purchase properties,
retire mortgage indebtedness and other related adjustments. 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 following table illustrates the actual and pro forma results of
operations for the three months ended March 31, 1999 and 1998:
THREE MONTHS ENDED
MARCH 31,
----------------
1999 1998
(ACTUAL) (PRO FORMA)
-------- -----------
(UNAUDITED)
REVENUES:
Rental income ........................................... $ 5,985 $ 5,778
Investment revenue ...................................... 110 117
------- -------
Total revenues ........................................ 6,095 5,895
COSTS AND EXPENSES:
Operating expenses ...................................... 1,591 1,472
Depreciation and amortization ........................... 797 729
Interest ................................................ 1,072 1,242
General and administrative expenses ..................... 412 234
Minority interest in earnings of consolidated affiliate . 23 --
------- -------
Total costs and expenses .............................. 3,895 3,677
------- -------
NET INCOME ................................................ $ 2,200 $ 2,218
======= =======
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE .................................. $ 0.21 $ 0.22
======= =======
NUMBER OF SHARES USED IN COMPUTING BASIC EARNINGS
PER SHARE ............................................... 10,298 10,239
======= =======
DILUTED EARNINGS PER SHARE ................................ $ 0.21 $ 0.21
======= =======
NUMBER OF SHARES USED IN COMPUTING DILUTED EARNINGS
PER SHARE ............................................... 10,433 10,504
======= =======
11
The following table illustrates the actual FFO and pro forma FFO
calculation for the three months ended March 31, 1999 and 1998:
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
(ACTUAL) (PRO FORMA)
-------- -----------
(UNAUDITED)
Net income ...................................... $ 2,200 $ 2,218
Depreciation of real estate assets .............. 776 716
Amortization of leasing costs ................... 8 13
Lease termination fee ........................... 112 --
Minority interest ............................... 23 --
------- -------
FUNDS FROM OPERATIONS ........................... $ 3,119 $ 2,947
======= =======
FUNDS FROM OPERATIONS PER SHARE (DILUTED) ....... $ 0.30 $ 0.28
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING (DILUTED) ... 10,433 10,504
======= =======
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 March 31, 1999, the Company had total mortgage indebtedness of
approximately $74.4 million, all of which was fixed rate mortgage indebtedness
bearing interest at a weighted average rate of 7.90% and collateralized by 16 of
the Company's existing properties. 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.
On February 4, 1999, the Company secured a $35,000,000 Master Revolving
Credit Agreement (the "Credit Agreement") with City National Bank of Florida.
Advances under this Agreement are limited to $16,590,000, with any excess
advances being conditioned on the lender securing participation from other
lenders. The Credit Agreement accrues interest at 225 basis points over the
thirty day LIBOR rate, payable monthly, adjusted every six months and matures
February 4, 2002. Advances under the Credit Agreement will be used to fund
property acquisitions, development activities and other Company activities, and
is secured by four of the Company's unencumbered properties.
In addition, the terms of the Credit Agreement allow the lender to cease
funding and/or accelerate the maturity date if neither Mr. Katzman nor Mr.
Valero remains as the executives in control of the Company. The Credit Agreement
also limits the amount that can be borrowed for the purchase of vacant land and
other customary conditions, including, among other things, the payment of
commitment fees and the required delivery of various title, insurance, zoning
and environmental assurances on the secured properties, and will contain various
covenants, such as a prohibition on secondary financing on any of the secured
properties.
The Company completed an IPO of its common stock in May 1998. Pursuant
to the IPO, an aggregate of 4,700 shares of the Company's common stock were
sold, of which 3,330,398 shares, generating net proceeds of approximately $33.5
million, were sold by the Company and 1,369,602 shares were sold by a
stockholder of the Company. As of March 31, 1999, no proceeds from the IPO
remained available for use.
12
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 the first quarter of
2000. It is anticipated that future funding required for this project is
estimated to be $13.0 million and will come from the Credit Agreement and other
sources of cash including obtaining permanent debt on certain unencumbered
existing properties. Management expects this redevelopment 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 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 inaccurate or the proceeds
from the IPO 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 March 31, 1999, the Company declared and
paid a cash dividend of $0.25 per outstanding share of Common Stock.
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.
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
13
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 26, 1998, Albertsons, Inc. ("Albertsons") commenced an
action against a subsidiary of the Company (the "Subsidiary") in the Circuit
Court for the Eleventh Judicial District in and for Miami-Dade County, Florida,
alleging breach of a letter agreement and seeking 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. Among other things, the complaint alleged
that Albertsons and the Subsidiary entered into a letter agreement which the
parties intended to be memorialized into a formal lease agreement and as to
which the parties intended to be bound. In February, 1999, Albertsons
voluntarily dismissed its complaint relating to this action in its entirety.
Except as described above, neither the Company nor the Company's
properties are subject to any material litigation. Further, to the Company's
knowledge, except as described above, there is no litigation threatened against
the Company or any of its properties, other than routine litigation and
administrative proceedings arising in the ordinary course of business, which
collectively are not expected to have a material adverse affect on the business,
financial condition, results of operations or cash flows of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 1, 1999 a wholly owned subsidiary of the Company, Equity One
(Walden Woods) Inc., entered into a limited partnership as a general partner.
The limited partners contributed an income producing shopping center (Walden
Woods Village) and the Company contributed 93,656 shares of common stock to the
limited partnership at an agreed upon price of $10.30 per share. Based on this
per share price and the net value of property contributed by the limited
partners, each of the partners received 93,656 limited partnership units. The
Company and the limited partners have entered into a Redemption Agreement
whereby the limited partners can request that the Company purchase back all or
part of the common stock at $10.30 per share no earlier than two years nor later
than fifteen years after the exchange date of January 1, 1999. As a result of
the Redemption Agreement, the minority interest has been presented as a
liability. In addition, under the terms of the limited partnership agreement,
the minority interest does not have an interest in the common stock of the
Company except to the extent of dividends declared on such common stock.
Accordingly, a preference in earnings has been allocated to the minority
interest to the extent of the dividends declared. The shares of the Company held
by the consolidated limited partnership are not considered outstanding in the
condensed consolidated financial statements.
On March 10, 1999, Gazit (1995), Inc. exercised 242,136 Series C
Warrants at an exercise price of $8.25 per share producing total proceeds to the
Company of $2.0 million. Approximately $1.1 million of these proceeds were used
to pay down the Company's line of credit, while the remaining balance was
applied towards the April 6, 1999 purchase of a K-Mart Lease at its Lantana
Village Shopping Center for a purchase price of $2.6 million.
14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
10.33 - Master Revolving Credit Agreement, by and between City
National Bank and the Company, dated February 4, 1999
27.1 - Financial Data Schedule
(B) Report on Form 8-K
None
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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.
Date: May 14, 1999 EQUITY ONE, INC.
/s/ CHAIM KATZMAN
------------------------------------------------
Chaim Katzman
Chief Executive Officer
(Principal Executive Officer:
/s/ PETER SACKMANN
------------------------------------------------
Peter Sackmann
Controller
(Principal Accounting Financial Officer)
16
EXHIBIT INDEX
EXHIBITS DESCRIPTION
- -------- -----------
10.33 - Master Revolving Credit Agreement, by and between City National Bank and
the Company, dated February 4, 1999
27.1 - Financial Data Schedule