UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A NO. 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission File No. 0001042810
EQUITY ONE, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
1696 N.E. MIAMI GARDENS DRIVE
NORTH 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 July 25, 2001, 13,011,901 shares of the Company's
common stock, par value $0.01 per share, were issued and outstanding.
EQUITY ONE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q/A QUARTER ENDED MARCH 31, 2001
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets-
As of March 31, 2001 (unaudited) and December 31, 2000................................................. 3
Condensed Consolidated Statements of Operations-
For the three-month periods ended March 31, 2001 and 2000 (unaudited).................................. 4
Condensed Consolidated Statements of Comprehensive Income-
For the three-month periods ended March 31, 2001 and 2000 (unaudited).................................. 5
Condensed Consolidated Statements of Stockholders' Equity-
For the three-month periods ended March 31, 2001 and 2000 (unaudited).................................. 6
Condensed Consolidated Statements of Cash Flows-
For the three-month periods ended March 31, 2001 and 2000 (unaudited).................................. 7
Notes to the Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................. 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................... 14
Item 2. Changes in Securities and Use of Proceeds.............................................................. 14
Item 3. Defaults Upon Senior Securities........................................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders.................................................... 14
Item 5. Other Information...................................................................................... 14
Item 6. Exhibits and Reports on Form 8-K....................................................................... 14
Signatures...................................................................................................... 14
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, 2001 (UNAUDITED) AND DECEMBER 31, 2000
MARCH 31, DECEMBER 31,
2001 2000
------------------- --------------------
(UNAUDITED)
ASSETS
Rental Properties
Land, building and equipment................................. $ 219,932 $ 216,698
Building improvements........................................ 9,263 8,228
Land held for development.................................... 10,977 11,008
Construction in progress..................................... 7,272 7,128
-------------- --------------
Total rental properties........................................ 247,444 243,062
Accumulated depreciation..................................... (17,044) (15,836)
-------------- --------------
Rental properties, net......................................... 230,400 227,226
Cash and cash equivalents...................................... 783 322
Restricted cash................................................ 4,356 4,273
Securities available for sale.................................. 1,564 1,403
Accounts and other receivables, net............................ 913 2,234
Due from related parties....................................... 12 47
Deposits....................................................... 1,505 822
Prepaid and other assets....................................... 1,185 667
Deferred expenses, net......................................... 1,401 1,404
Goodwill, net.................................................. 631 644
-------------- --------------
Total assets...................................................... $ 242,750 $ 239,042
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable....................................... $ 125,540 $ 121,675
Credit Agreement............................................. 3,772 4,243
Accounts payable and accrued expenses........................ 3,067 2,857
Tenants' security deposits................................... 1,666 1,476
Deferred rental income....................................... 709 662
Minority interest in equity of consolidated subsidiary....... 3,869 3,875
-------------- --------------
Total liabilities.............................................. 138,623 134,788
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock................................................. 129 128
Additional paid-in capital................................... 106,171 105,368
Retained earnings............................................ 131 423
Accumulated other comprehensive income ...................... (150) (311)
Unamortized restricted stock compensation and notes
receivable................................................. (2,154) (1,354)
-------------- --------------
Total stockholders' equity..................................... 104,127 104,254
-------------- --------------
Total liabilities and stockholders' equity........................ $ 242,750 $ 239,042
============== ==============
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-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
Three Months Ended
March 31,
---------------------
2001 2000
------- -------
(Unaudited)
REVENUES:
Rental income............................. $ 9,165 $ 8,034
Management fees........................... 526 31
Investment revenue........................ 136 39
------- -------
Total revenues.......................... 9,827 8,104
------- -------
COSTS AND EXPENSES:
Operating expenses........................ 2,733 2,178
Depreciation.............................. 1,207 967
Interest.................................. 2,082 1,726
General................................... 718 573
Amortization expense goodwill............. 13 13
------- -------
Total costs and expenses.................. 6,753 5,457
------- -------
Income before minority interest in earnings
of consolidated subsidiary................. $ 3,074 $ 2,647
Minority interest in earnings of
consolidated subsidiary ................ -- 24
------- -------
Net Income .................................. $ 3,074 $ 2,623
======= =======
EARNINGS PER SHARE:
Basic earnings per share..................... $ 0.24 $ 0.23
======= =======
Number of shares used in computing basic
earnings per share........................ 12,706 11,299
======= =======
Diluted earnings per share................... $ 0.23 $ 0.23
======= =======
Number of shares used in computing diluted
earnings per share........................ 13,232 11,479
======= =======
See accompanying notes to the condensed consolidated financial statements.
4
5
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2001 2000
------------- --------------
(UNAUDITED)
Net income............................................................... $ 3,074 $ 2,623
Other comprehensive income
Net unrealized holding gain on securities available for sale.......... 161 56
------------- --------------
Comprehensive income..................................................... $ 3,235 $ 2,679
============= ==============
See accompanying notes to the condensed consolidated financial statements.
5
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
UNAMORTIZED
RESTRICTED
ACCUMULATED STOCK
ADDITIONAL OTHER COMPENSATION TOTAL
PAID-IN RETAINED COMPREHENSIVE AND NOTES STOCKHOLDERS'
COMMON STOCK CAPITAL EARNINGS INCOME RECEIVABLE EQUITY
---------- ---------- ---------- ------------- ------------ -------------
THREE MONTHS ENDED MARCH 31, 2001
Balance, January 1, 2001............ $ 128 $ 105,368 $ 423 $ (311) $ (1,354) $ 104,254
Issuance of common stock......... 1 811 (800) 12
Stock issuance cost.............. (8) (8)
Net income....................... 3,074 3,074
Net unrealized holding gain on
securities available for sale.. 161 161
Dividends paid................... (3,366) (3,366)
---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 2001 (Unaudited). $ 129 $ 106,171 $ 131 $ (150) $ (2,154) $ 104,127
========== ========== ========== ========== ========== ==========
THREE MONTHS ENDED MARCH 31, 2000
Balance, January 1, 2000............ $ 113 $ 89,990 $ 2,390 $ (519) $ (545) $ 91,429
Issuance of Common Stock......... 3 2,835 2,838
Stock issuance cost.............. (133) (133)
Net income ...................... 2,623 2,623
Net unrealized holding gain on
securities available for sale.. 56 56
Dividends paid................... (2,990) (2,990)
---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 2000 (Unaudited). $ 116 $ 92,692 $ 2,023 $ 463 $ (545) $ 93,823
========== ========== ========== ========== ========== ==========
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-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------------------
2001 2000
----------------- -----------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income....................................................... $ 3,074 $ 2,623
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 1,282 1,052
Provision for losses on accounts receivable.................... 25 32
Minority interest in earnings of consolidated subsidiary....... -- 24
Changes in assets and liabilities:
Restricted cash.............................................. (83) --
Accounts and other receivables............................... 1,296 985
Deposits..................................................... (683) (643)
Prepaid and other assets..................................... (518) (195)
Accounts payable and accrued expenses........................ 210 898
Deferred rental income....................................... 190 59
Tenants' security deposits................................... 47 66
Due from related parties..................................... 35 28
---------------- -----------------
Net cash provided by operating activities........................... 4,875 4,929
---------------- -----------------
INVESTING ACTIVITIES
Additions to rental property..................................... (4,382) (5,416)
Purchases of securities.......................................... -- (11)
---------------- -----------------
Net cash used in investing activities............................... (4,382) (5,427)
---------------- -----------------
FINANCING ACTIVITIES
Repayments of mortgage notes payable............................. (835) (675)
Borrowings under mortgage notes payable.......................... 4,700 6,500
Repayments under credit agreement................................ (471) (4,389)
Cash dividends paid to stockholders.............................. (3,366) (2,990)
Stock subscription and issuance.................................. 12 1,714
Stock issuance cost.............................................. (8) (133)
Deferred financing expenses, net................................. (58) 260
Change in minority interest...................................... (6) (24)
---------------- -----------------
Net cash (used in) provided by financing activities................. (32) 263
---------------- -----------------
Net Increase (Decrease) in Cash and Cash Equivalents................ 461 (235)
Cash and Cash Equivalents, Beginning of Period...................... 322 427
---------------- -----------------
Cash and Cash Equivalents, End of Period............................ $ 783 $ 192
================ =================
(Continued)
7
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
2001 2000
------------------ -----------------
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE
Cash paid for interest, net of amount capitalized................ $ 1,997 $ 1,695
================== =================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Change in unrealized holding gain on securities available for sale $ 161 $ 56
================== =================
Issuance of restricted stock..................................... $ 811 $ 1,124
================== =================
(Concluded)
See accompanying notes to the condensed consolidated financial statements.
8
EQUITY ONE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim condensed financial data of Equity One,
Inc. (the "Company") are unaudited; however, in the opinion of
management, the interim data include all adjustments necessary for a fair
presentation of the results for the interim periods. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the reported
amounts of revenue and expenses during the reporting periods. Actual
results could differ from those estimates.
The results of operations for the three-month periods ended
March 31, 2001 are not necessarily indicative of the results to be
expected for the year ending December 31, 2001. The December 31, 2000
condensed consolidated balance sheet was derived from the audited
consolidated financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States
of America.
The interim unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 2000
appearing in the Company's Form 10-K/A No. 3 filed with the Securities
and Exchange Commission.
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.
3. EARNINGS PER SHARE
Basic earnings per share are 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. MINORITY INTEREST
On January 1, 1999, a wholly-owned subsidiary of the Company,
Equity One (Walden Woods) Inc. (the "Walden Woods General Partner"),
entered into a limited partnership as a general partner. An income
producing shopping center was contributed by its owners (the "Walden
Woods Minority Partners"), and the Walden Woods General Partner
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 asset value of the property contributed by the Walden Woods
Minority Partners, each of the partners received 93,656 limited
partnership units. The Company and the Walden Woods Minority Partners
have entered into an agreement (the "Redemption Agreement") whereby the
Walden Woods Minority Partners can request that the Company purchase
either their limited partnership units or any shares of common stock
which they have received in exchange for their limited partnership units
at a price of $10.30 per unit or 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 Walden Woods Minority Partners do 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 Walden Woods Minority Partners to the
extent of the dividends declared. The 93,656 shares of common stock of
the Company held by the consolidated limited partnership are not
considered outstanding in the condensed consolidated financial
statements.
On December 5, 2000, a wholly-owned subsidiary of the Company,
Equity One (North Port), Inc., entered into a limited partnership (the
"Shoppes of North Port, Ltd.") as a general partner. An income producing
shopping center ("Shoppes of North Port") was contributed by its owners
(the "North Port Minority Partners") and the Company contributed an
income producing property to a limited liability company wholly-owned by
the Shoppes of North Port, Ltd. Both the
9
North Port Minority Partners and the general partner were issued
operating partnership units ("OPUs") based on the net value of the
properties contributed. The North Port Minority Partners received 261,850
OPUs which can be redeemed for the Company's common stock on a
one-for-one basis or cash at an agreed upon price of $11.00 per share no
earlier than December 10, 2001, nor later than three and one half years
thereafter. Accordingly, the minority interest has been presented as a
liability in the accompanying consolidated balance sheet. The North Port
Minority Partners receive a preferred quarterly distribution equal to a
9.0% annual return on their initial capital contribution. This amount is
reflected as interest expense in the 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.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2000
Total revenues increased by approximately $1.7 million, or 21.3% to
$9.8 million for the three months ended March 31, 2001 from $8.1 million for the
comparable period of 2000. The increase in revenue was primarily the result of
the acquisition of properties and the completion of development projects. The
acquisition of Mariners Crossing (September 2000), Shoppes of North Port
(December 2000) and Pompano Beach (January 2001) contributed $568,000 in revenue
growth. The completion of phase one of Forest Village (April 2000), phase two of
the Shops at Skylake (July 2000) and several smaller development projects at
Lake Mary, Pointe Royale and Losco Corners increased revenues by approximately
$517,000. Additional sources of increased revenues were increased third party
management fees and commissions of $495,000, increased termination fees of
$154,000 and increased interest and dividend income of $97,000, offset by a
decline in rental revenue from all other properties of $108,000.
Operating expenses increased by approximately $555,000, or 25.5% to
$2.7 million for the three months ended March 31, 2001 from $2.2 million for the
comparable period of 2000. The acquisitions and completion of development
projects described above resulted in operating expenses increasing by
approximately $250,000; the management company's operating expenses increased by
$445,000 primarily due to managing a larger in-house portfolio and assuming the
property management of eleven third-party owned shopping centers and the asset
management of seventeen third-party owned shopping centers; and a decline in
operating expenses from all other properties of approximately $140,000.
Depreciation and amortization expense increased by approximately
$240,000, or 24.8% to $1,207,000 for the three months ended March 31, 2001, from
$967,000 for the comparable period of 2000. The increase resulted primarily from
the acquisitions of additional properties and the completion of several
development projects, described above.
Interest expense increased by approximately $356,000, or 20.6% to $2.1
million for the three months ended March 31, 2001 from $1.7 million for the
comparable period of 2000. The increase in interest expense was primarily due to
the following factors: (i) a net increase in mortgage interest of $353,000
primarily due to the assumption of two loans and the closing of one new loan
totaling $24.2 million offset by the payoff of one loan of $2.5 million, (ii)
other interest of $64,800 related to distributions to the North Port Minority
Partners; (iii) a $32,000 reduction in interest on the Lake Mary loan due to a
$1.4 million pay down, (iv) a reduction of the line of credit interest by
$229,000 due to decreased borrowing under that facility, and (v) a decrease in
interest capitalization of $197,000, to $348,300 for the three months ended
March 31, 2001 from $544,800 for the comparable period of 2000.
General and administrative expenses increased by $145,000, or 25.3% to
$718,000 for the three months ended March 31, 2001 from $537,000 for the
comparable period of 2000. The increase was primarily the result of managing the
Company's growth, as compensation cost increased $123,200, directors' fees
increased $42,300 and all other costs declined $20,500. During the three months
ended March 31, 2001, direct costs (primarily payroll) of the development
department totaling $143,800 were capitalized, compared to $236,200 for the same
period in 2000.
As a result of the foregoing, net income increased by approximately
$451,000 or 17.2% to $3.1 million for the three months ended March 31, 2001,
compared to $2.6 million for the comparable period of 2000.
10
FUNDS FROM OPERATIONS
The Company defines funds from operations ("FFO") consistent with the
NAREIT definition as net income before gains (losses) on the sale of real
estate, extraordinary items and minority interest, plus real estate depreciation
and amortization of capitalized leasing costs. Management believes that FFO
should be considered along with, but not as an alternative to, net income as
defined by accounting principles generally accepted in the United States of
America ("GAAP") as a measure of the Company's operating performance. FFO does
not represent cash generated from operating activities in accordance with GAAP
and is not necessarily indicative of funds available to fund the Company's cash
needs. FFO is derived from historical net income as follows:
The following table illustrates the calculation of FFO for the
three-month periods ended March 31, 2001 and 2000 (in thousands except per share
data):
THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2000
--------- ----------
Funds from Operations (UNAUDITED)
Net income................................................ $ 3,074 $ 2,623
Depreciation of real estate assets........................ 1,195 961
Amortization of leasing costs............................. 21 26
Interest on convertible partnership units................. 64 --
Minority interest......................................... -- 24
--------- ----------
Funds from operations........................................ $ 4,354 $ 3,634
========= ==========
FFO increased by approximately $720,000, or 19.8% to $4.4 million for
the three months ended March 31, 2001, from $3.6 million for the comparable
period of 2000. The increase is primarily the result of acquisitions of
additional properties and the completion of several development projects,
described above.
CASH FLOW
Net cash provided by operations of approximately $4.9 million for the
three months ended March 31, 2001 included: (i) net income of $3.1 million, (ii)
adjustment for non-cash items of $1.3 million, and (iii) a net increase in
operating assets and liabilities of $494,000, compared to net cash provided by
operations of approximately $4.9 million for the three months ended March 31,
2000, which included (i) net income of $2.6 million, (ii) adjustment for
non-cash items reducing cash flow by $1.1 million, and (iii) a net increase in
operating assets and liabilities of $1.2 million.
Net cash used in investing activities of approximately $4.4 million for
the three months ended March 31, 2001 included: (i) the acquisition of the
Pompano Beach property for $2.9 million, (ii) construction and development cost
of $1.4 million of which $952,000 is attributed to Skylake, and (iii) other
capital improvements of $107,000.
Net cash used in financing activities of $32,000 for the three months
ended March 31, 2001 included (i) principal payments on mortgage notes of
$835,000, (ii) borrowings under new mortgage notes of $4.7 million, (iii)
repayments on the Credit Agreement of $471,000, (iv) cash dividends paid to
common stockholders of $3.4 million, and (v) other miscellaneous uses of
$60,000.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the principal sources of funding for the Company's
operations, including the renovation, expansion, development and acquisition of
the Existing Properties have been operating cash flows, the issuance of equity
securities, the placement of mortgage loans and periodic borrowings under the
Company's Credit Agreement (as defined below). The Company's principal demands
for liquidity are maintenance, repair and tenant improvements relating to the
Existing Properties, acquisitions and development activities, debt service and
repayment obligations, and distributions to its stockholders.
11
On February 4, 1999, the Company secured a $35.0 million credit
agreement with City National Bank of Florida (the "Credit Agreement"). 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. On March 31, 2001, the
limitation on advances under the Credit Agreement was approximately $20.6
million, with future increases conditioned on the posting of additional
collateral. The Credit Agreement is currently secured by mortgages on a portion
of the Shops at Skylake, and on East Bay Plaza, Beauclerc Village, Mandarin
Landing, Mandarin Mini-storage, Equity One Office Building and Montclair
Apartments.
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
contains other customary conditions and covenants, 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 a prohibition on secondary financing on any of the secured properties.
On November 17, 2000, the Company closed the sale of one million shares
of the Company's common stock to Alony Hetz Properties & Investments, Ltd.
("Alony Hetz") at a price of $10.875 per share. As stipulated in the
subscription agreement between Alony Hetz and the Company, Alony Hetz is
obligated to purchase and the Company is obligated to sell an additional 925,000
shares on or before August 17, 2001 at a price of $10.875 per share (the
"Additional Alony Hetz Shares"). Alony Hetz also holds 375,000 and 650,000
warrants exercisable at a price of $10.875 per share through December 31, 2001
and 2002, respectively.
As of March 31, 2001, the Company had total mortgage indebtedness of
$125.5 million, all of which was fixed rate mortgage indebtedness bearing
interest at a weighted average annualized rate of 7.48% and collateralized by 21
of the Existing Properties, as well as $3.8 million outstanding under the Credit
Agreement in accordance with the terms described above.
As of March 31, 2001, the percentage of the total real estate cost of
the Company's Existing Properties that was encumbered by debt was 50.2%. None of
the existing mortgages are subject to cross default provisions of mortgages on
other properties nor are any cross-collateralized.
As of May 11, 2001, the outstanding balance under the Credit Agreement
had been reduced to $1.9 million. In addition to the outstanding balance, the
Credit Agreement has also been used to provide a $1.0 million letter of credit
in connection with the Pine Island/Ridge Plaza financing, a $115,000 letter of
credit in connection with the Forest Village financing and to support $440,000
in escrows for property taxes on the properties comprising the collateral.
Development of the second phase of Forest Village, totaling
approximately 100,000 square feet has not commenced, but is anticipated to be
completed in 2003 at an estimated cost of $7.0 million. Development of phase
three of the Shops at Skylake, totaling approximately 105,000 square feet has
not commenced, but is anticipated to be completed in 2003 at an estimated cost
of $7.3 million. The Company expects to fund the costs of these development
projects from cash flow from operations, proceeds from the sale of the
Additional Alony Hetz Shares, borrowings under the Credit Agreement and other
sources of cash, including obtaining permanent debt on certain unencumbered
existing properties. Upon stabilization, the Company expects these developments
to have a positive effect on cash generated by operating activities and FFO.
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 cash flow from
operations or amounts available under existing 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, 2001, the Company declared a
quarterly cash dividend of $0.26 per outstanding share of common stock which was
paid to shareholders of record on March 30, 2001.
12
INFLATION AND RECESSION CONSIDERATIONS
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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The primary market risk to which the Company has exposure is interest
rate risk. Changes in interest rates can affect the Company's net income and
cash flows. As changes in market conditions occur, interest rates can either
increase or decrease, and interest expense from the variable component of the
Company's debt balances will move in the same direction. With respect to its
investment portfolio, changes in interest rates generally do not affect the
Company's interest income as its investments are predominantly in equity
securities. With respect to its mortgage notes payable, changes in interest
rates generally do not affect the Company's interest expense as its mortgage
notes payable are predominantly at a fixed-rate, for extended terms, and would
be unaffected by any sudden change in interest rates. The Company's possible
risk is from increases in long-term real estate mortgage rates that may occur
over a decade or more, as this may decrease the overall value of real estate.
Because the Company has the intent to hold its existing mortgages to maturity
(or until the sale of the Property), there is believed to be no interest rate
market risk on the Company's results of operations or its working capital
position. The Company estimates the fair value of its long term, fixed rate
mortgage loans generally using discounted cash flow analysis based on current
borrowing rates for similar types of debt. At December 31, 2000, the fair value
of the mortgage loans was estimated to be $124.2 million compared to a carrying
value amount of $121.7 million. If the weighted average interest rate on the
Company's fixed rate debt were 100 basis points higher or lower, the fair market
value would be $117.7 million and $131.2 million, respectively.
If the weighted average interest rate on the Company's variable rate
debt were 100 basis points higher or lower, annual interest expense would be
increased or decreased by approximately $42,000, based on the Company's
variable rate debt balance on December 31, 2000.
The Company's objective in managing its exposure to interest rate
changes is to limit the impact of interest rate changes on earnings and cash
flows. The Company may use a variety of financial instruments to reduce its
interest rate risk, including interest rate swap agreements whereby the Company
exchanges its variable interest costs on a defined amount of principal for
another party's obligation to pay fixed interest on the same amount of
principal, or interest rate caps, which will set a ceiling on the maximum
variable interest rate the Company will incur on the amount of debt subject to
the cap and for the time period specified in the interest rate cap. At the
present time, the Company has not executed or entered into any such financial
instruments and has no material market risk sensitive instruments.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Company's properties are subject to any
material litigation. Further, to the Company's knowledge 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, 2001 the Company issued to various employees 32,799
shares of unregistered restricted stock that vest under a variety of schedules
ranging from one to three years. On January 2, 2001 the Company issued to the
non-employee members and Secretary of the Board of Directors a total of 16,000
shares of unregistered restricted stock that vest one-half on December 31, 2001
and one-half on December 31, 2002. On March 15 and 18, 2001, the Company issued
to one officer 18,000 and 14,000 shares of unregistered restricted stock,
respectively, that vest one-half on the first anniversary of their issuance and
one-half on the second anniversary of their issuance.
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
None.
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: July 26, 2001 EQUITY ONE, INC.
/s/ CHAIM KATZMAN
----------------------------------------
Chaim Katzman
Chief Executive Officer
(Principal Executive Officer)
/s/ HOWARD M. SIPZNER
----------------------------------------
Howard M. Sipzner
Chief Financial Officer
(Principal Accounting Financial Officer)
14