FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION NO. 333-85424
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 3, 2002)
400,000 8.25% SERIES E CUMULATIVE REDEEMABLE PREFERRED SHARES
OF
KRAMONT REALTY TRUST
In this prospectus supplement we are offering 400,000 of our 8.25%
Series E cumulative redeemable preferred shares of beneficial interest, par
value $.01 per share, at a price of $25.50 per share, for an aggregate purchase
price of $10,200,000, with the purchasers to pay an additional per share amount
of $0.0057 per day for the number of days from and including December 31, 2003
through and including the day of sale (with any included complete calendar month
being deemed to have 30 days), such additional amount being equal to the accrued
and unpaid distributions payable with respect to such 8.25% Series E cumulative
redeemable preferred shares of beneficial interest through the date of any such
sale.
We will pay quarterly cumulative distributions, in arrears, on the
8.25% Series E cumulative redeemable preferred shares. These distributions are
payable on the 20th day of January, April, July and October of each year, when
and as authorized by our board of trustees and declared by us, beginning on
April 20, 2004, at a yearly rate of 8.25% of the $25.00 liquidation preference,
or $2.0625 per 8.25% Series E cumulative redeemable preferred share, per year.
We may not redeem the 8.25% Series E cumulative redeemable preferred shares
prior to December 30, 2008, except as necessary to preserve our status as a real
estate investment trust. On or after December 30, 2008, we may, at our option,
redeem the 8.25% Series E cumulative redeemable preferred shares, in whole or
from time to time in part, for $25.00 per 8.25% Series E cumulative redeemable
preferred share in cash plus any accrued and unpaid distributions through the
date of redemption. The 8.25% Series E cumulative redeemable preferred shares
have no stated maturity, are not subject to any sinking fund or mandatory
redemption and will remain outstanding indefinitely unless we redeem them. The
8.25% Series E cumulative redeemable preferred shares are subject to certain
restrictions on ownership and transfer designed to preserve our qualification as
a real estate investment trust for federal income tax purposes.
We expect to deliver 400,000 of our Series E cumulative redeemable
preferred shares offered by this prospectus supplement in a direct placement on
or about February 27, 2004. We will pay certain expenses relating to the
offering. After paying our estimated expenses, we anticipate receiving
approximately $10,100,000 in net proceeds from this offering.
Our Series E cumulative redeemable preferred shares are traded on the
New York Stock Exchange under the symbol "KRTPrE". On February 17, 2004, the
last reported sale price for our Series E cumulative redeemable preferred shares
was $26.84.
PER SHARE TOTAL
--------- -----
PUBLIC OFFERING PRICE $25.50 $10,200,000(1)
NET PROCEEDS, BEFORE EXPENSES, TO US $25.50 $10,200,000(1)
(1)In addition to the public offering price of $25.50 per share,
purchasers will pay an additional per share amount of $0.0057 per day for the
number of days from and including December 31, 2003 through and including the
day of sale (with any included complete calendar month being deemed to have 30
days), such additional amount being equal to the accrued and unpaid
distributions payable with respect to such 8.25% Series E cumulative redeemable
preferred shares of beneficial interest through the date of any such sale. If
the date of such sale is February 27, 2004, this payment would be $0.3306 per
share and an aggregate amount of $132,240.
INVESTING IN OUR SERIES E CUMULATIVE REDEEMABLE PREFERRED SHARES
INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE S-5 OF THIS PROSPECTUS
SUPPLEMENT.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus Supplement is February 23, 2004.
TABLE OF CONTENTS
PAGE
----
Summary of the Offering and the Company............................................................. S-1
Recent Developments................................................................................. S-4
Risk Factors........................................................................................ S-5
Cautionary Language Regarding Forward-Looking Statements............................................ S-16
Ratio of Earnings to Fixed Charges and Preferred Share Dividends.................................... S-18
Use of Proceeds..................................................................................... S-18
Non-Recurring Reduction in Net Income............................................................... S-18
Description of Our Shares........................................................................... S-19
Description of the Series E Preferred Shares........................................................ S-19
Federal Income Tax Considerations................................................................... S-25
Plan of Distribution................................................................................ S-36
Legal Matters....................................................................................... S-37
Where You Can Find More Information................................................................. S-37
Incorporation of Certain Information By Reference................................................... S-37
ii
SUMMARY OF THE OFFERING
This summary highlights information contained elsewhere in this
prospectus supplement and the accompanying prospectus. Because it is a summary,
it may not contain all of the information that is important to you. Before
making a decision to invest in our 8.25% Series E cumulative redeemable
preferred shares, which we sometimes refer to as the "Series E preferred
shares," you should read carefully this entire prospectus supplement and the
accompanying prospectus, as well as more detailed information in the documents
incorporated by reference in this prospectus supplement and in the accompanying
prospectus, including our consolidated financial statements and the notes to the
consolidated financial statements.
The Series E preferred shares offered hereby are being sold by us. None
of our shareholders is selling any shares in this offering.
Securities Offered 400,000 Series E preferred shares
Price per share $25.50.
Accrued Distributions The purchasers will pay an additional
per share amount of $0.0057 per day
for the number of days from and
including December 31, 2003 through
and including the day of sale (with
any included complete calendar month
being deemed to have 30 days), such
additional amount being equal to the
accrued and unpaid distributions
payable with respect to such Series E
preferred shares through the date of
any such sale. If the sale is made on
February 27, 2004, the accrued
distributions payable will be $0.3306
per share.
Series E preferred shares expected to be
outstanding after this offering 2,800,000
Maturity The Series E preferred shares have no
stated maturity and are not subject
to any sinking fund or mandatory
redemption.
Use of Proceeds We expect that the net proceeds from
this offering will be approximately
$10,100,000 million after deducting
certain expenses (and excluding
accrued distributions payable). We
intend to use the net proceeds for
general corporate purposes, which may
include, among other things,
acquisitions of interests in real
property, capital expenditures,
repayment of debt and working capital
needs.
S-1
Ranking The Series E preferred shares rank
senior to our common shares and on a
parity with our Series B-1 preferred
shares, with respect to distribution
rights and rights upon our
liquidation, dissolution or winding
up.
Distributions Purchasers will be entitled to
receive cumulative cash distributions
from the date of original issue
(excluding such date), payable
quarterly in arrears on the 20th of
January, April, July and October of
each year, commencing on April 20,
2004, at the rate of 8.25% of the
liquidation preference per annum
(equivalent to $2.0625 per annum per
share).
Liquidation Preference If we liquidate, dissolve or wind up,
holders of the Series E preferred
shares will have the right to receive
$25.00 per share, plus accrued and
unpaid distributions to the date of
payment, before any payment is made
to holders of our common shares.
Optional Redemption The Series E preferred shares are not
redeemable prior to December 30,
2008, except in limited circumstances
to preserve our status as a real
estate investment trust. On and after
December 30, 2008, the Series E
preferred shares will be redeemable
for cash at our option in whole or
from time to time in part, at $25.00
per share, plus accrued and unpaid
distributions to the redemption date.
Voting Rights Holders of Series E preferred shares
generally have no voting rights.
However, if we do not pay
distributions on the Series E
preferred shares for six or more
quarterly periods, whether or not
consecutive, holders of the Series E
preferred shares (voting separately
as a class with all other classes or
series of parity preferred shares
upon which like voting rights have
been conferred) will be entitled to
vote for the election of two
additional trustees to serve on our
board of trustees until all
distribution arrearages have been
paid. In addition, we may not (x)
authorize or issue any shares of
beneficial interest which rank senior
to the Series E preferred shares as
to
S-2
distribution rights or liquidation
preference, or, (y) subject to
certain exceptions, amend any of the
provisions of our Declaration of
Trust to change the preferences,
rights or privileges of the Series E
preferred shares so as to materially
and adversely affect the Series E
preferred shares, without the consent
of at least two-thirds of the Series
E preferred shares.
Conversion The Series E preferred shares are not
convertible into or exchangeable for
any other property or securities.
Ownership and Transfer Limits The Series E preferred shares are
subject to certain restrictions on
ownership and transfer intended to
assist us in maintaining our status
as a real estate investment trust for
United States federal income tax
purposes.
Trading The Series E preferred shares are
listed for trading on the New York
Stock Exchange. However, no assurance
can be given that a market for the
Series E preferred shares will
develop or, if developed, will be
maintained.
Risk factors An investment in the Series E
preferred shares involves various
risks, and prospective investors
should carefully consider the matters
discussed under "Risk Factors"
beginning on page S-5 of this
prospectus supplement and in the
attached prospectus before making a
decision to invest in the Series E
preferred shares.
THE COMPANY
We are Kramont Realty Trust, a self-administered, self-managed real
estate investment trust, which we sometimes refer to as a "REIT," organized
under the laws of the State of Maryland. We sometimes refer to ourselves as
Kramont.
We are engaged in the ownership, acquisition, development,
redevelopment, management and leasing of community and neighborhood shopping
centers. All of our assets are held by two operating partnerships, Kramont
Operating Partnership, L.P. and Montgomery CV Realty L.P., which we sometimes
collectively refer to as the "operating partnerships," under an UPREIT
structure. UPREIT stands for "Umbrella Partnership Real Estate Investment
Trust." An UPREIT is a real estate investment trust that conducts its operations
through one or more
S-3
umbrella limited partnerships.
We own and operate 84 shopping centers and two office buildings, and
manage four shopping centers for third parties and four shopping centers in
connection with a joint venture. These properties are located in 16 states in
the eastern and southeastern regions of the United States and their aggregate
size is approximately 12.3 million square feet.
We employ approximately 142 full and part-time employees, including
management, accounting, legal, acquisitions, property management, maintenance
and administrative personnel.
Our principal executive offices are located at Plymouth Plaza, 580 West
Germantown Pike, Suite 200, Plymouth Meeting, Pennsylvania 19462, and our
telephone number is (610) 825-7100. Additional information regarding Kramont is
set forth in our Annual Report on Form 10-K for the fiscal year ended December
31, 2002, and other documents we file with the Securities and Exchange
Commission (which are incorporated by reference in this prospectus supplement).
RECENT DEVELOPMENTS
On February 17, 2004, we acquired Perkins Farm Marketplace, a 203,308
square foot community shopping center in Worcester, Massachusetts for a cash
price of approximately $19.75 million plus transaction costs.
On January 30, 2004, we redeemed all of our 9.5% Series D cumulative
redeemable preferred shares of beneficial interest for $25.00 per share plus
accrued and unpaid distributions through such date of $0.066 per share.
On December 30, 2003, we sold 2,400,000 of our Series E preferred
shares in a public offering at $25.00 per share, for an aggregate purchase price
of $60,000,000. Cohen & Steers Capital Advisors, LLC acted as placement agent in
connection with the offering. The net proceeds to us from this offering were
approximately $58,500,000.
On October 31, 2003, the lease for Snyder Drugs/Drug Emporium's Upper
Darby, Pennsylvania store expired, and Drug Emporium, which commenced bankruptcy
proceedings on September 10, 2003, rejected the three other leases it had with
us, in Bensalem and Whitehall, Pennsylvania, and in Hamilton, New Jersey. Annual
minimum rents under these four leases was approximately $697,000.
In July, 2003, Wal-Mart Stores, Inc., our largest tenant based on our
annualized minimum rents, closed its store located at Spartanburg, South
Carolina. To this date, Wal-Mart has continued to honor all of its obligations
under the Spartanburg lease. The annual minimum rent for the Spartanburg store
is approximately $297,000. In September, 2003, Wal-Mart subleased its store in
Pensacola, Florida, closed since March, 2002, to Bealls Department Store. The
annual minimum rent for the Pensacola store is approximately $579,000.
S-4
In April, 2003, Kmart Corporation, our fourth largest tenant based on
our annualized minimum rents, closed its Manchester, Connecticut store, after
rejecting the lease under bankruptcy proceedings in January, 2003. The annual
minimum rent for this store was $232,000.
RISK FACTORS
Investment in our Series E preferred shares involves various risks. In
addition to the other information in this prospectus supplement, the
accompanying prospectus and other documents that are incorporated by reference
into this prospectus supplement, you should consider carefully the following
risk factors before deciding to invest in our Series E preferred shares.
GENERAL REAL ESTATE RISKS.
Your investment in our Series E preferred shares is subject to risks related to
the ownership of real estate securities generally.
Your investment in our Series E preferred shares will be affected by
adverse economic conditions and regulatory changes. In addition, your investment
may be subject to risks generally incident to the ownership of real estate,
including:
- changes in general economic or local conditions;
- changes in supply of or demand for similar or competing
properties in an area;
- changes in interest rates which may render the sale and/or
refinancing of a property difficult or unattractive;
- changes in consumer spending patterns;
- increases in operating costs and expenses;
- excess supply of retail or commercial space and construction
of new shopping centers, regional malls or other retail or
commercial spaces;
- tax, real estate, environmental and zoning laws and changes in
such laws; and
- periods of higher interest rates or tight money supply, which
may render it more expensive to operate.
In addition, some significant operating expenses associated with our
properties, such as debt payments, maintenance, tenant improvement costs and
taxes, generally remain constant when gross income from properties is reduced.
For these and other reasons, we cannot assure you that we will be
profitable or that we will realize growth in the value of our properties.
S-5
We are dependent on the retail industry.
The market for retail space and, indirectly, the general economic or
local conditions of the retail sector in which we operate can significantly
affect our performance. Consolidation in the retail sector, the financial
distress of some large retailers, competition from e-commerce companies and the
excess amount of retail space in some markets has adversely affected the market
for retail space. To the extent that these conditions persist, we cannot assure
you that we will have sufficient net income and cash available for distributions
to shareholders and we may not be able to obtain debt or equity financing on
reasonable terms and conditions.
One or more vacancies at a property may make it difficult for us to sell or
re-lease that property.
Our ability to rent or relet unleased space will be affected by many
factors, including the existence of covenants typically found in shopping center
tenant leases, such as covenants restricting the use of other space at the
shopping center to those which are not competitive with another tenant. Our
ability to lease or relet our properties may cause fluctuations in our cash
flow, which, in turn, may affect the cash available for distributions to
shareholders.
We are dependent on the financial stability of our tenants for revenue.
Substantially all of our income is derived from rental payments from
tenants of our properties. Therefore, the success of our investments is
dependent to a large extent on the financial stability of our tenants. Lease
payment defaults by tenants could cause us to reduce the amount of distributions
to shareholders. A default by a tenant on its lease payments to us would cause
us to lose revenue from the property and require us to find an alternative
source of revenue to meet our mortgage payment obligations and prevent a
foreclosure if the property is subject to a mortgage. In the event of a default,
we may experience delays in enforcing our rights as landlord and may incur
substantial costs in protecting our investment and reletting our property. If a
lease is terminated, we cannot assure you that we will be able to lease the
property for the rent previously received or sell the property without incurring
a loss. In addition, if a large number of tenants default under their leases, it
would adversely affect our net income and cash available for distributions to
our shareholders.
We rely on major tenants to pay rent, and their inability to pay rent may
substantially reduce our net income and cash available for distributions to
holders of our Series E preferred shares.
Our five largest tenants are Wal-Mart Stores, Inc., Ahold, The TJX
Companies, Inc., Kmart Corporation and Shop Rite. As of September 30, 2003,
Wal-Mart Stores, Inc. represented approximately 7.01% of our annualized minimum
rents, Ahold represented approximately 5.03% of our annualized minimum rents,
The TJX Companies, Inc. represented approximately 2.96% of our annualized
minimum rents, Kmart Corporation represented approximately 2.68% of our
annualized minimum rents and Shop Rite represented approximately 2.06% of our
annualized minimum rents. As of September 30, 2003, no other tenant represented
more than 1.86% of the aggregate annualized minimum rents of our properties. If
any of our major tenants were to close stores at our properties as a result of
bankruptcy or for other reasons, such closures could adversely affect other
tenants by causing a decrease in customer traffic at such properties, which in
turn could adversely affect our financial position by causing tenants to default
on lease payment obligations. This could be true even if the tenant continued to
pay rent under the leases
S-6
for the closed stores. In addition, our financial position and our ability to
make distributions may be adversely affected if any of our major tenants
experiences financial difficulties, including a bankruptcy, insolvency or
general downturn in the business of any of these tenants, if any of these
tenants does not renew its leases as they expire or if our tenants are acquired
or merged with other entities.
Uninsured losses relating to real property may adversely affect your returns.
We carry comprehensive liability, fire, flood, extended coverage and
rental loss insurance for our properties with customary terms carried for
similar properties. We believe we are adequately insured for all material risks
of loss. However, we cannot assure you that similar insurance will be available
in the future or will be available at commercially reasonable rates. In
addition, we cannot assure you that every loss affecting our properties will be
covered by insurance or that any loss that we incur will not exceed the limits
of policies obtained. Our net income and cash available for distributions would
be adversely affected by an uninsured loss. Although we believe that we
currently carry adequate insurance coverage for damage to our properties or
liability which could arise from terrorist attacks on our properties, we cannot
assure you that insurance adequate to cover damage liability arising from
terrorist attacks will be available in the future or will be available at
commercially reasonable rates.
Competition with other properties and other companies may increase costs,
decrease acquisition opportunities and reduce returns.
The leasing of real estate is highly competitive. Most of our
properties are located in developed retail and commercial areas, and there are
generally numerous other neighborhood or community shopping centers within a
five-mile radius of any given property. In addition, there are one or more
regional malls within a ten-mile radius of some of our properties.
There are numerous developers and real estate companies which compete
with us in seeking acquisition opportunities and locating tenants to lease
vacant space, some of which may have greater financial resources than we do. In
addition, these developers or real estate companies may develop or acquire new
shopping centers or regional malls, or renovate, refurbish or expand existing
shopping centers or regional malls, in the vicinity of one or more of our
properties. Competition from these developers and real estate companies could
adversely and materially affect our acquisition opportunities and ability to
locate tenants to lease vacant space.
Compliance with regulatory requirements, including the Americans with
Disabilities Act, at our properties may cause us to incur additional costs.
Our properties are subject to various federal, state and local
regulatory requirements, including the Americans with Disabilities Act, which
requires that buildings be made accessible to people with disabilities.
Governmental authorities could impose fines and private litigants may
be awarded damages if we fail to comply with these requirements. We believe that
our properties are in substantial compliance with all material federal, state
and local regulatory requirements. We cannot assure you, however, that
regulatory requirements will not be changed or that new
S-7
regulatory requirements will not be imposed that would require significant
unanticipated expenditures by us or the tenants. Unexpected expenditures would
adversely affect our net income and cash available for distributions to holders
of our Series E preferred shares.
Illiquidity of real estate investments may make it difficult for us to sell
properties to respond to changing market conditions.
Our ability to vary our portfolio in response to changes in economic
and other conditions will be limited as a result of various factors. First, real
estate investments are relatively illiquid. In addition, REIT requirements may
subject us to confiscatory taxes on gain recognized from the sale of property if
such property is considered to be held primarily for sale to customers in the
ordinary course of our trade or business. We cannot assure you that we will be
able to promptly dispose of one or more of our properties when we want or need
to. Consequently, the sale price for any property may not recoup or exceed the
amount invested in the property.
Costs associated with environmental matters may adversely affect our operating
results.
Under some environmental laws, a current or previous owner or operator
of real property, and parties that generate or transport hazardous substances
that are disposed of at real property, may be liable for the costs of
investigating and remediating these substances on or under the property. The
federal Comprehensive Environmental Response, Compensation & Liability Act, as
amended, and similar state laws, impose liability on a joint and several basis,
regardless of whether the owner, operator or other responsible party was at
fault for the presence of such hazardous substances. The costs of remediating
hazardous or toxic substances can be substantial and can exceed the value of the
subject property. In connection with the ownership or operation of our
properties, we could be liable for such costs in the future. The presence of
hazardous or toxic substances on our properties, or our failure to remediate
such substances, also may adversely affect our ability to sell or rent our
properties or to borrow funds using such properties as collateral. In addition,
environmental laws may impose restrictions on the manner in which we use our
properties or operate our business, and these restrictions may require
expenditures for compliance.
We are currently not aware of any material environmental claims pending
or threatened against us in excess of available insurance. However, we cannot
assure you that a material environmental claim or compliance obligation will not
arise or that we will not undertake environmental remediation that either is not
covered by insurance or is in excess of such coverage. The costs of defending
against any claims of liability, of remediating a contaminated property, or of
complying with future environmental requirements could be substantial to us and
affect our operating results.
COMPANY RISKS.
Our properties are subject to risks related to specific geographic areas which
could adversely affect net income.
We own properties located in 16 states, primarily in the eastern and
southeastern regions of the United States. To the extent that general economic
or other relevant conditions decline in the states in which our properties are
located and result in a decrease in consumer demand in
S-8
these areas, the income from, and value of, these properties may be adversely
affected. The impact of any general decline would affect us more significantly
if it affected states in which we had a significant concentration of properties,
or the eastern and southeastern regions of the United States as a whole.
Our issuance of additional shares, warrants or debt securities, whether or not
convertible, may reduce the market price for our shares.
We cannot predict the effect, if any, that future sales of our shares,
warrants or debt securities, or the availability of our securities for future
sale, will have on the market price of our shares, including our Series E
preferred shares. Sales of substantial amounts of our common shares or preferred
shares, warrants or debt securities convertible into or exercisable or
exchangeable for common shares in the public market or the perception that such
sales might occur could reduce the market price of our Series E preferred shares
and the terms upon which we may obtain additional equity financing in the
future. In addition, we may issue additional shares in the future to raise
capital or as a result of the following:
- The issuance of common shares under the 2000 Incentive Plan or
other remuneration plans. We may also issue our common shares
to our employees in lieu of cash bonuses or to our trustees in
lieu of trustee's fees.
- The exercise of options to purchase our common shares. As of
September 30, 2003, we had outstanding options to acquire
approximately 450,528 of our common shares. In addition, we
may in the future issue additional options or other securities
convertible into or exercisable for our common shares under
our 2000 Incentive Plan or other remuneration plans. We may
also issue options or convertible securities to our employees
in lieu of cash bonuses or to our trustees in lieu of
trustee's fees.
- The redemption of partnership units in the operating
partnerships. Under the terms of the operating partnerships,
minority limited partners in each partnership may elect to
have their partnership units in the operating partnerships
redeemed for cash. Upon such election, we can elect to issue
our common shares in lieu of the cash payment, currently on a
one-to-one basis. In the event all of the limited partners in
both operating partnerships elect to have their partnership
units redeemed for cash, we may elect to issue an aggregate of
1,666,152 of our common shares in connection with these
redemptions. We may, in the future, issue additional
partnership units in the operating partnerships to third
parties in exchange for real property.
- The issuance of debt securities exchangeable for our common
shares.
- The exercise of warrants we may issue in the future.
- Lenders sometimes ask for warrants or other rights to acquire
shares in connection with providing financing. We cannot
assure you that our lenders will not request such rights.
S-9
The Series E preferred shares are a recently created issue of securities and do
not have an established trading market, which may negatively affect their market
value and your ability to transfer or sell your shares.
The Series E preferred shares are a recently authorized series of our
securities with no established trading market. On December 24, 2003, we amended
our declaration of trust to designate Series E preferred shares for the first
time. We amended our declaration of trust again on February 18, 2004 to
authorize additional Series E preferred shares. We first issued Series E
preferred shares on December 30, 2003, and the New York Stock Exchange first
approved Series E preferred shares for listing on December 29, 2003. We cannot
assure you that an active trading market for the Series E preferred shares will
develop or, even if one develops, will be maintained. As a result, the ability
to transfer or sell the Series E preferred shares and any trading price of the
Series E preferred shares could be adversely affected.
Our ability to pay distributions on our shares may be limited.
Because we conduct all of our operations through the operating
partnerships, our ability to make distributions on our shares depends almost
entirely on payments and distributions received on our interests in the
operating partnerships. Additionally, the terms of some of the debt for which
Kramont Operating Partnership, L.P. is liable limits its ability to make some
types of payments and other distributions to us. This in turn limits our ability
to make some types of payments, including payment of distributions on our
shares, unless we meet certain financial tests or such payments or distributions
are required to maintain our qualification as a REIT. As a result, if we are
unable to meet the applicable financial tests, we may not be able to pay
distributions on our shares in one or more periods.
The market value of the Series E preferred shares could be substantially
affected by various factors.
The share price of the Series E preferred shares will depend on many
factors, which may change from time to time, including:
- prevailing interest rates, increases in which may have an
adverse effect on the share price of the Series E preferred
shares;
- the market for similar securities issued by REITs;
- the limited number of holders of Series E preferred shares;
- general economic and financial market conditions; and
- our financial condition, performance and prospects.
Our business depends on key personnel.
The success of our business will be dependent on the efforts of our
executive officers and trustees, particularly Louis P. Meshon, Sr. The loss of
his services could adversely affect our business, assets or results of
operations.
S-10
Our organizational documents do not place limits on the incurrence of debt.
Our organizational documents do not limit the amount of indebtedness
that we may incur. Although our board attempts to maintain a balance between
total outstanding indebtedness and the value of our portfolio, it could alter
this balance at any time. If we become more highly leveraged, by issuing new
debt securities or otherwise, then the resulting increase in debt service could
diminish our ability to make distributions to shareholders and make payments on
other outstanding indebtedness. If we default on our obligations under any
outstanding indebtedness or new debt securities we issue, we could lose our
interest in any properties or other collateral that secure that indebtedness.
We may need to borrow additional money to qualify as a REIT.
Our ability to make distributions to shareholders could be diminished
by increased debt service obligations if we need to borrow additional money in
order to maintain our REIT qualification. For example, differences in timing
between when we receive income and when we have to pay expenses could require us
to borrow money to meet the requirement that we distribute to shareholders at
least 90% of our net taxable income excluding net capital gain each year. The
incurrence of large capital expenditures also could require us to borrow money
to meet this requirement.
We might need to borrow money for these purposes even if we believe
that market conditions are not favorable for such borrowings. In other words, we
may have to borrow money on unfavorable terms.
We cannot avoid risks inherent in development and acquisition activities and
property development.
Developing or expanding existing properties in our real estate
portfolio is an integral part of our strategy for maintaining and enhancing the
value of our portfolio. We may also choose to acquire additional properties in
the future. While our existing policies with respect to developing and expanding
properties are intended to limit some of the risks otherwise associated with
property acquisition such as not starting construction on a project prior to
obtaining a commitment from an anchor tenant, we nevertheless will incur risks,
including risks related to costs required to identify and acquire properties,
delays in construction and lease-up, costs of materials, financing availability,
volatility in interest rates and labor availability. In addition, our policies
may change.
In addition, once a property is acquired, the renovation and
improvement costs, if any, we incur in bringing an acquired property up to
market standards may exceed our estimates, and the property may fail to perform
as expected. We also may be unable to identify properties to acquire or
successfully integrate acquired properties and operations. In addition, we may
incur costs required to redevelop or renovate our current properties.
We are subject to risks associated with debt financing and existing debt
maturities.
We are subject to a variety of risks associated with debt financing.
These risks could increase if we issue new debt securities. Examples of these
risks include the following:
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- our cash from operating activities may be insufficient to meet
required payments;
- we may be unable to pay or refinance indebtedness on our
properties;
- if interest rates or other factors result in higher interest
rates on refinancing, these factors will diminish our returns
on development and redevelopment activities, reduce cash from
operating activities and hamper our ability to make
distributions to shareholders;
- if we are unable to secure refinancing of indebtedness on
acceptable terms, we may be forced to dispose of properties
upon disadvantageous terms, which may cause losses and affect
our funds from operations;
- if properties are mortgaged to secure payment of indebtedness
and we are unable to meet payments, the mortgagee may
foreclose upon the properties, resulting in a loss of income
and a valuable asset to us; and
- we may not be able to sell properties that currently are
mortgaged to secure payment of indebtedness.
We have substantial debt obligations which could limit our net income and cash
available for distribution.
We have substantial debt obligations. Our debt at September 30, 2003
was approximately $513.1 million, of which approximately $432.8 is long-term
debt. Payments of principal and interest made to service our debts may leave us
with insufficient cash to pay the distributions that we are required to pay to
maintain our qualification as a real estate investment trust. In addition, 68 of
our properties are security for our mortgage indebtedness.
It may be difficult for us to meet our balloon payment obligations; balloon
payment obligations may adversely affect our ability to pay distributions to the
holders of our Series E preferred shares.
A number of our outstanding loans require lump sum or "balloon"
payments for the outstanding principal balance at maturity. As of September 30,
2003, we had $190 million outstanding on a secured first mortgage loan facility
with Metropolitan Life Insurance Company, which is secured by 15 properties and
is due in June 2013, and approximately $62.5 million outstanding on a secured
first mortgage loan facility with Salomon Brothers Realty Corp., which is
secured by 9 properties and is due in October, 2008.
The remainder of our mortgages that have balloon indebtedness have due
dates ranging from March 2004 to August 2028. In addition, we may finance future
acquisitions with debt which may require a lump sum or "balloon" payment for the
outstanding principal balance at maturity. Our ability to pay the outstanding
principal balance of our debt at maturity may depend upon our ability to
refinance the debt, or to sell properties. We cannot assure you that we will be
able to refinance our payment obligations on reasonable terms and conditions,
that we will be able to sell any properties or that the amounts we receive from
refinancings or sales will be sufficient to make the required balloon payment on
our debt. If we cannot make a balloon
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payment when due, our lenders may foreclose on the properties securing the debt,
which foreclosure would have a material adverse effect on our business, assets
and results of operations.
If we fail to make our debt payments, we could lose our investment in a
property.
If we are unable to make our debt payments on loans secured by
mortgages on our properties as required, a lender could foreclose on the
property or properties securing our debt. This could cause us to lose part or
all of our investment, which could cause the value of our Series E preferred
shares and the distributions payable to their holders and holders of our other
shares to be reduced.
Our floating rate debt will be adversely affected by increases in interest
rates.
As of September 30, 2003, we had indebtedness with an aggregate
outstanding principal balance of approximately $71.6 million that bears interest
at rates that are variable. New debt securities could also have floating
interest rates. As a result of variable interest rates on the debt and on other
debt we may incur in the future, an increase in interest rates could have an
adverse effect on our net income and cash available for distributions.
FEDERAL INCOME TAX RISKS.
Failure to qualify as a real estate investment trust could adversely affect our
operations and our ability to make distributions.
It is expected that we will continue to qualify to be taxed as a REIT
under the Internal Revenue Code of 1986, as amended, which we sometimes refer to
as the Code. However, we cannot assure you that we will be able to operate in a
manner so as to maintain our qualification as a REIT. Qualification as a REIT
involves the application of highly technical and complex tax law provisions for
which there are only limited interpretations. In addition, qualification as a
REIT involves the determination of various factual matters that will not be
entirely in our control. We also cannot assure you that new laws, regulations or
interpretations will not change the applicable REIT qualification rules.
If we fail to qualify as a REIT for any taxable year, our distributions
to our shareholders would cease to qualify for the deductions for dividends
paid, with the effect that we would be subject to federal income tax on our
taxable income at corporate rates. In addition, we could be disqualified from
treatment as a REIT for four taxable years following the year of losing our REIT
status. Losing our REIT status would reduce net earnings available for
investment or distribution to holders of Series E preferred shares because of
the additional tax liability. In addition, we might be required to borrow funds
or liquidate some investments in order to pay the applicable tax.
Real estate investment trust distribution requirements limit the amount of cash
we will have available for other business purposes, including amounts to fund
our future growth.
To maintain our qualification as a REIT under the Code, we will have to
distribute annually to our shareholders at least 90% of our ordinary taxable
income, excluding net capital
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gains. This requirement will limit our ability to accumulate capital for use for
other business purposes. If we do not have sufficient cash or other liquid
assets to meet the distribution requirements, we may have to borrow funds or
sell properties on adverse terms in order to meet the distribution requirements.
If we fail to make a required distribution, we would cease to qualify as a REIT.
Our board may determine without shareholder approval that we should no longer
qualify as a REIT.
Our board may determine without shareholder approval that it is in the
best interests of the company to cease to qualify as a REIT for federal income
tax purposes. In the event that our board should make this determination, we and
our shareholders would no longer be entitled to the Federal income tax benefits
that are applicable to a REIT.
Legislative or regulatory action could adversely affect purchasers of our Series
E preferred shares.
In recent years, numerous legislative, judicial and administrative
changes have been made in the provisions of the federal income tax laws
applicable to investments similar to an investment in our Series E preferred
shares. Changes are likely to continue to occur in the future, and we cannot
assure you that any of these changes will not adversely affect your taxation as
a holder of Series E preferred shares. Any of these changes could have an
adverse effect on an investment in Series E preferred shares or on the market
value or the resale potential of our properties. You are urged to consult with
your own tax advisor with respect to the impact that recent legislation may have
on your investment and the status of legislative, regulatory or administrative
developments and proposals and their potential effect.
Recent changes in taxation of corporate dividends may adversely affect the value
of our Series E preferred shares.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 that was
enacted into law on May 28, 2003, among other things, generally reduces to 15%
the maximum marginal rate of tax payable by individuals on dividends received
from a regular C corporation. This reduced tax rate, however, will not apply to
dividends paid to individuals by a REIT on its shares, except for certain
limited amounts, which we do not expect to pay the holders of Series E preferred
shares. While the earnings of a REIT that are distributed to its shareholders
still generally will be subject to less combined federal income taxation than
earnings of a non-REIT C corporation that are distributed to its shareholders
net of corporate-level income tax, this legislation could cause individual
investors to view the stock of regular C corporations as more attractive
relative to the shares of a REIT than was the case prior to the enactment of the
legislation. Individual investors could hold this view because the dividends
from regular C corporations will generally be taxed at a lower rate while
dividends from REITs will generally be taxed at the same rate as the
individual's other ordinary income. We cannot predict what effect, if any, the
enactment of this legislation may have on the value of the shares of REITs in
general or on the value of our Series E preferred shares in particular, either
in terms of price or relative to other investments.
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CERTAIN PROVISIONS OF THE MARYLAND GENERAL CORPORATION LAW AND OUR DECLARATION
OF TRUST, BYLAWS AND THE TERMS OF THE SERIES E PREFERRED SHARES MAY INHIBIT
BUSINESS COMBINATIONS
Provisions of the Maryland General Corporation Law may prevent a business
combination involving us.
Provisions of the Maryland General Corporation Law applicable to us
prohibit business combinations with:
- any person who beneficially owns 10% or more of the voting
power of our outstanding shares or any of our affiliates or
associates who, at any time within the two year period prior
to the date in question, was the beneficial owner of 10% or
more of the voting power of our outstanding shares (an
"interested shareholder"); or
- an affiliate of an interested shareholder.
A person is not an interested shareholder if our board approved in
advance the transaction by which that person otherwise would have become an
interested shareholder. However, in approving a transaction, the board may
provide that its approval is subject to compliance, at or after the time of
approval, with any terms and conditions determined by the board.
These prohibitions last for five years after the most recent date on
which the interested shareholder became an interested shareholder. Thereafter,
Maryland law provides that any business combination must be recommended by our
board and approved by the affirmative vote of at least 80% of the votes entitled
to be cast by holders of our outstanding shares and two-thirds of the votes
entitled to be cast by holders of our shares other than shares held by the
interested shareholder or its affiliate or associate. These requirements, as
well as our ability to authorize and issue additional authorized but unissued
common and preferred shares and to classify or reclassify any unissued common or
preferred shares and set the preferences, rights and other terms of the
classified or reclassified shares, could inhibit a change in control even if a
change in control were in your best interest. These provisions of Maryland law
do not apply, however, to business combinations with a person that are approved
or exempted by our board prior to the time the person becomes an interested
shareholder.
Our declaration of trust and the terms of the Series E preferred shares contain
ownership limitations which may discourage a takeover.
To preserve our qualification as a REIT, no more than 50% in value of
our outstanding shares may be owned, directly or indirectly, by five or fewer
individuals. Our declaration of trust and the terms of the Series E preferred
shares authorize our board to take any action that may be required to preserve
our qualification as a REIT and limit any direct or indirect or constructive
ownership by any one person to not more than 9.8% in value or in number of our
common shares or any series of our preferred shares or 9.8% in value of all of
our outstanding shares. These restrictions may discourage a change in control
and may deter individuals or entities from making tender offers for shares,
which offers might be financially attractive to shareholders or which may cause
a change in our management.
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Our staggered board may prevent shareholders from making a bid for control.
Our bylaws provide that the number of trustees may be established by
the board. Any vacancy will be filled at any regular meeting or at any special
meeting called for that purpose by a majority of the remaining trustees, except
that a vacancy resulting from an increase in the number of trustees must be
filled by a majority of the entire board.
Our board is divided into three classes of trustees. Each year, one
class of trustees is elected to a three-year term by the shareholders. The
staggered terms prevent the shareholders from voting on the election of more
than one class of trustees at each annual meeting and, thus, may delay, defer or
prevent a change in control or deter a bid for control of us even in a case
where the holders of a majority of our outstanding shares believe a change in
control would be in their interest.
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
Certain information both included and incorporated by reference in this
prospectus supplement and the accompanying prospectus may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended, and as such may involve known and unknown risks, uncertainties
and other factors which may cause our actual results, performance or
achievements to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. These
include statements of forecasts, expectations, estimates, beliefs, intentions,
projections and similar expressions. Forward-looking statements are based on
certain assumptions and expectations of future events which may not prove to be
accurate and that could be affected by the risks and uncertainties involved in
our business, many of which cannot be predicted with accuracy and some of which
might not even be anticipated. Forward-looking statements describe our future
plans, strategies and expectations and are generally identifiable by use of the
words "may," "will," "should," "expect," "anticipate," "estimate," "believe,"
"intend" or "project", or the negative thereof, or other variations thereon or
comparable terminology. Readers of this prospectus supplement are cautioned that
any such statements are not guarantees of future performance and that actual
results may differ materially from those projected and implied in the
forward-looking statements. Factors which could have a material adverse effect
on the operations and future prospects of our company, the offering described in
this prospectus supplement, and on the value of the Series E preferred shares,
include:
- our inability to identify properties to acquire or our
inability to successfully integrate acquired properties and
operations;
- economic factors adversely affecting the retail industry,
including the effect of general economic downturns on demand
for leased space at and the amount of rents chargeable by
neighborhood and community shopping centers;
- changes in tax laws or regulations, especially those relating
to REITs and real estate in general;
- our failure to continue to qualify as a REIT under U.S. tax
laws;
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- the number, frequency and duration of tenant vacancies that we
experience;
- the time and cost required to solicit new tenants and to
obtain lease renewals from existing tenants on terms that are
favorable to us;
- tenant bankruptcies and closings;
- the general financial condition of, or possible mergers or
acquisitions or bankruptcies involving, our tenants;
- competition from other real estate companies or from competing
shopping centers or other commercial developments;
- changes in interest rates and national and local economic
conditions;
- the continued service of our senior executive officers;
- possible environmental liabilities;
- the availability, cost and terms of financing;
- the time and cost required to identify, acquire, construct or
develop additional properties that result in the returns
anticipated or sought;
- the costs required to re-develop or renovate any of our
current or future properties;
- our inability to obtain insurance coverage to cover
liabilities arising from terrorist attacks or other causes or
to obtain such coverage at commercially reasonable rates;
- liabilities and expenses related to compliance with laws
(including the Americans with Disabilities Act) and
liabilities and expenses arising out of litigation;
- illiquid nature of real estate investments;
- our substantial debt obligations, our ability to incur
additional debt and potential increases in our debt service
obligations;
- any inability to consummate the offering with respect to all
of the 400,000 Series E preferred shares and our decision to
sell fewer shares; and
- our agreement, in connection with closing the offering, to
terms in the purchase agreement to be entered into with
purchasers of our Series E preferred shares, which could
modify the rights or obligations of Kramont.
You should also carefully consider any other factors contained in this
prospectus supplement and the accompanying prospectus, including the information
incorporated by reference into this supplemental prospectus or into the
accompanying prospectus. You should pay particular attention to those factors
discussed in this prospectus supplement and in the
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accompanying prospectus under the heading "Risk Factors." You should not rely on
the information contained in any forward-looking statements, and you should not
expect us to update any forward-looking statements.
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED SHARE DIVIDENDS
The following table sets forth our ratios of earnings to fixed charges
for the periods indicated. In computing the ratios of earnings to fixed charges,
earnings have been based on consolidated income from continuing operations
before fixed charges (exclusive of capitalized interest). Fixed charges consist
of interest on debt, including amounts capitalized and interest expense related
to the guaranteed debt of the partnerships in which we hold an interest. In
computing the ratios of earnings to combined fixed charges and preferred share
dividends, preferred share dividends consist of dividends on our Series B-1
preferred shares and our recently redeemed Series D preferred shares.
FOR THE NINE
YEAR ENDED DECEMBER 31, MONTHS ENDED
--------------------------------------------------------------- SEPTEMBER 30,
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- -------------
Ratio of Earnings to
Fixed Charges(1) 2.27 1.75 1.65 1.48 1.50 1.51
---- ---- ---- ---- ---- ----
Ratio of Earnings to
Combined Fixed
Charges and
Preferred Share
Dividends(1) 2.27 1.75 1.43 1.23 1.26 1.26
---- ---- ---- ---- ---- ----
(1) Our ratio of earnings to fixed charges and ratio of earnings to
combined fixed charges and preferred share dividends have been revised from
those presented in the accompanying prospectus to reflect the impact of the
implementation of the Statement of Financial Accounting Standard No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
USE OF PROCEEDS
The net proceeds to us from the offering (after deducting estimated
fees and expenses of $100,000 related to this offering) are estimated to be
approximately $10,100,000. We intend to use the net proceeds for general
corporate purposes, which may include, among other things, acquisitions, capital
expenditures, repayment of debt and working capital needs.
NON-RECURRING REDUCTION IN NET INCOME
In connection with the redemption of all of our outstanding Series D
cumulative redeemable preferred shares on January 30, 2004, our results for the
first quarter of 2004 will reflect a non-recurring reduction in net income
attributable to common shareholders of approximately $17.7 million. On July 31,
2003, the SEC issued an interpretation of FASB-EITF Topic D-42, "The Effect on
the Calculation of Earnings per Share for the Redemption or Induced Conversion
of Preferred Stock." Under the SEC's interpretation relating to the redemption
of preferred securities, the difference between the carrying amount of the
shares and the redemption
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price must be recorded as a reduction in net income attributable to common
shareholders and, therefore, will impact our earnings per share and funds from
operations per share. We have agreed with Fleet National Bank N.A., on its own
behalf and as agent for certain other banks providing for a credit facility
under a loan agreement we entered into in 2002, that this non-recurring
reduction in net income attributable to common shareholders will not result in
any non-compliance with financial covenants under this loan agreement.
DESCRIPTION OF OUR SHARES
Our authorized shares consist of 93,483,845 common shares of beneficial
interest, $.01 par value per share, and 6,516,155 preferred shares of beneficial
interest, $.01 par value per share. As of February 23, 2004, 24,069,925 common
shares, 1,183,240 Series B-1 preferred shares and 2,400,000 Series E preferred
shares were issued and outstanding. In addition, as of February 23, 2004,
approximately 1,666,152 units of partnership interest were held by limited
partners other than us in our operating partnerships, Kramont Operating
Partnership, L.P. or Montgomery CV Realty L.P. These units of partnership
interest may be redeemed at any time for cash or, at our option, for common
shares on a one-to-one basis (subject to adjustment). Under our Declaration of
Trust, the Board may increase or decrease the aggregate number of shares or the
number of shares of any class or series, without any action by the shareholders.
DESCRIPTION OF THE SERIES E PREFERRED SHARES
The description of the particular terms of the Series E preferred
shares supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the preferred shares set
forth in the accompanying prospectus, to which description reference is hereby
made. The following summary of the material terms and provisions of the Series E
preferred shares does not purport to be complete and is qualified in its
entirety by reference to the pertinent sections in the Articles Supplementary
creating the Series E preferred shares and the Articles Supplementary
authorizing the additional Series E preferred shares offered by this prospectus
supplement, which we sometimes refer to together as the articles supplementary,
a copy of which will be made available by us on request, our Declaration of
Trust, our bylaws, as amended, and applicable laws.
Maturity
The Series E preferred shares have no stated maturity and are not
subject to any sinking fund or mandatory redemption.
Ranking
The Series E preferred shares rank, with regard to rights to receive
distributions and amounts payable upon liquidation, dissolution or winding up of
Kramont, on a parity with the Series B-1 preferred shares (as well as any other
class or series of shares of beneficial interest of Kramont issued in the future
which is entitled to receive distributions or assets upon liquidation,
dissolution or winding up of the affairs of the Trust on a parity with the
Series E preferred shares). The Series E preferred shares rank senior to the
Kramont common shares.
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Distributions
The holders of Series E preferred shares are entitled to receive
cumulative cash distributions, when, as and if authorized by the board of
trustees and declared by Kramont, out of assets legally available for payment of
distributions. Distributions are payable quarterly by Kramont in cash at a rate
of $2.0625 per Series E preferred share per annum (equivalent to 8.25% of the
liquidation preference per annum). Distributions accrue and are cumulative from
the day following the date on which the Series E preferred shares are first
issued. Distributions will be payable quarterly in arrears when, as and if
authorized by the board of trustees of Kramont on the 20th day of January,
April, July, and October of each year, commencing on April 20, 2004.
Distributions payable on Series E preferred shares for the initial distribution
period and for any period less than a full quarterly distribution period will be
computed on the basis of a 360-day year consisting of twelve 30-day months.
At any time the accrued distributions have not been paid in full (or
authorized and set apart for payment) on the Series E preferred shares and any
other preferred shares ranking on a parity as to distributions with the Series E
preferred shares, all distributions authorized to be paid to any of such shares,
including Series E preferred shares, must be authorized to be paid pro rata on
all such shares based on their respective accrued and unpaid distributions.
These requirements do not apply to (i) distributions payable in shares which
rank junior to Series E preferred shares or (ii) distributions paid on Series
B-1 preferred shares and Series D preferred shares in connection with the
redemption of the Series D preferred shares.
Except as set forth above, at any time that accrued distributions on
the Series E preferred shares have not been, or are not contemporaneously,
authorized and paid (or a sum sufficient for their payment authorized and set
apart), no distributions may be authorized or paid or set apart for payment upon
any shares ranking junior to or on a parity with the Series E preferred shares.
Likewise, no shares ranking junior to or on a parity with the Series E preferred
shares may be redeemed (other than the Series D preferred shares), purchased or
otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any such shares) by Kramont
(except by conversion into or exchange for other such shares). These
requirements do not apply to (i) distributions payable in shares which rank
junior to Series E preferred shares or (ii) distributions paid on Series B-1
preferred shares and Series D preferred shares in connection with the redemption
of the Series D preferred shares.
No distributions on Series E preferred shares may be authorized or paid
by Kramont at any time when prohibited by any agreement of Kramont, including
any agreement relating to its indebtedness, or when restricted or prohibited by
applicable law. However, distributions on the Series E preferred shares continue
to accrue whether or not any payment is so prohibited, whether or not
authorized, whether or not Kramont has earnings and whether or not Kramont has
assets legally available for their payment.
Distributions Upon Liquidation, Dissolution or Winding Up
Upon any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of Kramont, after payment or provision for payment of the
debts and other liabilities of Kramont, but before any distribution or payment
to holders of shares ranking junior to the Series E preferred shares as to the
distribution of assets upon any such liquidation, dissolution or winding
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up, the holders of Series E preferred shares are entitled to receive, out of the
assets of Kramont legally available for distribution to its shareholders,
liquidating distributions in cash or property in the amount of $25.00 per share
plus an amount equal to all distributions accrued and unpaid on each share
(whether or not declared) up to the date of the liquidation, dissolution or
winding up.
If the legally available assets of Kramont are insufficient to pay the
full amount due to holders of the Series E preferred shares and the
corresponding amounts due to holders of all shares ranking on a parity with the
Series E preferred shares, all of such holders share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they otherwise would be respectively entitled.
The provisions relating to a liquidation, dissolution or winding up do
not apply to the consolidation or merger of Kramont with or into another entity
nor the dissolution, liquidation, winding up or reorganization of Kramont
immediately followed by incorporation of another corporation to which Kramont's
assets are distributed, nor the sale, lease, transfer or conveyance of all or
substantially all of Kramont's assets to another entity so long as, in each
case, provision is made to provide for the rights of the holders of the Series E
preferred shares to receive distributions and participate in any distribution
upon liquidation, dissolution or winding up of the affairs of the resulting or
surviving entity.
After payment of the amounts described above, the holders of Series E
preferred shares have no right to any other assets of Kramont nor any other
distribution.
In determining whether a distribution (other than upon voluntary or
involuntary liquidation), by dividend, redemption or other acquisition of shares
of beneficial interest or otherwise, is permitted under Maryland law, amounts
that would be needed if Kramont were to be dissolved at the time of distribution
to satisfy the preferential rights upon dissolution of holders of Series E
preferred shares will not be added to Kramont's total liabilities.
Conversion
The Series E preferred shares are not convertible into or exchangeable
for any other property or securities of Kramont.
Voting Rights
Holders of the Series E preferred shares have no voting rights, except
in the limited circumstances set forth below. Whenever distributions on any
Series E preferred shares are in arrears for six or more quarterly distribution
periods (whether or not consecutive), the number of trustees of Kramont will be
increased by two and the holders of the Series E preferred shares will be
entitled to vote (separately as a class with the holders of any other series of
preferred shares upon which like voting rights have been conferred and are
exercisable) for the election of two additional trustees which we call the
preferred trustees. Two preferred trustees are to serve until all past and
current accrued and unpaid distributions on the Series E preferred shares have
been authorized and paid or set apart for payment.
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In addition, Kramont may not, without the consent or the affirmative
vote of the holders of at least two-thirds of the outstanding Series E preferred
shares:
(i) authorize, create or issue, or increase the authorized or
issued amount of, any class or series of shares of beneficial interest or rights
to subscribe to or acquire any class or series of shares of beneficial interest
or any security convertible into any class or series of shares of beneficial
interest, if those shares of beneficial interest would rank as to distribution
rights or liquidation preference, senior to the Series E preferred shares, or
reclassify any shares of beneficial interest into any such shares; or
(ii) amend, alter or repeal any of the provisions of Kramont's
Declaration of Trust (including the terms of the Series E preferred shares) that
would change the preferences, rights or privileges with respect to the Series E
preferred shares so as to materially and adversely affect the Series E preferred
shares.
However, no consent of the holders of Series E preferred shares will be
required, (i) to increase the number of authorized common shares; (ii) to
authorize or increase the number of any shares of beneficial interest ranking on
a parity with or junior to the Series E preferred shares as to distribution
rights or liquidation preference; (iii) in connection with any corporate action,
including any merger or consolidation involving Kramont or a sale of Kramont's
assets, irrespective of the effect that such merger, consolidation or sale may
have upon the preferences, conversion and other rights, voting powers,
restrictions, dividends or other distributions, qualifications and terms and
conditions of redemption of the Series E preferred shares or the holders
thereof; or (iv) if the Series E preferred shares have been called for
redemption.
Certain provisions in our declaration of trust, as supplemented, may
have the effect of delaying, deferring or preventing a change in control of the
company (see above, "Risk Factors -- Our declaration of trust and the terms of
the Series E preferred shares contain ownership limitations which may discourage
a takeover").
Restrictions on Ownership and Transfer
Among other requirements, in order for us to qualify as a REIT under
the Internal Revenue Code, no more than 50% in value of our outstanding shares
may be owned, actually or constructively, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year. In addition, if we, or an owner of 10% or more of our shares,
actually or constructively owns 10% or more of one of our tenants (or a tenant
of any partnership or limited liability company in which we are a partner or
member), the rent received by us (either directly or through one or more
subsidiaries) from the tenant will not be qualifying income for purposes of the
gross income tests for REITs contained in the Code. A REIT's stock must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of twelve months or during a proportionate part of a shorter taxable year.
The articles supplementary contain restrictions on the ownership and
transfer of the Series E preferred shares which are intended to assist us in
complying with these requirements and continuing to qualify as a REIT. In the
event of any proposed transfer or issuance of Series E preferred shares that
would jeopardize Kramont's status as a REIT, our board of trustees has the right
to refuse to permit such transfer or issuance and to take any action necessary
to
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cause the transfer or issuance not to occur. As discussed below, any shares that
are purported to be transferred in a transfer or issuance of Series E preferred
shares that would (i) result in a direct or indirect ownership of more than 9.8%
of the lesser of the number or the value of the total outstanding Series E
preferred shares (other than by certain persons previously approved by the board
of trustees of Kramont); or (ii) result in Kramont being "closely held" within
the meaning of Section 856(h) of the Code, will be automatically transferred to
a charitable trust for the benefit of a charitable beneficiary and the shares
purportedly so transferred may be purchased by Kramont.
Our board of trustees, in its sole discretion, may exempt a proposed
transferee from the ownership limitations discussed above. However, the board
may not grant an exemption to any person if doing so would result in Kramont
being "closely held" within the meaning of Section 856(h) of the Code or
otherwise would result in Kramont failing to qualify as a REIT. In order to be
considered by the board of trustees for an exemption, a person also must not
own, directly or indirectly, an interest in a tenant of Kramont (or a tenant of
any entity owned or controlled by Kramont) that would cause Kramont to own,
directly or indirectly, more than a 9.8% interest in such a tenant. The person
seeking an exemption must represent to the satisfaction of the board of trustees
that it will not violate the two aforementioned restrictions. The person also
must agree that any violation or attempted violation of any of the foregoing
restrictions will result in the automatic transfer of the shares causing such
violation to the trust discussed below.
The declaration of trust and the articles supplementary further
prohibit (a) any person from beneficially or constructively owning shares of
beneficial interest of Kramont, including Series E preferred shares, that would
result in Kramont being "closely held" under Section 856(h) of the Code or
otherwise cause Kramont to fail to qualify as a REIT and (b) any person from
transferring shares of beneficial interest of Kramont, including Series E
preferred shares, if such transfer would result in the shares of beneficial
interest of Kramont being owned by fewer than 100 persons. Any person who
acquires or attempts or intends to acquire beneficial or constructive ownership
of shares of beneficial interest of Kramont that will or may violate any of the
foregoing restrictions on transferability and ownership, or any person who would
have owned shares of beneficial interest of Kramont that resulted in a transfer
of shares to the trust, is required to give notice immediately to Kramont and
provide Kramont with such other information as Kramont may request in order to
determine the effect of such transfer on Kramont's status as a REIT. The
foregoing restrictions on transferability and ownership will not apply if the
board of trustees determines that it is no longer in the best interests of
Kramont to attempt to qualify, or to continue to qualify, as a REIT.
If any transfer of shares of beneficial interest of Kramont, including
Series E preferred shares, occurs which, if effective, would result in any
person beneficially or constructively owning shares of beneficial interest of
Kramont in excess or in violation of the above transfer or ownership
limitations, then that number of shares of beneficial interest of Kramont the
beneficial or constructive ownership of which otherwise would cause such person
to violate such limitations will be automatically transferred to a trust for the
exclusive benefit of one or more charitable beneficiaries, and the intended
transferee will not acquire any rights in the shares. The intended transferee
will not benefit economically from ownership of any shares of beneficial
interest held in the trust, will have no rights to distributions and will not
possess any rights to vote or other rights attributable to the shares of
beneficial interest held in the trust. The trustee of
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the trust will have all voting rights and rights to distributions with respect
to shares of beneficial interest held in the trust, which rights will be
exercised for the exclusive benefit of the charitable beneficiaries of the
trust. Any distribution paid prior to the discovery by Kramont that shares of
beneficial interest have been transferred to the trustee will be paid by the
recipient of such distribution to the trustee upon demand, and any distribution
authorized but unpaid will be paid when due to the trustee. Any distribution so
paid to the trustee will be held in trust for the charitable beneficiaries of
the trust.
Within 20 days of receiving notice from Kramont that shares of
beneficial interest of Kramont have been transferred to the trust, the trustee
will sell the shares of beneficial interest held in the trust to a person,
designated by the trustee, whose ownership of the shares will not violate the
ownership limitations set forth in the declaration of trust. Upon such sale, the
interest of the charitable beneficiaries in the shares sold will terminate and
the trustee will distribute the net proceeds of the sale to the intended
transferee and to the charitable beneficiaries of the trust as follows. The
intended transferee will receive the lesser of (i) the price paid by the
intended transferee for the shares or, if the intended transferee did not give
value for the shares in connection with the event causing the shares to be held
in the trust (e.g., a gift, devise or other such transaction), the market price
of such shares on the day of the event causing the shares to be held in the
trust and (ii) the price per share received by the trustee from the sale or
other disposition of the shares held in the trust. Any net sale proceeds in
excess of the amount payable to the intended transferee will be paid immediately
to the charitable beneficiaries of the trust.
All certificates evidencing shares of Series E preferred shares will
bear a legend referring to the restrictions described above. These ownership
limitations could delay, defer or prevent a transaction or a change in control
of Kramont that might involve a premium price for the common shares or otherwise
be in the best interest of the shareholders.
Redemption
Except in certain circumstances relating to Kramont's maintenance of
its status as a REIT (see below), the Series E preferred shares are not
redeemable before December 30, 2008. On or after that date, Kramont may redeem
the Series E preferred shares in whole or in part for $25.00 per share, plus all
accrued and unpaid distributions up to the date of redemption. If fewer than all
of the shares are redeemed, those redeemed must be redeemed from all holders,
pro rata.
Once a notice of redemption of any Series E preferred shares is given
and the funds necessary for the redemption set aside, distributions will cease
to accrue on the shares called for redemption, those shares will no longer be
outstanding, and all rights of the holders of those shares will terminate,
except the right to receive the amount described above.
Unless all accrued distributions on all Series E preferred shares have
been authorized and paid (or set apart for payment), (i) no Series E preferred
shares may be redeemed unless all Series E preferred shares are redeemed, and
(ii) no Series E preferred shares may be purchased or acquired by Kramont except
on conversion into or exchange for Kramont shares ranking junior to Series E
preferred shares as to distributions and on the liquidation, dissolution or
winding up of Kramont. These requirements do not prevent the purchase,
acquisition or redemption of Series E preferred shares pursuant to a purchase or
exchange offer made to all holders of Series E preferred shares and do not
prevent the purchase, acquisition or redemption
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of Series E preferred shares at any time after the issue date from persons
owning in the aggregate more shares than are permitted by the ownership
limitations intended to protect Kramont's qualification as a REIT.
Notice of any redemption must be given by publication, once a week for
two successive weeks beginning 30 to 60 days prior to the date of redemption, in
a newspaper of general circulation in the City of New York. A similar notice
must be mailed by Kramont in the same time period to the holders of the Series E
preferred shares to be redeemed at their respective addressees as they appear on
the share transfer records of Kramont. No failure to give this notice or any
defect in the notice or the mailing thereof will affect the validity of the
proceedings for the redemption of any Series E preferred shares except as to any
holder to whom Kramont failed to give notice or whose notice was defective.
In addition to any information required by law or by the applicable
rules of any exchange upon which the Series E preferred shares may be listed or
admitted to trading, the notice will state:
(i) the date fixed by the board of trustees for the redemption;
(ii) the price to be paid to redeem the shares (including any
accrued and unpaid distributions);
(iii) the number of shares to be redeemed and, if less than all
shares held by the particular holder are to be redeemed, the number of shares to
be redeemed from that particular holder;
(iv) the place or places where certificates evidencing the shares
are to be surrendered for payment of the amount set forth in clause (ii) above;
and
(v) that distributions on the shares to be redeemed will cease to
accrue on the date set forth in clause (i) above.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of material Federal income tax
considerations applicable to us and to the holders of our Series E preferred
shares and our election to be taxed as a REIT. It is not tax advice. The summary
is not intended to represent a detailed description of the Federal income tax
consequences applicable to a particular shareholder in view of any person's
particular circumstances, nor is it intended to represent a detailed description
of the Federal income tax consequences applicable to shareholders subject to
special treatment under the Federal income tax laws, like insurance companies,
tax-exempt organizations, financial institutions, and securities broker-dealers.
The following discussion relating to an investment in our Series E
preferred shares was based on consultations with Roberts & Holland LLP, our
special counsel. In the opinion of Roberts & Holland LLP, the following
discussion, to the extent it constitutes matters of law or legal conclusions
(assuming the facts, representations, and assumptions upon which the discussion
is based are accurate), accurately represents the material U.S. Federal income
tax
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considerations relevant to purchasers of our Series E preferred shares. Roberts
& Holland LLP has not rendered any opinion regarding any effect of such issuance
on holders of common shares. The sections of the Code relating to the
qualification and operation as a REIT are highly technical and complex. The
following discussion sets forth the material aspects of the Code sections that
govern the Federal income tax treatment of a REIT and its shareholders. The
information in this section is based on the Code; current, temporary, and
proposed Treasury regulations promulgated under the Code; the legislative
history of the Code; current administrative interpretations and practices of the
Internal Revenue Service, or IRS; and court decisions, in each case, as of the
date of this prospectus supplement. In addition, the administrative
interpretations and practices of the IRS include its practices and policies as
expressed in private letter rulings which are not binding on the IRS, except
with respect to the particular taxpayers who requested and received these
rulings.
General
We elected to be taxed as a REIT commencing with our taxable year
ending December 31, 2000. Kramont was organized to enable it to be in conformity
with the Code requirements for qualification and taxation as a REIT.
Provided that Kramont qualifies for taxation as a REIT, it generally
will not be subject to Federal income tax on that portion of its net income
which is distributed currently to its shareholders. This treatment substantially
eliminates the "double taxation" at the corporate and shareholder levels which
generally results from the use of corporate investment vehicles. Kramont may,
however, be subject to tax at normal corporate rates upon any taxable income or
capital gain not distributed.
If Kramont failed to satisfy either the 75% or the 95% gross income
test, each described below, but nonetheless continued to maintain its
qualification as a REIT because certain other requirements were met, it would be
subject to a 100% tax on the greater of the amounts, if any, by which it failed
the 75% or the 95% test, respectively, multiplied by a fraction intended to
reflect Kramont's profitability. In addition, if Kramont failed to distribute
during each calendar year at least the sum of (A) 85% of its REIT ordinary
income for such year, (B) 95% of its REIT capital gain net income for such year,
and (C) any undistributed taxable income from prior years, it would be subject
to a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Notwithstanding the foregoing, a REIT may elect to retain,
rather than distribute, all or a portion of its net long term capital gains and
pay the tax on the gains at normal corporate capital gains tax rates. In such a
case, a REIT may elect to have its shareholders include their proportionate
share of the undistributed long term capital gains in income and receive a
credit for their share of the tax paid by the REIT. For purposes of the 4%
excise tax described above, any retained amounts would be treated as having been
distributed.
Kramont may also be subject to the corporate "alternative minimum tax."
Additionally, Kramont could be subject to tax on the disposition of certain
assets acquired from a C corporation in a non-taxable exchange during a 10-year
period following their acquisition.
Finally, Kramont will be subject to a 100% tax on net income derived
from any "prohibited transaction." "Prohibited transactions" generally are sales
or other dispositions of property held as inventory or primarily for sale to
customers in the ordinary course of business.
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Such prohibited transactions, however, would exclude sales of certain dealer
property held by Kramont for at least four years, as well as "foreclosure
property."
Kramont uses the calendar year both for Federal income tax purposes and
for financial reporting purposes.
In order to qualify as a REIT, Kramont must meet, among others, the
following requirements:
Share Ownership Test
Shares of beneficial interest of Kramont must be held by a minimum of
100 persons for at least 335 days of a taxable year that is 12 months, or during
a proportionate part of a taxable year which lasts less than 12 months. In
addition, no more than 50% in value of the shares of beneficial interest of
Kramont may be owned, directly or indirectly by applying certain constructive
ownership rules, by five or fewer individuals (and certain tax exempt
organizations considered to be individuals) during the last half of each taxable
year. Kramont believes it satisfies both of these tests. In order to help comply
with the second of these tests, and prevent greater concentration of share
ownership, Kramont has placed certain restrictions on the transfer of Kramont
preferred and common shares.
To monitor their compliance with the share ownership requirements,
REITs are required to maintain records regarding the actual ownership of their
shares. To do so, REITs must demand written statements each year from specified
record holders of their shares in which the record holders are to disclose the
beneficial owners of the shares, which are the persons required to include in
gross income the REIT dividends. A list of those persons failing or refusing to
comply with this demand is required to be maintained by the REIT. Kramont has
complied with these requirements and expects to continue to comply with them in
the future.
Asset Tests
At the close of each quarter of its taxable year, Kramont must satisfy
tests relating to the nature of its assets. First, at least 75% of the value of
Kramont's total assets must be represented by any combination of interests in
real property, interests in mortgages on real property, shares in other REITs,
cash, cash items, stock or debt instruments held not more than one year
purchased with the proceeds of a stock offering or long-term debt offering
(lasting at least five years), and certain government securities. Second,
although the remaining 25% of Kramont's assets may be invested without regard to
the restrictions in the preceding sentence, the following rules will apply to
the investment of those remaining assets: (1) not more than 20% of the value of
Kramont's total assets may be represented by securities of one or more "taxable
REIT subsidiaries" (i.e., a corporation in which Kramont owns stock, as to which
Kramont and the corporation have elected for the corporation to be treated as a
taxable REIT subsidiary and which meets certain other requirements under the
Code); (2) not more than 5% of the value of Kramont's total assets may be
represented by securities of any one issuer (other than securities of
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a qualified REIT subsidiary or a taxable REIT subsidiary and securities
described in the preceding sentence); (3) Kramont may not hold securities
possessing more than 10% of the total combined voting power of the outstanding
securities of any one issuer (other than securities of a qualified REIT
subsidiary or a taxable REIT subsidiary and securities described in the
preceding sentence); and (4) Kramont may not hold securities having a value of
more than 10% of the total value of the outstanding securities of any one issuer
(other than securities of a qualified REIT subsidiary or a taxable REIT
subsidiary, securities described in the preceding sentence, and certain
"straight debt" that meets a safe harbor test set out in the Code). Qualified
REIT subsidiaries (i.e., corporations other than taxable REIT subsidiaries 100%
of the stock of which is owned by one REIT) are not treated as entities separate
from their parent REIT for Federal tax purposes. Instead, all assets,
liabilities, and items of income, deduction, and credit of each qualified REIT
subsidiary will be treated as the assets, liabilities, and items of Kramont.
By virtue of its partnership interest in Kramont Operating Partnership,
L.P., Kramont will be deemed to own its pro rata share of the assets of Kramont
Operating Partnership, L.P. and of any other partnership, including Montgomery
CV Realty L.P., in which Kramont Operating Partnership, L.P. is directly or
indirectly a partner.
Gross Income Tests
There are two separate percentage tests relating to the sources of
Kramont's gross income which must be satisfied for each taxable year. For the
purposes of these tests, where Kramont invests in a partnership, it will be
treated as receiving its share of the income and loss of the partnership.
Additionally, the gross income of the partnership will retain the same character
in the hands of Kramont as it has in the hands of the partnership.
1. The 75% Test. At least 75% of Kramont's gross income for each
taxable year must be "qualifying income." Qualifying income generally includes
(a) rents from real property (except as modified below); (b) interest on
obligations collateralized by mortgages on, or on interests in, real property;
(c) gains from the sale or other disposition of interests in real property and
real estate mortgages, other than gain from property held primarily for sale to
customers in the ordinary course of Kramont's trade or business ("dealer
property"); (d) distributions on shares in other REITs, as well as gain from the
sale of such shares; (e) abatements and refunds of real property taxes; (f)
income from the operation, and gain from the sale, of property acquired at or in
lieu of a foreclosure of a mortgage collateralized by such property
("foreclosure property"); (g) commitment fees received for agreeing to make
loans collateralized by mortgages on real property or to purchase or lease real
property; and (h) certain qualified temporary investment income attributable to
the investment of new capital received by Kramont in exchange for its shares
(including the securities offered pursuant to this prospectus) or in a public
offering of debt obligations having a term of at least five years, during the
one-year period following the receipt of such new capital.
Rents received by a REIT will qualify as "rents from real property" in
satisfying the gross income requirements for either the 75% test described above
or the 95% test described below, only if the following conditions are met.
First, in order to qualify as rents from real property, the rents received may
not be based in whole or in part on the income or profits of any person. The
rents may, however, qualify if they are based on a fixed percentage or
percentages of receipts or sales. Second, rents received from a tenant of which
Kramont owns at least 10%, either directly
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or constructively, will not qualify as rents from real property. Third, if more
than 15% of rent in connection with a lease of real property is attributable to
personal property, the amounts attributable to the lease of personal property do
not qualify as rents from real property. Fourth, for rents received to qualify
as rents from real property, Kramont generally must not operate or manage the
property or furnish or render services to tenants, other than through an
"independent contractor" (as defined in Section 856 of the Code) from whom
Kramont derives no revenue (and who, in certain circumstances, must bear the
cost for such services and receive and retain an adequate separate charge
therefor) or a taxable REIT subsidiary. The "independent contractor"
requirements, however, do not apply to the extent the services provided by
Kramont are "usually or customarily rendered" in connection with the rental of
space for occupancy only and are not otherwise considered "rendered to the
occupant." In addition, Kramont (or its affiliate) may provide non-customary
services to tenants of its properties without disqualifying all of the rent from
the property if the amount received for the services does not exceed 1% of the
total gross income from the property. For purposes of this test, the amount
received from any non-customary services is deemed to be at least 150% of the
direct cost of providing the services.
2. The 95% Test. At least 95% of Kramont's gross income for the
taxable year must be derived either from the qualifying income described above,
or from dividends, interest, or gains from the sale or disposition of stock or
other securities that are not dealer property. Income which qualifies for the
95% test but not for the 75% test includes dividends, interest on any
obligations not collateralized by an interest in real property, and any payments
made on Kramont's behalf by a financial institution pursuant to a rate
protection agreement. Finally, income derived from "prohibited transactions,"
described above, does not qualify for either the 75% test or the 95% test.
Income derived from Kramont's investment in its properties through
Kramont Operating Partnership, L.P., will qualify in major part under both the
75% and 95% gross income tests. Furthermore, Kramont's share of gains on sales
of the properties owned, directly or indirectly, by Kramont Operating
Partnership, L.P. or of Kramont's interest in Kramont Operating Partnership,
L.P. will generally qualify under both the 75% and 95% gross income tests.
Kramont believes that the income on its other investments will not cause Kramont
to fail the 75% or 95% gross income test for any year.
Even if Kramont fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may still qualify as a REIT for such year
if it is entitled to relief under the following conditions. Relief generally
will be available if: (a) Kramont's failure to comply was due to reasonable
cause and not to willful neglect; (b) Kramont reports the nature and amount of
each item of its income included in the tests on a schedule attached to its tax
return; and (c) any incorrect information on this schedule is due to reasonable
cause and is not due to fraud with intent to evade tax. Even if these relief
provisions apply, however, Kramont will still be subject to a 100% tax based
upon the greater of the amounts, if any, by which it fails either the 75% or the
95% gross income test, respectively, multiplied by a fraction intended to
reflect Kramont's profitability for that year, less certain adjustments.
Annual Distribution Requirements
In order to qualify as a REIT, Kramont is required to make
distributions of dividends (other than capital gain dividends) to its
shareholders each year in an amount at least equal to (A)
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the sum of (1) 90% of Kramont's REIT taxable income (computed without regard to
the dividends paid deduction and Kramont's net capital gain) and (2) 90% of the
net income (after tax), if any, from foreclosure property, minus (B) the sum of
certain items of non-cash income. Such distributions generally must be paid in
the taxable year to which they relate. However, Kramont may make the
distributions in the following taxable year if it declares the dividends before
it timely files its tax return for the prior year, and pays the dividends before
the first regular dividend payment after the declaration is made. To the extent
that Kramont does not distribute all of its net capital gain or distributes at
least 90%, but less than 100%, of its REIT taxable income as adjusted, it will
be subject to tax on the undistributed amount at regular capital gains or
ordinary corporate tax rates, as the case may be.
Kramont intends to make timely distributions sufficient to satisfy the
annual distribution requirements. In this regard, the partnership agreement of
Kramont Operating Partnership, L.P. authorizes Kramont, as general partner, to
take such steps as may be necessary to cause Kramont Operating Partnership, L.P.
to distribute to its partners an amount sufficient to permit Kramont to meet
these distribution requirements. It is possible that Kramont may not have
sufficient cash or other liquid assets to meet the 90% dividend requirement, due
either to the payment of principal on debt or to timing differences between the
actual receipt of income and actual payment of expenses on the one hand, and the
inclusion of such income and deduction of such expenses in computing Kramont's
REIT taxable income on the other hand. To avoid any problem with the 90%
distribution requirement, Kramont must monitor the relationship between its REIT
taxable income and cash flow and, if necessary, must borrow funds (or cause
Kramont Operating Partnership, L.P. or other affiliates to borrow funds) in
order to satisfy the distribution requirement.
Failure to Qualify
If Kramont failed to qualify for taxation as a REIT in any taxable year
and the relief provisions did not apply, Kramont would be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which
Kramont failed to qualify would not be required and, if made, would not be
deductible by Kramont. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders would be taxable as
ordinary income. In addition, corporate distributees could be eligible for the
dividends received deduction. Finally, unless Kramont were entitled to relief
under specific statutory provisions, Kramont would be ineligible for
qualification as a REIT for the four taxable years following the year during
which qualification was lost.
Tax Aspects of Kramont's Investment in Partnerships
Kramont holds direct interests in Kramont Operating Partnership, L.P.
Kramont Operating Partnership, L.P. is a partnership for Federal income tax
purposes. Further, Montgomery CV Realty L.P. is a partnership for Federal income
tax purposes. If any entity directly or indirectly owned by Kramont were to be
treated as an association, such entity would be taxable as a corporation, and,
therefore, subject to an entity-level tax on its income. In such a situation,
the character of Kramont's assets and items of gross income would change, which
could preclude Kramont from satisfying the asset tests and possibly the income
tests (see above,
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"--Asset Tests" and "--Gross Income Tests"), and in turn could prevent Kramont
from qualifying as a REIT.
Sale of Properties
Kramont's gain, including Kramont's share of any gain realized by
Kramont Operating Partnership, L.P. on the sale of any dealer property generally
will be treated as income from a prohibited transaction that is subject to a
100% penalty tax. (See above, "--General.") Under existing law, whether property
is dealer property is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. Kramont believes that,
in general, the properties it owns, directly and indirectly, should not be
considered dealer property, and that the amount of income from prohibited
transactions, if any, will not be material.
Taxation of Taxable U.S. Shareholders
As long as Kramont qualifies as a REIT, "U.S. Shareholders," defined
below, are required to treat distributions with respect to their shares out of
current or accumulated earnings as ordinary income, to the extent that the
distributions are not designated as capital gain dividends. For purposes of
determining whether distributions on the shares of Kramont are out of current or
accumulated earnings and profits, the earnings and profits of Kramont generally
will be allocated first to the holders of Kramont preferred shares and second to
the holders of Kramont common shares. Corporate shareholders will not be
eligible for the dividend received deduction with respect to dividends received
from Kramont.
Dividends that are designated as capital gain dividends will be taxed
as long-term capital gains to the extent that they do not exceed Kramont's
actual net capital gain for the taxable year, regardless of the period for which
the shareholder has held its shares. However, corporate shareholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. On November 10, 1997, the IRS released Notice 97-64 describing
forthcoming temporary regulations that would permit a REIT to designate
different classes of capital gain dividends. In general, under Notice 97-64, if
a REIT designates a dividend as a capital gain dividend, it may be eligible to
further designate such dividend as a 20% rate gain distribution, generally
subject to Federal income tax in the hands of individual shareholders at a rate
no greater than 20% (15% for designated capital gain dividends after May 6, 2003
through December 31, 2008, as discussed below, under "-- Recent Tax
Legislation"), an unrecaptured Section 1250 gain distribution, generally subject
to Federal income tax in the hands of individual shareholders at a rate no
greater than 25%, or a 28% rate gain distribution, generally subject to Federal
income tax in the hands of individual shareholders at a rate no greater than
28%. Notice 97-64 serves as guidance until regulations are issued and applies to
taxable years ending on or after May 7, 1997. Corporate shareholders will
generally be subject to Federal income tax at maximum marginal rates of 35% on
all dividends paid by Kramont.
For the purposes of this discussion, the term "U.S. Shareholder" means
a holder of Kramont common or preferred shares who (for United States Federal
income tax purposes) is (a) a citizen or resident of the United States; (b) a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, except to the
extent otherwise provided in Treasury Regulations with respect to an entity
treated as a partnership for Federal tax purposes; (c) an estate, the income of
which is subject to United
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States Federal income taxation regardless of its source; or (d) a trust, if (A)
a court within the United States is able to exercise primary supervision over
the administration of the trust and (B) one or more United States persons have
the authority to control all substantial decisions of the trust.
To the extent that Kramont makes distributions in excess of current and
accumulated earnings and profits, these distributions are treated first as a
tax-free return of capital to the shareholder. Any such distributions reduce the
tax basis of a shareholder's shares by the amount of such distribution (but not
below zero). The excess of any distributions over the shareholder's tax basis is
taxable as capital gain, if the shares are held as a capital asset.
Any dividend declared by Kramont in October, November, or December of
any year and payable to a shareholder of record on a specific date in any such
month will be treated as both paid by Kramont and received by the shareholder on
December 31 of such year, provided that the dividend is actually paid by Kramont
during January of the following calendar year.
In general, a U.S. Shareholder must treat any gain realized upon a
taxable disposition of Series E preferred shares as long-term capital gain or
loss if the U.S. Shareholder has held the shares for more than one year and
otherwise as short-term capital gain or loss. However, any loss upon a sale or
exchange of securities by a shareholder who has held such securities for six
months or less (after applying certain holding period rules) will generally be
treated as a long-term capital loss, to the extent of any actual or deemed
distributions from Kramont received by such shareholder that are required to be
treated by such shareholder as long-term capital gains. All or a portion of any
loss that a U.S. Shareholder realizes upon a taxable disposition of the Series E
preferred shares may be disallowed if the U.S. Shareholder purchases other
Series E preferred shares within 30 days before or after the disposition.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of Kramont.
Election to retain net long term capital gain
If Kramont retains and pays income tax on its net long-term capital
gain attributable to a taxable year, its shareholders may be required to include
in their income as long-term capital gain their proportionate share of such
amount, as designated by Kramont. A Kramont shareholder will be treated as
having paid his or her share of the tax paid by Kramont in respect of the amount
designated by Kramont, for which the Kramont shareholder will be entitled to a
credit or refund. Additionally, each Kramont shareholder's adjusted basis in
Kramont shares will be increased by the excess of the amount includable in
income over the tax deemed paid on that amount. Kramont must pay tax on its
designated long-term capital gain within 30 days of the close of any taxable
year in which it designates long-term capital gain pursuant to this rule, and it
must mail a written notice of its designation to its shareholders within 60 days
of the close of the taxable year.
Taxation of Tax Exempt Shareholders
Most tax-exempt employees' pension trusts are not subject to Federal
income tax except to the extent of their receipt of "unrelated business taxable
income" as defined in Internal Revenue Code Section 512(a). Distributions by
Kramont to a shareholder that is a tax-exempt entity should not constitute
unrelated business taxable income, as long as the securities are not
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otherwise used in an unrelated trade or business of the tax-exempt entity, and
the tax-exempt entity has not financed the acquisition of its securities with
"acquisition indebtedness," as defined in the Code. In addition, certain pension
trusts that own more than 10% of a "pension-held REIT" must report a portion of
the distribution that they receive from such a REIT as unrelated business
taxable income. Kramont does not believe it is a pension-held REIT for purposes
of this rule.
Redemption of Series E preferred shares
A redemption of Series E preferred shares will be treated as a
distribution that is taxable at ordinary income tax rates as a dividend (to the
extent of Kramont's current or accumulated earnings and profits), unless the
redemption satisfies certain tests set forth in the Code enabling the redemption
to be treated as a sale of the Series E preferred shares (in which case the
redemption will be treated in the same manner as a sale described above). The
redemption will satisfy such tests if it (i) is "substantially disproportionate"
with respect to the holder's share interest in Kramont, (ii) results in a
"complete termination" of the holder's interest in all classes of shares of
Kramont, or (iii) is "not essentially equivalent to a dividend" with respect to
the holder, all within the meaning of the Code. In determining whether any of
these tests have been met, shares considered to be owned by the holder by reason
of certain constructive ownership rules set forth in the Code, as well as shares
actually owned, generally must be taken into account. Because the determination
as to whether any of the three alternative tests described above will be
satisfied with respect to any particular holder of Series E preferred shares
depends upon the facts and circumstances at the time that the determination must
be made, prospective investors are advised to consult their own tax advisors to
determine such tax treatment.
Information reporting requirements and backup withholding
Under the backup withholding rules, a shareholder may be subject to
backup withholding at the rate of 28% with respect to distributions unless such
holder:
- is a corporation or comes with certain other exempt categories
and, when required, demonstrates this fact; or
- provides a completed form W-9 which contains the holder's
taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies the
applicable requirements of the backup withholding rules.
Any amount paid as backup withholding will be creditable against the
shareholder's income tax liability. In addition, we may be required to
withholding a portion of capital gain distributions to any shareholder who fails
to certify its non-foreign status to us. See below, "-- Taxation of Foreign
Shareholders." We will report to our shareholders and to the Internal Revenue
Service the amount of distributions we pay during each calendar year, and the
amount of tax we withhold, if any. A shareholder who does not provide us with
its correct taxpayer identification number also may be subject to penalties
imposed by the Internal Revenue Service.
Taxation of foreign shareholders
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A "Non-U.S. Holder" is any person who holds securities and is not (a) a
citizen or resident of the United States; (b) a corporation or partnership
created or organized in the United States or under the laws of the United States
or of any state thereof; (c) an estate whose income is includable in gross
income for U.S. Federal income tax purposes regardless of its source; or (d) a
trust if (A) a court in the United States is able to exercise primary
jurisdiction over its administration and (B) one or more United States persons
have the authority to control all substantial decisions of the trust. This
discussion is based on current law and is for general information only. Non-U.S.
Holders are urged to consult with their own legal and tax advisors regarding the
United States Federal income tax consequences of holding Kramont shares.
1. Ordinary Dividends. The portion of dividends received by
Non-U.S. Holders payable out of Kramont's earnings and profits which are not
attributable to capital gain of Kramont from a disposition of a USRPI, as
defined below, and which are not effectively connected with a U.S. trade or
business of the Non-U.S. Holder will be subject to U.S. withholding tax at the
rate of 30%, unless reduced by an applicable treaty. In general, Non-U.S.
Holders will not be considered engaged in a U.S. trade or business solely as a
result of their ownership of securities. Where the dividend income from a
Non-U.S. Holder's investment in securities is considered effectively connected
with the Non-U.S. Holder's conduct of a U.S. trade or business, the Non-U.S.
Holder generally will be subject to U.S. tax at graduated rates, similar to the
manner in which U.S. shareholders are taxed with respect to such dividends.
Additionally, a Non-U.S. Holder that is a foreign corporation may also be
subject to the 30% branch profits tax on its effectively connected earnings
(unless reduced by an applicable treaty) and may be subject to additional taxes
under the branch profits provisions of the Code.
2. Non-Dividend Distributions. As long as Kramont is a
domestically controlled REIT, as defined below, a distribution from Kramont
received by a non-U.S. Holder, no portion of which is a dividend out of the
earnings and profits of Kramont or attributable to gain recognized by Kramont
from the disposition of a USRPI, as defined below, will not be subject to U.S.
income or withholding tax. If it cannot be determined at the time a distribution
is made whether or not such distribution will be in excess of Kramont's current
and accumulated earnings and profits, the entire distribution will be subject to
withholding at the rate applicable to dividends. However, the Non-U.S. Holder
may seek a refund of such amounts from the IRS if it is subsequently determined
that such distribution was, in fact, in excess of current and accumulated
earnings and profits of Kramont.
3. Certain Dividends. Under the Foreign Investment in Real
Property Tax Act of 1980, a distribution made by Kramont to a Non-U.S. Holder,
to the extent attributable to gains from dispositions by Kramont of United
States real property interests, which we sometimes refer to as USRPIs, such as
the properties beneficially owned by Kramont, will be considered effectively
connected with a U.S. trade or business of the Non-U.S. Holder. As such, these
amounts will generally be subject to U.S. income tax at the rate applicable to
U.S. individuals or corporations, as the case may be, without regard to whether
such distribution is designated as a capital gain dividend. In addition, Kramont
will be required to withhold tax equal to 35% of the amount of these dividends
attributable to gain from a U.S. real property interest. Any such distributions
made to a Non-U.S. Holder that is a corporate shareholder may also be subject to
the 30% branch profits tax on effectively connected earnings, unless the rate is
reduced or eliminated pursuant to a tax treaty. Although the law is not clear on
this matter, Kramont may
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treat amounts designated by it as undistributed capital gains in respect of the
Series E preferred shares with respect to non-U.S. Holders in the same manner as
actual distributions by Kramont of capital gain dividends. Under that approach,
the non-U.S. Holder would be able to offset as a credit against its resulting
Federal income tax liability an amount equal to its proportionate share of the
tax paid by Kramont on the undistributed capital gains and to receive from the
IRS a refund to the extent its proportionate share of this tax paid by Kramont
were to exceed its actual Federal income tax liability.
4. Dispositions of Securities. Except as provided below, a sale
of securities by a Non-U.S. Holder generally will not be subject to U.S.
taxation unless the securities constitute a U.S. real property interest. The
securities will not constitute a U.S. real property interest if Kramont is a
"domestically controlled REIT." A domestically controlled REIT is a REIT in
which, at all times during a specified testing period, less than 50% in value of
its securities is held directly or indirectly by Non-U.S. Holders. Kramont
believes it is a domestically controlled REIT and that the sale of securities of
Kramont by a Non-U.S. Holder thus will not be subject to U.S. taxation. Because
Kramont's currently outstanding securities are publicly traded and because
available information may not accurately identify the status of all holders as
foreign or domestic, however, no assurance can be given that Kramont will be a
domestically controlled REIT. Even if Kramont were ultimately determined not to
be a domestically controlled REIT, however, a Non-U.S. Holder's sale of
securities of Kramont generally would still not be subject to tax if (a) the
securities are "regularly traded" (as defined by applicable Treasury
Regulations) on an established securities market and (b) the selling Non-U.S.
Holder held 5% or less of Kramont's outstanding securities at all times during a
specified testing period of up to 5 years. No assurance can be given that the
Series E preferred shares will qualify under this test.
If gain on the sale of securities by a Non-U.S. Holder were subject to
U.S. taxation, the Non-U.S. Holder would generally be subject to the same
treatment as a U.S. shareholder with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). The purchaser of such securities might also be
required to withhold 10% of the purchase price and remit such amount to the IRS.
Capital gains of a Non-U.S. Holder may also be subject to tax in the United
States, even if Kramont is a domestically controlled REIT, if either: (1) the
Non-U.S. Holder's investment in securities were effectively connected with a
U.S. trade or business conducted by such Non-U.S. Holder, or (2) if the Non-U.S.
Holder were a nonresident alien individual who was present in the United States
for 183 days or more during the taxable year and certain other conditions were
satisfied. Distributions in excess of current and accumulated earnings and
profits would be applied against and reduce the basis of the shares and, to the
extent exceeding the basis of the shares, would be treated as gain from a sale
of the shares. Such distributions may also be subject to 10% withholding tax.
State and local tax considerations
Kramont and its shareholders may be subject to state or local taxation
in various jurisdictions, including those in which it or they transact business
or reside. The state and local tax treatment of Kramont and its shareholders may
not conform to the Federal income tax consequences discussed above.
Consequently, prospective shareholders should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in the shares
of beneficial interest of Kramont.
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Recent tax legislation
On May 28, 2003, the President signed into law the Jobs and Growth Tax
Relief Reconciliation Act of 2003. This new tax legislation reduces the maximum
individual tax rate for long-term capital gains generally from 20% to 15% (for
sales occurring after May 6, 2003 through December 31, 2008) and for certain
dividends generally from 38.6% to 15% (for tax years from 2003 through 2008).
Without future congressional action, the maximum tax rate on long-term capital
gains will return to 20% in 2009, and the maximum rate on dividends will
increase to 35% in 2009 and 39.6% in 2011. Because we are not generally subject
to Federal income tax on the portion of our REIT taxable income or capital gains
distributed to our shareholders, however, our dividends will generally not be
eligible for the new 15% tax rate on dividends. As a result, our ordinary REIT
dividends will continue to be taxed at the higher tax rates applicable to
ordinary income. In the case of noncorporate shareholders, the 15% rate for
long-term capital gains and dividends will generally apply to:
(1) long-term capital gains, if any, recognized on the disposition of
the Series E preferred shares;
(2) distributions we designate as capital gain dividends (except to the
extent attributable to real estate depreciation, in which case such
distributions would continue to be subject to a 25% tax rate);
(3) dividends attributable to dividends received by us from non-REIT
corporations, such as taxable REIT subsidiaries (although we do not anticipate
receiving a material amount of such dividends); and
(4) dividends to the extent attributable to income upon which we have
paid corporate income tax (e.g., if we distribute less than 100% of our taxable
income).
PLAN OF DISTRIBUTION
Subject to the terms and conditions of a purchase agreement expected
to be dated February 24, 2004, certain investment advisory clients of Cohen &
Steers Capital Management, Inc. will agree to purchase, and we will agree to
sell, 400,000 Series E preferred shares at a price of $25.50 per share, and the
purchasers will pay an additional per share amount of $0.0057 per day for the
number of days from and including December 31, 2003 through and including the
day of sale (with any included complete calendar month being deemed to have 30
days), such additional amount being equal to the accrued and unpaid
distributions payable with respect to such Series E preferred shares through
the date of any such sale. If the sale is made on February 27, 2004, the
amount of such accrued and unpaid distributions will be $0.3306 per share.
No placement agent or underwriter has been engaged by the Company in
connection with this offering. Cohen & Steers Capital Management, Inc. is an
investment adviser to certain persons which own our shares of beneficial
interest. According to a Schedule 13F filed by Cohen & Steers Capital
Management, Inc. on February 17, 2004, as of December 31, 2003, it beneficially
owned 3,559,400, or approximately 14.8%, of our common shares then outstanding.
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Jeffries & Company, Inc. is acting as settlement agent in connection
with the sale of our Series E preferred shares under the purchase agreement and
will receive a fee of $4,000 from the Company.
After paying this fee and other estimated expenses, we anticipate
receiving approximately $10,100,000 in net proceeds from this offering.
LEGAL MATTERS
Venable LLP, Baltimore, Maryland, will pass on the validity of the
Series E preferred shares to be issued in connection with this offering.
WHERE YOU CAN FIND MORE INFORMATION
We file reports with the Securities and Exchange Commission, or the
SEC, on a regular basis that contain financial information and results of
operations. You may read or copy any document that we file with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may obtain information about the Public Reference Room by calling the SEC
for more information at 1-800-SEC-0330. Our SEC filings are also available at
the SEC's web site at http://www.sec.gov.
Our web site address on the Internet is www.kramont.com. By providing a
hyperlink on our Internet web site to a third-party SEC filings web site, we
make available free of charge through our Internet web site our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to the Section 13(a) or
15(d) of the Securities and Exchange Act of 1934, as amended, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. We do not maintain or provide such information directly
to our Internet web site. We make no representations or warranties with respect
to the information contained on the third-party SEC filings web site and we take
no responsibility for supplementing, updating, or correcting any such
information. The content of our web site is not incorporated by reference into
this prospectus.
Our common shares, our Series B-1 preferred shares, and our Series E
preferred shares, are listed on the New York Stock Exchange and we are required
to file reports, proxy statements and other information with the New York Stock
Exchange. You may read any document we file with the New York Stock Exchange at
the offices of the New York Stock Exchange which is located at 20 Broad Street,
17th Floor, New York, New York 10005.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings that
we will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934.
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1. Our Registration Statement on Form S-3, filed with the SEC on
April 3, 2002 (Registration No. 333-85424), as amended;
2. Our Annual Report on Form 10-K for the fiscal year ended
December 31, 2002;
3. Our Quarterly Reports on Form 10-Q for the quarters ended
March 31, 2003, June 30, 2003 and September 30, 2003;
4. Our Current Reports on Form 8-K dated March 19, 2003, May 9,
2003, June 10, 2003, July 14, 2003, August 11, 2003, November 13, 2003, December
29, 2003, December 30, 2003, December 31, 2003 and February 23, 2004;
5. Our Definitive Proxy Statement on Schedule 14A filed with the
SEC on April 22, 2003; and
6. The description of our Series E preferred shares included in
our Registration Statement on Form 8-A, filed with the SEC on December 29, 2003,
including the information incorporated therein by reference and including any
amendment or reports filed for the purpose of updating such description.
You may request a copy of these filings, at no cost, by writing or
telephoning our Secretary at the following address:
Kramont Realty Trust
Plymouth Plaza
580 West Germantown Pike
Plymouth Meeting, PA 19462
(610) 825-7100
THIS PROSPECTUS SUPPLEMENTS THE ACCOMPANYING PROSPECTUS AND IS PART OF
A REGISTRATION STATEMENT WE FILED WITH THE SEC. YOU SHOULD RELY ONLY ON THE
INFORMATION OR REPRESENTATIONS PROVIDED IN THIS AND THE ACCOMPANYING PROSPECTUS
AND ANY APPLICABLE SUPPLEMENT. WE HAVE AUTHORIZED NO ONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. IF DIFFERENT INFORMATION IS PROVIDED, IT SHOULD NOT BE
RELIED ON. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE
OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THE
DOCUMENT.
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