UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 14, 2003
EQUITY ONE, INC.
(Exact name of registrant as specified in its charter)
FLORIDA
(State of other jurisdiction of incorporation)
001-13499 52-1794271
(Commission File Number) (I.R.S. Employer Identification No.)
1696 N.E. MIAMI GARDENS DRIVE, NORTH MIAMI BEACH, FLORIDA 33179
(Address of principal executive offices)
Registrant's telephone number, including area code: (305) 947-1664
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
Item 5. Other Events
Equity One, Inc. ("the Company") is filing this Form 8-K, which includes
the financial statements of IRT Partners L.P. ("LP") as of December 31, 2002 and
2001 and for each of the three years in the period ended December 31, 2002, the
unaudited condensed financial statements as of September 30, 2003 and for the
three and nine month periods ended September 30, 2003, and 2002 and Management's
Discussion and Analysis of Financial Condition and Results of Operations of LP,
as LP is a non-wholly owned subsidiary that is a co-guarantor of the unsecured
senior notes and unsecured revolving credit facility of the Company.
(a) Included are the unaudited condensed financial statements of IRT Partners
L.P. as of September 30, 2003 and for the three and nine month periods
ended September 30, 2003 and 2002.
(b) Included are the audited financial statements of IRT Partners L.P. as of
December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001
and 2000.
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(a) FINANCIAL INFORMATION
IRT PARTNERS L.P.
(a limited partnership)
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
2003 2002
------------- -------------
ASSETS
PROPERTIES:
Income producing........................................................ $ 185,587 $ 173,611
Less: accumulated depreciation.......................................... (1,938) (28,945)
------------- -------------
Properties, net...................................................... 183,649 144,666
CASH AND CASH EQUIVALENTS.................................................. 12 608
CASH HELD IN ESCROW........................................................ - 4,033
ADVANCES TO AFFILIATE...................................................... - 20,866
OTHER ASSETS............................................................... 3,288 2,932
------------- -------------
TOTAL...................................................................... $ 186,949 $ 173,105
============= =============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Mortgage notes payable.................................................. $ 34,555 $ 41,476
Unamortized premium on mortgage notes payable........................... 4,803 -
------------- -------------
Total mortgage notes payable......................................... 39,358 41,476
Other liabilities....................................................... 3,426 2,208
------------- -------------
Total liabilities................................................. 42,784 43,684
LIMITED PARTNERS' CAPITAL.................................................. 11,161 9,684
COMMITMENTS AND CONTINGENT LIABILITIES
GENEARL PARTNERS' CAPITAL.................................................. 133,004 119,737
------------- -------------
TOTAL...................................................................... $ 186,949 $ 173,105
============= =============
See accompanying notes to the condensed financial statements.
2
IRT PARTNERS L.P.
(a limited partnership)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
For the Period
--------------------------------
Three Months Ended January 1, February 12, Nine Months Ended
September 30, 2003 to 2003 to September 30,
---------------------- February 11, September 30, ------------------------
2003 2002 2003 2003 2003 2002
--------- --------- -------------------------------- ---------- ----------
REVENUES FROM RENTAL PROPERTIES..... $ 6,117 $ 5,827 $ 2,783 $ 15,493 $ 18,276 $ 17,993
--------- --------- ------------- ------------- ---------- ----------
COSTS AND EXPENSES:
Property operating expenses...... 1,724 1,659 902 4,406 5,308 5,055
Interest expense................. 591 816 374 1,575 1,949 2,400
Amortization of deferred
financing fees................. - 5 3 1 4 14
Rental property depreciation and
amortization................... 799 982 555 1,949 2,504 2,940
General and administrative
expenses......................... 15 261 4 16 20 853
--------- --------- ------------ --------------- ---------- ----------
Total costs and expenses..... 3,129 3,723 1,838 7,947 9,785 11,262
--------- --------- ------------ --------------- ---------- ----------
INCOME BEFORE INTEREST INCOME FROM
AFFILIATES....................... 2,988 2,104 945 7,546 8,491 6,731
INTEREST INCOME FROM AFFILIATES..... - 76 15 71 86 234
--------- --------- ------------ --------------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS... 2,988 2,180 960 7,617 8,577 6,956
--------- --------- ------------ --------------- ---------- ----------
DISCONTINUED OPERATIONS:
Income from operations of sold
properties..................... - 196 - - - 625
Gain (loss) on disposal of
income producing properties.... - 2,185 (19) - (19) 2,185
--------- --------- ------------ --------------- ---------- ----------
Total income from
discontinued operations..... - 2,381 (19) - (19) 2,810
--------- --------- ------------ --------------- ---------- ----------
NET INCOME.......................... $ 2,988 $ 4,561 $ 941 $ 7,617 $ 8,558 $ 9,775
========= ========= ============ =============== ========== ==========
See accompanying notes to the condensed financial statements.
3
IRT PARTNERS L.P.
(a limited partnership)
CONDENSED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2003
(UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
General Limited Total
Partner's Partners' Partners'
Capital Capital Capital
----------- ----------- -----------
Balance, January 1, 2003.................... 119,737 $ 9,684 $129,421
Cash distributions.......................... (10,173) (602) (10,775)
Net income.................................. 8,080 478 8,558
Fair value adjustment due to merger......... 15,360 1,601 16,961
----------- ----------- -----------
Balance, September 30, 2003................. $ 133,004 $ 11,161 $144,165
=========== =========== ===========
See accompanying notes to the condensed financial statements.
4
IRT PARTNERS L.P.
(a limited partnership)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
September 30,
----------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net income............................................................ $ 8,558 $ 9,775
Adjustments to reconcile net income to net cash provided by
operating activities:
Straight line rent adjustment.................................... (63) (138)
Amortization of premium on mortgage notes payable................ (330) -
Amortization of deferred financing fees.......................... 4 14
Rental property depreciation and amortization.................... 2,504 2,940
Depreciation and amortization included in discontinued operations - 180
Loss (gain) on disposal of real estate........................... 19 (2,185)
Changes in assets and liabilities:
Increase in other assets........................................ (376) (1,305)
Increase in other liabilities................................... 1,218 1,514
------------ ------------
Net cash provided by operating activities............................. 11,534 10,795
------------ ------------
INVESTING ACTIVITIES:
Additions to and purchases of properties........................... (1,197) (4,756)
Proceeds from disposal of properties............................... - 6,513
Decrease in cash held in escrow.................................... 4,033 -
------------ ------------
Net cash provided by investing activities............................. 2,836 1,757
------------ ------------
FINANCING ACTIVITIES:
Repayments of mortgage notes payable............................... (6,921) (585)
Payment of deferred financing costs................................ - (58)
Advances from (to) affiliate, net.................................. 2,730 (3,398)
Cash contributions................................................. - 1,946
Cash distributions paid............................................ (10,775) (10,252)
------------ ------------
Net cash used in financing activities................................. (14,966) (12,347)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................. (596) 205
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....................... 608 500
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................. $ 12 $ 705
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized................. $ 2,306 $ 2,373
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company merged with IRT and the assets and liabilities of LP were
restated to fair value as follows:
Fair value of assets acquired.................................. $191,173
Assumption of liabilities and mortgage notes payable........... (41,524)
Fair value adjustment of mortgage notes payable................ (5,133)
------------
Partners' capital.............................................. $144,516
============
See accompanying notes to the condensed financial statements.
5
IRT PARTNERS L.P.
(a limited partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 and 2002
(UNAUDITED)
(in thousands)
1. ORGANIZATION AND IRT PROPERTY COMPANY MERGER
IRT Partners L.P. ("LP"), a Georgia limited partnership, was formed on July
15, 1998 in order to enhance the acquisition opportunities of its general
partner through a downREIT structure. This structure offers potential sellers
the ability to make a tax-deferred transfer of their real estate properties in
exchange for partnership units ("OP Units") of LP.
On February 12, 2003, Equity One, Inc. (the "Company" or "Successor")
completed a statutory merger with IRT Property Company ("IRT" or "Predecessor"),
LP's general partner. As a result of the merger, the Company acquired from IRT
the general partnership interests in LP. The Company now owns approximately
94.4% of LP's partnership interests. As a result of the substantial change in
ownership from this transaction, "push-down" accounting has been applied to LP's
financial statements, assets and liabilities of LP have been restated to fair
value in the same manner as IRT's assets and liabilities were recorded by the
Companyas as a result of the merger. Although the fair values assigned to the
identifiable tangible and intangible assets and liabilities of LP are
preliminary as LP is evaluating the fair values and allocation of costs,
management does not believe that any future adjustment would have a material
effect on LP's financial position or results of operations.
The results of operations for the three and nine-month periods ended
September 30, 2002 and for the period from January 1, 2003 through February 11,
2003 have been recorded based on the historical values of the assets and
liabilities of LP prior to the merger. For the period from February 12, 2003
through September 30, 2003, the results of operations have been recorded under
the fair values assigned to the assets and liabilities after the Company's
merger with IRT.
LP is obligated to redeem each OP Unit held by a person other than the
Company, at the sole request of such limited partner, for cash equal to the fair
market value of a share of the Company's common stock at the time of such
redemption. However, the Company may elect, at its option, to acquire any such
OP Unit presented for redemption for one common share of the Company's stock or
cash.
At September 30, 2003, LP owns 23 neighborhood and community shopping
centers located in Florida, Tennessee, Georgia and North Carolina. The shopping
centers are anchored by necessity-oriented retailers such as supermarkets, drug
stores, national value retailers and department stores.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared by LP's management in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions of Form 10-Q and Article 10 of Regulation S-X of the U.S.
Securities and Exchange Commission (the "SEC"). Accordingly, these unaudited
condensed financial statements do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. The results of operations for the three and nine-month periods
ended September 30, 2003 are not necessarily indicative of the results that may
be expected for the full year. These unaudited condensed financial statements
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained elsewhere in
6
this Form 10-Q and the audited financial statements and related footnotes for
the year ended December 31, 2002 included in the Current Report of Equity One,
Inc. on Form 8-K filed with the SEC on November 14, 2003.
The preparation of condensed 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 amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
3. RENTAL PROPERTIES
Income producing property is stated at cost and includes all costs related
to acquisition, development and construction, including tenant improvements,
interest incurred during development, costs of pre-development and certain
direct and indirect costs of development. Costs incurred during the
predevelopment stage are capitalized once management has identified a site,
determined that the project is feasible and that it is probable that LP will be
able to proceed with the project. Expenditures for ordinary maintenance and
repairs are expensed to operations as they are incurred. Significant renovations
and improvements, which improve or extend the useful life of assets, are
capitalized.
Income producing properties are individually evaluated for impairment when
conditions exist that may indicate that it is probable that the sum of expected
future cash flows (on an undiscounted basis) from a property is less than its
historical net cost basis. Upon determination that a permanent impairment has
occurred, LP records an impairment charge equal to the excess of historical cost
basis over fair value. In addition, LP writes off costs related to
predevelopment projects when it determines that it will no longer pursue the
project.
Depreciation expense is computed using the straight-line method over the
estimated useful lives of the assets, as follows:
Land improvements 40 years
Buildings 30-40 years
Building improvements 5-40 years
Tenant improvements Over the terms of the related lease
Equipment 5-7 years
Acquisitions of properties are accounted for using the purchase method and,
accordingly, the results of operations are included in LP's results of
operations from the respective dates of acquisition. The Company uses various
valuation methods to allocate the purchase price of acquired property between
land, buildings and improvements, equipment, and other identifiable intangibles
such as lease origination costs and acquired leases and any debt assumed. LP's
allocation of the purchase prices for the acquisitions consummated during 2003
is preliminary and is subject to change.
4. MORTGAGE NOTES PAYABLE
Mortgage notes payable are collateralized by real estate investments. These
notes have stated interest rates ranging from 7.02% to 9.1875% and are due in
monthly installments with maturity dates ranging from 2009 to 2015. LP, upon the
merger of IRT and the Company, recorded a premium on the mortgage notes of
$5,133.
7
5. INCOME TAXES
No federal or state income taxes are reflected in the accompanying
condensed financial statements because LP is a partnership and its partners are
required to include their respective share of profits and losses in their income
tax returns.
6. DISPOSITIONS
LP has adopted SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, effective January 1, 2002, and has included the operations of
properties sold and held for sale, as well as the gain on sale of sold
properties, as discontinued operations for all periods presented. LP expects to
reclassify historical operating results whenever necessary in order to comply
with the requirements of SFAS No. 144.
The following table reflects the properties being reported in discontinued
operations for the three and nine-month periods ended September 30, 2002 (there
have been no dispositions during 2003):
Property Location Date Sold Square Feet Sales Price Gain (Loss)
----------------------- ------------------ ------------ ------------ ------------ ------------
Forest Hills Centre* Wilson, NC 9/25/02 74,180 $ 6,850 $ 2,185
Asheville Plaza Asheville, NC 11/4/02 49,800 950 733
Lawrence Commons* Lawrenceburg, TN 12/12/02 52,295 4,219 1,252
------------ ------------ ------------
Total..................................................... 176,275 $ 12,019 $ 4,170
============ ============ ============
*During first quarter 2003, additional expenses totaling $19 were
recognized as a loss under discontinued operations relating to these properties.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
which rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB Statement No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. It also
rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor
Carriers, and amends FASB Statement No. 13, Accounting for Leases. Finally SFAS
No. 145 amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The provisions related to the rescission of FASB Statement
No. 4 and its amendment Statement No. 64 is effective for fiscal years beginning
after May 15, 2002. LP adopted SFAS No. 145 as of July 2002 and will reflect any
gains (losses) from extinguishment of debt as part of ordinary income.
In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantee's of Indebtedness of Other's (an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34). FIN
45 clarifies the requirements of FASB Statement No. 5, Accounting for
Contingencies. It requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes under that
guarantee regardless of whether or not the guarantor receives separate
identifiable consideration (i.e., a premium). LP adopted the new disclosure
requirements, which are effective beginning with 2002 calendar year-end
financials. FIN 45's provisions for initial recognition
8
and measurement are effective on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 did not have a material
impact on LP's financial statements.
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), an interpretation of ABR 51. FIN 46
provides guidance on identifying entities for which control is achieved through
means other than through voting rights, variable interest entities ("VIE"), and
how to determine when and which business enterprises should consolidate the VIE.
In addition, FIN 46 requires both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE to make additional
disclosures. The transitional disclosure requirements will take effect almost
immediately and are required for all financial statements issued after January
31, 2003. The consolidated provisions of FIN 46 are effective immediately for
variable interests in VIEs created after January 31, 2003. For variable
interests in VIEs created before February 1, 2003, the provisions of FIN 46 are
effective for the first interim or annual period ending after December 15, 2003.
LP is not a party to any VIE's.
In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which clarifies the accounting
and reporting for derivative instruments, including derivative instruments that
are embedded in contracts. This statement is effective for contracts entered
into or modified after June 30, 2003. LP adopted this pronouncement beginning
July 1, 2003. The adoption of SFAS No. 149 did not have a material impact on
LP's financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for the classification and measurement of financial
instruments that possess characteristics similar to both liability and equity
instruments. SFAS No. 150 also addresses the classification of certain financial
instruments that include an obligation to issue equity shares. On October 29,
2003, the FASB voted to defer, for an indefinite period, the application of the
guidance in FASB Statement No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. The FASB decided to defer
the application of the aspect of Statement 150 until it could consider some of
the resulting implementation issues.
8. COMMITMENTS AND CONTINGENCIES
LP has guaranteed the $150,000 unsecured senior notes of the Company
bearing interest at fixed interest rates ranging from 7.25% to 7.84% and
maturing between 2006 and 2012. The interest rate of one series of these senior
notes is subject to a 50 basis point increase if the Company does not maintain
an investment grade debt rating. LP has also guaranteed a $340,000 unsecured
revolving credit facility of the Company, under which $138,000 was outstanding
at September 30, 2003. These notes and revolving credit facility have also been
guaranteed by most of the Company's wholly-owned subsidiaries.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with LP's unaudited
Condensed Financial Statements, including the notes thereto, which are included
elsewhere herein and LP's audited Financial Statements and notes thereto for the
year ended December 31, 2002 appearing in the Current Report on Form 8-K of the
Company filed November 14, 2003. The results of operations for an interim period
may not give a true indication of results for the year.
9
Unless the context otherwise requires, all references to "we," "our," "us,"
"IRT Partners," and "LP" in this report refer collectively to IRT L.P.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002.
Total revenues from rental properties increased by $290,000, or 5.0%, to
$6.1 million in 2003 from $5.8 million in 2002 due to an increase in expense
recoveries.
Property operating expenses increased by $65,000, or 3.9%, to $1.7 million
for 2003 from $1.7 million in 2002.
Rental property depreciation and amortization decreased by $183,000, or
18.6%, to $799,000 for 2003 from $982,000 in 2002 due to the restatement of the
assets to fair value and allocation between depreciable and non-depreciable
assets upon the merger of IRT with the Company.
Interest expense decreased by $225,000, or 27.6%, to $591,000 for 2003 from
$816,000 in 2002 related to the payoff of a mortgage note and amortization of
premium on mortgage notes payable of $142,000.
During 2002, a property was sold and the operations are reflected in income
from operations of sold properties. LP recognized a gain on the sale of $2.2
million. There were no dispositions during 2003.
As a result of the foregoing, net income decreased by $1.6 million, or
34.5%, to $3.0 million for 2003 from $4.6 million in 2002.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002.
Total revenues from rental properties increased by $283,000, or 1.6%, to
$18.3 million in 2003 from $18.0 million in 2002 due to an increase in expense
recoveries.
Property operating expenses increased by $253,000, or 5.0%, to $5.3 million
for 2003 from $5.1 million in 2002.
Rental property depreciation and amortization decreased by $436,000, or
14.8%, to $2.5 million for 2003 from $2.9 million in 2002 related to the
restatement of the assets to fair value and allocation between depreciable and
non-depreciable assets upon the merger of IRT with the Company.
Interest expense decreased by $451,000, or 18.8%, to $1.9 million for 2003
from $2.4 million in 2002 related to the payoff of a mortgage note and
amortization of premiums on mortgage notes payable of $330,000.
During 2002, a property was sold and the operations are reflected in income
from operations of sold properties. LP recognized a gain on the sale of $2.2
million. There were no dispositions during 2003.
As a result of the foregoing, net income decreased by $1.2 million, or
12.5%, to $8.6 million for 2003 from $9.8 million in 2002.
CASH FLOWS
Net cash provided by operating activities of $11.5 million for the nine
months ended September 30, 2003 included: (i) net income of $8.6 million, (ii)
adjustments for non-cash items which increased
10
cash flow by $2.1 million, and (iii) a net increase in operating assets and
liabilities of $842,000, compared to net cash provided by operating activities
of $10.8 million for the nine months ended September 30, 2002, which included
(i) net income of $9.8 million, (ii) adjustments for non-cash and gain on sale
items which increased cash flow by $811,000, and (iii) a net increase in
operating assets and liabilities of $209,000.
Net cash provided by investing activities of $2.8 million for the nine
months ended September 30, 2003 included: (i) capital improvements of $1.2
million offset by proceeds from escrowed funds on sale of properties of $2.9
million and $1.1 million returned to the operating cash accounts. These amounts
should be compared to net cash provided by investing activities of $1.8 million
for the nine months ended September 30, 2002 which included: (i) the acquisition
of one shopping center for $1.9 million and (ii) construction, development and
other capital improvements of $3.0 million, offset by proceeds from the sale of
one property of $6.5 million.
Net cash used in financing activities of $15.0 million for the nine months
ended June 30, 2003 included: (i) the payoff of one mortgage note for $5.3
million and monthly principal payments on mortgage notes of $1.6 million, (ii)
distributions to OP Unit holders of $10.8 million, offset by advances from
affiliates of $2.7 million, compared to net cash used by financing activities of
$12.3 million for the nine months ended September 30, 2002 which included: (i)
net proceeds from issuance of OP Units of $1.9 million, offset by (a)
distribution to OP Unit holders of $10.3 million, (b) net advances to affiliates
of $3.4 million, (c) principal payments on mortgage notes of $585,000, and (d)
other uses of $58,000.
LIQUIDITY AND CAPITAL RESOURCES
LP's principal demands for liquidity are maintenance expenditures, repairs,
property taxes and tenant improvements, leasing costs, debt service and
distributions to its OP Unit holders. LP presently expects cash from its
operating activities to be the primary source of funds to pay distributions,
mortgage note payments and certain capital improvements on LP's properties.
LP guarantees the Company's indebtness under the Company's unsecured senior
debt and unsecured revolving credit facilities.
LP, through the Company, uses unsecured borrowings for use in meeting
capital requirements. As of September 30, 2003, LP had $34.6 million in mortgage
notes payable at a weighted average interest rate of 8.4%, which are due in
monthly installments with maturity dates ranging from 2006 to 2015.
As of September 30, 2003, the scheduled amortization and principal payments
due on mortgage notes payable are as follows (in thousands):
Total
Scheduled Balloon Principal Balance
Year Amortization Payments Due at Maturity
---------------------- -------------- -------------- ------------------
2003.................. $ 115 $ - $ 115
2004.................. 650 - 650
2005.................. 709 - 709
2006.................. 771 - 771
2007.................. 838 - 838
Thereafter............ 5,508 25,964 31,472
-------------- -------------- ------------------
Total............. $ 8,591 $ 25,964 $ 34,555
============== ============== ==================
Our debt level could subject us to various risks, including the risk that
our cash flows will be insufficient to meet required payments of principal and
interest, and the risk that the resulting reduced
11
financial flexibility could inhibit our ability to develop or improve our rental
properties, withstand downturns in our rental income or take advantage of
business opportunities. In addition, because we currently anticipate that only a
small portion of the principal of our indebtedness will be repaid prior to
maturity, it is expected that it will be necessary to refinance the majority of
our debt. Accordingly, there is a risk that such indebtedness will not be able
to be refinanced or that the terms of any refinancing will not be as favorable
as the terms of our current indebtedness.
We believe, based on currently proposed plans and assumptions relating to
our operations, that our existing financial arrangements, together with cash
generated from our operations, will be sufficient to satisfy our cash
requirements for a period of at least twelve months. In the event that our plans
change, our assumptions change or prove to be inaccurate or cash flows from
operations or amounts available under existing financing arrangements prove to
be insufficient to fund our expansion and development efforts or to the extent
we discover suitable acquisition targets the purchase price of which exceeds our
existing liquidity, we would be required to seek additional sources of
financing. There can be no assurance that any additional financing will be
available on acceptable terms or at all, and any future equity financing could
be dilutive to existing partners. If adequate funds are not available, our
business operations could be materially adversely affected.
INFLATION
Most of our leases contain provisions designed to partially mitigate the
adverse impact of inflation. Such provisions include clauses enabling us 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 our leases require the tenant to pay its share of operating
expenses, including common area maintenance, real estate taxes and insurance,
thereby reducing our exposure to increases in costs and operating expenses
resulting from inflation.
Our financial results are affected by general economic conditions in the
markets in which our 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 to meet their lease obligations and could
otherwise adversely affect our 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 our experience,
generally maintain more consistent sales performance during periods of adverse
economic conditions.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
Certain matters discussed in this Quarterly Report on Form 10-Q contain
"forward-looking statements" for purposes of Section 27A of the Securities Act
of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements are based on current expectations and
are not guarantees of future performance.
All statements other than statements of historical facts are
forward-looking statements, and can be identified by the use of forward-looking
terminology such as "may," "will," "might," "would," "expect," "anticipate,"
"estimate," "would," "could," "should," "believe," "intend," "project,"
"forecast," "target," "plan," or "continue" or the negative of these words or
other variations or comparable terminology, are subject to certain risks, trends
and uncertainties that could cause actual results to differ materially from
those projected. Because these statements are subject to risks and
uncertainties, actual results may differ materially from those expressed or
implied by the forward-looking statements. We caution you not to place undue
reliance on those statements, which speak only as of the date of this report.
12
Among the factors that could cause actual results to differ materially are:
o general economic conditions, competition and the supply of and demand
for shopping center properties in our markets;
o management's ability to successfully combine and integrate the
properties and operations of separate companies that we have acquired
in the past or may acquire in the future;
o interest rate levels and the availability of financing;
o potential environmental liability and other risks associated with the
ownership, development and acquisition of shopping center properties;
o risks that tenants will not take or remain in occupancy or pay rent;
o greater than anticipated construction or operating costs;
o inflationary and other general economic trends;
o the effects of hurricanes and other natural disasters; and
o other risks detailed from time to time in the reports filed by us with
the Securities and Exchange Commission.
Except for ongoing obligations to disclose material information as
required by the federal securities laws, we undertake no obligation to
release publicly any revisions to any forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence
of unanticipated events.
13
(b) IRT PARTNERS LP
INDEX TO FINANCIAL STATEMENTS
Page
------
Independent Auditors' Report ................................... 1
Balance Sheets:
December 31, 2002 and 2001................................. 2
Statements of Earnings:
For the Years Ended December 31, 2002, 2001 and 2000....... 3
Statements of Changes in Partners' Capital:
For the Years Ended December 31, 2002, 2001 and 2002 ...... 4
Statements of Cash Flows:
For the Years Ended December 31, 2002, 2001 and 2000....... 5
Notes to Financial Statements:
As of December 31, 2002, 2001 and
for the years ended December 31, 2002, 2001 and 2000....... 6
14
INDEPENDENT AUDITORS' REPORT
To IRT Partners L.P.
Atlanta, Georgia
We have audited the accompanying balance sheets of IRT Partners L.P. ("LP") (a
Georgia limited partnership) as of December 31, 2002 and 2001, and the related
statements of earnings, changes in partners' capital and cash flows for each of
the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the LP's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements referred to above present fairly, in
all material respects, the financial position of IRT Partners L.P. as of
December 31, 2002 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 7 to the financial statements, in 2002, LP
changed its method of reporting discontinued operations to conform with
Statement of Financial Accounting Standards No. 144.
As discussed in Note 9 to the financial statements, on February 12, 2003, IRT
Property Company, LP's general partner, merged with and into Equity One, Inc.
Accordingly, Equity One, Inc. became the general partner of LP.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 7, 2003
15
IRT PARTNERS L.P.
BALANCE SHEETS
December 31, 2002 and 2001
(In thousands, except unit amounts)
2002 2001
--------------- -------------
ASSETS
Rental properties.................................................. $ 173,611 $ 172,770
Accumulated depreciation........................................... (28,945) (27,145)
------------- -------------
Net rental properties........................................... 144,666 145,625
Cash and cash equivalents.......................................... 608 500
Cash held in escrow................................................ 4,033 -
Advances to affiliate, net......................................... 20,866 18,149
Prepaid expenses and other assets.................................. 2,932 2,599
------------- -------------
Total assets.................................................... $ 173,105 $ 166,873
============= =============
LIABILITIES & PARTNERS' CAPITAL
Liabilities:
Mortgage notes payable, net........................................ $ 41,476 $ 37,464
Accrued expenses and other liabilities............................. 2,208 2,154
------------- -------------
Total liabilities............................................... 43,684 39,618
Limited partners' capital interest (815,852 OP Units in 2002
and 2001, respectively) at redemption value........................ 9,684 8,648
Commitments and contingencies (Note 5)
Partners' capital:
General partner (145,999 and 144,229 OP Units
in 2002 and 2001, respectively)................................. 1,291 1,269
Limited partner (13,637,773 and 13,462,596 OP Units
in 2002 and 2001, respectively)................................. 118,446 117,338
------------- -------------
Total partners' capital......................................... 119,737 118,607
------------- -------------
Total liabilities and partners' capital ............ $ 173,105 $ 166,873
============= =============
The accompanying notes are an integral part of these balance sheets.
16
IRT PARTNERS L.P.
STATEMENTS OF EARNINGS
For the Years Ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
------------ ------------ ------------
Revenues:
Income from rental properties................................ $ 25,018 $ 21,957 $ 19,091
Interest income from affiliate............................... 312 417 331
------------ ------------ ------------
Total revenues............................................ 25,330 22,374 19,422
------------ ------------ ------------
Expenses:
Operating expenses of rental properties...................... 6,885 5,950 5,194
Interest on mortgages........................................ 3,212 2,772 2,441
Depreciation................................................. 3,992 3,658 3,347
Amortization of deferred financing costs..................... 19 9 -
General and administrative................................... 1,064 1,050 848
------------ ------------ ------------
Total expenses............................................ 15,172 13,439 11,830
------------ ------------ ------------
Income from continuing operations before gains on sales of
properties and discontinued operations.................... 10,158 8,935 7,592
Gain on sales of properties and outparcels....................... - 1,401 -
------------ ------------ ------------
Income from continuing operations......................... 10,158 10,336 7,592
------------ ------------ ------------
Discontinued Operations..........................................
Income from discontinued operations.......................... 678 870 793
Gain on sales of properties.................................. 4,176 - -
------------ ------------ ------------
Income from discontinued operations....................... 4,854 870 793
------------ ------------ ------------
Net income.............................................. $ 15,012 $ 11,206 $ 8,385
============ ============ ============
The accompanying notes are an integral part of these statements.
17
IRT PARTNERS L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Years Ended December 31, 2002, 2001 and 2000
(In thousands)
Limited
Total Partners'
General Limited Partners' Capital
Partner Partner Capital Interest
------------ ------------ ------------ ------------
Balance, December 31, 1999........................... $ 1,041 $ 96,693 $ 97,734 $ 6,374
Issuance of units.................................... 113 11,688 11,801 -
Distributions........................................ (107) (9,900) (10,007) (767)
Net income........................................... 84 7,705 7,789 596
Adjustment to reflect limited partners' capital
interest.......................................... - (418) (418) 418
------------ ------------ ------------ ------------
Balance, December 31, 2000........................... 1,131 105,768 106,899 6,621
Issuance of units.................................... 147 14,520 14,667 -
Distributions........................................ (121) (11,250) (11,371) (767)
Net income........................................... 112 10,540 10,652 554
Adjustment to reflect limited partners' capital
interest.......................................... - (2,240) (2,240) 2,240
------------ ------------ ------------ ------------
Balance, December 31, 2001........................... 1,269 117,338 118,607 8,648
Issuance of units.................................... 20 1,926 1,946 -
Distributions........................................ (148) (13,815) (13,963) (829)
Net income........................................... 150 14,031 14,181 831
Adjustment to reflect limited partners' capital
interest.......................................... - (1,034) (1,034) 1,034
------------ ------------ ------------ ------------
Balance, December 31, 2002........................... $ 1,291 $ 118,446 $ 119,737 $ 9,684
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
18
IRT PARTNERS L.P.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income........................................................... $ 15,012 $ 11,206 $ 8,385
Adjustments to reconcile earnings to net cash from operating activities:
Depreciation....................................................... 4,202 3,895 3,581
Gain on sale of operating properties............................... (4,176) (1,108) -
Gain on sale of outparcel.......................................... - (293) -
Straight line rent adjustment...................................... (159) (189) (41)
Amortization of debt costs and discounts........................... 19 10 -
Changes in assets and liabilities:
Increase in prepaid expenses and other assets..................... (135) (284) (50)
Increase in accrued expenses and other liabilities................ 43 461 1,038
------------ ------------ ------------
Net cash flows from operating activities............................... 14,806 13,698 10,837
------------ ------------ ------------
Cash flows from (used in) investing activities:
Additions to operating properties.................................... (5,833) (17,508) (13,898)
Proceeds from sale of operating properties........................... 11,568 6,181 -
Proceeds from sale of outparcel...................................... - 348 -
Increase in cash held in escrow...................................... (4,033) - -
------------ ------------ ------------
Net cash flows from (used in) investing activities..................... 1,702 (10,979) (13,898)
------------ ------------ ------------
Cash flows (used in) from financing activities:
Issuance of units for cash........................................... 1,946 14,667 11,801
Distributions paid................................................... (14,792) (12,138) (10,774)
Advances to affiliate................................................ (2,706) (18,130) -
Collection of advances to affiliate.................................. - - 8,904
Proceeds from mortgage notes payable................................. - 7,540 -
Principal amortization of mortgage notes payable..................... (790) (671) (586)
Payment of deferred financing costs.................................. (58) (130) -
------------ ------------ ------------
Net cash flows (used in) from financing activities..................... (16,400) (8,862) 9,345
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents................... 108 (6,143) 6,284
Cash and cash equivalents at beginning of period....................... 500 6,643 359
------------ ------------ ------------
Cash and cash equivalents at end of period............................. $ 608 $ 500 $ 6,643
============ ============ ============
Supplemental disclosures of cash flow information:
Total cash paid for interest......................................... $ 3,184 $ 2,745 $ 2,445
============ ============ ============
The accompanying notes are an integral part of these statements.
19
IRT PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001, and 2000
(Dollars in thousands, except unit data)
1. Organization and Nature of Operations
IRT Partners L.P. ("LP"), a Georgia limited partnership formed July 15,
1998, is the entity through which IRT Property Company (the "Company"), a
self-administered and self-managed real estate investment trust ("REIT"),
conducts a portion of its business and owns (either directly or through
subsidiaries) a portion of its assets.
The Company is the sole general partner of LP and maintains an indirect
partnership interest through its wholly owned subsidiary, IRT Management Company
("IRTMC"). The Company initially contributed 20 shopping centers, related assets
and cash to LP in exchange for 8,486,217 limited partnership units ("OP Units").
The Company was issued additional OP Units in exchange for cash contributions to
fund further acquisition activity. Since the formation of LP, the Company has
contributed cash to acquire eight shopping centers and LP has divested eight
shopping centers. At December 31, 2002, the Company and IRTMC own approximately
1% and 93.4%, respectively of LP.
As more fully discussed in Note 9, on February 12, 2003, the Company merged
with and into Equity One, Inc., with the Company ceasing to exist as a separate
corporate entity. Equity One, Inc. succeeded directly to the interest of IRT
Property Company as general partner of LP.
LP was formed by the Company in order to enhance the Company's acquisition
opportunities through a downREIT structure. This structure offers potential
sellers the ability to make a tax-deferred sale of their real estate properties
in exchange for OP Units of LP. In August 1998, certain unaffiliated persons
contributed their interests in three Florida shopping centers in exchange for a
total of 815,852 OP Units.
LP is obligated to redeem each OP Unit held by a person other than the
Company, at the request of the holder, for cash equal to the fair market value
of a share of the Company's common stock at the time of such redemption,
provided that the Company may elect to acquire any such OP Unit presented for
redemption for one common share or cash. Such limited partnership interest held
by persons unaffiliated with the Company is reflected as "Limited Partners'
Capital Interest" in the accompanying balance sheets at the cash redemption
amount on the balance sheet dates.
Federal income tax laws require the Company, as a REIT, to distribute 90%
(95% for years prior to 2001) of its ordinary taxable income. LP makes quarterly
distributions to holders of OP Units to enable the Company to satisfy this
requirement.
At December 31, 2002, LP owns 23 neighborhood and community shopping
centers located in Florida, Tennessee, Georgia and North Carolina. The shopping
centers are anchored by necessity-oriented retailers such as supermarkets, drug
stores, national value retailers and department stores.
2. Summary of Significant Accounting Policies
Use of Estimates
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 and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.
20
Significant estimates and assumptions within the financial statements
include impairment evaluation of operating and development properties and other
long-term assets, determination of useful lives of assets subject to
depreciation or amortization and valuation adjustments to tenant related
accounts. Actual results could differ from those estimates.
Revenue Recognition
Leases with tenants are accounted for as operating leases. Rental revenue
for leases entered into after January 1, 2000 is recognized on a straight-line
basis over the initial lease term. Rental revenue for leases entered into prior
to January 1, 2000, is accounted for based on contractual rental obligations,
which is not materially different from revenue recorded on a straight-line basis
to any interim or annual period. Certain tenants are required to pay percentage
rents based on their gross sales exceeding specified amounts. This percentage
rental revenue is recorded upon collection, which is not materially different
from recognizing such percentage rental revenue on an accrual basis. LP receives
reimbursements from tenants for real estate taxes, common area maintenance and
other recoverable costs. These tenant reimbursements are recognized as revenue
in the period the related expense is recorded.
In addition, LP makes specific valuation adjustments (bad debt reserves) to
tenant-related revenue based upon the tenant's credit and business risk.
Other non-rental revenue is recognized as revenue when earned.
Gain on sales of real estate assets is recognized at the time title to the
asset is transferred to the buyer, subject to the adequacy of the buyer's
initial and continuing investment and the assumption by the buyer of all future
ownership risks of the property. The gain on sales of operating properties is
calculated based on the net carrying value of the property at the time of sale.
The net carrying value represents the cost of acquisition, renovation or
betterment of the property less the accumulated depreciation of such costs.
Gains on sales of operating properties are included in discontinued operations.
For gains on outparcel sales, the gain is calculated based on the value assigned
to the outparcel lot through specific identification of costs or the relative
sales value of the outparcel lot to the entire property.
Rental Properties
Rental properties are stated at cost less accumulated depreciation. Costs
incurred for the acquisition, renovation, and betterment of the properties are
capitalized and depreciated over their estimated useful lives. Recurring
maintenance and repairs are charged to expense as incurred. Depreciation is
computed on a straight-line basis generally for a period of 16 to 40 years for
significant improvements and buildings. Tenant improvements are depreciated on a
straight-line basis over the life of the related lease.
The Company periodically evaluates the carrying value of LP's long-lived
assets, including operating and development properties, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." Impairment is based on whether
it is probable that undiscounted future cash flows from each property will be
less than its net book value. If an impairment exists, the asset is written down
to its estimated fair value and an impairment loss is recognized.
Cash Equivalents and Cash Held in Escrow
LP considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
When appropriate, the Company enters into tax-free exchanges under Section
1031 of the Internal Revenue Code of 1986, as amended (the "Code"). As of
December 31, 2002, cash was held in escrow pending the execution of such an
exchange.
21
Deferred Leasing Costs
Internal and external commission costs incurred in obtaining tenant leases
are included in prepaid expenses and other assets. The costs are amortized on a
straight-line basis over the terms of the related leases. Upon lease
cancellation or termination, unamortized costs are charged to operations.
Deferred Financing Costs
Costs related to loan costs incurred in obtaining long-term financing are
included within prepaids and other assets. The costs are capitalized and
amortized over the life of the financing on a straight-line basis, which
approximates the effective interest method. Upon prepayment, applicable
unamortized costs are charged to operations.
Income Taxes
No federal or state income taxes are reflected in the accompanying
financial statements since LP is a partnership and its partners are required to
include their respective share of profits and losses in their income tax
returns.
Segment Reporting
In 1998, LP adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement established standards for
reporting financial and descriptive information about operating segments in
annual financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. LP's chief operating decision
maker is the senior management group of the Company.
LP owns and operates retail shopping centers in the southeastern United
States. Such shopping centers generate rental and other revenue through the
leasing of shop spaces to a diverse base of tenants. LP evaluates the
performance of each of its shopping centers on an individual basis due to
specific geographical market demographics and local competitive forces. However,
because the shopping centers have generally similar economic characteristics and
tenants, the shopping centers have been aggregated into one reportable segment.
Derivative Financial Instruments
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. This statement, as amended, establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair market value. SFAS No. 133 requires that changes in the derivative's fair
market value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting. The Company and LP adopted this statement on January l, 2001. The
Company or LP did not hold and has not engaged in transactions using derivative
financial instruments. The adoption of this statement did not have a material
effect on LP's balance sheets or statements of earnings.
Recent Accounting Pronouncements
In June 2001, SFAS No. 141, "Business Combinations," was issued. This
statement eliminates pooling of interests accounting and requires all business
combinations initiated after June 30, 2001 to be
22
accounted for using the purchase method. LP adopted this standard on January 1,
2002 and believes adoption of this standard will not have a significant effect
on the LP's financial statements.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets," was
issued establishing accounting and reporting standards that address how goodwill
and intangible assets should be accounted for within the financial statements.
The statement requires companies to not amortize goodwill and intangible assets
with infinite lives, but to test such assets for impairment on a regular basis.
An intangible asset that has a finite life should be amortized over its useful
life and evaluated for impairment on a regular basis. This statement is
effective for fiscal years beginning after December 15, 2001. LP adopted this
standard on January 1, 2002 and believes adoption of this standard will not have
a significant effect on LP's financial statements.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued establishing new rules and clarifies
implementation issues with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," by allowing a
probability weighted cash flow estimation approach to measure the impairment
loss of a long-lived asset. The statement also established new standards for
accounting for discontinued operations. Transactions that qualify for reporting
in discontinued operations include the disposal of a component of an entity's
operations that comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest
of the entity. The statement is effective for fiscal years beginning after
December 15, 2001. LP adopted this standard on January 1, 2002. The disposition
of operating properties is reported as discontinued operations.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued.
This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, FASB Statement No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets
of Motor Carriers." This Statement amends FASB Statement No. 13, "Accounting for
Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The adoption of SFAS No.
145 had no effect on the financial position and results of operations of LP.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued which nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred
in a Restructuring)." The adoption of SFAS No. 146 had no effect on the
financial position and results of operations of LP.
In December 2002, SFAS 148, "Accounting for Stock-Based Compensations -
Transition and Disclosure", was issued which is an amendment of SFAS 123,
"Accounting for Stock-Based Compensation." This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. This standard had no effect of the financial position and results
of operations of LP.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others an Interpretation of SFAS No. 5, 57, and
107", and recession of FASB Interpretation No. 34. The
23
interpretation elaborates on the disclosures to be made by a guarantor in its
financial statements. It also requires a guarantor to recognize a liability for
the fair value of the obligation undertaken in issuing the guarantee at the
inception of a guarantee. This interpretation had no effect on the financial
position and results of operations of LP.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 clarifies the application of Accounting Research
Bulletin ("ARB") No. 51, "Consolidated Financial Statements", to certain
entities in which equity investors do not have characteristics of controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The application of the majority voting interest requirement in
ARB 51 to certain types of entities may not identify the party with a
controlling financial interest because the controlling financial interest may be
achieved through arrangements that do not involve a controlling interest. FIN
No. 46 applies immediately to variable interest entities created after January
31, 2003 and to fiscal years beginning after June 15, 2003 for variable interest
entities acquired before February 1, 2003. The adoption of FIN No. 46 will not
have an impact on LP's financial statements.
Reclassification of Amounts
Certain prior year amounts in the financial statements have been
reclassified to conform to the reporting requirements of discontinued operations
in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." See Note 7.
3. Rental Properties
Buildings and related improvements are depreciated on a straight-line basis
for a period of 16 to 40 years. Tenant improvements are depreciated on a
straight-line basis over the life of the related lease. Rental properties are
comprised of the following:
December 31,
-------------------------
2002 2001
----------- -----------
Land related to building and improvements........ $ 40,468 $ 40,555
Building and improvements........................ 128,628 128,222
Tenant improvements.............................. 4,515 3,993
----------- -----------
Total rental properties..................... $ 173,611 $ 172,770
=========== ===========
Rental properties acquired in 2002, 2001 and 2000 and disposed in 2002 and
2001 are summarized below. In connection with the acquisition of Parkwest
Crossing in 2002, the Company assumed a $4,800, 8.1% mortgage. See Note 7. LP
did not dispose of any properties in 2000.
Shopping Center Acquisitions
Total
Date Square Year Built/ % Leased Initial
Acquired Property Name City, State Footage Renovated at Acquisition Cost Cash Paid
- ---------------------------------------------------------------------------------------------------------------------
(unaudited)
2002 Acquisitions
2/19/02 2Parkwest Crossing Durham, NC 5,602 1991 100% $ 6,620 $ 1,946
2001 Acquisitions
4/12/01 Unigold Shopping Center Orlando, FL 102,985 1987 97% $ 8,000 $ 7,903
11/30/01 Carrollwood Center Tampa, FL 96,242 1971/1996 85% 6,763 6,763
----------------- -------- --------
199,227 $ 14,763 $ 14,666
================= ======== ========
24
Total
Date Square Year Built/ % Leased Initial
Acquired Property Name City, State Footage Renovated at Acquisition Cost Cash Paid
- ---------------------------------------------------------------------------------------------------------------------
(unaudited)
2000 Acquisitions
12/28/00 Pine Ridge Square Coral Springs, FL 117,399 1986 100% $ 11,600 $ 11,438
Shopping Center Dispositions
Date Square Sales Net Gain
Sold Property Name City, State Footage Price Proceeds Loss
- --------------------------------------------------------------------------- ---------- ----------- -----------
(unaudited)
2002 Dispositions
9/25/02 Forest Hills Centre Wilson, NC 74,180 $6,850 $ 6,513 $ 2,185
11/14/02 Asheville Plaza Asheville, NC 49,800 950 950 733
12/12/02 Lawrence Commons Lawrenceburg, TN 52,295 4,219 4,029 1,252
--------- ---------- ----------- -----------
176,275 $ 12,019 $ 11,492 $ 4,170
========= ========== =========== ===========
2001 Dispositions
4/18/01 Eden Center Eden, NC 56,355 $ 3,950 $ 3,830 $ 742
5/31/01 Chadwick Square Hendersonville, NC 32,100 2,401 2,351 366
--------- ---------- ----------- ----------
88,455 $ 6,351 $ 6,181 $ 1,108
========= ========== =========== ==========
<FN>
(1) Calculation is based upon financial information prior to accounting for
discontinued operations under SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." See Note 7 for more information.
</FN>
4. Mortgage Notes Payable
Mortgage notes payable are collateralized by various real estate
investments having a net carrying value of approximately $66,533 at December 31,
2002. These notes have stated interest rates ranging from 7.02% to 9.1875% and
are due in monthly installments with maturity dates ranging from 2006 to 2015.
In February 2002, the Company assumed a non-recourse, secured loan totaling
$4,800 in connection with the acquisition of Parkwest Crossing. The secured loan
has a fixed interest rate of 8.1 %. The loan is due and payable September 1,
2010 and the principal amortization is based on a 30-year amortization schedule.
Costs associated with assuming the secured loan totaled $56 and are being
amortized over the term of the loan.
In April 2001, LP obtained a non-recourse, secured loan on Pine Ridge
Square of $7,540, at a fixed interest rate of 7.02%. The loan is due and payable
in ten years and the principal amortization is based on a 30-year amortization
schedule. Costs associated with obtaining the secured note totaled $130 and are
being amortized over the term of the loan.
25
Future principal amortization and balloon payments applicable to mortgage
notes payable at December 31, 2002 are as follows:
Principal Balloon
Year Amortization Payments Total
--------------------- ------------- ---------- ---------
2003................. $ 740 $ - $ 740
2004................. 801 - 801
2005................. 872 - 872
2006................. 813 4,797 5,610
2007................. 789 - 789
Thereafter........... 5,518 25,964 31,482
-------------- ---------- ---------
$ 9,533 $ 30,761 40,294
============== ==========
Interest Premium..... 1,182
---------
$ 41,476
=========
The $1,182 of interest premium as of December 31, 2002 relates to the fair
value adjustment of the three mortgages assumed from the minority interest in
connection with the formation of LP in 1998.
Based on the borrowing rates currently available to LP for notes with
similar terms and maturities, the estimated fair value of mortgage notes payable
was approximately $45,818 and $38,796 at December 31, 2002 and 2001,
respectively.
5. Commitments and Contingencies
LP is not aware of any environmental problems on the properties owned. LP
has not obtained phase one environmental surveys on those properties owned and
located in North Carolina. Although no assurance can be given that LP's
properties will not be affected adversely in the future by environmental
problems, LP presently believes that there are no environmental matters that are
reasonably likely to have a material adverse effect on LP's financial position.
LP has guaranteed the bank indebtedness and senior indebtedness of the
Company and the following is a description of the Company's indebtedness.
Effective August 31, 1993, the Company issued $86,250 of 7.3% convertible
subordinated debentures due August 15, 2003, none of which are outstanding as of
December 31, 2002. In January 2002, the Company redeemed all of the outstanding
debentures at par plus accrued interest for $23,110.
On March 26, 1996, the Company issued $50,000 of 7.45% senior notes. These
notes were due April 1, 2001 and were repaid on such date. These senior notes
were issued at a discount of $84, which was amortized over the life of the notes
on a straight-line basis for financial reporting purposes. Net proceeds from the
issuance totaled approximately $49,394. Interest on the 7.45% senior notes was
payable semi-annually on April 1 and October 1. Costs associated with the
issuance of these senior notes totaled approximately $522 and were amortized
over the life of the notes.
On August 15, 1997, the Company issued $75,000 of 7.25% senior notes due
August 15, 2007. These senior notes were issued at a discount of $426, which is
being amortized over the life of the notes on a straight-line basis for
financial reporting purposes. Net proceeds from the issuance totaled $73,817.
Interest on the 7.25% senior notes is payable semi-annually on February 15 and
August 15. Costs associated with the issuance of these senior notes totaled
approximately $757 and are being amortized over the life of the notes.
26
On March 23, 2001, the Company established a Medium Term Note Program (the
"MTN Program"), pursuant to the Company's shelf registration statement filed in
January 2001. The MTN Program allows the Company, from time to time, to issue
and sell up to $100,000 of medium term notes. Medium term notes have a maturity
of nine months or more from the date of issuance and are unconditionally
guaranteed as to the payment of principal, premium, if any, and interest, if
any, by each of LP, IRTMC, and two other subsidiaries of the Company.
On March 29, 2001, pursuant to the MTN Program, the Company issued $50,000
of 7.77% senior notes due April 1, 2006. Net proceeds from the issuance totaled
$49,324. Interest on these senior notes is payable semi-annually on April 1 and
October 1. Costs associated with the issuance of these senior notes totaled
approximately $676 and are being amortized over the life of the notes.
On January 23, 2002, pursuant to the MTN Program, the Company issued
$25,000 of 7.84% senior unsecured notes due January 23, 2012. Interest on these
senior notes is payable semi-annually on January 23 and July 23. Costs
associated with the issuance of these senior notes totaled approximately $306
and are being amortized over the life of the notes.
On November 1, 1999, the Company obtained a $100,000 unsecured revolving
loan facility ("Revolving Loan"), with an original maturity date of November 1,
2002. This Revolving Loan replaced the Company's previous credit facility and is
led by a different financial institution and further backed by a syndicate of
four other financial institutions. Not later than November 1 of each year
commencing in 2000, the Company may request to extend the maturity date for an
additional 12-month period beyond the existing maturity date. In addition to the
new Revolving Loan, the Company secured a $5,000 unsecured swing line, scheduled
to mature on October 31, 2000. In October 2000, the Company extended the
maturity date of the Revolving Loan and swing line credit facility to November
1, 2003 and the Company secured an option to increase the Revolving Loan at its
discretion by $50,000. On May 29, 2002, the Company amended and renewed the
existing $100,000 unsecured line of credit, as well as extended the Company's
option to expand the line by $50,000, until May 29, 2005.
Under the Revolving Loan, the Company may elect to pay interest at either
the lender's prime, adjusted daily or the LMOR plus the "Applicable Margin"
based upon the rating of the senior unsecured debt obligations of the Company.
The Applicable Margin ranges from 0.95% to 1.40%. The Applicable Margin prior to
the amendment on May 29, 2002 was 1.15%. Effective on the date of the amendment
the Applicable Margin decreased to 1.05%. At December 31, 2002, the weighted
average interest rate was 2.71% on outstanding borrowings under the Revolving
Loan. The terms of the Revolving Loan and swing line credit facility require the
Company to pay an annual facility fee equal to 0.2% of the total commitment. The
terms also include certain customary operational and financial covenants, which
the Company was in compliance with as of December 31, 2002 and 2001.
Following the execution of the merger agreement with IRT in October 2002
(see Note 9), three IRT shareholders filed three separate purported class action
and derivative suits in the Superior Court of Cobb County, State of Georgia,
against IRT, IRT's board of directors and the Company alleging claims of breach
of fiduciary duty by the defendant directors, unjust enrichment and irreparable
harm. The complaints sought declaratory relief, an order enjoining consummation
of the merger, and unspecified damages. Although the Georgia court did not grant
the plaintiffs the equitable relief requested and permitted the completion of
the merger, two of these lawsuits, Greaves v. IRT Property Company, et. al. and
Phillips v. IRT Property Company, et. al., are still pending and second amended
complaints have been filed in each case and the other was voluntarily dismissed.
Management believes there will be no material effect on the L.P.'s financial
statements as a result of these suits.
27
6. Rental Income
Leases with tenants are accounted for as operating leases. Certain tenants
are required to pay percentage rents based on gross sales exceeding stated
amounts. LP receives reimbursements from tenants for real estate taxes, common
area maintenance and other recoverable costs. Rents from tenants are summarized
as follows:
2002 2001 2000
------------ ------------ ------------
Minimum rental income............ $ 18,389 $ 16,864 $ 15,112
Percentage rental income......... 357 339 316
Other rental income.............. 6,272 4,754 3,663
------------ ------------ ------------
Total rental income........... $ 25,018 $ 21,957 $ 19,091
============ ============ ============
Minimum rents to be received from tenants on noncancellable operating
leases for LP's shopping center investments at December 31, 2002 are as follows:
Year Amount
----------------- -------------
2003............. $ 17,896
2004............. 15,837
2005............. 13,326
2006............. 9,761
2007............. 6,864
Thereafter....... 33,773
-------------
$ 97,457
=============
7. Discontinued Operations
LP adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," effective January 1, 2002. SFAS No. 144 requires LP to
report in discontinued operations the results of operations of a property that
has either been disposed or is classified as held for sale, unless certain
conditions are met. SFAS No. 144 further requires LP to reclassify results of
operations from a property disposed of or held for sale subsequent to December
31, 2001 as income from discontinued operations during prior reported periods.
LP classified the results of operations from three properties sold during
2002 as income from discontinued operations for the three years in the period
ended December 31, 2002 in the accompanying Statements of Earnings. The effect
of the adoption of SFAS No. 144 on the statements of earnings is shown below.
2002 2001 2000
-------- -------- --------
Income from rental properties............... $ 1,145 $ 1,406 $ 1,327
-------- -------- --------
Operating expenses of rental properties..... 257 299 300
Depreciation................................ 210 237 234
-------- -------- --------
Total expenses........................... 467 536 534
-------- -------- --------
Income from discontinued operations...... $ 678 $ 870 $ 793
======== ======== ========
28
8. Related-Party Transactions
LP advances cash generated by the properties within LP to the Company based
on cash flow requirements. Also, in certain instances, the Company advances cash
to LP for operating requirements. As of December 31, 2002, LP had advances to
the Company of $20,866. During 2002, the Company paid LP approximately $312 in
interest from the advances, which bear interest calculated on a monthly basis,
at the three-month Treasury bill rate.
9. Subsequent Events
On February 12, 2003, Equity One, Inc. and the Company completed the merger
transaction pursuant to which the Company merged with and into Equity One, Inc.,
with the Company ceasing to exist as a separate corporate entity. Following the
merger, the Company's stock is no longer separately traded on the New York Stock
Exchange or any other exchange and represents only the right to receive merger
consideration provided pursuant to the merger agreement. Finally, following the
merger, the Company's status as a reporting person under the Securities Exchange
Act of 1934 was terminated and it no longer files separate reports with the
Securities and Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired. Not applicable
(b) Pro Forma Financial Information. Not applicable
(c) Exhibits.
Consent of Deloitte & Touche LLP
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Equity One
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
Date: November 14, 2003 EQUITY ONE, INC.
By: /s/ Howard M. Sipzner
-------------------------------
Howard M. Sipzner
Chief Financial Officer
EQUITY ONE, INC.
30
INDEX TO EXHIBITS
Exhibit Number Description of Exhibit
- -------------- ----------------------
23.1 Consent of Deloitte & Touche LLP
31