ITEM 1 - BUSINESS
GENERAL
FAC Realty, Inc. (the "Company"), a self-administered and self-managed real estate investment trust ("REIT"), is one of the nation's largest owners and operators of factory outlet centers. The Company is vertically integrated, providing development, construction management, leasing, marketing and asset management services. As of December 31, 1996, the Company owned and operated 36 factory outlet centers (the "Properties") located in 21 states containing an aggregate of approximately 4.9 million square feet of gross leasable area ("GLA"). The Properties are tenanted primarily by large manufacturers of widely recognized, traditional brand name merchandise such as VF Factory Outlet, Inc. (Lee, Wrangler, Jantzen, Jansport, Vanity Fair and Health-tex), 9 West (Easy Spirit and Enzo), Sara Lee Corporation (L'eggs, Hanes, Bali, Playtex, Coach and Champion), Phillips-Van Heusen Corporation (Bass, Van Heusen and Geoffrey Beene), Levi Strauss & Co. (Levi's), Nike, Inc., Revlon Inc. (Prestige Fragrance), Bugle Boy Industries, Inc., Reebok International, Ltd., LCI Holdings (Liz Claiborne), Dinnerware Plus, Inc. (Mikasa) and WestPoint Stevens (Martex).
In June 1993, the Company completed its initial public offering (the "IPO") which combined (i) four partnerships, each of which had developed, acquired and owned one factory outlet center (collectively, the "CP Properties"), (ii) a fifth partnership formed to develop an additional factory outlet center, and (iii) certain assets of North-South Management Corporation, which had managed the CP Properties since 1988. Prior to or concurrently with the completion of the IPO, the Company (i) acquired the CP Properties and (ii) acquired 21 factory outlet centers from VF Corporation (the "VF Properties") totaling 1,725,000 square feet. In December 1993, the Company used the proceeds of a secondary public offering to purchase six additional factory outlet centers totaling 908,000 square feet from entities and individuals constituting the Willey Creek Group, at that time one of the largest private owners and operators of factory outlet centers in the country. In addition, in June 1994, the Company purchased three additional properties totaling 451,412 square feet from the Willey Creek Group and in December 1994 acquired an expansion of one of the initial six Willey Creek properties. During 1995, the Company opened one additional outlet center and completed expansions of several others. In 1996, the Company completed the outlet center opened in 1995 and expanded four other centers. The Company ended 1996 with approximately 4.9 million square feet of GLA, up 5.1% from 4.6 million at December 31, 1995.
The Company has elected to be treated as a REIT for Federal income tax purposes. The Company intends to continue to operate in the manner required to maintain its REIT status.
RECENT EVENTS. As a result of its recent decision to diversify its portfolio, on March 27, 1997, the Company purchased five community shopping centers located in the Raleigh, North Carolina area for $32,300,000 from an unrelated third party. The centers total 606,000 square feet and feature anchor tenants such as Winn-Dixie, Food Lion, Inc., K-Mart Corporation, and Eckerd Drug. The acquisition was funded from the Company's line of credit facility and internal cash flow. As a result of the recent acquisition, the Company owns 41 shopping centers containing an aggregate of approximately 5.5 million square feet of GLA.
BUSINESS STRATEGY
The Company's business strategy is to increase overall shareholder return through acquisition and portfolio diversification, expansion of its existing centers, selective development of new properties, and by increasing the value of its assets in the portfolio through proactive asset management, leasing, marketing and financial controls. The following is a brief description of the Company's current business strategy and philosophy .
MANAGEMENT. The Company's senior and middle management team consists of a group of real estate professionals with over 410 years of collective shopping center experience. The team is headed by its new Chief Executive Officer, C. Cammack Morton. Since joining the Company, Mr. Morton has assembled a management team of seasoned veterans in finance/accounting, asset management, law, retail development, leasing and marketing. These new members of management bring years of experience and shopping center industry designations to the Company, along with relationships with factory outlet tenants, shopping center tenants, and the financial and investment community.
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ACQUISITION AND PORTFOLIO DIVERSIFICATION. The Company believes that retail concepts within the shopping center industry are merging, and that a diversified shopping center portfolio will provide opportunities for growth and overall return to shareholders. To implement this strategy, the Company intends to focus on selective acquisitions of retail centers. Retail centers may include, but are not limited to, community shopping centers, outlet centers, "power strip" centers and "power outlet" centers. The Company believes opportunities for the acquisition of retail centers exist, particularly in the southeastern United States. In such acquisitions, the Company looks for strong demographics and traffic counts, good visibility and access, as well as the potential for increase in cash flow through increasing rents, retenanting, remerchandising or future expansions. The Company intends to use its existing tenant relationships to assist in accomplishing its objectives.
The recent acquisition of five community shopping centers from North Hills, Inc. is the beginning of implementation of the Company's diversification strategy. The North Hills properties meet the Company's acquisition criteria and their proximity to the Company's headquarters, together with the Company's knowledge of the market, should allow the Company to manage them with little increase in cost. Most importantly, the Company believes its existing tenant relationships should allow for not only remerchandising the existing centers, but at potentially better market rates.
As the Company pursues its diversification strategy, it also intends to focus on attracting new tenants to its portfolio to offer a wider range of merchandise and amenities to consumers. These may include full-service restaurants, theaters, entertainment and hotels.
EXPANSION AND IMPROVEMENTS TO EXISTING CENTERS. The Company intends to hold the majority of its Properties for long-term investment and, therefore, intends to continue selective expansion of its existing centers. The Company's philosophy is to expand its existing centers in response to tenant demand. Prior to commencement of an expansion, the Company requires a significant percentage of lease commitments. The Company believes that selective expansion allows it to take advantage of management's development experience and tenant relationships. During the past three years, the Company has added over 600,000 square feet of expansion space to its outlet centers.
The Company's asset management team, which includes development, leasing, marketing, finance and property management, continually evaluates potential opportunities at its existing centers for further expansion, remerchandising, capital improvements and renovation, all in an effort to increase property value. The Company also monitors each center's sales, occupancy and overall performance. Properties which may be underperforming are considered for re-tenanting, change of use or sale. In addition, the Company intends to improve its ongoing program of regular maintenance, periodic renovation and capital improvement of existing facilities in an effort to increase property values and tenants' sales. The Company is replacing the energy management systems at certain Properties and is evaluating other Properties for cost-saving opportunities.
The Company intends to fund these expansions and improvements primarily through its internally generated cash flow.
DEVELOPMENT OF NEW PROPERTIES. The Company believes that opportunities continue to exist to attract tenants to newly developed factory outlet centers or community shopping centers (which may include both factory outlet tenants and regional or national off-price, grocery or other destination-type tenants). The Company intends to selectively develop centers on new sites in areas with access to major highways, good visibility and strong demographics, where a substantial percentage of lease commitments have been obtained from tenants. The Company looks for sites where it believes there is potential to expand. Accordingly, the Company generally acquires a minimum site area sufficient to develop the initial, and at least one additional phase of a project, plus sufficient contiguous property to be sold or otherwise developed for complementary uses.
The Company is currently in the pre-development and marketing stage for a "power outlet" mall located in Lake Carmel, New York. The project is planned to contain in excess of 300,000 square feet of GLA and is planned to include "big box" users, which attract destination-oriented shoppers, as well as traditional outlets. If appropriate tenant interest is obtained, and the necessary agreements, permits and approvals are received, the Company intends to commence construction in the fall of 1997. No assurance can be given, however, that the project will be developed.
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FINANCING. The Company's policy is to finance its acquisitions, expansions and developments with the source of capital believed by management to be most appropriate, which may include undistributed cash flow, borrowings from institutional lenders, newly-issued equity securities, and debt securities on a secured or unsecured basis. The Company's philosophy is to use its Funds Available for Distribution, which the Company refers to as Funds Available for Reinvestment, to their greatest potential as a key source of financing. The Company's decision to use its cash flow in this fashion will result in a decrease in dividend distributions (See "Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters").
In 1996, the Company issued convertible preferred stock in exchange for $20 million of new equity. It also recently completed a $150,000,000 credit facility with Nomura Asset Capital Corporation. The credit facility with Nomura is secured by 17 of the Company's Properties, plus an assignment of the excess cash flow from 18 additional Properties. The Nomura credit facility was used in part to repay existing indebtedness of approximately $84.5 million and may be utilized to expand existing properties, fund acquisitions of retail centers, and refinance existing indebtedness.
Any additional debt financing, including additional lines of credit, may be secured by mortgages on the Properties. Such mortgages may be recourse or non-recourse or cross-collateralized or may contain cross-default provisions. The Company does not have a policy limiting the number of mortgages that may be placed on, or the amount of indebtedness that may be secured by, any particular property, however, current mortgage financing instruments do limit additional indebtedness on such properties.
MARKETING. Management believes that the major goal of marketing is to maximize sales and increase the net asset value of the Properties. The Company has analyzed the Properties based on net operating income (NOI) and created a marketing strategy to prioritize the marketing and leasing needs of each center to better utilize marketing dollars. The marketing efforts are primarily focused on the larger centers located in markets with regional customer draw; such centers account for the vast majority of the Company's NOI. Each of the Properties has a marketing manager responsible for developing and implementing marketing strategies.
Marketing plans for each center are prepared by the marketing manager for the merchants, as well as for internal use by the Company's leasing department. Each marketing plan details goals, strategies and tactics to create awareness, generate traffic and maximize sales at the Properties. Marketing efforts also include utilizing an advertising agency specializing in shopping center marketing, television, radio and print advertising, billboards, special events, promotions and a public relations program.
On a corporate level, information packages and the Company's internet web site are continually updated in an effort to communicate more effectively with the investment community. The web site includes a guest book to monitor investment community interest.
OPERATING PRACTICES. The Company is a vertically integrated real estate investment trust providing development, construction management, legal, leasing, marketing, finance and asset management services. The Company believes it can increase value to its shareholders by conducting the vast majority of these services in-house. Each area has been set up along functional lines, with the Company's property management and marketing areas being staffed by individuals with industry accreditations such as CSM (Certified Shopping Center Manager) and CMD (Certified Marketing Director).
The Company's leasing department has also been staffed to address the Company's philosophy regarding the changing retail environment and the Company's diversification strategy. The staff has individuals experienced in all areas of retail leasing, such as factory outlets, power centers, community centers, regional malls and specialty centers. This breadth of experience has brought to the Company a broader range of tenant relationships to position the Company for growth.
The Company believes that increased focus on financial controls and management information systems (MIS) will be critical over the next several years to enhance the analysis and communication of financial data. In order to accomplish this, the Company has staffed its finance area with professionals with specialized knowledge in real estate finance and acquisition analysis. The MIS department is in the process of enhancing the Company's systems to allow all personnel easy access to all financial and lease data in a concise format.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following supplements the discussion of the Company's primary management, portfolio diversification, expansion and improvements, development, financing, marketing and operations strategies set forth elsewhere in this report. The Company's policies with respect to those activities and the matters discussed below have been determined by the Board of Directors of the Company and may be amended or revised from time to time at the discretion of the Board of Directors without a vote of the shareholders of the Company. No assurance can be given that the Company's investment objectives will be attained or that the value of the Company will not decrease.
INVESTMENT POLICIES. The Company may expand existing properties, develop new properties, purchase or lease income-producing properties for long-term investment, expand and improve the properties it owns or sell such properties, in whole or in part, when circumstances warrant. The Company also may participate with other entities in property ownership through joint ventures or other types of co-ownership. Equity investments may be subject to existing mortgage financing and other indebtedness which have priority over the equity interest of the Company. While the Company intends to emphasize equity real estate investments, it may, in its discretion, invest in mortgages and other real estate interests. The Company does not presently intend to invest in mortgages or deeds of trust, but it may invest in such instruments if management concludes that the Company may benefit from the cash flow or appreciation of the subject property. Subject to the percentage of ownership limitations and gross income tests which must be satisfied to qualify as a REIT, the Company also may invest in securities of concerns engaged in real estate activities or in securities of other issuers. The Company does not intend to invest in the securities of any other issuer for the purpose of exercising control; however, the Company may in the future acquire all or substantially all of the securities or assets of other REITs, management companies or similar entities where such investments would be consistent with the Company's investment policies. In any event, the Company does not intend that its investments in securities would require the Company to register as an investment company under the Investment Company Act of 1940, and the Company would divest securities before any such registration would be required.
CERTAIN OTHER ACTIVITIES. The Company may make investments other than as previously described but has no present intention to do so. The Company has authority to offer shares of Common Stock or other securities in exchange for property, to repurchase or otherwise reacquire outstanding shares of Common Stock or other securities and may engage in such activities in the future. At all times the Company intends to make investments in such a manner as to be consistent with the requirements of the Code to qualify as a REIT unless, because of changed circumstances, the Board determines that it is no longer in the best interests of the Company to qualify as a REIT.
MAJOR TENANT
VF Corporation, which is one of the world's largest apparel manufacturers, has the largest number of stores and square footage in the Company's property portfolio with 32 stores, 25 of which anchor the Company's outlet centers and approximately 1,226,000 square feet representing 25% of the Company's total square footage. VF Corporation, through its operating subsidiaries and divisions, designs, manufactures and markets clothing apparel. Rental revenues from VF Factory Outlet, Inc. ("VFFO"), a subsidiary of VF Corporation, represented approximately 14% of the Company's 1996 rental revenues. The Company could be adversely affected in the event of the bankruptcy or insolvency of, or a downturn in the business of, VFFO or in the event that VFFO does not renew its leases as they expire. Since VFFO is the anchor tenant in 25 of the Company's 36 factory outlet centers, the failure of VFFO to renew its leases or otherwise to continue to operate in one or more of the centers could have a material adverse impact on the performance of other tenants in the affected center (and may permit some tenants to terminate their leases) and on the Company. No other tenant accounted for more than 6.6% of the Company's base rental revenues or aggregate leased GLA during 1996.
VFFO has 21 leases with the Company for initial terms of 10 years which were executed in June 1993. These leases with VFFO provide that if the expansions of certain of the Company's outlet centers are completed as scheduled, the initial terms of these leases will expire ten years from the date such expansions are completed. To date, seven of those leases had been amended to extend their maturity dates between July 2004 and March 2006. Pursuant to these leases, VFFO is obligated to pay certain increases in common area maintenance expenses and its pro rata share of insurance expenses and real estate taxes, and certain operating expenses. Additionally, certain stores (six in total) may cease operations during the term of their leases if VFFO does not meet a break-even point in these locations for three consecutive years. No more than two of these VFFO stores may close in any year and the tenant is still obligated
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for the payment of all rental obligations for the remaining term. As of December 31, 1996 all six locations had income in excess of the break-even point. See "Item 2
ITEM 2 - PROPERTIES
As of December 31, 1996, the Properties consisted of 36 factory outlet centers containing approximately 4.9 million square feet of GLA located in 21 states. In addition, the Company has acquired 606,000 square feet in the recent property acquisition which brings the total GLA to 5.5 million square feet. At December 31, 1996 the Company's Operating Properties, Development Properties, and Properties Held for Sale (see table below) were 91.4%, 69.1% and 42.9% leased, respectively, for an overall leased percentage of 87.1%. The outlet centers contained 756 stores with over 218 different tenants. Twenty-one (21) of the Properties are enclosed malls, ranging in size from approximately 60,000 to 187,000 square feet of GLA (aggregating approximately 2.0 million square feet of GLA), and 15 are strip centers containing between approximately 25,000 to 448,000 square feet of GLA (aggregating approximately 2.8 million square feet of GLA). The Company owns an aggregate of approximately 181 acres of undeveloped parcels located adjacent to certain of the Properties (the "Undeveloped Parcels").
The following table sets forth the location of, and certain information relating to, the Properties as of December 31, 1996.
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(1) Total rental revenue consists of base and percentage rent plus recoveries from tenants for the year ended December 31, 1996. (2) As of March 31, 1997, the Branson, MO center was 80.0% leased and occupied with an additional 5% of GLA committed, and an additional 7% of GLA under negotiation.
The following table sets forth certain information as of December 31, 1996 relating to the Company's 36 centers. All of the Properties are owned in fee simple by the Company, except for the factory outlet center located in Boaz, Alabama, which the Company holds pursuant to a lease which has renewal options through 2027. The Company recently obtained the right to purchase the land and building during any term for a total of $25,000 plus the present value of any future rental payments due during the remaining term. The Company's monthly rental payments during the current term are $350.00 through and including January 31, 1998; $500.00 from February 1, 1998 through and including January 31, 1999; $750.00 from February 1, 1999 through and including January 31, 2002; and $1,000.00 throughout the remainder of the term and any renewal terms. The current term expires January 31, 2007. Additionally, the Company holds a ground lease at its Iowa, Louisiana center which has renewal options through 2087.
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1) "EM" indicates an enclosed mall and "SC" indicates a strip center. 2) Reflects the year in which the factory outlet center was developed or re-developed for use as a factory outlet center. 3) Total Rental Revenue consists of base and percentage rent plus recoveries from tenants for the year ended December 31, 1996. 4) Average Rental Revenue per square foot is defined as Total Rental Revenue divided by GLA in operation, exclusive of anchors, at December 31, 1996. The average rental revenue paid by the Company's anchor tenants (VF Factory Outlet, Carolina Pottery, and WestPoint Stevens), including base and percentage rents plus recoveries, was $5.57, $4.89, and $6.35 per square foot, respectively, in 1996. (5) As of March 31, 1997, the Branson, MO center was 80.0% leased and occupied with an additional 5% of GLA committed, and an additional 7% of GLA under negotiation. (6) The Company is converting this property to general office use.
PROPERTIES HELD FOR SALE
Due in part to the Company's ongoing strategic evaluation of its portfolio of assets, the Directors of the Company authorized management in 1995 to pursue the sale of certain properties that currently are not fully consistent with or essential to the Company's long-term strategies. Three of these properties presently held for sale were written down by $8.5 million in 1995 to their fair value less costs to sell and an additional $5 million write down was taken on one of the properties in 1996.
These non-cash adjustments were charged to operations and represent the difference between the estimated net realizable value and net book value of each asset. After recording the $5 million valuation adjustment in 1996, the net carrying value of assets currently being marketed for sale at December 31, 1996 is $11.4 million. Two assets previously classified as held for sale will no longer be carried as held for sale and have been reclassified as income producing properties. The two centers were previously classified for sale to combine with another property; after further evaluation the Company feels that this will not be necessary in order to sell the other property. There is also $15.8 million of debt which is required to be retired from the sale proceeds and during 1996, these three properties contributed about $2.1 million of revenue and $1.1 million of net operating income before interest expense. This non-cash adjustment was charged to operations and represents the difference between the estimated net realizable value and net book value of that asset.
The Company is still in the process of marketing the properties. Management plans to evaluate all properties on a regular basis in accordance with its strategy for growth and diversification and in the future may identify other properties for disposition or may decide to defer the pending disposition of those assets now held for sale.
One of these properties (Lathrop, CA) is currently being converted to office use and has 30% of the total GLA leased with an additional 52% of GLA under negotiation. The Company anticipates that it will retain the property during 1997 to stabilize the revenues and dispose of the center in 1998 in order to obtain a higher return.
PLANNED EXPANSIONS
For the year ended December 31, 1996 the Company had delivered approximately 163,000 square feet of expansion space to tenants in Nebraska City, Nebraska; Story City, Iowa; Tupelo, Mississippi and Smithfield, North
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Carolina. The Company also completed final construction of approximately 81,000 square feet of its 288,000 square foot outlet center being developed in Branson, Missouri. The following table sets forth certain information relating to the Company's proposed 1997 expansion activities:
* The percentage of expansion GLA committed reflects the percentage of the proposed GLA for which leases or lease commitments have been obtained from tenants as of March 31, 1997.
In undertaking developments and expansions, the Company will incur certain risks, including the expenditure of funds on, and the devotion of management's time to, projects which may not come to fruition. In addition, completion of planned developments and expansions will be subject to the availability of adequate debt or equity financing. Other risks inherent in development and expansion activities include possible cost-overruns, work stoppages and delays beyond the reasonable control of the Company. Accordingly, there can be no assurance if or when any or all of the Company's planned expansions or any other development or expansion project will be completed or, if completed, that the costs of construction will not exceed, by a material amount, estimated costs.
In addition, the agreement pursuant to which the Company acquired the VF Properties required, subject to certain conditions, that the Company complete, during the three years following the acquisition, the expansion of ten properties by an aggregate of at least 320,000 square feet of gross building area (approximately 288,000 square feet of GLA). The agreement provided for periodic payments to VF Corporation, aggregating up to approximately $21.7 million if the expansions are not completed on a timely basis. This amount was reduced as the expansions of the VF Properties were completed. Three expansions totaling approximately 97,000 square feet were completed in 1994, two additional expansions approximating 100,000 square feet were completed in 1995 and three additional expansions totaling approximately 106,000 square feet in Story City, Iowa, Nebraska City, Nebraska and Tupelo, Mississippi were completed in 1996. In December 1996 the Company and VFFO entered into an amendment which set forth a framework to resolve the outstanding issues related to the expansion requirements. The amendment deleted the requirement that the Company expand the Hempstead, Texas, Livingston, Texas and Lebanon, Missouri centers and substituted therefor: (i) the now-completed expansion of the Tupelo, Mississippi center; (ii) the existing arrangement whereby the Company's center and an adjacent center in Sulphur Springs, Texas are operated as a single property; and (iii) the completed requirement that the Company enter into contracts to provide for the benefit of VFFO, for at least three years, three billboards each near the Draper, Utah; Crossville, Tennessee and Tupelo, Mississippi centers. In addition, the Company paid to VFFO the $2,016,000 final installment due under the agreement referenced above. As of February 28, 1997, the Company had satisfied its obligations under the agreement.
ADDITIONAL INFORMATION ABOUT CERTAIN CENTERS
As of December 31, 1996, the Company's factory outlet center at Vacaville, California, had a book value of at least 10% of the total assets of the Company and generated gross revenue in 1996 that accounted for more than 10% of the Company's 1996 aggregate gross revenue. The following sets forth information relating to this center:
The Vacaville, California outlet center is located on 53 acres at the intersection of Interstate 80 and Nut Tree Road, approximately 60 miles east of San Francisco and 30 miles west of Sacramento, the state capital. Phase I of the center, which opened in 1988, contains approximately 206,000 square feet of GLA. Phase II, which opened in 1992, contains approximately 120,000 square feet of GLA. Phase III, which also opened in 1992, contains approximately 122,000 square feet of GLA. As of December 31, 1996, 1995 and 1994, Vacaville was 89%, 88% and 92%, respectively, leased to over 100 tenants with an average effective annual rental revenue per square foot of $22.58, $25.97
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and $25.82, respectively. Major tenants at the center include VF Factory Outlet, Levi's, Reebok, Mikasa, 9 West and Carter Childrenswear, with The GAP Outlet scheduled to open in August 1997.
The following table shows the lease expirations for tenants in occupancy as of December 31, 1996 for the Vacaville outlet center (assuming that none of the tenants exercise renewal options).
(1) Total leased GLA is not equal to leased GLA due to vacancies. (2) Expirations assume no renewals or releasing for tenants in occupancy as of December 31, 1996.
UNDEVELOPED PARCELS
The Company owns approximately 181 acres of undeveloped parcels located near certain of the Company's factory outlet centers. The Company intends to pursue a marketing program to lease, develop or sell the parcels it owns through third party brokers. During 1996, 2.4 acres were sold at Mesa, Arizona for a total sale price of $205,000 and a gain of $37,000. Because property held for sale by a REIT is subject to significant restrictions imposed by the Code, the Company has formed a non-qualified REIT subsidiary under Section 356 of the Code. By using a non-qualified REIT subsidiary, the Company anticipates it will be able to avoid the 100% tax imposed on the gain derived from the sale of certain outparcels of land owned by the Company.
TENANTS
GENERAL. Management believes the Properties offer manufacturers a diverse tenant mix which includes many well-known manufacturers/retailers. The majority of the Company's current tenants are large, publicly-traded manufacturers. The Company's current core tenant mix at its Properties features such well-known brands as Lee, Wrangler, Jantzen, Jansport, Bass, Van Heusen, Vanity Fair, Health-tex, Easy Spirit, 9 West, Enzo, Casual Corner, L'eggs, Hanes, Bali, Champion, Levi's, Nike, Revlon, Liz Claiborne, Mikasa, Martex and Bugle Boy. In Nashville, Tennessee and Branson, Missouri, the Company has added Reading China & More as an anchor in an effort to diversify its tenant base. Several new relationships were developed during the year, such as The GAP, which plans to open in three of the Company's locations in 1997, and Sunbeam/Oster.
TENANT LEASES. The majority of the leases with the Company's tenants have terms of between five and ten years which expire between 1997 and 2006. While many of these leases are triple net leases which require tenants to pay their pro rata share of utilities, real estate taxes, insurance and operating expenses, as of December 31, 1996, 21% of the aggregate GLA of its factory outlet centers was leased to tenants under gross leases, pursuant to which the Company is obligated to pay all utilities and other operating expenses of the applicable factory outlet center. VFFO is the Company's largest tenant. See "Item 1 -- Business -- Major Tenant" for a discussion of the Company's leases with VFFO.
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LEASE EXPIRATION
The following table shows tenant lease expirations for tenants in occupancy as of December 31, 1996 for the next ten years at the Properties (assuming that none of the tenants exercises any renewal option):
(1) Total leased GLA is not equal to leased GLA due to vacancies. (2) Expirations assume no renewals or releasing for tenants in occupancy as of December 31, 1996.
TENANT CONCENTRATIONS
The following table provides certain information regarding the ten largest tenants (based upon total GLA leased) and other tenants for the year ended December 31, 1996.
(1) Total leased GLA is not equal to leased GLA due to vacancies.
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MORTGAGE DEBT
The following table sets forth, as of December 31, 1996, certain information regarding the mortgages encumbering certain of the Properties (in thousands).
(1) The $75,000,000 Revolving Credit Facility was paid in full from proceeds funded under a newly issued credit facility issued by Nomura Asset Capital Corporation. The Facility is secured by the same properties as the previous credit facility, plus an assignment of additional cash flow from the properties secured by the collateral mortgage notes, matures in 1999 with a 1 year extension and bears an interest rate of LIBOR + 2.25%.
TAXES
Because the acquisitions of all of the Properties were taxable transactions to the sellers of those properties, the Company has a "stepped-up" aggregate cost basis in these real estate assets for Federal income tax purposes. Depreciation is calculated using the straight line method over the estimated useful lives of the assets, for which buildings and improvements range from 15 to 31.5 years and equipment ranges from five to 10 years.
The Company's aggregate real estate tax obligation for the Properties during the fiscal year ended December 31, 1996, was approximately $5.1 million, or $1.09 per square foot of GLA. The real estate obligation and rates per square foot of GLA for Vacaville, the Company's largest outlet center, was approximately $1.4 million or $3.13 per square foot of GLA.
EXECUTIVE OFFICES
The Company relocated its corporate headquarters in December 1996 and currently leases its 17,500 square foot executive offices in Cary, North Carolina.
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ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
On August 25, 1995, the Company executed definitive written agreements ("Agreements") to acquire both the factory outlet centers owned by The Public Employees Retirement System of Ohio ("OPERS") and the management and business operations of the Charter Oak Group Ltd., a subsidiary of Rothschild Realty, Inc., ("RRI"), subject to certain terms and conditions. On December 7, 1995, the Company reported that RRI had terminated the Agreements and thus, the acquisitions did not take place.
Subsequent to the termination of the Agreements, RRI for itself and on behalf of OPERS made a demand for payment with respect to a $5 million promissory note (the "Note") issued by the Company in connection with its proposed purchase of the OPERS' centers and the management and business operations of RRI's Charter Oak Group, Ltd. The Note is payable only upon the occurrence of certain conditions relating to the termination of the Agreements and the Company asserts that certain of the required conditions were not met and thus, the Note is not properly due and payable as RRI has asserted.
After an unsuccessful attempt at mediation of the dispute, RRI filed for arbitration of the matter in New York. The Company thereafter sought a preliminary injunction in North Carolina, seeking, among other things, a stay of the New York arbitration. The North Carolina court entered an order requiring the parties to arbitrate in North Carolina. RRI did not appeal the order and the parties are in the process of selecting a mutually acceptable arbitrator in Raleigh, North Carolina.
The Company intends to continue to vigorously defend its position in the upcoming arbitration and, while no assurance can be given as to the outcome of such arbitration, it continues to assert that it has meritorious defenses to the payment of the Note.
On July 19, 1996, a purported class action lawsuit was filed in the United States District Court for the Eastern District of North Carolina against the Company, its former chairman and chief executive officer, J. Dixon Fleming, Jr., and a former president of the Company, David A. Hodson. The complaint seeks certification of a class consisting of all persons (with certain exclusions) who purchased common stock of the Company between December 16, 1993 and April 17, 1996, inclusive (the "Class Period"). The complaint alleges that, during the Class Period, defendants made certain false or misleading statements to the public concerning (1) earnings and funds from operations; (2) the Company's ability to maintain dividends at prior levels; (3) the alleged maintenance of dividends through borrowings rather than funds from operations; (4) the Company's ability to close a proposed acquisition; (5) the alleged purchase of certain properties from affiliates of the individual defendants at inflated prices; and (6) alleged improper accounting practices.
On October 30, 1996, a second purported class action lawsuit was filed in the United States District Court for the Eastern District of North Carolina against the Company and Messrs. Fleming and Hodson, containing factual allegations and legal claims similar to those asserted in the prior purported class action. The plaintiffs in both actions seek unspecified monetary damages. The cases have been consolidated and the Company has filed motions to dismiss both lawsuits, which motions are currently pending.
The Company believes that it and the named officers have substantial defenses to the plaintiffs' claims and the Company intends to vigorously defend the actions. However, no assurance can be given as to the ultimate outcome of the litigation.
In addition, the Company is a party to certain legal proceedings relating to its ownership, management and leasing of the properties, arising in the ordinary course of business.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock began trading on the NYSE on June 3, 1993, under the symbol "FAC." At March 31, 1997, there were approximately 758 stockholders of record.
The following table sets forth the quarterly high and low sales prices of the Common Stock and dividends paid per share for 1996 and 1995:
DISTRIBUTIONS
The Company intends to make a determination regarding its dividend distributions annually following review of the Company's year end financial results. The Company's policy is to declare dividends in amounts equal to 95% of the Company's taxable income which is the minimum dividend required to maintain REIT status. Based upon previous losses, the Company will have approximately $5.2 million of net operating loss carry forwards for 1997 which could result in no dividend payment requirement to maintain its REIT status. Under the Company's line of credit with Nomura, the Company may not make distributions if it is in monetary default under the line of credit. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity."
The Company provides a Dividend Reinvestment Plan for stockholders of record. Information on the Plan can be obtained from the Company's transfer agent and registrar, First Union National Bank of North Carolina at (800) 829-8432.
RELATED SHAREHOLDER MATTERS
See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity" for a discussion of the Series A Convertible Preferred Stock, Senior Notes and Warrants issued pursuant to a Note Purchase Agreement. All such securities were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Exchange Act of 1934.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The following information should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this report and "Management's Discussion and Analysis of Results of Operations and Financial Condition" included in Item 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the selected financial data included in Item 6 of this report, and the consolidated financial statements and notes thereto included in Item 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in a separate section of this report.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
For information on the business experience of Messrs. Morton and Miniutti, see "Executive Officers."
Robert O. Amick is the President of The Amick Group, a financial consulting firm that he founded in 1992. Mr. Amick served as Vice President and Controller of J.C. Penney Co., Inc. from 1982 to 1992 and was a director of J.C. Penney Business Services, Inc. from 1985 to 1992. Mr. Amick also is a director of Protection Mutual Insurance Company and Park P.M. Company.
B. Mayo Boddie, Sr. is the Chairman of the Board of Boddie-Noell Enterprises, Inc., an operator of Hardee's Restaurant franchises, a position he has held since it was founded by Mr. Boddie and his family in 1962. He is also the Chairman of the Board of Boddie-Noell Properties, Inc., a real estate investment trust, since 1987. Mr. Boddie is a director and a member of the executive board of First Union National Bank of North Carolina, a subsidiary of First Union Corporation.
J. Richard Futrell, Jr. is the retired Chairman and Chief Executive Officer of Centura Banks, Inc., a position he held from 1989 to 1993. He currently serves as a member of Centura's board of directors and its executive committee.
John W. Gildea has been Managing Director of Gildea Management Company and affiliates since 1990. From 1986 to 1990, he was Senior Vice President of Donaldson, Lufkin & Jenrette. Mr. Gildea also is President of Gildea Investment Co, an investment advisory firm, since 1983. He is a director of America Service Group, Inc., UNC, Inc., and Barry's Jewelers.
Theodore E. Haigler, Jr. served as the President, Chief Executive Officer and a director of Burroughs- Wellcome Co. (now Glaxo Wellcome, Inc.), a pharmaceutical company, from 1986 until his retirement in 1989. Mr. Haigler was a director of Tenax Corporation and CCB Financial Corporation, a bank holding company, from 1974 to 1995.
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EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the current executive officers of the Company.
NAME AGE POSITION - - - ------------------------ ---------- ---------------------------------------- C. Cammack Morton 45 President and Chief Executive Officer Patrick M. Miniutti 49 Executive Vice President and Chief Financial Officer Christopher G. Gavrelis 43 Senior Vice President - Management Connell L. Radcliff 42 Senior Vice President - Development Michaela M. Twomey 45 Senior Vice President and General Counsel
C. Cammack Morton joined the Company in December 1995 as Chief Operating Officer and was elected President and a Director in January 1996. Effective January 1, 1997, Mr. Morton became the Company's chief executive officer. Prior to his affiliation with the Company, Mr. Morton served as the Managing Director of Rothschild Realty, Inc. ("Rothschild") and President and Chief Executive Officer of the Charter Oak Group, Ltd. (the "Charter Oak Group"), a subsidiary of Rothschild engaged in the development and management of factory outlet centers. He joined Rothschild in 1987 as Vice President, was promoted to Senior Vice President in 1989 and to Managing Director in 1991. To resolve certain personal financial matters arising out of a limited partner obligation to the general partner of a real estate partnership, Mr. Morton filed a petition for relief under Chapter 11 of the United States Bankruptcy Code in March 1994. After settling with the general partner, the bankruptcy case was dismissed in June 1994. Mr. Morton is the immediate past president of the Developers of Outlet Centers, the leading trade organization for the owners and operators of factory outlet centers. He also serves on the Editorial Advisory Board of SHOPPING CENTER WORLD and on the Advisory Board of VALUE RETAIL NEWS, a unit of the International Council of Shopping Centers.
Patrick M. Miniutti joined the Company as Executive Vice President, Chief Financial Officer and Director in August 1996. Prior to his affiliation with the Company, Mr. Miniutti served for three years as Executive Vice President, Chief Financial Officer and Trustee of Crown American Realty Trust. Prior thereto, Mr. Miniutti held senior financial positions for a combined 12 years with New Market Companies, Inc., Western Development Corporation (predecessor to The Mills Corporation) and Cadillac Fairview Corporation Limited, which was preceded by ten years in public accounting, principally with national firms. Mr. Miniutti is a member of the American Institute of Certified Public Accountants and a former member of its Real Estate Accounting Committee which was responsible for promulgating most of the real estate accounting rules in practice today.
Christopher G. Gavrelis joined the Company in December 1995 and was named Senior Vice President in January 1996. Prior to his affiliation with the Company, Mr. Gavrelis was Vice President of the Charter Oak Group for approximately four years. From 1989 to 1991, Mr. Gavrelis served as regional property manager for McArthur/Glen Realty Corp. (now HGI Realty, Inc.), a company engaged in the development and operation of factory outlets centers. Mr. Gavrelis is responsible for the Company's management, administration and construction activities.
Connell L. Radcliff has served as Senior Vice President of the Company since its organization in April 1993. Mr. Radcliff joined North-South Management Corporation (a predecessor company) as Vice President - Leasing in 1989. From 1987 to 1989, Mr. Radcliff was a real estate broker for The Shopping Center Group, a real estate brokerage firm specializing in national tenant representation. Mr. Radcliff is responsible for the Company's development activities.
Michaela M. Twomey joined the Company as Senior Vice President and General Counsel in August 1996. Ms. Twomey was previously with Morrison & Foerster LLP in Washington, D.C. for eleven years where she served as principal outside counsel to the Charter Oak Group since its inception. Prior thereto, she practiced primarily real estate law for seven years. Ms. Twomey is a member of the bars of the District of Columbia and Virginia as well as the Real Property, Probate and Trust Law Section of the American Bar Association.
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COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's directors, executive officers and owners of more than 10% of the Company's Common Stock ("10% beneficial owners") to file with the Securities and Exchange Commission (the "SEC") and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Executive officers, directors and 10% beneficial owners are required by SEC regulations to furnish the Company with copies of all forms they file pursuant to Section 16(a). To the Company's knowledge, during the year ended December 31, 1996, all required Section 16(a) reports were filed on a timely basis.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation of (i) the Chief Executive Officer, (ii) the three most highly compensated executive officers other than the Chief Executive Officer who were serving as executive officers at December 31, 1996 and (iii) one former executive officer (collectively, the "Named Executive Officers") for services rendered in all capacities during 1996.
SUMMARY COMPENSATION TABLE
------------------ (1) The 1996 bonuses were paid in the form of restricted stock, which at the time of the award the market price of Common Stock was $6.25 per share. The restricted stock issued in lieu of cash bonuses is subject to a three year cliff vest. (2) Pursuant to employment agreements entered into between the Company and Messrs. Morton, Miniutti and Gavrelis, restricted stock of 90,000, 90,000 and 16,667 shares, respectively, were issued to each executive. The value of the restricted stock is based on the market price of Common Stock at the date of grant. At December 31, 1996, the market value of such shares were $596,250 for Messrs. Morton and Miniutti and $110,419 for Mr. Gavrelis. (3) Consists of matching contributions to the Company's 401(k) Retirement and Savings Plan. (4) Allowance for relocation expenses paid by the Company.
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(5) Restricted stock of 90,000 shares originally awarded as a long-term incentive with a market value of $10.00 per share Common Stock on the date of grant pursuant to Mr. Fleming's employment agreement. Such shares were cancelled upon his termination as an officer and director of the Company. Mr. Fleming received the equivalent value of 16,000 shares, or approximately $100,000, pursuant to his employment agreement, which is included as other compensation (see Note (6) below). (6) Includes amounts accrued as of December 31, 1996 representing the remaining value of Mr. Fleming's employment contract (see "Item 11 -- Executive Compensation -- Severance Agreements") and matching contributions to the Company's 401(K) Retirement and Savings Plan.
STOCK OPTIONS
The following table provides certain information regarding the stock options granted during 1996 to the Named Executive Officers.
(1) 100,000 option share vested upon grant with the remainder at 20% per year. (2) 20% vested upon grant with the remainder at 20% per year.
The following table sets forth certain information concerning the number of shares of Common Stock underlying options held by each of the Named Executive Officers and the value of such options at December 31, 1996.
FISCAL YEAR-END OPTION VALUES
NUMBER OF VALUE OF SECURITIES UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS OPTIONS AT AT FISCAL FISCAL YEAR-END YEAR-END (#) ($) EXERCISABLE/ EXERCISABLE/ NAME UNEXERCISABLE UNEXERCISABLE - - - --------------------- -------------------------- -------------------------- C. Cammack Morton 100,000/200,000 -- Patrick M. Miniutti 40,000/160,000 -- Christopher G. Gavrelis 7,000/28,000 -- Connell L. Radcliff 30,750/32,500 -- J. Dixon Fleming, Jr. 64,270/50,180 --
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LONG-TERM COMPENSATION
The following table sets forth certain information regarding long-term incentive awards made to the Named Executive Officers during 1996 in the form of Restricted Stock.
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
PERFORMANCE OR NUMBER OF OTHER PERIOD UNTIL NAME SHARES (#) MATURATION OR PAYOUT - - - -------------------- ---------------- -------------------- C. Cammack Morton 90,000 10 years (1) Patrick M. Miniutti 90,000 10 years (1) Christopher G. Gavrelis 16,667 3 years (2) J. Dixon Fleming, Jr. 90,000 10 years (3)
(1) Awards increased to 150,000 shares and 120,000 shares, respectively, subsequent to December 31, 1996 for Messrs. Morton and Miniutti with vesting to occur in ten equal annual installments, provided Mr. Morton and Mr. Miniutti continue to be employed by the Company. (2) Vesting to occur in three equal annual installments, provided Mr. Gavrelis continues to be employed by the Company. (3) The 90,000 shares awarded to Mr. Fleming were canceled upon his termination as an officer and director of the Company.
EMPLOYMENT AGREEMENTS
ANNUAL COMPENSATION AND BASIC TERMS. The Company is a party to employment agreements with Messrs. Morton, Miniutti, Gavrelis and Radcliff. The agreements with Messrs. Morton and Miniutti were entered into in December 1995 and August 1996, respectively, and provide for an initial three-year term which is automatically extended for an additional year at the end of each year of the agreement, subject to the right of either party to terminate as of the end of the then-existing three-year term by giving one year's prior written notice. The agreement with Mr. Gavrelis was entered into in December 1995 and provides for an initial two-year term. The agreement with Mr. Radcliff was entered into in May 1993 and provided for an initial two-year term, which has been extended through May 1997. Pursuant to their respective agreements, each executive is required to devote his entire business time to the Company and is prohibited from competing with the Company for a period of one year following termination of employment. Pursuant to recent actions by the Independent Directors, following consultations with an executive compensation consultant retained by the Executive Compensation Committee, the employment agreements will be revised to reflect current base annual salaries as follows: Mr. Morton - $330,000; Mr. Miniutti - $225,000; Mr. Gavrelis - $160,000; and Mr. Radcliff - $182,000. In addition, Messrs. Morton and Miniutti will receive 30,000 shares and 15,000 shares of restricted stock as part of their annual compensation, respectively, based on an equivalent cash value of approximately $200,000 and $100,000, respectively. The number of restricted shares issued annually will be adjusted on March 1st of each year based on the then market price of the stock. Such restricted stock will be subject to a one year cliff vest. The base annual salaries are subject to periodic increases based upon the performance of the Company and the executive. Messrs. Morton and Miniutti each agreed to take the raises in their base salaries for 1997 in the form of restricted stock, which will be subject to a three year cliff vest, in the amounts of 6,000 shares and 4,500 shares, respectively. In addition, they have agreed to take all future raises in the form of restricted stock subject to similar vesting provisions. If the employment of any executive is terminated "without cause" (as defined in the respective agreements), such executive will be entitled to (i) the greater of the base salary payable to the executive for the remainder of the then existing employment term or one year's base salary, (ii) in the case of Messrs. Morton and Miniutti, the product of the number of years representing the unexpired term of the agreement and an amount equal to the average bonuses paid to such executive over the three years immediately prior to termination, and in the case of Messrs. Gavrelis and Radcliff, a pro rata portion of any incentive compensation or bonus payable for the years of
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termination and (iii) certain other accrued benefits. If the employment of any executive is terminated due to "change of control" an additional two years will added to the unexpired term of the respective agreements.
LONG-TERM COMPENSATION. Subsequent to December 31, 1996, in recognition of the increases in their responsibilities and after consultation with an executive compensation consultant, the Independent Directors replaced the previous long-term incentive plan awards of 90,000 shares of restricted stock for Messrs. Morton and Miniutti with grants of 150,000 shares and 120,000 shares, respectively. These grants are being issued pursuant to the Company's 1996 Restricted Stock Plan. These restricted shares will vest in ten equal annual installments commencing on March 1, 1997, provided each executive continues to be employed by the Company. If the Company (i) does not extend the executive's employment agreement beyond its initial three-year term; or (ii) terminates the executive "without cause" (as defined in their respective employment agreements) all unvested shares of restricted stock will become fully vested. The executives will be entitled to receive dividends on only the vested shares. Mr. Gavrelis was awarded 16,667 shares of restricted stock which vests in three equal annual installments commencing March 1, 1997, provided he continues to be employed by the Company.
In addition, the employment agreements for Messrs. Morton, Miniutti and Gavrelis provide for the grant of options to purchase 300,000, 200,000 and 35,000 shares of the Common Stock, respectively. The Company granted the options to Messrs. Morton and Gavrelis at an exercise price of $10.25 per share and at $8.625 per share for Mr. Miniutti. The options for Mr. Morton vest on the following schedule: 100,000 shares at date of grant and 20% of the remainder per year thereafter. The options for Messrs. Miniutti and Gavrelis vest at the rate of 20% at date of grant and 20% per year thereafter.
SEVERANCE AGREEMENTS
The Company is also party to an employment agreement with Mr. Fleming which stipulates an annual base salary of $285,000. Mr. Fleming's employment as chief executive officer of the Company terminated effective December 31, 1996 and he resigned as Chairman effective February 15, 1997. The Company agreed to treat his departure as a termination without cause pursuant to the terms of his employment agreement with the Company. Pursuant to such agreement, Mr. Fleming is entitled to severance payments through December 1998 that are expected to aggregate approximately $600,000. He will also be entitled to certain other benefits. In addition, pursuant to the agreement, Mr. Fleming waived his rights with respect to 90,000 shares of restricted stock of the Company, however, he is entitled to receive the equivalent value of 16,000 shares, or approximately $100,000 as additional compensation. In addition, Mr. Fleming and the Company agreed to modify the non-competition provisions of Mr. Fleming's employment agreement to permit Mr. Fleming's ownership, management, control or participation in the development of outlet shopping centers located outside the United States.
The Company was party to employment agreements with David A. Hodson, John M. Slocum and R. Kenneth Langston, all former officers of the Company. In 1995, the Company entered into severance agreements with the three former officers which provided them with certain severance payments, which the Company recorded as an expense in 1995. The severance agreements also provided for the vesting of certain stock options and the continued participation in the Company's medical and dental insurance plans.
CHANGE IN CONTROL ARRANGEMENTS
Under the employment agreements, termination "without cause" includes any termination resulting from a "change in control" of the Company. The term "change in control" generally is defined under the employment agreements to include the first to occur of the following: (i) any person or group owns or controls 50% or more of the outstanding Common Stock, (ii) any person or group who owned less than 5% of the outstanding Common Stock on the date of the agreement owns 20% or more of the outstanding Common Stock or (iii) the stockholders of the Company approve a business combination that will result in a change in ownership of 20% or more of the outstanding Common Stock.
Upon the occurrence of a "change in control" of the Company (as defined in the Option Plan), all nonvested stock options granted thereunder become immediately vested and exercisable in full. "Change in control" generally is defined
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under the Option Plan to occur at such time as any person or group beneficially owns at least 25% of the outstanding Common Stock.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BY MANAGEMENT. The following table sets forth certain information regarding the beneficial ownership of Common Stock of the Company as of March 31, 1997 by the: (a) Chief Executive Officer; (b) other current executive officers named on the Summary Compensation Table; (c) certain former executive officer named on the Summary Compensation Table; (d) directors; and (e) current executive officers and directors as a group. Except as otherwise described in the notes below, the following beneficial owners have sole voting power and sole investment power with respect to all shares of Common Stock set forth opposite their name.
(1) An asterisk (*) indicates less than one percent. Class includes the common share equivalents of the Convertible Preferred Stock and warrants convertible into common stock. (2) Includes 108,000 shares of restricted stock as to which Mr. Morton has sole voting power, and 100,000 shares subject to presently exercisable options. (3) Includes 96,500 shares of restricted stock as to which Mr. Miniutti has sole voting power, and 40,000 shares subject to presently exercisable stock options. (4) Includes 22,667 shares of restricted stock as to which Mr. Gavrelis has sole voting power, and 7,000 shares subject to presently exercisable stock option. (5) Includes 6,000 shares of restricted stock as to which Mr. Radcliff has sole voting power, and 30,750 shares subject to presently exercisable stock options. (6) Includes 2,000 shares subject to presently exercisable stock options. (7) Includes 2,000 shares subject to presently exercisable stock options and 200 shares held by a trust established for the benefit of Mr. Futrell. (8) Includes 4,000 shares held by Mr. Gildea's spouse as custodian for their children, 111,111 shares of common stock equivalents of Convertible Preferred Stock as to which Mr. Gildea has sole voting power and 746,666 shares of common stock equivalents of Convertible Preferred Stock and warrants convertible into 20,000 shares of common stock owned by Network Fund III, Ltd. ("Network") as to which Mr. Gildea is a director of Network and a Managing Director of Gildea Management Company, which has an investment advisory agreement with Network.
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(9) Includes 2,000 shares subject to presently exercisable stock options and ten shares held by Mr. Haigler as a custodian under the Uniform Gifts to Minors Act. (10) Includes 64,270 shares subject to presently exercisable options and 100 shares held by Mr. Fleming's spouse. (11) Includes 250,020 shares subject to presently exercisable options, 857,777 shares of common stock equivalents of Convertible Preferred Stock and warrants convertible into 20,000 shares of common stock.
BY OTHERS. The following table sets forth certain information regarding each person or entity known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock as of March 31, 1997.
NAME AND ADDRESS OF AMOUNT AND NATURE OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS (1) - - - --------------------- ------------------------ ----------------------- Jeffrey B. Citrin(2) 807,222(3) 5.33% 950 Third Avenue 17th Floor New York, NY 10022
(1) Class includes the common stock equivalents of the Convertible Preferred Stock and warrants convertible into common stock. (2) Based upon a Schedule 13D dated July 22, 1996 filed with the Securities and Exchange Commission. (3) Includes 547,222 shares of common stock equivalents as to which Blackacre Capital Group, L.P. possess voting and investment control over and warrants convertible into 260,000 shares of common stock as to which Blackacre Bridge Capital, L.L.C. is the record holder. Jeffrey B. Citrin is the President of Blackacre Capital Management Corp., the general partner of Blackacre Capital Group, L.P. and the managing member of Blackacre Bridge Capital, L.L.C.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 5, 1995 the Company purchased three parcels of land near its Smithfield, North Carolina factory outlet center totaling 4.94 acres for $735,000 from two partnerships, of which former executive officers and their affiliates are general partners. The parcels were used as part of the expansion of the Smithfield center.
In 1994, the Company's Board of Directors approved acquisition of certain land adjacent to one of the Company's existing outlet centers for potential expansion of that center. The cost of the land acquisition was $400,000. The seller of the land was a partnership whose partners include former executive officers of the Company.
During 1993, the Company acquired a 19 acre tract of land in a non-monetary transaction from a partnership whose partners include two former executive officers of the Company. The recorded value of the land was $748,000. In return for the land, the Company assumed certain outstanding debt and the remaining purchase price was settled by reducing amounts owed to the Company by a tenant whose majority owners were also partners in the partnership. A review of this transaction resulted in J. Dixon Fleming, Jr., the Company's former Chairman and Chief Executive officer, agreeing to permit the Company to satisfy a $0.6 million asset valuation issue by offsetting amounts otherwise owed to Mr. Fleming pursuant to his employment agreement (see "Item 11 -- Executive Compensation -- Severance Agreements") or by the acceptance from Mr. Fleming of some other cash or value equivalent. The Company has recently entered into an agreement with Mr. Fleming to sell to him the 19 acre land tract for the sum of $750,000 which would satisfy the asset valuation issue. The consummation of this transaction is secured by the unpaid severance amounts due to Mr. Fleming. Also in settling the terms of Mr. Fleming's severance and non-competition restrictions, $0.25 million of his severance was applied to certain advertising expenses incurred by the Company.
The Company has granted Mr. Fleming an option to purchase the Company's interest in a project to develop international outlet centers for an amount equal to the Company's total costs plus interest. Mr. Fleming has also agreed to be responsible for the costs of the project in excess of $250,000. The option expires on December 31, 1997. In the event such option is not exercised, the Company has agreed to negotiate a similar option, exercisable in 1998 for the greater of (i) the fair market value of such investment, or (ii) $250,000 plus interest.
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PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are filed as part of the report:
Page
Report of independent auditors............................
Consolidated balance sheets as of December 31, 1996 and 1995..................................................
Consolidated statements of operations for the years ended December 31, 1996, 1995 and 1994..........................
Consolidated statements of stockholders' equity for years ended December 31, 1996, 1995 and 1994....................
Consolidated statements of cash flows for the years ended December 31, 1996, 1995 and 1994....................
Notes to consolidated financial statements................
(a)(2) Included with this report is the following consolidated financial statement schedule:
Schedule III - Real Estate and Accumulated Depreciation...
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(a)(3) Included with this report are the following exhibits:
--------------
(1) Incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-11 (File No. 33-71558).
(2) Incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed with the Commission on July 10, 1996.
(3) Incorporated by reference to Exhibit 3.2 of the Company's Current Report on Form 8-K filed with the Commission on July 10, 1996.
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(4) Incorporated herein by reference to the document filed under the same Exhibit number to the Company's Form 10-K filed with the Commission on April 16, 1996.
(5) Incorporated herein by reference to Exhibit 10.12 to the Company's Current Report on Form 8-K filed with the Commission on May 31, 1995.
(6) Incorporated herein by reference to Exhibit 10.13 to the Company's Current Report on Form 8-K filed with the Commission on May 31, 1995.
(7) Incorporated herein by reference to Exhibit 10.14 to the Company's Current Report on Form 8-K filed with the Commission on May 31, 1995.
(8) Incorporated herein by reference to Exhibit 10.15 to the Company's Current Report on Form 8-K filed with the Commission on May 31, 1995.
(9) Incorporated herein by reference to Exhibit 10.16 to the Company's Current Report on Form 8-K filed with the Commission on May 31, 1995.
(10)Incorporated herein by reference to Exhibit 10.17 to the Company's Current Report on Form 8-K filed with the Commission on May 31, 1995.
(11)Incorporated herein by reference to Exhibit 10.18 to the Company's Current Report on Form 8-K filed with the Commission on May 31, 1995.
(12)Incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on July 10, 1996.
(13)Incorporated herein by reference to Exhibit 10.23 to the Company's Form 10-K filed with the Commission on April 16, 1996.
(14)Incorporated herein by reference to Exhibit 10.24 to the Company's Form 10-K filed with the Commission on April 16, 1996.
(15)Incorporated herein by reference to Exhibit 10.25 to the Company's Form 10-K filed with the Commission on April 16, 1996.
(16)Incorporated herein by reference to Exhibit 10.26 to the Company's Form 10-K filed with the Commission on April 16, 1996.
(17)Incorporated herein by reference to Exhibit 2.1 to the Company's Form 8-K filed with the Commission on March 10, 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FACTORY STORES OF AMERICA, INC.
By /s/ C. CAMMACK MORTON C. Cammack Morton, President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on the 11th day of April, 1997.
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FAC REALTY, INC. AUDITED CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
Board of Directors and Stockholders FAC Realty, Inc.
We have audited the accompanying consolidated balance sheets of FAC Realty, Inc. and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FAC Realty, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information required to be set forth therein.
ERNST & YOUNG LLP
Raleigh, North Carolina January 31, 1997, except for Notes 10 and 12 as to which the date is March 27, 1997
FAC REALTY, INC. CONSOLIDATED BALANCE SHEETS
SEE ACCOMPANYING NOTES.
FAC REALTY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
SEE ACCOMPANYING NOTES.
FAC REALTY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
SEE ACCOMPANYING NOTES.
FAC REALTY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
SEE ACCOMPANYING NOTES.
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
FAC Realty, Inc. (the "Company"), formerly Factory Stores of America, Inc., was incorporated on March 31, 1993 as a self-administrated and self-managed real estate investment trust (REIT). The Company is principally engaged in the development, ownership, acquisition, and operation of factory outlet and community shopping centers. The Company's revenues are primarily derived under real estate leases with national, regional and local retailing companies.
The properties owned by the Company consist of: (1) 21 enclosed and 12 unenclosed factory outlet centers in 20 states aggregating approximately 4,600,000 square feet; (2) five community shopping centers located in the Raleigh, NC area (see Note 12); (3) two unenclosed factory outlet centers held for sale aggregating approximately 150,000 square feet; (4) one former factory outlet center which is being converted to commercial office use with approximately 150,000 square feet that is held for sale; and (5) approximately 181 acres of outparcel land located near or adjacent to certain of the Company's centers and is actively being marketed for lease or sale.
As the owner of real estate, the Company is subject to risks arising in connection with the underlying real estate, including defaults under or non-renewal of tenant leases, competition, inability to rent unleased space, failure to generate sufficient income to meet operating expenses, as well as debt service, capital expenditures and tenant improvements, environmental matters, financing availability and changes in real estate and zoning laws. The success of the Company also depends upon certain key personnel, the Company's ability to maintain its qualification as a REIT, compliance with the terms and conditions of the debt on its income properties and other debt instruments, and trends in the national and local economy, including income tax laws, governmental regulations and legislation and population trends.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, FSA Properties, Inc., which was formed on December 30, 1994 to hold the assets and liabilities of 18 of the Company's outlet centers in connection with the Company's $70 million bridge financing (see Note 2). As of December 31, 1996 and 1995, the consolidated financial statements also include the accounts of FSA Finance, Inc., a wholly owned subsidiary formed on May 22, 1995 in connection with a $95 million securitized debt offering (see Note 3). As of December 31, 1996, the consolidated financial statements also include the accounts of FAC Outparcels, Inc., a majority owned subsidiary formed on February 22, 1996 to hold certain outparcels which the Company is marketing for sale or lease. All significant intercompany balances have been eliminated in consolidation.
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
INCOME-PRODUCING PROPERTIES
Income-producing properties are recorded at cost less accumulated depreciation. Included in such costs are acquisition, development, construction, tenant improvements, interest incurred during construction, certain capitalized improvements and replacements and certain allocated overhead. Allocated overhead is computed primarily on the basis of time spent by certain departments in various operations and represents direct costs of the development department which meet the definition of "indirect costs" in Statement of Financial Accounting Standards No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects."
Leasing charges, including tenant construction allowances and direct costs incurred by the Company to obtain a lease, are deferred and amortized over the related leases or terms appropriate to the expenditure.
Depreciation is provided utilizing the straight-line method over the estimated useful life of 31.5 years for building and improvements, 15 years for land improvements and 5 to 10 years for equipment.
Certain improvements and replacements are capitalized when they extend the useful life, increase capacity, or improve the efficiency of the asset. All other repair and maintenance items are expensed as incurred.
Substantially all of the income-producing properties have been pledged to secure the Company's debt.
Properties under development include costs related to new development and expansions in process totaling approximately $2.5 million and $32.8 million at December 31, 1996 and 1995, respectively. The pre-construction stage of project development involves certain costs to secure land and zoning and complete other initial tasks which are essential to the development of the project. These costs are transferred to developments under construction when the pre-construction tasks are completed. The Company charges operations for the costs of unsuccessful development projects.
The Company adopted the Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to be Disposed Of" ("FAS 121") as of January 1, 1996. The pronouncement requires that certain long-lived assets be reviewed for potential impairment when circumstances indicate that the carrying amount of such assets may not be recoverable. Additionally, FAS 121 requires that certain long-lived assets held for disposition (see Note 13) be reported at the lower of the carrying amount or fair value less any selling costs.
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Properties held for sale, at their expected net realizable values, have been separately classified in the accompanying balance sheet at December 31, 1996. As a result of the Company's intent to sell three outlet center properties, the Company recognized a charge to 1996 earnings of $5.0 million and to 1995 earnings of $8.5 million to reduce the carrying amount of these centers to their estimated net realizable value.
INTEREST COSTS
Interest costs are capitalized related to income-producing properties under construction, to the extent such assets qualify for capitalization. Total interest capitalized was $2.0 million, $2.6 million and $1.1 million for the years ended December 31, 1996, 1995 and 1994, respectively. Interest expense includes amortization of deferred financing costs (see Note 3) and is net of miscellaneous interest income on cash and escrow deposit balances.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
RESTRICTED CASH
In connection with the sale of the $95 million securitized debt offering, the lender required a holdback of a portion of the loan proceeds to fund certain environmental and engineering work and to make certain lease related payments that may be required in connection with the renewal or termination of certain leases by a tenant at most of the factory outlet centers. Such holdback amounts to approximately $3.9 and $4.8 million at December 31, 1996 and 1995, respectively.
REVENUE RECOGNITION
The Company, as a lessor, has retained substantially all of the risks and benefits of ownership and accounts for its leases as operating leases. Minimum rental income is recognized on a straight-line basis over the term of the lease and unpaid rents are included in rents and other receivables from tenants in the accompanying balance sheets. Certain lease agreements contain provisions which provide for rents based on a percentage of sales that are recognized ratably on an estimated basis throughout the year. In addition, certain leases provide for additional rents based on a percentage of sales volume above a specified breakpoint and reimbursement of real estate taxes, insurance, advertising, utilities and certain common area maintenance (CAM) costs. These additional rents are reflected on the accrual basis. In lease agreements where the tenant is not required to reimburse the Company for real estate taxes, insurance and CAM costs, the Company has allocated a portion of the rental amount to tenant recoveries. For tenants who are not obligated to pay directly or reimburse the Company for utility costs related to their store, the Company has allocated a portion of their rental revenue to offset the utility expense.
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's principal financial instrument subject to potential concentration of credit risk is tenant accounts receivable which are unsecured. Although the tenants are primarily in the retail industry, the properties are geographically diverse. The Company's exposure to credit loss in the event that payment is not received for revenue recognized equals the outstanding accounts receivable balance. The Company provides an allowance for estimated uncollectible amounts.
ACCRUED EXPENSES
Due to potential environmental issues associated with the properties acquired by the Company and the properties adjacent to the Company's properties, the Company accrued for the potential remediation costs at the date of acquisition of the properties. At December 31, 1996 and 1995, accrued expenses include $500,000 for the potential remediation costs based on the Company's review of environmental assessments.
STOCK OPTIONS
In October 1995, FASB issued Statement No. 123, "Accounting for Stock-Based Compensation" ("FASB 123"). FASB 123 encourages companies to adopt the fair value method for expense recognition of employee stock options. FASB 123 also allows companies to continue to account for stock options and stock based awards using the intrinsic value method as outlined under Accounting Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and to make pro forma disclosures of net income and net income per share as if the fair value method had been applied. Currently, the Company uses APB 25 in accounting for its stock options and stock based awards and will continue to apply APB 25 for future stock options and stock based awards.
EARNINGS PER SHARE
Primary earnings per common share amounts are computed by dividing income less preferred dividends ($368,000 for the year ended December 31, 1996) by the weighted average number of common shares actually outstanding for the years ended December 31, 1996, 1995 and 1994 of 11,817,000, 11,814,000, and 11,811,000, respectively, which exclude unvested restricted shares. Under fully diluted earnings computation per share amounts would be based on income divided by the weighted average number of common shares as increased by the number of shares that would be outstanding assuming conversion of the Convertible Preferred Stock. Fully diluted earnings per share amounts are not presented because the effect of such inclusion would be to increase earnings per share. Shares issuable under employee stock options and the warrant agreements (see Note 5) are excluded from the weighted average number of shares on the assumption that their effect is not dilutive because the market price of the stock did not exceed the exercise price for the reporting period.
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company is taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with the tax year ending December 31, 1993. As a REIT, the Company generally is not subject to federal income tax. To maintain qualification as a REIT, the Company must distribute at least 95% of its REIT taxable income to its stockholders and meet certain other requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on its taxable income at regular corporate rates. The Company may also be subject to certain state and local taxes on its income and property and federal income and excise taxes on its undistributed taxable income.
DIVIDENDS
During 1996, 1995 and 1994, distributions were paid of $0.75, $2.52, and $1.89, respectively. The ordinary income, return of capital and long-term gain portions of such distributions for each year are indicated in the table below:
There were no accrued dividends as of December 31, 1996.
RECLASSIFICATIONS
Certain 1995 and 1994 financial statement amounts have been reclassified to conform with 1996 classifications. These reclassifications had no effect on net income or stockholders' equity as previously reported.
3. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets as of December 31 are summarized as follows (in thousands):
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DEFERRED CHARGES AND OTHER ASSETS (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs, including fees and costs incurred to obtain financing, are being amortized on a straight line basis over the terms of the respective agreements. Unamortized deferred financing costs are charged to expense when the associated debt is retired before the maturity date.
As described in Note 4, on April 30, 1996 the Company refinanced its existing credit line and in connection therewith the related deferred financing costs of $103,000 were written off as an extraordinary loss.
OTHER ASSETS
During 1993, as part of the VF acquisition (see Note 9), the Company acquired a favorable lease agreement for land and buildings which has been capitalized as an intangible asset. This asset is being amortized over the remaining life of the lease. The carrying value of the intangible asset, approximating $3.1 and $3.6 million at December 31, 1996 and 1995, respectively, is reviewed if the facts and circumstances suggest that it may be impaired. If such a review indicates that the carrying amount of the asset may not be recoverable, the Company will reduce the carrying value by the amount of the impairment.
4. DEBT ON INCOME PROPERTIES
Debt on income properties consists of the following at December 31 (in thousands):
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT ON INCOME PROPERTIES (CONTINUED)
On May 22, 1995, the Company closed a $95 million rated debt securitization (the "Mortgage Notes") by FSA Finance, Inc. The total offering of $95 million consisted of $58 million of Class A Notes rated "AA"; $20 million of Class B Notes rated "A"; and $17 million of Class C Notes rated "BBB". Interest on the Class A Notes, Class B Notes and Class C Notes is payable monthly in arrears at rates per annum equal to 7.42%, 7.78% and 8.31%, respectively. The Company used these proceeds to repay a $70 million bridge loan, applied $16 million to reduce the Company's existing revolving credit line, fund escrow reserves and applied the balance to pay certain expenses related to the issuance and sale of the Mortgage Notes. The Mortgage Notes are secured by a cross-collateralized mortgage which covers 18 factory outlet centers owned by FSA Properties, Inc.
Principal of the Class A Notes is paid monthly in accordance with an amortization schedule calculated based upon level debt service payments in respect of the Mortgage Notes, the weighted average interest rate on the Mortgage Notes (7.67%) and a 25-year amortization schedule. The remaining unpaid principal of the Mortgage Notes is scheduled to be paid as a balloon payment on June 1, 2002 (the "Scheduled Maturity Date"). Neither the Class B Notes nor the Class C Notes will receive scheduled note principal payments prior to the Scheduled Maturity Date. At the Scheduled Maturity Date the entire principal amount of each of the Class B Notes and the Class C Notes is scheduled to be paid as a balloon payment.
The notes are subject to Optional Redemption (as defined) in whole or in part on any payment date beginning on June 1, 1998. Any Optional Redemption occurring on or prior to December 1, 2001 is subject to the payment of a yield maintenance premium.
On April 30, 1996, the Company closed on a $75 million credit facility from Bank One, Dayton, The facility was used to refinance the Company's existing credit line and repay $5 million in short-term promissory notes. As a result, the Company expensed the related unamortized loan costs of $103,000 which has been classified as an extraordinary item in the accompanying consolidated statements of operations. In February 1997, the Company closed a $150 million line of credit facility with Nomura Asset Capital Corporation, replacing this $75 million credit facility (see Note 12).
Combined aggregate principal maturities of notes payable are as follows (in thousands):
1997 $ 76,353 1998 7,383 1999 7,383 2000 1,822 2001 1,964 Thereafter 78,790 -------------------- $ 173,695 ====================
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT ON INCOME PROPERTIES (CONTINUED)
The Company estimates that the fair value of notes payable approximates the carrying value based upon its effective current borrowing rate for debt with similar terms and remaining maturities. Disclosure about fair value of financial instruments is based upon information available to management as of December 31, 1996. Although management is not aware of any factors that would significantly affect the fair value of amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date.
5. CONVERTIBLE PREFERRED STOCK AND UNSECURED SENIOR NOTES
On April 2, 1996, the Company executed a Note Purchase Agreement and other related documents (collectively the "Agreements") with Gildea Management Company ("Gildea") and Blackacre Bridge Capital, L.L.C. ("Blackacre"), whereby Gildea and Blackacre agreed to purchase in a private placement up to $25.0 million of the Company's Exchangeable Notes (the "Exchangeable Notes") and $5.0 million of its Senior Notes, both of which were unsecured. On April 3, and 29, 1996, Exchangeable Notes with an aggregate principal amount of $10.0 million each were sold pursuant to the Agreements.
Holders of the Exchangeable Notes, subject to certain conditions, were required to exchange them for shares of the Company's Series A Convertible Preferred Stock (the "Series A Preferred") at the rate of one share of Series A Preferred for each $25 in principal amount of Exchangeable Notes, upon stockholder approval of necessary amendments to the Company's Certificate of Incorporation and authorization of the Series A Preferred. Each share of Series A Preferred is convertible into shares of the Company's Common Stock at a conversion price equal to the lower of $9 per share or the 30-day average price of the Company's Common Stock on the NYSE following an announcement by the Company of the initial funding, subject to certain limitations. Dividends on the Series A Preferred will be paid quarterly on each Common Stock dividend payment date in an amount equal to the dividends that would have been paid on the Common Stock then issuable upon conversion of the Series A Preferred.
On August 1, 1996, the Company issued holders of the Exchangeable Notes 800,000 shares of the Company's Series A Preferred Stock in exchange for notes with an aggregate principal amount of $20 million (net of issue cost of $838,000). The 800,000 shares of the Series A Preferred Stock are convertible, at the option of the holders, into an aggregate of 2,222,222 shares of the Company's Common Stock.
On April 29, 1996, $5 million of the Senior Notes were placed at 97% of their face amount. On November 12, 1996, $2.5 million of the Senior Notes were place at 100% of their face amount. Under the Agreements, these notes mature on the second anniversary of the initial funding and bear interest, payable quarterly, at an annual rate of 11% during the first year and 13% thereafter until maturity. The resulting discount ($150,000) on the Senior Notes is being amortized to interest expense over the term of the notes. In March 1997, the Company repaid the Senior Notes at their face amounts.
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. CONVERTIBLE PREFERRED STOCK AND UNSECURED SENIOR NOTES (CONTINUED)
In connection with the issuance of the Exchangeable Notes and the initial $5 million of Senior Notes, on April 3, 1996 the Company issued the holder detachable warrants for the purchase of 200,000 shares of Common Stock of the Company. Each warrant entitles the holder, subject to certain conditions, to purchase on or before April 3, 2003 one share of Common Stock of the Company at a price equal to $9.50 per share, subject to adjustment under certain conditions. The warrants were valued at an aggregate value of $6,000 at the issuance date. The $2.5 million of Senior Notes have detachable warrants for the purchase of 100,000 shares of Common Stock of the Company that were issued with terms and conditions similar to the existing Senior Notes, except that each warrant entitles the holder to purchase one share of Common Stock at a price equal to $8.375 per share. These warrants were valued at an aggregate value of $3,000 at the issuance date.
6. LEASES
The Company leases certain signage and equipment under capital lease agreements which expire beginning in 1998 through 2007. Capital leases entered into during the years ended December 31, 1996, 1995 and 1994 totaled approximately $214,800, $168,000, and $147,000, respectively. The signage and equipment are included in equipment and total capitalized cost is approximately $1,324,000 and $1,109,000, with related accumulated depreciation of $210,000 and $131,000 as of December 31, 1996 and 1995, respectively. Amortization of assets acquired through capital leases is included with depreciation and amortization expense in the accompanying statement of operations.
The Company leased an airplane under an operating lease beginning in January 1994 through December 1995. Total lease payments under this lease were approximately $659,000 and $133,000 for the years ended December 31, 1995 and 1994. As of December 31, 1995, the lease was canceled at a cost of approximately $180,000.
Aggregate future minimum lease payments under capital and operating leases having remaining terms in excess of one year as of December 31, 1996, are as follows (in thousands):
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LEASE AGREEMENTS
The Company is the lessor of retail stores under operating leases with initial terms that expire from 1997 to 2006. Many leases are renewable for five years at the lessee's option.
Expected future minimum rents to be received from tenants, excluding renewal options and contingent rentals, under operating leases in effect at December 31, 1996, are as follows (in thousands):
1997 $ 34,206 1998 30,050 1999 25,623 2000 19,821 2001 13,774 Thereafter 34,206 -------------------- $ 157,680 ====================
For the years ended December 31, 1996, 1995 and 1994 rental revenue from a single major tenant, VF Corporation, comprised approximately 14%, 14% and 15%, respectively, of total rental revenue.
8. STOCK AND BONUS INCENTIVE PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
EMPLOYEE STOCK OPTION PLAN
The Company established an Employee Stock Incentive Plan (the "Stock Incentive Plan") in 1993 for the purpose of attracting and retaining the Company's executive officers and other employees. A maximum of 1,100,000 shares of common stock are reserved for issuance under the Stock Incentive Plan. The Stock Incentive Plan allows for the grant of "incentive" and "nonqualified" options (within the meaning of the Internal Revenue Code) that are exercisable at a price equal to the closing price of the Common Stock on the New York Stock Exchange on the trading day immediately preceding the date of grant.
The options generally are exercisable on a pro rata basis over a period of four to five years from the grant date. As of December 31, 1996 and 1995, options outstanding were 1,047,500 shares and 432,500 shares, respectively, of which 512,820 shares and 317,080 shares, respectively, were exercisable. As of December 31, 1996 and 1995, no stock options had been exercised.
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK AND BONUS INCENTIVE PLANS (CONTINUED)
In connection with the severance arrangements the Company entered into with certain former executive officers in 1995 (see Note 11) who held options to purchase a total of 204,800 shares, the vesting of options for 138,080 shares was accelerated. The remaining 66,720 shares had vested prior to severance date.
Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing a model with the following weighted average assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.99% and 7.74%, dividend yields of 0% and 0%, volatility factors of 0.104 and 0.104; and a weighted-average expected life of the option of 10 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earning per share information):
Because Statement 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1997.
A summary of the Company's stock option activity, and related information for the years ended December 31 follows:
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK AND BONUS INCENTIVE PLANS (CONTINUED)
RESTRICTED STOCK PLAN
The Company established the FAC Realty, Inc. 1996 Restricted Stock Plan (the "Restricted Plan"), reserving 350,000 shares of Common Stock for issuance thereunder, to give the Executive Compensation Committee ("Committee") more flexibility in designing equity-based compensation arrangements to attract, motivate and retain executives and other key employees. Such equity-based compensation is designed to more closely align the financial interests of management with that of the shareholders. Pursuant to recent action by the Board of Directors, the Company has reserved an additional 150,000 shares of Common Stock for issuance under the Restricted Plan. The Restricted Plan, which is administered by the Committee, provides for the grant of restricted stock awards to any new or existing employee of the Company, including executive officers. Awards under the Restricted Plan typically will be subject to various vesting schedules ranging from one to ten years from the date of grant. The Restricted Plan permits the Committee to customize the vesting schedule by deferring the commencement date, lengthening the vesting period and/or conditioning vesting upon the achievement of specified performance goals.
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK AND BONUS INCENTIVE PLANS (CONTINUED)
In 1996, as part of employment agreements or incentives, the Company granted and issued 42,592 shares of restricted stock to certain officers and other key employees at no purchase cost to the employees. These shares will vest in three equal annual installments commencing March 1, 1997. Subsequent to December 31, 1996, the Company granted 60,000 shares of restricted stock to the officers of the Company in lieu of a cash bonus for 1996 which are subject to a three year cliff vesting and represent 150% of an equivalent cash bonus of an average of 20% of the salaries for the officers. The recipients of the restricted stock are entitled to receive dividends on both the vested and unvested shares.
The Company's Independent Directors, upon the recommendation of the Executive Compensation Committee, which in turn received recommendations from an executive compensation consulting firm, have approved a long-term incentive program for two senior executive officers. Pursuant to such program, 270,000 shares of restricted stock will be awarded to the senior executives officers replacing the 180,000 shares awarded in 1996. These shares will vest in equal annual installments over ten years commencing March 1, 1997, were awarded. The senior executive officers will be entitled to receive dividends on only the vested portion of these specific restricted shares. They will be entitled to receive dividends on all other vested and unvested restricted stock issued to them as other compensation, including their portion of the restricted stock issued in lieu of cash bonuses as noted above. In addition, 90,000 shares of restricted stock previously granted to the former chairman and chief executive officer of the Company were cancelled upon his resignation.
The issuance of restricted shares in 1996, net of the cancelled shares, has been reflected in the Company's financial statements as an increase to Common Stock, and Additional Paid in Capital of $3,000 and $2,435,000, respectively, with an offsetting amount in the stockholder's equity section labeled deferred compensation. The deferred compensation expense will be recognized as compensation expense ratably over the vesting periods.
DIRECTORS' STOCK AWARD PLAN
On May 23, 1995, the Board of Directors adopted, with stockholder approval, the 1995 Directors' Stock Award Plan (the "Directors' Plan") and reserved 25,000 shares of Common Stock for awards to be granted under the Directors' Plan. Under the Directors' Plan, each Outside Director who continues as a director as of the adjournment of each quarterly meeting of the Board, beginning with the first quarterly meeting after May 1, 1995, will automatically receive an award of shares of Common Stock equal in value to, and in lieu of, one-half of the quarterly installment of the retainer fee. The number of shares subject to each award will be based on the closing price of the Common Stock on the New York Stock Exchange on the trading date immediately preceding the date of the relevant quarterly meeting. The awards will be fully vested on the date of grant, but an Outside Director will not be permitted to sell or otherwise dispose of the shares until six months after the grant date. During 1996 and 1995, 2,197 and 924 shares were issued in connection with this plan.
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK AND BONUS INCENTIVE PLANS (CONTINUED)
OTHER PLANS
The Company has adopted a Bonus Incentive Plan for senior management. Under the terms of the plan, senior management employees can earn bonuses up to 75% of their base salary based on the achievement of specific individual and Company performance goals. Bonuses were paid in 1996 with restricted stock as noted above and bonuses of $176,900 were paid in 1995. There were no bonuses earned for the year ended December 31, 1994.
On January 1, 1994, the Company adopted a 401(k) Savings & Retirement Plan and Trust (the "Plan"), a tax qualified defined contribution plan. The Plan covers substantially all employees of the Company who have attained 21 years of age and completed at least one year of service. Eligible employees may elect to contribute 1% to 15% of their compensation to the Plan. The Company may elect to match a certain percentage of each employees contribution and may also elect to make a profit sharing contribution. For the years ended December 31, 1996, 1995 and 1994, the Company contributed $64,084, $59,710, and $44,140, respectively, as a matching contribution and there was no profit sharing contribution made by the Company. The Plan was replaced effective January 1, 1997 by The FAC Realty, Inc. 401(k) and Profit Sharing Plan, which is substantially similar to the Plan, as described above.
9. COMMITMENTS AND CONTINGENCIES
Under the terms of the purchase agreement to acquire the VF Properties, entered into in 1993, the Company committed to expand certain of these properties by an aggregate of at least 320,000 square feet in the 36 months following the acquisition. Through December 31, 1996, the Company completed eight expansions totaling approximately 303,000 square feet. The original commitment contemplated the completion of two more expansions. Under the terms of the agreement, at completion of an expansion and upon payment to VF Corporation of a tenant allowance, VF Corporation would renew its lease for its original term as of that date. On December 10, 1996, the Company and VF Factory Outlet, Inc. ("VFFO"), a operating subsidiary of VF Corporation, entered into an Amendment and Waiver Agreement ("Amendment Agreement") whereby the requirement to complete the final two expansions was waived. Under the terms of the Amendment Agreement, in lieu of the requirement to expand the additional two centers, the Company remained obligated to pay a tenant allowance for the two centers and will provide for VFFO's benefit nine additional billboards at three center locations selected by VFFO for at least three years. Additionally, the Amendment Agreement requires that the Company continue to manage and market an adjacent factory outlet center at its Sulphur Springs, TX center as a single property. The Company entered into a third party management agreement with this outlet center in June 1996. Pursuant to the Amendment Agreement, the obligation, under the terms of the original commitment, to pay $9.5 million to VF Corporation in the event all of the expansions were not completed as planned, has been extinguished. As of December 31, 1996, the Company's other unsecured notes payable included $2,016,000 due to VFFO for tenant allowances which were subsequently paid with the Nomura credit facility (see Note 12).
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
During 1996 the Company completed construction of a 288,000 square foot outlet center in Branson, Missouri and expansions of approximately 158,000 square feet at Story City, Iowa, Nebraska City, Nebraska, Smithfield, North Carolina, and Tupelo, Mississippi. The anticipated cost of these projects is $42.5 million of which $40.7 million has been expended as of December 31, 1996 and has been reclassified from the properties under development category for financial statements purposes. The remaining $1.8 million in anticipated costs represent estimated tenant buildouts and allowances. Additionally, the Company is currently in the pre-development and marketing stage for a property located in Lake Carmel, New York. If the appropriate tenant interest is obtained and the appropriate agreements, permits and approvals have been received, the Company intends to commence construction in the fall of 1997.
On July 19, 1996, a purported class action lawsuit was filed in the United States District Court for the Eastern District of North Carolina against the Company, its former chairman and chief executive officer, J. Dixon Fleming, Jr., and a former president of the Company, David A. Hodson. The complaint seeks certification of a class consisting of all persons (with certain exclusions) who purchased common stock of the Company between December 16, 1993 and April 17, 1996, inclusive (the "Class Period"). The complaint alleges that, during the Class Period, defendants made certain false or misleading statements to the public concerning (1) earnings and funds from operations; (2) the Company's ability to maintain dividends at prior levels; (3) the alleged maintenance of dividends through borrowings rather than funds from operations; (4) the Company's ability to close a proposed acquisition; (5) the alleged purchase of certain properties from affiliates of the individual defendants at inflated prices; and (6) alleged improper accounting practices.
On October 30, 1996, a second purported class action lawsuit was filed in the United States District Court for the Eastern District of North Carolina against the Company and Messrs. Fleming and Hodson, containing factual allegations and legal claims similar to those asserted in the prior purported class action. The plaintiffs in both actions seek unspecified monetary damages. The cases have been consolidated and the Company has filed motions to dismiss both lawsuits, which motions are currently pending.
The Company believes that it and the named former officers have substantial defenses to the plaintiffs' claims and the Company intends to vigorously defend the actions. However, no assurance can be given as to the ultimate outcome of the litigation.
In addition, the Company is a party to certain legal proceedings relating to its ownership, management and leasing of the properties, arising in the ordinary course of business.
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. OTHER RELATED PARTY TRANSACTIONS
During 1993, the Company acquired a 19 acre tract of land in a non-monetary transaction from a partnership whose partners include two former executive officers of the Company. The recorded value of the land was $748,000. In return for the land, the Company assumed certain outstanding debt and the remaining purchase price was settled by reducing amounts owed to the Company by a tenant whose majority owners were also partners in the partnership. A review of this and other transactions resulted in J. Dixon Fleming, Jr., the Company's former Chairman and Chief Executive Officer, agreeing to permit the Company to satisfy certain asset valuation issues by offsetting amounts otherwise owed to Mr. Fleming pursuant to his employment agreement (see Note 12) or by the acceptance from Mr. Fleming of some other cash or value equivalent. The Company has recently entered into an agreement with Mr. Fleming to sell to him the 19 acre land tract for the sum of $750,000 which would substantially satisfy the asset valuation issues.
In 1994, the Company's Board of Directors approved acquisition of certain land adjacent to one of the Company's existing outlet centers for potential expansion of that center. The cost of the land acquisition was $400,000. The seller of the land was a partnership whose partners include former executive officers of the Company.
On May 5, 1995 the company purchased three parcels of land near its Smithfield, North Carolina Factory outlet center totaling 4.94 acres for $735,000 from two partnerships, of which former executive officers and their affiliates are general partners. The parcels were used as part of the expansion of the Smithfield center.
11. TERMINATED ACQUISITION
On August 25, 1995, the Company signed definitive agreements to acquire the factory outlet centers owned by The Public Employees Retirement System of Ohio (OPERS) and the management and business operations of the Charter Oak Group Ltd., a subsidiary of Rothschild Realty, Inc., ("RRI"), subject to certain conditions. On December 7, 1995, the Company reported that RRI had terminated the agreements under which the Company would have acquired the properties owned by OPERS and the management and business operations of the Charter Oak Group, Ltd.
As a result of the Company's pursuit of the acquisition, the Company incurred direct costs approximating $4.5 million related to the performance of due diligence. In addition, in contemplation of a successful consummation of the acquisition transaction, the Company entered into various severance arrangements aggregating approximately $2.0 million with three former executive officers and certain other employees of the Company in 1995. The Company has recorded the $6.5 million charge as a component of general and administrative expense in the 1995 financial statements.
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. TERMINATED ACQUISITION (CONTINUED)
In 1996, RRI for itself and on behalf of OPERS made a demand for payment with respect to a $5.0 million promissory note (the "Note") issued by the Company in connection with the Company's proposed purchase of the factory outlet centers and other properties owned by OPERS. The Note was payable only upon the occurrence of certain conditions relating to termination of the definitive acquisition agreements, some of which conditions the Company asserts were not satisfied. The Company's management has unsuccessfully pursued negotiations with RRI to settle this claim. To date, these discussions have focused on payment by the Company of a portion of the actual costs incurred by RRI, OPERS and certain affiliates in connection with the transaction. RRI has represented these costs to be approximately $1.3 million. RRI has filed an arbitration action to settle the dispute. While no assurance can be given as to the outcome of any such arbitration, the Company believes it has meritorious defenses to the payment of the Note.
12. SUBSEQUENT EVENTS
The Company obtained a $150,000,000 credit facility with Nomura Asset Capital Corporation on February 19, 1997. The credit facility with Nomura is secured by 17 of the Company's centers plus an assignment of excess cash flow from the properties currently secured under the $95 million rated debt securitization (see Note 4). The credit facility is for a term of 2 years with a 1 year renewal option and bears interest at the rate of 1 month LIBOR (London Interbank Offered Rate) plus 2.25%. The proceeds from the credit facility will be used to fund acquisitions, expansions of existing centers, repay indebtedness, and fund operating activities, including the repurchase of the Company's stock. The indebtedness repaid included $75,000,000 of debt on income properties, $7,420,000 of unsecured senior notes and $2,016,000 of other unsecured notes outstanding at December 31, 1996 The new credit facility contains financial covenants relating to debt to total asset value and net operating income to debt service coverage.
On March 27, 1997, the Company purchased five community centers located in the Raleigh, North Carolina area for $32.3 million. Pro forma results of operations for the years ended December 31, 1996 and 1995 are set forth below which assume the acquisition of the five properties aggregating 605,668 square feet of retail and office space had been completed as of January 1, 1995. The pro forma condensed statements of operations are not necessarily indicative of what actual results of operations of the Company would have been assuming such transaction had been completed as of January 1, 1995, nor does it purport to represent results of operations of future periods (in thousands, except for per share data).
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS (CONTINUED)
Subsequent to December 31, 1996, J. Dixon Fleming, Jr. resigned as Chairman and Chief Executive Officer of the Company. Pursuant to his three year employment agreement entered into on December 15, 1995, he is entitled to a lump sum distribution of the value of the remaining term of the agreement. The Company has accrued $767,000 as an additional general and administrative expense for 1996 representing the remaining value of his contract. - - - - 13. ADJUSTMENT TO CARRYING VALUE OF ASSETS
As part of the Company's ongoing strategic evaluation of its portfolio of assets, the Directors of the Company authorized management in 1995 to pursue the sale of certain properties that currently are not fully consistent with or essential to the Company's long-term strategies. Under generally accepted accounting principles ("GAAP"), assets held for the long-term production of income are recorded at their historical cost, adjusted for depreciation. However, when a decision is made to dispose of certain assets, the carrying value of those assets is computed using fair value less costs to sell.
Accordingly, in the fourth quarter of 1996 and 1995, the Company recorded a $5.0 million and $8.5 million adjustment, respectively, to the carrying value of the assets held for sale as required under GAAP. This non-cash adjustment was charged to operations and represents the difference between the net realizable value and net book value of that asset. Under GAAP, when a decision is made to dispose of several discrete assets, the anticipated loss on disposal of one asset cannot be offset by the anticipated gains on the others. Any gains are deferred until realized, while estimated losses are recorded currently as an adjustment to the carrying value.
FAC REALTY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. ADJUSTMENT TO CARRYING VALUE OF ASSETS (CONTINUED)
After recording the $5.0 million and $8.5 million valuation adjustment, the net carrying value of assets currently being marketed for sale at December 31, 1996 and 1995 are $11.4 million and $16.6 million, respectively. There is also $15.8 million of debt associated with these assets held for sale. For the year ended December 31, 1996, these properties contributed approximately $2.1 million of revenue and incurred a loss of $1.0 million after deducting related interest expense on the debt associated with the properties. For the year ended December 31, 1995 these properties contributed approximately $3.0 million of revenue and net loss of $0.5 million after deducting related interest expense.
The Company has begun the process of marketing these properties and no sales agreements have been completed to date. Management plans to evaluate all properties on a regular basis in accordance with its strategy for growth and in the future may identify other properties for disposition or may decide to defer the pending disposition of those assets now held for sale.
14. QUARTERLY INFORMATION
Selected quarterly financial data for the four quarters in 1996 and 1995 are as follows (in thousands, except per share data):
FAC Realty, Inc.
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1996
- - - ------------------------------------------------ Life on Which Depreciation in Latest Income Date of Date Statements if Construction Acquired Computed (1) - - - ----------------------------------------------- Boaz, AL 1993 31.5 / 5 - - - ----------------------------------------------- Casa 1994 31.5 / 5 Grande, AZ - - - ----------------------------------------------- Mesa, AZ 1993 31.5 / 5 - - - ----------------------------------------------- Tucson, 1993 31.5 / 5 AZ - - - ----------------------------------------------- Lathrop, 1994 31.5 / 5 CA - - - ----------------------------------------------- Vacaville, 1993 31.5 / 5 CA - - - ----------------------------------------------- Graceville, 1993 31.5 / 5 FL - - - ----------------------------------------------- Lake 1993 31.5 / 5 Park, GA - - - ----------------------------------------------- W. 1993 31.5 / 5 Frankfort, IL - - - ----------------------------------------------- Story 1993 31.5 / 5 City, IA - - - ----------------------------------------------- Carrollton, 1993 31.5 / 5 KY - - - ----------------------------------------------- Georgetown, 1993 31.5 / 5 KY - - - ----------------------------------------------- Hanson, 1993 31.5 / 5 KY - - - ----------------------------------------------- Arcadia, 1993 31.5 / 5 LA - - - ----------------------------------------------- Iowa, LA 1993 31.5 / 5 - - - ----------------------------------------------- Kittery, 1993 31.5 / 5 ME - - - ----------------------------------------------- Branson, 1995 31.5 / 5 MO - - - ----------------------------------------------- Lebanon, 1993 31.5 / 5 MO - - - ----------------------------------------------- Tupelo, 1993 31.5 / 5 MS - - - ----------------------------------------------- Nebraska 1993 31.5 / 5 City, NE - - - ----------------------------------------------- Las 1993 31.5 / 5 Vegas, NV - - - ----------------------------------------------- Conway, 1993 31.5 / 5 NH - - - ----------------------------------------------- Lake 1993 31.5 / 5 George, NY - - - ----------------------------------------------- Smithfield, 1993 31.5 / 5 NC - - - ----------------------------------------------- Crossville, 1993 31.5 / 5 TN - - - ----------------------------------------------- Nashville, 1993 31.5 / 5 TN - - - ----------------------------------------------- Tri-Cities, 1993 31.5 / 5 TN - - - ----------------------------------------------- Union 1993 31.5 / 5 City, TN - - - ----------------------------------------------- Corsicana, 1993 31.5 / 5 TX - - - ----------------------------------------------- Hempstead, 1993 31.5 / 5 TX - - - ----------------------------------------------- LaMarque, 1994 31.5 / 5 TX - - - ----------------------------------------------- Livingston, 1993 31.5 / 5 TX - - - ----------------------------------------------- Mineral 1993 31.5 / 5 Wells, TX - - - ----------------------------------------------- Sulphur 1993 31.5 / 5 Springs, TX - - - ----------------------------------------------- Draper, 1993 31.5 / 5 UT - - - ----------------------------------------------- North 1993 31.5 / 5 Bend, WA - - - -----------------------------------------------
(1) Buildings and improvements are depreciated based on a 15 - 31.5 year life. Tenant improvements are depreciated over the estimated terms of the leases, which range from 5 - 10 years.
FAC Realty, Inc.
Schedule III - Real Estate and Accumulated Depreciation (continued)
December 31, 1996
The changes in total real estate for years ended December 31, 1996, 1995 and 1994 are as follows:
The changes in accumulated depreciation for years ended December 31, 1996, 1995 and 1994 are as follows: