FORM 10-K/A
Securities and Exchange Commission
Washington, D.C. 20549
(X) Annual Report Pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File Number 1-11998
FAC REALTY TRUST, INC.
(Exact name of Registrant as specified in its charter)
Maryland 56-1819372
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11000 Regency Parkway
Third Floor, East Tower
Cary, North Carolina 27511
(Address of Principal Executive Offices) (Zip Code)
(919) 462-8787
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 31, 1998, was approximately $115.5 million.
As of March 23, 1998, there were 14,275,820 shares of the Registrant's Common
Stock, $.01 par value, outstanding.
Documents Incorporated by Reference
None.
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FAC Realty Trust, Inc.
Index to Form 10-K
For the Year Ended December 31, 1997
Page
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PART I
Item 1 - Business 3
Item 2 - Properties 13
Item 3 - Legal Proceedings 23
Item 4 - Submission of Matters to a Vote of
Security Holders 24
PART II
Item 5 - Market for the Registrant's Common Equity
and Related Stockholder Matters 25
Item 6 - Selected Financial Data 25
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation 28
Item 8 - Financial Statements and Supplementary
Data 44
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 44
PART III
Item 10 - Directors and Executive Officers of
the Registrant 45
Item 11 - Executive Compensation 47
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 55
Item 13 - Certain Relationships and Related
Transactions 56
PART IV
Item 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 57
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PART I
Item 1 - Business
General
FAC Realty Trust, Inc. (the "Company"), is a self-administered and
self-managed real estate investment trust ("REIT"). The Company is vertically
integrated, providing acquisition, development, construction, leasing, marketing
and asset management to community and outlet center properties. As of December
31, 1997, the Company owned and operated 28 community shopping centers in 15
states aggregated 3.1 million square feet of gross leasable area ("GLA"), 10
outlet centers in 9 states aggregating approximately 2.1 million square feet;
two outlet centers aggregating approximately 0.1 million square feet and one
former outlet center which has been converted to commercial office use with
approximately 0.2 million square feet that are held for sale; and approximately
182 acres of outparcel land located near or adjacent to certain of the Company's
centers. The Properties are tenanted primarily by large widely recognized
retailers and/or manufacturers of traditional brand-name merchandise such as
Winn Dixie, Food Lion, K Mart, 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), 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 outlet
centers from VF Corporation (the "VF Properties") totaling approximately 1.7
million square feet. In December 1993, the Company used the proceeds of a
secondary public offering to purchase six additional outlet centers totaling
approximately 0.9 million square feet from entities and individuals constituting
the Willey Creek Group, at that time one of the largest private owners and
operators of outlet centers in the country. In addition, in June 1994, the
Company purchased three additional properties totaling approximately 0.5 million
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.
Change of Domicile and UPREIT Conversion
On December 17, 1997, following shareholder approval, the Company changed
its domicile from the State of Delaware to the State of Maryland. The
reincorporation was accomplished through the merger of FAC Realty, Inc. into its
Maryland subsidiary FAC Realty Trust, Inc., (the "Company"). Following the
reincorporation, on December 18, 1997, the Company reorganized as an umbrella
partnership real estate investment trust (an "UPREIT"). The Company then
contributed to FAC Properties, L.P., a Delaware limited partnership (the
"Operating Partnership") substantially all of its assets and liabilities, except
for legal title to 18 properties, which remains in a wholly owned subsidiary of
the Company. In exchange for the Company's assets, the Company received limited
partnership interest ("Units") in the Operating Partnership in an amount and
designation that corresponded to the number and designation of outstanding
shares of capital stock of the Company at the time. The Company is the sole
general partner of the Operating Partnership. As additional limited partners are
admitted to the Operating Partnership in exchange for the contribution of
properties, the Company's percentage ownership in the Operating Partnership will
decline. As the Company issues additional shares of capital stock, it will
contribute the proceeds for that capital stock to the Operating Partnership in
exchange for a number of Units equal to the number of shares that the Company
issues. The Company conducts substantially all of its business and owns
substantially all of its assets (either directly or through subsidiaries)
through the Operating Partnership such that a Unit is economically equivalent to
a share of the Company's common stock.
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The purpose of reincorporating in Maryland and of becoming an UPREIT was as
follows:
o The Company will realize a cost savings in annual franchise tax payments of
approximately $150,000 by changing its state of incorporation from Delaware
to Maryland
o By adopting an UPREIT structure, the Company will realize annual cost
savings of approximately $188,000 beginning in 1998 related to state
franchise tax payments on its assets located in certain states; and
o An UPREIT may allow the Company to offer Units in the Operating Partnership
in exchange for ownership interests from tax-motivated sellers. Under
certain circumstances, the exchange of Units for a seller's ownership
interest will enable the Operating Partnership to acquire assets while
allowing the seller to defer the tax liability associated with the sale of
such assets. Effectively, this allows the Company to use Units instead of
sock to acquire properties, which provide an advantage over non-UPREIT
entities.
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.
Acquisitions and Significant Transactions
North Hills Portfolio
In March, 1997, the Company purchased five community shopping centers
located in the Raleigh, North Carolina area for $32.4 million from an unrelated
third party. The centers total approximately 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. As a result of the acquisition, the Company ended 1997 with 41
shopping centers containing an aggregate of approximately 5.5 million square
feet of GLA.
Lazard Freres Transaction
On February 24, 1998, Prometheus Southeast Retail, LLC ("PSR"), a real
estate investment affiliate of Lazard Freres Real Estate Investors, LLC,
entered into a definitive agreement (the "Stock Purchase Agreement") with the
Company to make a $200 million strategic investment in the Company (the
"Transaction"). PSR has committed to purchase $200 million in newly issued
common shares of the Company at a purchase price of $9.50 per share. The
investment can be made in stages, at the Company's option, through March 30,
2000 allowing the Company to obtain capital as needed to fund its future
acquisition and development plans as well as retire debt. Upon completion of
funding, PSR will own an equity interest in the Company of approximately 60%, on
a diluted basis, not including any further issuance of Operating Partnership
Units for transactions under contract or transactions into which the Company may
enter in the future.
As part of the Transaction, three representatives of Lazard will be
nominated to the Company's Board of Directors, which will have a total number of
nine directors.
On March 23, 1998, the Company issued 2,350,000 shares of its common stock
to PSR for a total consideration of $22.3 million (the "Initial Purchase") as
part of the First Closing. In the event that the Second Closing does not occur
by September 30, 1998 or the Stock Purchase Agreement is terminated prior to the
Second Closing (other than as a result of PSR's material breach of the Stock
Purchase Agreement), PSR has an option under the Stock Purchase Agreement to
require that the Company repurchase the shares of Common Stock acquired in the
Initial Purchase at a price equal to the purchase price thereof, together with
any accrued dividends (the "Put Option"). The Put Option may also be exercised
at any time within two months after the earlier to occur of the date that the
Company fails to receive stockholder approval of the Transaction, the date the
Stock Purchase Agreement is terminated prior to the Second Closing and August
31, 1998. The Company does not have the right to require PSR to exercise the Put
Option. Therefore, in the event that stockholder approval of the Transaction is
not obtained and PSR does not exercise the Put Option within two months, the
shares of Common Stock issued to PSR in the Initial Purchase will remain
outstanding and the Put Option will expire.
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If the stockholders approve the Transaction, PSR would have the right,
pursuant to a Contingent Value Right Agreement, to receive on January 1, 2004
payment in cash or stock of an aggregate amount equal to the lesser of (a) (i)
21,052,632 shares multiplied by $19 per share ($400 million) less (ii) the
dividends paid to PSR through January 1, 2004 and less (iii) the fair market
value of the shares purchased and (b) 4,500,000 multiplied by the fair market
value on such date.
Whether or not the Transaction is fully consummated, the Company will
reimburse PSR for its expenses in connection with the Transaction, including
expenses of monitoring the Company and of performing its duties under the
Transaction Documents. These expenses and Transaction expenses incurred by the
Company are estimated to aggregate approximately $3.3 million, exclusive of a
claim by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") of a
"success based" advisory fee. The Company believes that DLJ, which rendered a
fairness opinion to the Company, but was not requested to perform any other
services in connection with the Transaction, is not entitled to any additional
fees or consideration. DLJ, however, has notified the Company that it believes
it is entitled to additional "success based" advisory fees under the terms of
its engagement letter with the Company dated May 23, 1997. As of the date
hereof, there has been no resolution of the disagreement.
Provided that PSR is not in material default under the Stock Purchase
Agreement, has not breached any of its representations and warranties in any
material respect and has satisfied in all material respects its covenants
relating to the Initial Purchase, the Company will pay PSR a break-up fee of
$2,250,000 (the "Break-up Fee") in the event that the Stock Purchase Agreement
is terminated any time prior to the Second Closing. The Break-up Fee, therefore,
will be payable to PSR if the stockholders do not approve the Transaction. In
addition, in the event that a competing transaction is entered into by the
Company on any date on or prior to the one-year anniversary of the date that the
Stock Purchase Agreement is terminated, the Company will pay PSR an additional
$3,000,000 (the "Topping Fee").
Notwithstanding the foregoing, if a Topping Fee is payable to PSR and PSR
profits on the sale of the shares purchased in the Initial Purchase in
connection with a competing transaction, then PSR must pay the Company the
amount by which such profit, the Break-up Fee and the Topping Fee exceed
$7,750,000.
Each of the Company's and PSR's obligations to effect the Second Closing
and the Subsequent Closings are subject to various mutual and unilateral
conditions, including, without limitation, the following: (i) stockholder
approval of the Transaction; (ii) the continued qualification of the Company as
a REIT for federal income tax purposes; (iii) the receipt of an opinion of
counsel to the effect that the Company is a "domestically controlled" REIT; (iv)
the continuing correctness of the representations and warranties in the Stock
Purchase Agreement, (v) the receipt of any consents necessary for the
Transaction, and (vi) various other customary conditions. In addition, PSR is
not obligated to fund more than $100 million of the Transaction unless a
significant portion of the Konover & Associates South transaction, as described
below, is consummated.
Konover & Associates South Transaction
On February 24, 1998, the Company entered into definitive agreements
with affiliates of Konover & Associates South, a privately held real estate
development firm based in Boca Raton, Florida, to acquire 11 community shopping
centers totaling approximately 2.0 million square feet and valued at nearly $100
million. The purchase equates to approximately $24 million in equity, consisting
of the issuance of Units, at $9.50 per Unit, and/or cash, plus the assumption of
approximately $76 million in debt. At closing, $17 million of the equity will be
paid in the form of Units or cash. The remaining $7 million will be paid in cash
over a three-year period with interest at 7.75% per annum. In addition, the
Company will issue 200,000 warrants to Mr. Simon Konover. One hundred thousand
of the warrants have an exercise price of $9.50 per share, and the remaining
100,000 warrants have an exercise price of $12.50 per share. The warrants vest
in 20% increments over a five-year period and may be subject to forfeiture upon
the occurrence of certain events.
As part of the transaction, the Company intends to operate under the name
"Konover Property Trust". The Company will remain listed on the New York Stock
Exchange and intends to change its ticker symbol from FAC to KPT, pending formal
approval by the shareholders in July, 1998. The Company will continue to operate
the Konover & Associates South office in Boca Raton, Florida due to its
strategic location in the Southeast.
Simon Konover, founder of both Konover & Associates South and Konover &
Associates, Inc., a $500 million plus real estate company headquartered in West
Hartford, Connecticut, will become Chairman of the Board of the Company upon
completion of the transaction. He will not become an executive officer of the
Company.
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Rodwell/Kane Portfolio
On October 7, 1997, the Company entered into agreements to purchase nine
shopping centers located in North Carolina and Virginia, (the "Rodwell/Kane
Properties") totaling 1.0 million square feet, and to assume third-party
management of an additional 1.2 million square feet of community shopping
centers. The centers to be purchased are owned primarily by Roy O. Rodwell,
Chairman and Co-Founder of Atlantic Real Estate Corporation ("ARC"), a privately
held real estate development company based in Durham, North Carolina and John M.
Kane, Chairman of Kane Realty Corporation, a real estate development and
brokerage company based in Raleigh, North Carolina, in a transaction valued at
$63.3 million.
As of March 31, 1998, the acquisition of seven of the nine centers
discussed above had closed. The acquisition of the eighth center closed on May
14, 1998. The ninth and final center will be managed by the Company and is
expected to be acquired in the year 2000. Its acquisition prior to the year 2000
would trigger an onerous loan assumption fee.
In exchange for their equity ownership interests in the community centers,
Mr. Rodwell, Mr. Kane and related parties will receive approximately 1.2 million
Units in the Operating Partnership and approximately $3.0 million in cash. The
number of Units to be issued to the sellers was based on a $9.50 price per share
of the Company's Common Stock. The issuance of approximately 269,000 Units and
payment of $0.8 million of cash will be deferred until the completion of certain
performance requirements. As part of the purchase price, the Company will also
assume approximately $48.8 million of fixed-rate debt on the properties to be
acquired.
Joint Ventures
On September 22, 1997, the Company and ARC jointly created a limited
liability company named Atlantic Realty LLC ("Atlantic") to develop and manage
retail community and neighborhood shopping centers in North Carolina. Atlantic
currently has plans to develop approximately one million square feet, including
outparcels, over the next several years. The Company and ARC will own Atlantic
equally, with the Company serving as managing member overseeing its operations.
As of March 31, 1998, the Company has invested $2.5 million in this joint
venture. The investment in Atlantic will be accounted for under the equity
method of accounting as major decisions must be agreed to by both the Company
and ARC. As of March 31, 1998, Atlantic had total assets of approximately $8.1
million and debt of $5.6 million. The joint venture had no other operations.
During 1997, the Company entered into a joint venture, known as Mount
Pleasant FAC LLC, with AJS Group, to develop a 425,000-square foot
retail/entertainment shopping center in Mount Pleasant, South Carolina.
Construction on the center is expected to begin May 1998, with completion
targeted for May 1999. As of March 31, 1998, the Company has invested $1.3
million in this joint venture. This 50% investment in the joint venture is
accounted for under the equity method of accounting as major decisions must be
agreed to by both the Company and the AJS Group. The joint venture had
approximately $4.8 million of assets and $3.5 of debt at March 31, 1998. The
joint venture had no other operations.
During 1998, the Company entered into a joint venture, known as Wakefield
Commercial LLC, primarily to develop two community shopping centers. The two
retail centers, one approximately 200,000 square feet and the other
approximately 300,000 square feet, will be located on 65 acres within a 500-acre
parcel of land zoned for commercial use. The Company will perform all leasing,
property management and marketing functions for the two centers. The Company
will hold a 50% interest in the venture, which is accounted for under the equity
method of accounting as major decisions must be agreed to by both the Company
and its venture partner. As of March 31, 1998, the Company had invested $0.6
million in this joint venture and had advanced the joint venture $4.7 million.
The advances carry interest at 11% per annum. The joint venture had no other
operations.
The acquisition and development of the above properties are subject to,
among other things, completion of due diligence and various contingencies,
including those inherent in development projects, such as zoning, leasing and
financing. There can be no assurance that all of the above transactions will be
consummated.
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Other
On January 7, 1998, the Company completed the purchase of a 55,909-square
foot shopping center located in Danville, Virginia. This Food Lion-anchored
center was purchased for $3.1 million in cash, net of $2.3 million in debt
assumed.
On March 11, 1998, the Company closed on a $75 million, 15-year permanent
credit facility secured by 11 properties previously securing its $150 million
revolving credit facility. The loan is at an effective rate of 7.73% and is
amortized on a 338-month basis. The proceeds were used to pay down certain
outstandings on the $150 million Nomura credit facility.
During 1997, the Company completed construction of a 32,000 square foot
expansion at its Crossville, Tennessee outlet center. In addition, the Company
began construction on a 44,000 square foot Winn Dixie at its Wilson, North
Carolina center. The Company is currently in the pre-development and marketing
stage for a "power" outlet mall located in Lake Carmel, New York and a
retail/entertainment shopping center in Mt. Pleasant, South Carolina. These
projects are planned to contain in excess of 300,000 and 425,000 square feet of
GLA, respectively. If appropriate tenant interest is obtained and the
appropriate agreements, permits and approvals are received, the Company intends
to commence construction in the Fall and Spring of 1998, respectively. No
assurance can be given, however, that the expansions or project will be
developed and/or completed.
Business Strategy
The Company's business strategy is to increase overall shareholder value
through acquiring and selectively developing new properties, expanding its
existing centers 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 management team consists of a group of highly
experienced real estate professionals with a wide variety of shopping center
experience. The team is headed by its 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, development,
leasing and marketing. These members of management bring to the Company years of
experience and professional accreditations from shopping center industry
organizations. They also bring the Company relationships with retail shopping
and manufacturer tenants, and the financial and investment community.
Acquisition and Portfolio Diversification. The Company believes that retail
concepts within the retail shopping center industry are merging, and that a
diversified shopping center portfolio will provide the best opportunities for
growth and overall return to shareholders. To implement this strategy, the
Company intends to focus on selective acquisitions and development of retail
centers. Retail centers may include, but are not limited to, community shopping
centers, retail/entertainment centers, "power strip" centers and "power outlet"
centers. The Company believes that many 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, and the potential for enhancing cash flows through
increasing rents, re-tenanting, remerchandising or future expansions. The
Company intends to use its existing tenant relationships to assist in
accomplishing its objectives.
The 1997 acquisition of five community shopping centers from North Hills,
Inc. was the beginning of the implementation of the Company's diversification
strategy. This portfolio of properties meets the Company's acquisition criteria.
Their proximity to the Company's headquarters, together with the Company's
knowledge of the market, has allowed the Company to manage them very
efficiently. The estimated annualized return on the acquisition is in excess of
13%. Most importantly, the Company has already utilized its existing tenant
relationships to remerchandise the existing centers at 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, but are not limited
to, full-service restaurants, theaters, entertainment and hotels.
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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 approximately 0.4 million
square feet of expansion space to its centers. The Company intends to fund
future expansions and improvements primarily through internally generated cash
flow and its revolving credit facility.
The Company's asset management team, which includes development, leasing,
marketing, finance and property management personnel, 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 in some cases sale. In addition,
the Company has an ongoing program of regular maintenance, periodic renovation
and capital improvement of existing facilities in an effort to increase property
values and tenants' sales.
Development of New Properties. The Company believes that opportunities
continue to exist to attract tenants to newly developed retail centers. The
Company intends to selectively develop centers on new sites in high growth areas
with easy access, 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 stage of several retail
community centers in the North Carolina area. The centers are proposed to be
anchored primarily by well-known grocery and drug chains. If appropriate tenant
interest and necessary approvals are obtained, the Company intends to pursue
development. No assurance can be given, however, that the projects will be
developed.
Strategic Alliances. The Company has entered into several strategic
alliances with well-known and experienced developers, primarily in the Raleigh,
North Carolina area. The philosophy is to align itself with big developers whose
reputation and/or knowledge in certain markets enhances the ability to complete
development projects. These alliances may also lead to new tenant relationships
and/or larger portfolio acquisitions.
Atlantic Real Estate Corporation (ARC). As a result of the Company's
relationship with Roy Rodwell, on September 22, 1997, the Company and ARC formed
a limited liability company known as Atlantic Realty, LLC to develop and manage
retail community and neighborhood shopping centers in North Carolina. Of the
nearly one million square feet of planned development the LLC has completed
development of a 38,600 square foot center in Pembroke, North Carolina anchored
by Food Lion. A second project known as Park Place is under development and if
tenant interest continues the project is expected to be complete in Spring,
1998. Two other projects are in development.
Wakefield. Much like the Company's alliance with ARC, this strategic
alliance known as Wakefield Commercial LLC, was formed primarily to develop two
community shopping centers. The two retail centers, one 200,000 square feet and
the other 300,000 square feet will be located on 65 acres within a 500-acre
parcel of land zoned for commercial use. The Company will perform all leasing,
property management and marketing functions for the two centers. This is the
fourth project to be jointly developed and managed by Atlantic Realty LLC. The
Company will hold a 50% interest in the venture.
Wakefield Commercial, LLC purchased the 500-acre parcel of land in
February, 1998. The shopping centers will be directly adjacent to Wakefield's
residential community, a 2,200-acre upscale, mixed-use development of 3,400
homes priced from $225,000 to $1 million; 75% of the community has been pre-sold
to nationally recognized builders. The exclusive community is expected to
include a Wake County public school campus, public library, city park and an
18-hole TPC golf course.
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Mount Pleasant. The Company has entered into a strategic joint venture,
known as Mount Pleasant, LLC, with AJS Group, to develop a 425,000 square foot
retail/entertainment shopping center in Mt. Pleasant, South Carolina.
Construction on the center, to be named Mt. Pleasant Towne Centre, is slated to
begin in May, 1998, with completion targeted for May, 1999. Belk Department
Stores will anchor the center with a new fashion department store concept.
Mt. Pleasant Towne Centre will be a unique retail and entertainment
shopping center featuring upscale, nationally recognized fashion and specialty
tenants, restaurants and a movie theater in a quaint village setting. The
center's "Main Street" buildings and pedestrian mall area have been designed to
replicate and complement the distinctive architectural styles found throughout
the Carolinas' Low Country region.
The Company is a 50% owner and provides all leasing, management and
development pertaining to this joint venture.
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").
Previous sources of financing alternatives for the Company have included
the issuance by the Company in 1996 of $20 million of equity in the form of
convertible preferred stock. In early 1997, a $150 million credit facility with
Nomura Asset Capital Corporation was completed and secured by 21 of the
Company's properties, plus an assignment of the excess cash flow from 18
additional properties. This facility was used during 1997 to fund the repayment
of approximately $84.5 million in debt, $30.4 million for the North Hills
portfolio, and $11.1 million invested in income-producing properties.
Additionally, the Company loaned $8.5 million to Davie Plaza Associates, a
related entity of Konover & Associates South.
On March 11, 1998, the Company closed on a $75 million, 15-year permanent
credit facility secured by 11 properties previously securing its $150 million
revolving credit facility. The loan is at an effective rate of 7.73%, is
amortized on a 338-month basis. The proceeds were used to pay down certain
outstandings on the $150 million Nomura credit facility.
On March 23, 1998, the Company issued 2,350,000 shares of its common stock
to PSR for a total consideration of $22.3 million as part of the first closings
of the Lazard Transaction as described above.
The Company also entered into a line of credit for $2.5 million with First
Union National Bank. The line is tied to the Company's operating accounts and is
utilized to maximize the Company's cashflow on a daily basis.
The Company may enter into additional mortgage indebtedness related to
certain joint venture development projects. The Company's philosophy is that any
joint venture borrowings would be based upon terms and conditions as its own.
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. Each of
the Properties has a marketing manager responsible for developing and
implementing marketing strategies.
9
<PAGE>
Marketing plans for each center are prepared by the marketing manager for
use by 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, providing
acquisition, development, construction, leasing, marketing 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 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
information systems (IS) 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 IS department is
continually focused on processes which will enhance the Company's systems to
allow all personnel easy access to all financial and lease data in a concise
format.
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 in this section have been determined by the Company's Board of
Directors and may be amended or revised from time to time at the discretion of
the Board of Directors without a vote of the Company's shareholders.
Investment Policies
At all times, it is the policy of the Company 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 of Directors determines
that it is no longer in the best interests of the Company to qualify as a REIT.
Other than the limitations provided in the Code, the Company has no stated
policy (i) that limits a certain percentage of Company assets from being
invested in any one type of investment or in any one property or (ii) that
limits the percentage of securities of any one issuer which the Company may
acquire.
The Company may 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. Equity
investments may be subject to existing mortgage financing and other indebtedness
which have priority over the Company's equity interest. These properties include
outlet centers and community shopping centers across the United States. See
"Business Strategy --Acquisition and Portfolio Diversification," "-- Expansion
and Improvements to Existing Centers," and "-- Development of New Properties."
The Company's organizational structure and financing strategy is conducive to
operating such investments. See "Business Strategy -- Operating Practices" and
" -- Financing" above.
The Company invests in real estate and interests in real estate primarily
for the purpose of producing income in the long-term, but the Company also
considers the potential for long-term appreciation when making investment
decisions.
10
<PAGE>
While the Company has emphasized, and intends to continue its emphasis, in
equity real estate investments, it may, in its discretion, invest in mortgages.
The Company has not previously invested in mortgages and the Company does not
presently intend to invest to a significant extent in mortgages or deeds of
trust, but it may invest in participating or convertible mortgages if it
concludes that it may benefit from the cash flow or any appreciation in the
value of the subject property. Such property would include community shopping
centers or outlet centers.
The Company may also participate with other entities in property ownership
through joint ventures or other types of co-ownership. The Company has invested
in real estate interests through joint ventures that intend to develop community
shopping centers or retail/entertainment shopping centers. See "Business
Strategy -- Strategic Alliances" above for more detail.
Subject to the percentage of ownership limitations and gross income tests
which must be satisfied to qualify as a REIT, the Company may also invest in
securities of concerns engaged in real estate activities, such as land
improvement or investments in outlet centers, or in securities of other issuers.
As disclosed above, the Company has not over the last three years invested, and
does not intend to invest, in the securities of any other issuer for the purpose
of exercising control. 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.
Policies with Respect to Certain Other Activities
The Company may, but does not presently intend to, make investments other
than as described above. The Company's policies regarding certain activities
(and the extent to which it has engaged in such activities during the last three
years) follow:
(i) The Company has authority to issue senior securities. The Company issued
$19.2 million of convertible preferred (Series A) stock in 1996, but it
has not otherwise issued senior securities.
(ii) The Company is authorized and will continue to borrow funds to fuel its
growth. See "Business Strategy -- Financing" above. See "Notes to
Consolidated Financial Statements" for a summary of borrowings at
December 31, 1997 and 1996.
(iii) The Company has authority to make loans to others and has done so on a
limited basis (see Note 5 to the Consolidated Financial Statements). The
Company has no immediate plans to lend money to other entities or
persons, except for loans to Officers secured by their ownership of the
Company's vested stock. The Board has approved loans to Officers to
enable them to retain their Company stock.
(iv) The Company does not 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.
(v) The Company has not engaged in trading, underwriting or agency
distribution or resale of securities of other issuers and does not intend
to do so.
(vi) The Company engages in the purchase and sale of investment properties, as
described in more detail throughout this section and the "Business
Strategy" section.
(vii) The Company has authority to offer shares of its capital stock or other
senior securities in exchange for property, but it has not issued Common
Stock or any senior securities in exchange for property. However, the
Company has acquired property in exchange for Units in the Operating
Partnership.
(viii) The Company has the authority to repurchase or otherwise reacquire its
Common Stock or any other securities, although it has not done so (except
to replace certain compensatory shares of restricted stock with options)
and has no plans to do so.
(ix) The Company has issued and intends to continue issuing annual reports to
shareholders, informing them of the status of the Company with audited
financial statements attached to the report.
All transactions, including lending and borrowing money, between the
Company and its affiliates must also be approved by a majority of the Company's
directors who are "Independent" (which is generally defined in the Articles of
Incorporation of the Company as a non-employee director who is not an affiliate
of the Company).
11
<PAGE>
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 34 stores (25 of which anchor the Company's 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 11% of the Company's 1997 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 41
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 6.0% of the Company's base rental revenues or aggregate leased GLA
during 1997.
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 for the payment of all rental obligations for the remaining term. As
of December 31, 1997 all six locations had income in excess of the break-even
point. See "Item 2 - Properties - Planned Expansions" for a discussion of the
Company's satisfaction of obligations to expand VFFO Properties.
Competition
In seeking new investment opportunities, the Company competes with other
real estate investors, including pension funds, foreign investors, real estate
partnerships, other real estate investment trusts and other domestic real estate
companies. On properties presently owned by the Company or in which it has
investments, the Company and its tenants and borrowers compete with other owners
of like properties for tenants and/or customers depending on the nature of the
investment. Management believes that the Company is well positioned to compete
effectively for new investments and tenants.
Environmental Matters
Phase I environmental site assessments and when applicable, Phase II
assessments (which generally did not include environmental sampling, monitoring
or laboratory analysis) have been completed by the Company with respect to all
of its properties either as required by a lender or upon
acquisition/development. No studies are dated prior to 1995.
The Company's policy going forward is to obtain new environmental site
assessments on all acquisition or development properties prior to purchase.
None of these environmental assessments or subsequent updates revealed any
environmental liability that management believes would have a material adverse
effect on the Company. No assurances can be given that (i) the environmental
assessments detected all environmental hazards, (ii) future laws, ordinances or
regulations will not impose any material environmental liability, or (iii)
current environmental conditions of the Properties will not be affected by
tenants, by properties in the vicinity of the Properties, or by third persons
unrelated to the Company.
The Vacaville, California property and one of the community shopping
centers have conditions which may pose a risk of environmental liability at
these properties. The Company believes that releases of petroleum products from
underground storage tanks located at adjacent properties may have affected these
properties. In each instance where remediation has been determined to be
necessary, the Company believes that the third
12
<PAGE>
parties responsible for any contamination have accepted responsibility therefor
and intend to remediate the effects of any such contamination. The Company also
believes that these responsible parties have sufficient resources to conduct
such remediation. There can be no assurance, however, that the responsible
parties will adequately complete remediation of any contamination. However, due
to the potential environmental issues associated with the property and the
properties adjacent to the Company's property, the Company has accrued $500,000
for the potential remediation cost of the property. If the responsible parties
do not complete such remediation, the Company may be required to do so, and the
expenses associated with such remediation may be material. In addition, the
investigation or remediation of such contamination (by the responsible parties
or by the Company) may impose limitations upon the Company's ability to use the
properties. Additionally, the lender on the Vacaville property required that
$150,000 be deposited into an escrow account, together with $4,200 in monthly
deposits, to be used, if necessary, to perform certain possible remediation
work. Management believes that these amounts will not be used given the results
of the environmental audits.
The Company believes that it is in compliance in all material respects with
Federal, state and local ordinances and regulations regarding hazardous or toxic
substances. Neither the Company, nor, to the Company's knowledge, any of its
predecessor entities or transferors have been notified by any governmental
authority as to it being designated as a potential responsible party or of any
material non-compliance, liability or other environmental claim in connection
with any of the Properties. The Company is not aware of any other environmental
condition with respect to any of its properties that it believes would involve
any substantial expenditure.
Insurance
Management believes that each of the Properties is covered by adequate
fire, flood, property and, in the case of the Vacaville and Lathrop centers,
earthquake insurance provided by reputable companies and with commercially
reasonable deductibles and limits.
Employees
As of March 31, 1998, the Company employed 207 persons, 90 of whom are
located primarily at the Company's headquarters in Cary, North Carolina. The
remaining 117 employees are property management, marketing and maintenance
personnel located at the Properties. The Company believes that its relations
with its employees are good.
Item 2 - Properties
As of December 31, 1997, the properties (the "Properties") owned by the
Company consist of: (1) 28 community shopping centers in 15 states aggregating
approximately 3,090,000 square feet; (2) 10 outlet centers in 9 states
aggregating approximately 2,120,000 square feet; (3) two outlet centers
aggregating approximately 150,000 square feet and one former factory outlet
center which has been converted to commercial office use with approximately
150,000 square feet that are held for sale; and (4) approximately 182.3 acres of
outparcel land located near or adjacent to certain of the Company's centers and
are being marketed for lease or sale.
13
<PAGE>
The following table sets forth the location of, and certain information
relating to, the Properties as of December 31, 1997:
<TABLE>
<CAPTION>
Total Total Percentage Percentage Percentage of
State Number GLA of Total Of Total Rental GLS in Leased
Of Centers (Sq. Ft.) GLA Revenue (1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Properties:
Community Centers
Arizona 2 294,788 5.4% 4.4% 90.0%
Florida 1 83,962 1.5% 1.0% 100.0%
Georgia 1 140,025 2.5% 1.5% 71.9%
Illinois 1 91,063 1.7% 0.7% 73.2%
Iowa 1 112,405 2.0% 1.3% 92.3%
Kentucky 3 304,402 5.5% 4.3% 98.7%
Louisiana 2 220,281 4.0% 3.5% 97.7%
Mississippi 1 124,412 2.3% 0.8% 93.7%
Missouri 1 83,464 1.5% 1.0% 100.0%
Nebraska 1 89,646 1.6% 1.2% 93.3%
Nevada 1 229,958 4.2% 4.0% 69.6%
North Carolina 5 605,485 11.0% 10.7% 98.1%
Tennessee 2 193,137 3.5% 2.0% 95.1%
Texas 6 515,412 9.4% 6.8% 89.7%
----------------------------------------------------------------------------
Subtotal (Community Centers
28 3,088,440 56.1% 43.2% 96.3%
Outlet Centers
Alabama 1 111,909 2.0% 1.5% 97.7%
California 1 447,725 8.1% 16.6% 96.6%
Maine 1 24,620 0.5% 1.0% 100.0%
Missouri 1 287,522 5.2% 5.1% 81.2%
New York 1 43,650 0.8% 1.2% 100.0%
North Carolina 1 355,756 6.5% 8.0% 99.7%
Tennessee 2 437,064 7.9% 11.0% 96.1%
Utah 1 185,281 3.4% 3.5% 100.0%
Washington 1 223,383 4.1% 6.7% 100.0%
----------------------------------------------------------------------------
Subtotal (Outlet Centers) 10 2,116,910 38.5% 54.6% 96.3%
----------------------------------------------------------------------------
Subtotal (Operating Properties)
38 5,205,350 94.6% 97.8% 93.4%
----------------------------------------------------------------------------
Properties Held for Sale:
Arizona 1 141,828 2.6% 1.4% 64.8%
California 1 131,400 2.4% 0.6% 34.1%
New Hampshire 1 24,740 0.4% 0.2% 54.2%
----------------------------------------------------------------------------
Subtotal 3 297,968 5.4% 2.2% 50.4%
----------------------------------------------------------------------------
Total (All Properties) 41 5,503,318 100.0% 100.0% 91.1%
============================================================================
</TABLE>
(1) Total rental revenue consists of base and percentage rent plus recoveries
from tenants for the year ended December 31, 1997.
14
<PAGE>
The following table sets forth certain information as of December 31, 1997
relating to the Company's 41 centers. All of the Properties are owned fee simple
by the Company, except for the outlet center located in Boaz, Alabama, which the
Company holds pursuant to a lease which has renewal options through 2027. The
Company has 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 through and including January 31, 1998; $500 from February 1, 1998
through and including January 31, 1999; $750 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.
<TABLE>
<CAPTION>
Date
Developed/ Gross Percentage Average Percentage of
(Expanded or Land Leasable of Total Rental GLA in
Renovated) Area Area Rental Revenue Per Operation
Property Location (1) (Acres) (Sq. Ft.) Revenue (2) Sq. Ft. (3) Leased
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Properties:
Community Centers:
Mesa, AZ Situated along U.S. Highways 60 1987
and 89 (1995) 26.9 167,213 3.0% 12.99 88.1%
Tucson, AZ Situated along Interstate 10 1984 12.5 127,575 1.4% 8.07 92.6%
Graceville, FL Situated along U.S. Highway 77 1985 25.0 83,962 1.0% 8.51 100.0%
Lake Park, GA Situated along Interstate 75 1989
(1992) 12.5 140,025 1.5% 12.20 71.9%
West Frankfort, IL Situated along Interstate 57 1990 20.0 91,063 0.7% 9.64 73.2%
Story City, IA Situated along Interstate 35 1990
(1996) 20.0 112,405 1.3% 8.68 92.3%
Carrollton, KY Situated along Highway 22 1989 21.2 63,896 0.7% 12.54 100.0%
Georgetown, KY Situated along Interstate 75 1991 16.7 176,615 3.0% 12.75 97.7%
Hanson, KY Situated along U.S. Highway 41 1989 21.3 63,891 0.6% 7.27 100.0%
Arcadia, LA Situated along Interstate I-20 1989
(1994) 28.7 89,528 1.3% 12.48 100.0%
Iowa, LA Situated along Interstate 10 1989
(1994) Lease 130,753 2.2% 12.85 96.2%
Tupelo, MS Situated along Interstate 44 1987
(1996) 16.8 124,412 0.8% 3.24 93.7%
Lebanon, MO Near Interstate 44 and State
Highways 5, 32 and 64 1985 23.7 83,464 1.0% 9.18 100.0%
Nebraska City, NE Intersection of U.S. Highway 75 1990
and State Highway 2 (1996) 21.4 89,646 1.1% 11.58 93.3%
Las Vegas, NV Situated along Las Vegas Blvd.
1992 25.7 229,958 3.9% 13.59 69.6%
Raleigh, NC Wake Forest Rd. 1966 6.0 54,375 1.1% 13.51 100.0%
Eastgate
Wilson, NC U.S. Highway 264 1992 18.5 91,266 1.2% N/A 100.0%
Gateway Plaza
Cary, NC U.S. Highway 64 1986 21.1 142,378 3.1% 12.34 97.2%
MacGregor Village
Raleigh, NC Falls of the Neuse Rd. 1980 19.5 165,309 3.4% 12.78 97.7%
North Ridge
Raleigh, NC-Tower U.S. Highway 64 1976 19.3 152,157 2.0% 7.44 97.4%
Tri-Cities, TN Situated along Interstate 81 and
State Highway 125 1990 23.3 132,908 1.4% 8.81 92.9%
Union City, TN Situated along U.S. Highway 51
1988 23.3 60,229 0.6% 9.29 100.0%
Corsicana, TX Intersection of Interstate 45/287
and State Highway 32 1989 20.0 63,605 0.6% 8.27 100.0%
Hempstead, TX Situated along U.S. Highway 290
1989 14.8 63,605 0.6% 13.89 94.0%
La Marque, TX Situated along Interstate 45 1990 19.2 176,071 3.2% 15.35 73.5%
15
<PAGE>
Livingston, TX Situated along U.S. Highway 59
1989 15.0 63,605 0.7% 10.70 100.0%
Mineral Wells, TX Situated along U.S. Highway 180
1989 15.5 63,609 0.7% 8.42 100.0%
Sulphur Springs, TX Situated along Interstate 30 1986 13.3 84,917 1.1% 8.97 100.0%
------------------------------------------------------------
Subtotal (Community Centers) 521.2 3,088,440 43.2% 11.25 91.4%
Outlet Centers:
Boaz, AL Situated along U.S. Highway 61 1982
(1994) Lease 111,909 1.5% $12.23 97.7%
Vacaville, CA Situated along Interstate 84 1988 52.6 447,725 16.6% 22.12 96.6%
Kittery, ME Situated along U.S. Highway 1 1987 5.3 24,620 1.0% 22.32 100.0%
Branson, MO Situated along U.S. Highway 248 1995 24.4 287,522 5.1% 12.73 81.2%
Lake George, NY Intersection of Rt. 9 and 49 1988 4.6 43,650 1.2% 15.10 100.0%
Smithfield, NC At the junction of 1988
Interstate 95 and U.S. (1995)
Highway 70 and 70-A (1996) 51.6 355,756 8.0% 15.68 99.7%
Crossville, TN Intersection of Interstate 40 and 1988
Genesis Road (1994)
(1997) 16.5 151,256 2.4% 13.56 100.0%
Nashville, TN Across from Opryland 1993
(1995) 33.1 285,808 8.6% 16.78 98.3%
Draper, UT Situated along 1986
Interstate 15 (1995) 28.9 185,281 3.5% 12.40 100.0%
North Bend, WA Situated along 1990
Interstate 90 (1994) 16.0 223,383 6.7% 18.86 100.0%
------------------------------------------------------------
Subtotal (Outlet Centers): 233.0 2,116,910 54.6% 17.02 96.3%
------------------------------------------------------------
Subtotal (Operating Properties): 754.2 5,205,350 97.8% 14.28 93.4%
============================================================
Properties Held for Sale:
Casa Grande, AZ Situated along Interstate 10 1991 14.9 141,828 1.4% 8.72 64.8%
Lathrop, CA Situated along Interstate 5 1993 14.3 131,400 0.6% 10.46 34.1%(4)
Conway, NH Intersection of Rt. 16 & 153 1985 2.1 24,740 0.2% 6.20 54.2%
------------------------------------------------------------
Subtotal (Properties Held for Sale) 31.3 297,968 2.2% 8.92 50.4%
------------------------------------------------------------
Total (All Properties) 785.5 5,503,318 100.0% $14.08 91.1%
===========================================================
</TABLE>
1) Reflects the year in which the outlet center was developed or re-developed.
2) Total Rental Revenue consists of base and percentage rent plus recoveries
from tenants for the year ended December 31, 1997.
3) Average Rental Revenue per square foot is defined as Total Rental Revenue
divided by GLA in operation, exclusive of anchors, at December 31, 1997.
The average rental revenue paid by the Company's anchor tenants
(Books-A-Million, Carolina Pottery, Food Lion, K-Mart, VF Corporation, West
Point Stevens and Winn Dixie), including base and percentage rents plus
recoveries, was $6.93, $4.55, $6.81, $5.65, $5.63, $5.28 and $6.65 per
square foot, respectively, in 1997.
4) The Company has converted this property to general office use and is
currently under contract for sale.
16
<PAGE>
Properties Held for Sale
As part of the Company's ongoing strategic evaluation of its portfolio of
assets, management has been authorized to pursue the sale of certain properties
that currently are not fully consistent with or essential to the Company's
long-term strategies. 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. In accordance with SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", assets held for sale are valued at the lower of carrying value or fair
value less selling costs. Accordingly, in the fourth quarters of 1996 and 1995,
the Company recorded a non-cash $5.0 million and $8.5 million adjustment to the
carrying value of the properties held for sale. The Company continues to operate
the properties and is actively marketing these properties. As of December 31,
1997, two of the properties held for sale are under contract.
After recording the $5.0 million and $8.5 million valuation adjustment in
1996 and 1995, respectively, the net carrying value of assets currently being
marketed for sale at December 31, 1997 and 1996 are $12.5 million and $11.4
million, respectively. There is $12.2 million of debt associated with these
properties held for sale at December 31, 1997. In March, 1998, the Company
repaid debt associated with one property held for sale in the amount of $5.7
million.
The following summary financial information pertains to the properties held
for sale for the year ended December 31 (in millions):
1997 1996 1995
---- ---- ----
Revenues $ 1.1 $ 2.1 $ 3.0
Net loss after operating and
interest expenses $ (1.1) $ (1.0) $ (0.5)
========= ========== =========
Planned Expansions
For the year ended December 31, 1997 the Company had delivered
approximately 32,470 square feet of expansion space to tenants in Crossville,
Tennessee. The following table sets forth certain information relating to the
Company's proposed 1998 expansion activities:
<TABLE>
<CAPTION>
Post- Percentage of
Current Expansion Expantion Expansion Planned Estimated
Center GLA GLA GLA GLA Completion Cost of
Location (Sq. Ft.) (Sq. Ft.) (Sq. Ft.) Committed* Date Expansion
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wilson, NC 91,266 45,464 136,730 100% April 1998 $2,450,000
Smithfield, NC 355,756 54,000 409,756 100% Summer 1999 $8,000,000
</TABLE>
* 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 December 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
17
<PAGE>
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 all remaining obligations under the
agreement.
Additional Information about Certain Centers
As of December 31, 1997, the Company's outlet center at Vacaville,
California, had a book value of 9% of the total assets of the Company and
generated gross revenue in 1997 that accounted for approximately 18% of the
Company's 1997 aggregate gross revenue. No other existing or planned center
accounts for greater than 10% of either the Company's 1997 aggregate gross
revenue or the Company's total assets at December 31, 1997.
The Company holds title to the Vacaville center in fee simple, but the
property is one of several that secures $54.6 million of Class A Collateralized
Mortgage Notes. These Mortgage Notes bear interest at 7.51% and are secured by
the Vacaville center and 17 other outlet centers. These Mortgage Notes are
payable in monthly principal payments ranging from $107,000 to $173,000
determined using various parameters plus monthly interest. Unpaid principal and
accrued interest will be due in June, 2002, with a balloon payment of $46.7
million.
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. The Company currently has no plans to further expand or renovate
the property. The realty tax rate on the property is $10.68 per $1,000 of
assessed value, and in 1997, the annual property taxes on the Vacaville center
were $1.4 million.
The city of Vacaville developmental plans continue to allow the building of
additional retail stores, restaurants, and area services in the properties
adjacent to the Company's Center (Factory at Vacaville) creating hub of retail
activity in this newly built area. Interstate 80 motorists exit off the side of
the freeway that Factory Stores at Vacaville are located, however, due to close
proximity, the neighboring complexes (which offer some name brand discounters)
appear to be monogamous with Factory Stores at Vacaville. This can cause
customer confusion. The Company has countered this perception with an
advertising campaign geared toward our shopper. During the past ten years, the
Company has maintained its image of a designation for its Sacramento and San
Francisco shopper.
18
<PAGE>
The following table discloses the occupancy rate and average effective
annual rental revenue per square foot for each of the last five years ending
December 31, 1997.
Year ended December 31, Occupancy Rate Annual Rental Revenue per Sq. Ft.
----------------------- -------------- ---------------------------------
1997 98% $22.12
1996 89% $22.58
1995 88% $27.94
1994 92% $27.58
1993 93% $26.61
The center's major tenants include: The Gap, NIKE, VF Factory Outlet,
Levi's, Reebok, 9 West and Carter Children's Wear Outlet, but none rent ten
percent or more of the center's total GLA.
The following table shows the lease expirations for tenants in occupancy as
of December 31, 1997 for the Vacaville outlet center (assuming that none of the
tenants exercise renewal options).
<TABLE>
<CAPTION>
Pro Forma Average
Annualized % of Annual
Leases to Leased GLA Base Rental Total Base Rent
Year Expire(2) (sq. ft.)(1) Revenue Revenue Per Sq. Ft.
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 30 114,669 1,870,603 26.8% $16.31
1999 20 67,513 908,756 13.0% 13.46
2000 19 60,146 1,106,659 15.9% 18.40
2001 27 86,103 1,383,223 19.8% 16.06
2002 6 29,645 531,603 7.6% 17.93
2003 7 63,079 933,178 13.4% 14.79
2004 2 8,400 140,800 2.0% 16.76
2005 0 0 0 0.0% 0.00
2006 1 6,000 108,000 1.5% 18.00
2007+ 0 0 0 0.0% 0.00
============================================================================
Total 112 432,555 $6,982,822 100.0% $16.14
============================================================================
</TABLE>
(1) Total leased GLA is not equal to leasable GLA due to vacancies.
(2) Expirations assume no renewals or releasing for tenants in occupancy as of
December 31, 1997.
Management believes that all of its properties, including the Vacaville
center, are adequately insured. For a description of the Vacaville center's
Federal tax basis, rate, method and life claimed with respect to the property,
see Schedule III to the Company's Consolidated Financial Statements.
19
<PAGE>
Undeveloped Parcels
The Company owns approximately 182 acres of undeveloped parcels located
near certain of the Company's shopping centers. The Company has a marketing
program to lease, develop or sell the parcels it owns through third party
brokers. During 1997, 27.6 acres were sold at $1.3 million which equaled the
cost of the acreage. 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 not be subject
to 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 tenants a diverse tenant
mix which includes many well-known manufacturers/retailers. The majority of the
Company's current tenants are large, publicly-traded companies. The Company's
current core tenant mix at its Properties features such well-known brands as
Nike, The Gap, Liz Claiborne, Lee, Wrangler, Jantzen, Jansport, Bass, Reading
China and More, Vanity Fair, Health-Tex, Easy Spirit, 9 West, Enzo, Casual
Corner, L'eggs, Hanes, Bali, Champion, Levi's, Revlon, Mikasa, 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 1998 and 2017. 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, 1997, 21% of the aggregate GLA of its shopping
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
center. VFFO is the Company's largest tenant. See "Item 1 -- Business -- Major
Tenant" for a discussion of the Company's leases with VFFO.
20
<PAGE>
Lease Expiration
The following table shows tenant lease expirations for tenants in occupancy
as of December 31, 1997 for the next ten years at the Properties (assuming that
none of the tenants exercises any renewal option):
<TABLE>
<CAPTION>
Pro Forma Average
Leased Annualized Annual Base Rent
Leases to GLA Base Rental % of Per
Year Expire (1) (sq. ft.)(2) Revenue Total Sq. Ft.
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 244 919,280 $8,910,000 21.9% $ 9.69
1999 144 490,375 5,489,879 13.4% 11.20
2000 186 698,148 7,852,768 19.3% 11.25
2001 106 437,826 4,842,505 11.9% 11.06
2002 65 280,460 2,738,874 6.7% 9.77
2003 71 1,334,110 5,936,296 14.5% 4.45
2004 11 196,256 1,005,992 2.5% 5.13
2005 11 210,451 1,350,395 3.3% 6.42
2006 13 200,684 1,416,834 3.5% 7.06
2007+ 7 243,722 1,223,713 3.0% 5.02
--------------------------------------------------------------------------------------------------------
Total 858 5,011,312 $40,767,256 100.0% $ 8.14
========================================================================================================
</TABLE>
(1) Expirations assume no renewals or releasing for tenants in occupancy as of
December 31, 1997.
(2) Total leased GLA is not equal to leasable GLA due to vacancies.
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, 1997.
<TABLE>
<CAPTION>
Percentage
of Total Number Actual
Total GLA GLA of Base Rental % of
Tenant Leased(1) Leased Stores Revenue Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VF Factory Outlet, Inc. 1,225,655 24.5% 34 $5,809,614 15.1%
Carolina Pottery Retail Group, Inc. 278,458 5.6% 4 1,116,335 2.9%
Phillips-Van Heusen Corporation 253,182 5.1% 59 2,682,570 7.0%
The Dress Barn, Inc. 139,604 2.8% 27 1,879,631 4.9%
Nine West Group, Inc. 135,555 2.7% 30 1,353,207 3.5%
Bugle Boy Industries, Inc. 129,120 2.6% 23 985,966 2.6%
US Factory Outlet 100,957 2.0% 3 102,912 0.3%
The Paper Factory of Wisconsin, Inc. 94,088 1.9% 24 1,446,686 3.8%
Designs, Inc./Levi Strauss & Co. 85,111 1.7% 9 1,220,521 3.2%
WestPoint Stevens Stores, Inc. 82,840 1.7% 4 348,537 0.9%
--------------------------------------------------------------------------
2,524,570 50.4% 217 16,945,978 44%
Others 2,486,742 49.6% 641 21,589,050 56%
--------------------------------------------------------------------------
Total 5,011,312 100.0% 858 $38,535,028 100.0%
==========================================================================
</TABLE>
(1) Total leased GLA is not equal to leasable GLA due to vacancies.
21
<PAGE>
Mortgage Debt
The following table sets forth, as of December 31, 1997, certain
information regarding the mortgages encumbering certain of the Properties (in
thousands).
1997 Estimated
<TABLE>
<CAPTION>
Annual Balloon
Principal Interest Debt Payment at
Amount Rate Type Service Maturity Maturity Secured By
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$54,583 7.51% Collateralized Mortgage Notes $1,324 $ 46,716 2002 Arcadia, LA; Carrollton,
KY; Casa Grande, AZ;
Conway, NH; Crossville,
TN; Draper, UT; Hanson,
KY; Iowa, LA; Kittery,
ME; La Marque, TX; Lake
George, NY; Las Vegas,
NV; Mesa, AZ; North Bend,
WA; Tucson, AZ; Union
City, TN; Vacaville, CA;
and West Frankfort, IL
(collectively "FSA
Finance Properties")
20,000 7.87 Collateralized Mortgage Notes -- 20,000 2002 FSA Finance Properties
17,000 8.39 Collateralized Mortgage Notes -- 17,000 2002 FSA Finance Properties
- ------------------------------------------------------------------------------------------------------------------------------------
91,583 Total Fixed Rate Debt 1,324 83,716
- ------------------------------------------------------------------------------------------------------------------------------------
736 Prime + 1/2 % Line of Credit -- 736 Eastgate
5,711 Prime + 2.25% (1) Mortgage 77 5,719 1998 Lathrop, CA
134,545 LIBOR + 2.25% (2) Revolving Credit Facility -- 134,545 1999 Georgetown, KY; Lake
Park, GA; Nashville, TN;
Smithfield, NC; Tri-
Cities, TN; Story City,
IA; Sulphur Springs, TX;
Nebraska City, NE; Boaz,
AL; Graceville, FL;
Tupelo, MS; Lebanon,
MO; Corsicana, TX;
Hempstead, TX;
Livingston, TX; and
Mineral Wells, TX;
MacGregor, North Ridge,
Gateway, Tower
- ------------------------------------------------------------------------------------------------------------------------------------
140,992 Total Variable Rate Debt 77 140,264
====================================================================================================================================
$232,575 Total Mortgage Debt $1,401 $223,980
====================================================================================================================================
</TABLE>
(1) The Company has repaid this mortgage debt as of March 25, 1998.
(2) This facility was reduced by $73.4 million on March 11, 1998 from a $75
million securitization with Nomura Asset Capital. Eleven of the properties
which secure this revolving facility now secure the $75 million
securitization. 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, 1997, was approximately $5.9 million,
or $1.07 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.
22
<PAGE>
Executive Offices
The Company currently leases its 31,800 square foot executive offices in
Cary, North Carolina.
Item 3 - Legal Proceedings
In August 1995, the Company executed written agreements ("Agreements") to
acquire both the 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. In December 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 acquisition. The Note was payable only upon the occurrence of certain
conditions and a dispute rose as to whether those conditions had been met.
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. Thereafter, the Company OPERS' and
RRI reached a settlement of the dispute. After an unsuccessful attempt at
mediation of the dispute, RRI filed for binding arbitration of the matter to
settle the dispute. Following the arbitration hearing held in late April 1997,
the Company agreed to pay $2.9 million to RRI on behalf of related entities of
OPERS in settlement of all outstanding issues between the Company and OPERS/RRI
relating to the terminated merger. The settlement was payable and was fully paid
on December 31,1997. The Company previously recorded a charge of $1.7 million in
December 1995 in connection with the termination. The remaining $1.2 million of
the $2.9 million, plus an estimated for the Company's legal fees, has been
accrued for as of December 1997 and is included in general and administrative
expenses. All amounts due to OPERS/RRI have been paid and the deed of trust has
been released. The Company considers the matter closed.
In July 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 sought
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 alleged 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.
In October, 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 were
consolidated and the Company filed motions to dismiss both lawsuits.
On November 5, 1997, the court granted the motions to dismiss and entered
judgment for defendants related to the above. The time for plaintiffs to file
appeals has expired without appeal.
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.
23
<PAGE>
Item 4 - Submission of Matters to a Vote of Security Holders
The Company held a Special Meeting of Stockholders on December 15, 1997 at
its corporate office in Cary, North Carolina.
The purpose of the meeting was to obtain the approval from stockholders of
record as of October 31, 1997 pertaining to the following:
o Reincorporation of the Company from the State of Delaware to the State
of Maryland
The reincorporation was approved as follows:
For 6,196,916 50.7%
Against 1,153,019 9.4%
Abstentions 96,371 0.8%
----------------------------------------------------------------
Total Voted 7,446,306 60.9%
----------------------------------------------------------------
Total Shares Outstanding 12,224,229 100.0%
================================================================
No other business was conducted at this Special Meeting
The reincorporation required an affirmative vote of the stockholders owning
a majority of the outstanding shares. The reincorporation took place on December
17, 1997. As a result of the reincorporation, the Company reorganized itself
into an umbrella partnership structure (an "UPREIT") through the contribution of
substantially all of its assets into a limited partnership known as FAC
Properties, LP, which is controlled by the Maryland company.
The Company felt those events were strategic for the Company for the
following reasons:
o The Company will realize a cost savings in annual franchise tax
payments of approximately $150,000 by changing its state of
incorporation from Delaware to Maryland.
o By adopting an UPREIT structure, the Company will realize annual cost
savings of approximately $188,000 beginning in 1998 related to state
franchise tax payments on its assets located in certain states; and
o An UPREIT structure may enable the Company to acquire properties under
more favorable economic terms.
24
<PAGE>
PART II
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." As of March 23, 1998, there were approximately 609 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 1997 and 1996:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------
High Low Dividends High Low Dividends
<S> <C> <C> <C> <C> <C> <C>
First Quarter $6 3/4 $ 5 3/4 $0.00 $13 5/8 $9 7/8 $0.25
Second Quarter 7 5 1/4 0.00 10 1/8 9 0.25
Third Quarter 8 7/16 6 1/16 0.00 9 1/2 8 1/2 0.25
Fourth Quarter 8 7/16 6 3/4 0.00 8 7/8 6 5/8 0.00
------------------------------------------------------------------------
</TABLE>
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
$____ million of net operating loss carry forwards for 1998 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 at (800) 829-8432.
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 of this report.
Industry analysts generally consider Funds from Operations ("FFO") an
appropriate measure of performance for an equity REIT. FFO means net income
(computed in accordance with generally accepted accounting principles) excluding
gains or losses from debt restructuring and sales of property plus depreciation
and amortization and adjustments for unusual items. Management believes that
FFO, as defined herein, is an appropriate measure of the Company's operating
performance because reductions for depreciation and amortization charges are not
meaningful in evaluating the operating results of the Properties which have
historically been appreciating assets.
Beginning in 1996 the Company adopted a change in the definition of FFO as
promulgated by the National Association of Real Estate Investment Trusts
(NAREIT). Under the new definition, amortization of deferred financing costs and
depreciation of non-real estate assets, as defined, are not included in the
calculation of FFO. All prior period FFO results have been retroactively
restated so that reported FFO in 1997 is comparable to prior periods.
"EBITDA" is defined as revenues less operating costs, including general and
administrative expenses, before interest, depreciation and amortization and
unusual items. As a REIT, the Company is generally not subject to Federal income
taxes. Management believes that EBITDA provides a meaningful indicator of
operating performance for the following reasons: (i) it is industry practice to
evaluate the performance of real estate properties based on net operating income
("NOI"), which is generally equivalent to EBITDA; and (ii) both NOI and EBITDA
are unaffected by the debt and equity structure of the property owner.
25
<PAGE>
FFO and EBITDA (i) do not represent cash flow from operations as defined by
generally accepted accounting principles, (ii) are not necessarily indicative of
cash available to fund all cash flow needs and (iii) should not be considered as
an alternative to net income for purposes of evaluating the Company's operating
performance or as an alternative to cash flow as a measure of liquidity.
Other data that management believes is important in understanding trends in
its business and properties are also included in the following table (in
thousands, except per share data).
The earnings per share amounts prior to 1997, have been restated as
required to comply with Statement of Financial Accounting Standards No. 128
"Earnings Per Share." For further discussion of earnings per share and the
impact of Statement No. 128, see Note 2 to the consolidated financial
statements.
<TABLE>
<CAPTION>
--------------------------------------------------------------------
1997 1996 1995 1994 1993 (a)
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Rental revenues $ 53,726 $ 47,170 $ 47,129 $ 42,077 $ 12,135
Property operating costs 15,671 13,975 13,648 10,454 3,371
--------------------------------------------------------------------
38,055 33,195 33,481 31,623 8,764
Depreciation and amortization 15,652 13,802 11,900 8,511 1,997
General and administrative 6,397 6,199 15,279 5,567 1,615
Interest 16,436 14,175 10,903 4,435 13
Adjustment to carrying value of assets -- (5,000) (8,500) -- --
Extraordinary (loss) on early extinguishment
of debt (986) (103) -- (884) --
--------------------------------------------------------------------
Net income (loss) $ (1,416) $ (6,084) $(13,101) $ 12,226 $ 5,139
====================================================================
Loss before extraordinary item $ (430) $ (5,981) $(13,101) $ 13,110 $ 5,139
Preferred stock dividends -- (368) -- -- --
--------------------------------------------------------------------
Loss before extraordinary item applicable to
common stockholders (430) (6,349) (13,101) 13,110 5,139
Extraordinary loss on early extinguishment of
debt (986) (103) -- (884) --
(Loss) income applicable to common
shareholders $ (1,416) $ (6,452) $(13,101) $ 12,226 $ 5,139
====================================================================
Per common share data:
Income (loss) before extraordinary item $ (0.04) $ (0.54) $ (1.11) $ 1.11 $ 0.86
Extraordinary item (0.08) (0.01) -- (0.07) --
--------------------------------------------------------------------
Net income (loss) $ (0.12) $ (0.55) $ (1.11) $ 1.04 $ 0.86
====================================================================
Weighted average common shares outstanding 11,824 11,817 11,814 11,811 5,989
====================================================================
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 (a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other Data:
EBITDA:
Net (loss) income $ (1,416) $ (6,084) $ (13,101) $ 12,226 $ 5,139
Adjustments:
Interest 16,436 14,175 10,903 4,435 13
Depreciation and amortization 15,652 13,802 11,900 8,511 1,997
Compensation under stock plans 537 392 -- -- --
Gain on sale of assets -- (37) (345) -- --
Non-recurring administrative costs 250 927 6,500 -- --
Merger termination costs 1,250 -- -- -- --
Adjustment to fair value of assets -- 5,000 8,500 -- --
Extraordinary loss on early extinguishment
of debt 986 103 -- 884 --
=====================================================================
$ 33,695 $ 28,278 $ 24,357 $ 26,056 $ 7,149
=====================================================================
Funds from Operations:
Net income (loss) $ (1,416) $ (6,084) $ (13,101) $ 12,226 $ 5,139
Adjustments:
Straight line rent (619) 383 (626) (922) (355)
Depreciation and amortization 15,254 13,513 11,722 8,428 1,953
Interest on exchangeable notes -- 553 -- -- --
Compensation under restricted stock award 537 392 -- -- --
Gain on sale of real estate -- (37) (345) -- --
Unusual items:
Non-recurring administrative costs 250 927 6,500 -- --
Merger termination costs 1,250 -- -- -- --
Adjustment to carrying value of assets -- 5,000 8,500 -- --
Extraordinary loss on early
extinguishment of debt 986 103 -- 884 --
---------------------------------------------------------------------
$ 16,242 $ 14,750 $ 12,650 $ 20,616 $ 6,737
=====================================================================
Weighted average shares outstanding-diluted (b) 14,158 13,399 11,814 11,811 5,989
=====================================================================
Funds Available for Distribution/Reinvestment:
Funds from Operations $ 16,242 $ 14,750 $ 12,650 $ 20,616 $ 6,737
=====================================================================
Adjustments:
Non-recurring administrative costs (250) (927) (6,500) -- --
Merger termination costs (1,250) -- -- -- --
Capitalized tenant allowances (1,418) (316) (1,380) (1,340) (156)
Capitalized leasing costs (1,054) (549) (407) (402) (68)
Recurring capital expenditures (845) (312) (796) (1,314) (233)
---------------------------------------------------------------------
$ 11,425 $ 12,646 $ 3,567 $ 17,560 $ 6,280
=====================================================================
Dividends declared on annual earnings $ 0.00 $ 10,142 $ 24,101 $ 22,681 $ 9,469
=====================================================================
Dividends declared on annual earnings per share $ 0.00 $ 0.75 $ 2.04 $ 1.92 $ 1.58
=====================================================================
Cash Flows:
Cash flows from operating activities $ 12,962 $ 7,649 $ 22,078 $ 20,674 $ 4,167
Cash flows from investing activities (62,185) (17,288) (50,854) (84,719) (173,023)
Cash flows from financing activities 47,061 15,018 29,134 59,750 174,447
---------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents $ (2,162) $ 5,379 $ 358 $ (4,295) $ 5,591
=====================================================================
Balance Sheet Data:
Income-producing properties (before depreciation $ 395,325 $ 354,029 $ 357,034 $ 321,088 $ 236,383
and amortization)
Total assets 403,626 358,612 355,095 326,270 245,457
Debt on income properties 232,575 173,695 170,067 101,193 33,968
Total liabilities 240,289 194,020 194,609 122,930 38,808
Total stockholders' equity 163,337 164,592 160,486 203,340 206,649
Portfolio Property Data:
Total GLA (at end of period) 5,503 4,865 4,626 4,234 3,502
Weighted average GLA 5,341 4,674 4,336 3,768 2,474
Number of properties (at end of period) 41 36 36 35 32
Occupancy (at end of year):
Operating 93.4% 91.4% 92.3% 92.9% 93.5%
Development 0.0% 69.1% 52.1% -- --
Held for sale 50.4% 42.9% 66.3% -- --
</TABLE>
27
<PAGE>
(a) Represents actual results of operations for the Company from March 31, 1993
(inception) to December 31, 1993, and actual balance sheet data at December
31, 1993.
(b) The following table sets forth the computation of the denominator to be
used in calculating the weighted-average shares outstanding based on
Statement of Financial Accounting Standard No. 128, "Earnings Per Share":
<TABLE>
<CAPTION>
Denominator:
<S> <C> <C> <C> <C> <C>
Denominator- weighted average shares 11,824 11,817 11,814 11,811 5,989
Effect of dilutive securities:
Preferred stock 2,222 1,582 - - -
Employee stock options 69 - - - -
Restricted stock 43 - - - -
-------------------------------------------------------------------------
Dilutive potential common shares 2,334 1,582 - - -
-------------------------------------------------------------------------
Denominator- adjusted weighted average shares and
assumed conversions 14,158 13,399 11,814 11,811 5,989
=========================================================================
</TABLE>
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 of this report. Certain
comparisons between the periods have been made on a percentage basis and on a
weighted average square foot basis, which adjusts for square footage added at
different times during the year.
Certain statements under this caption, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," constitute
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). See "Forward-Looking Statements" included under this
section.
General Overview
The Company was incorporated on March 31, 1993 and completed an Initial
Public Offering ("IPO") on June 10, 1993. Prior to completion of the IPO, the
Company owned four outlet centers in four states aggregating 701,000 square feet
of gross leasable area ("GLA"). Upon completion of the IPO, 21 outlet centers
(the "VF Properties") in eleven states were acquired from VF Corporation
totaling 1,725,000 square feet of GLA. On November 1, 1993, the Company acquired
a 167,000 square foot center located near Opryland in Nashville, Tennessee. On
December 23, 1993, the Company completed a secondary offering of Common Stock
and used the proceeds to purchase six outlet centers in six states from the
Willey Creek Group aggregating 908,000 square feet. As of December 31, 1993, the
Company owned 32 outlet centers in 21 states totaling 3,502,000 square feet of
GLA.
During 1994, the Company began development of a 288,000 square foot outlet
center in Branson, Missouri, acquired three additional properties totaling
449,000 square feet of GLA from the Willey Creek Group, and completed expansions
comprising 283,000 square feet of GLA in Iowa, Louisiana; Crossville, Tennessee;
North Bend, Washington; Arcadia, Louisiana; Boaz, Alabama; and Nashville,
Tennessee. By the end of 1994, the Company owned 35 outlet centers totaling
4,234,000 square feet of GLA, which represented a 21% increase over the prior
year end, and had one center under development.
During 1995, the Company delivered 109,000 square feet of expansion space
to tenants in Mesa, Arizona and Draper, Utah. In September, 1995, the Company
completed an expansion of 28,000 square feet of GLA in Nashville, Tennessee.
Throughout 1995, the Company continued development of its 288,000 square foot
outlet center in Branson, Missouri, with 207,000 square feet available for
delivery to tenants by December 31, 1995. The Company also began a 103,000
square foot expansion of its Smithfield, North Carolina factory outlet center,
with 48,000 square feet of the expansion space opening in November, 1995; and
had commenced two additional expansions totaling 48,000 square feet in Nebraska
City, Nebraska and Story City, Iowa which were being constructed pursuant to
commitments made to VF Corporation in connection with the purchase of the VF
Properties in June, 1993. As of December 31, 1996, the Company had satisfied its
obligations to VF Corporation. The Company ended 1995 with 4,626,000 square feet
of GLA, up 9% from the prior year end.
28
<PAGE>
During 1996, the Company completed the remaining 81,000 square feet of its
288,000 square foot outlet center in Branson, Missouri, and completed expansions
aggregating 158,000 square feet in Story City, Iowa; Nebraska City, Nebraska;
Smithfield, North Carolina; and Tupelo, Mississippi. The Company ended 1996 with
4,865,000 square feet of GLA, up 5.1% from the end of 1995.
Change of Domicile and UPREIT Conversion
On December 17, 1997, following shareholder approval, the Company changed
its domicile from the State of Delaware to the State of Maryland. The
reincorporation was accomplished through the merger of FAC Realty, Inc. into its
Maryland subsidiary FAC Realty Trust, Inc., (the "Company"). Following the
reincorporation, on December 18, 1997, the Company reorganized as an umbrella
partnership real estate investment trust (an "UPREIT"). The Company then
contributed to FAC Properties, L.P., a Delaware limited partnership (the
"Operating Partnership") substantially all of its assets and liabilities, except
for legal title to 18 properties, which remains in a wholly owned subsidiary of
the Company. In exchange for the Company's assets, the Company received limited
partnership interest ("Units") in the Operating Partnership in an amount and
designation that corresponded to the number and designation of outstanding
shares of capital stock of the Company at the time. The Company is the sole
general partner of the Operating Partnership. As additional limited partners are
admitted to the Operating Partnership in exchange for the contribution of
properties, the Company's percentage ownership in the Operating Partnership will
decline. As the Company issues additional shares of capital stock, it will
contribute the proceeds for that capital stock to the Operating Partnership in
exchange for a number of Units equal to the number of shares that the Company
issues. The Company conducts substantially all of its business and owns
substantially all of its assets (either directly or through subsidiaries)
through the Operating Partnership such that a Unit is economically equivalent to
a share of the Company's common stock.
The purpose of reincorporating in Maryland and of becoming an UPREIT was as
follows:
o The Company will realize a cost savings in annual franchise tax payments of
approximately $150,000 by changing its state of incorporation from Delaware
to Maryland
o By adopting an UPREIT structure, the Company will realize annual cost
savings of approximately $188,000 beginning in 1998 related to state
franchise tax payments on its assets located in certain states; and
o An UPREIT may allow the Company to offer Units in the Operating Partnership
in exchange for ownership interests from tax-motivated sellers. Under
certain circumstances, the exchange of Units for a seller's ownership
interest will enable the Operating Partnership to acquire assets while
allowing the seller to defer the tax liability associated with the sale of
such assets. Effectively, this allows the Company to use Units instead of
sock to acquire properties, which provide an advantage over non-UPREIT
entities.
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.
Acquisitions and Significant Transactions
North Hills Portfolio
In March, 1997, the Company purchased five community shopping centers
located in the Raleigh, North Carolina area for $32.4 million from an unrelated
third party. The centers total approximately 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. As a result of the acquisition, the Company ended 1997 with 41
shopping centers containing an aggregate of approximately 5.5 million square
feet of GLA.
Lazard Freres Transaction
On February 24, 1998, Prometheus Southeast Retail, LLC ("PSR"), a real
estate investment affiliate of Lazard Freres Real Estate Investors, LLC, entered
into a definitive agreement (the "Stock Purchase Agreement") with the Company to
make a $200 million strategic investment in the Company (the "Transaction"). PSR
has committed to purchase $200 million in newly issued common shares of the
Company at a purchase price of $9.50 per share. The investment can be made in
stages, at the Company's option, through March 30, 2000
29
<PAGE>
allowing the Company to obtain capital as needed to fund its future acquisition
and development plans as well as retire debt. Upon completion of funding, PSR
will own an equity interest in the Company of approximately 60%, on a diluted
basis, not including any further issuance of Operating Partnership Units for
transactions under contract or transactions into which the Company may enter in
the future.
As part of the Transaction, three representatives of Lazard will be
nominated to the Company's Board of Directors, which will have a total number of
nine directors.
On March 23, 1998, the Company issued 2,350,000 shares of its common stock
to PSR for a total consideration of $22.3 million (the "Initial Purchase") as
part of the First Closing. In the event that the Second Closing does not occur
by September 30, 1998 or the Stock Purchase Agreement is terminated prior to the
Second Closing (other than as a result of PSR's material breach of the Stock
Purchase Agreement), PSR has an option under the Stock Purchase Agreement to
require that the Company repurchase the shares of Common Stock acquired in the
Initial Purchase at a price equal to the purchase price thereof, together with
any accrued dividends (the "Put Option"). The Put Option may also be exercised
at any time within two months after the earlier to occur of the date that the
Company fails to receive stockholder approval of the Transaction, the date the
Stock Purchase Agreement is terminated prior to the Second Closing and August
31, 1998. The Company does not have the right to require PSR to exercise the Put
Option. Therefore, in the event that stockholder approval of the Transaction is
not obtained and PSR does not exercise the Put Option within two months, the
shares of Common Stock issued to PSR in the Initial Purchase will remain
outstanding and the Put Option will expire.
If the stockholders approve the Transaction, PSR would have the right,
pursuant to a Contingent Value Right Agreement, to receive on January 1, 2004
payment in cash or stock of an aggregate amount equal to the lesser of (a) (i)
21,052,632 shares multiplied by $19 per share ($400 million) less (ii) the
dividends paid to PSR through January 1, 2004 and less (iii) the fair market
value of the shares purchased and (b) 4,500,000 multiplied by the fair market
value on such date.
Whether or not the Transaction is fully consummated, the Company will
reimburse PSR for its expenses in connection with the Transaction, including
expenses of monitoring the Company and of performing its duties under the
Transaction Documents. These expenses and Transaction expenses incurred by the
Company are estimated to aggregate approximately $3.3 million, exclusive of a
claim by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") of a
"success based" advisory fee. The Company believes that DLJ, which rendered a
fairness opinion to the Company, but was not requested to perform any other
services in connection with the Transaction, is not entitled to any additional
fees or consideration. DLJ, however, has notified the Company that it believes
it is entitled to additional "success based" advisory fees under the terms of
its engagement letter with the Company dated May 23, 1997. As of the date
hereof, there has been no resolution of the disagreement.
Provided that PSR is not in material default under the Stock Purchase
Agreement, has not breached any of its representations and warranties in any
material respect and has satisfied in all material respects its covenants
relating to the Initial Purchase, the Company will pay PSR a break-up fee of
$2,250,000 (the "Break-up Fee") in the event that the Stock Purchase Agreement
is terminated any time prior to the Second Closing. The Break-up Fee, therefore,
will be payable to PSR if the stockholders do not approve the Transaction. In
addition, in the event that a competing transaction is entered into by the
Company on any date on or prior to the one-year anniversary of the date that the
Stock Purchase Agreement is terminated, the Company will pay PSR an additional
$3,000,000 (the "Topping Fee").
Notwithstanding the foregoing, if a Topping Fee is payable to PSR and PSR
profits on the sale of the shares purchased in the Initial Purchase in
connection with a competing transaction, then PSR must pay the Company the
amount by which such profit, the Break-up Fee and the Topping Fee exceed
$7,750,000.
Each of the Company's and PSR's obligations to effect the Second Closing
and the Subsequent Closings are subject to various mutual and unilateral
conditions, including, without limitation, the following: (i) stockholder
approval of the Transaction; (ii) the continued qualification of the Company as
a REIT for federal income tax purposes; (iii) the receipt of an opinion of
counsel to the effect that the Company is a "domestically controlled" REIT; (iv)
the continuing correctness of the representations and warranties in the Stock
Purchase Agreement, (v) the receipt of any consents necessary for the
Transaction, and (vi) various other customary conditions. In addition, PSR is
not obligated to fund more than $100 million of the Transaction unless a
significant portion of the Konover & Associates South transaction, as described
below, is consummated.
30
<PAGE>
Konover & Associates South Transaction
On February 24, 1998, the Company entered into definitive agreements with
affiliates of Konover & Associates South, a privately held real estate
development firm based in Boca Raton, Florida, to acquire 11 community shopping
centers totaling approximately 2.0 million square feet and valued at nearly $100
million. The purchase equates to approximately $24 million in equity, consisting
of the issuance of Units, at $9.50 per Unit, and/or cash, plus the assumption of
approximately $76 million in debt. At closing, $17 million of the equity will be
paid in the form of Units or cash. The remaining $7 million will be paid in cash
over a three-year period with interest at 7.75% per annum. In addition, the
Company will issue 200,000 warrants to Mr. Simon Konover. One hundred thousand
of the warrants have an exercise price of $9.50 per share, and the remaining
100,000 warrants have an exercise price of $12.50 per share. The warrants vest
in 20% increments over a five-year period and may be subject to forfeiture upon
the occurrence of certain events.
As part of the transaction, the Company intends to operate under the name
"Konover Property Trust". The Company will remain listed on the New York Stock
Exchange and intends to change its ticker symbol from FAC to KPT, pending formal
approval by the shareholders in July, 1998. The Company will continue to operate
the Konover & Associates South office in Boca Raton, Florida due to its
strategic location in the Southeast.
Simon Konover, founder of both Konover & Associates South and Konover &
Associates, Inc., a $500 million plus real estate company headquartered in West
Hartford, Connecticut, will become Chairman of the Board of the Company upon
completion of the transaction. He will not become an executive officer of the
Company.
Rodwell/Kane Portfolio
On October 7, 1997, the Company entered into agreements to purchase nine
shopping centers located in North Carolina and Virginia, (the "Rodwell/Kane
Properties") totaling 1.0 million square feet, and to assume third-party
management of an additional 1.2 million square feet of community shopping
centers. The centers to be purchased are owned primarily by Roy O. Rodwell,
Chairman and Co-Founder of Atlantic Real Estate Corporation ("ARC"), a privately
held real estate development company based in Durham, North Carolina and John M.
Kane, Chairman of Kane Realty Corporation, a real estate development and
brokerage company based in Raleigh, North Carolina, in a transaction valued at
$63.3 million.
As of March 31, 1998, the acquisition of seven of the nine centers
discussed above had closed. The acquisition of the eighth center closed on May
14, 1998. The ninth and final center will be managed by the Company and is
expected to be acquired in the year 2000. Its acquisition prior to the year 2000
would trigger an onerous loan assumption fee.
In exchange for their equity ownership interests in the community centers,
Mr. Rodwell, Mr. Kane and related parties will receive approximately 1.2 million
Units in the Operating Partnership and approximately $3.0 million in cash. The
number of Units to be issued to the sellers was based on a $9.50 price per share
of the Company's Common Stock. The issuance of approximately 269,000 Units and
payment of $0.8 million of cash will be deferred until the completion of certain
performance requirements. As part of the purchase price, the Company will also
assume approximately $48.8 million of fixed-rate debt on the properties to be
acquired.
Joint Ventures
On September 22, 1997, the Company and ARC jointly created a limited
liability company named Atlantic Realty LLC ("Atlantic") to develop and manage
retail community and neighborhood shopping centers in North Carolina. Atlantic
currently has plans to develop approximately one million square feet, including
outparcels, over the next several years. The Company and ARC will own Atlantic
equally, with the Company serving as managing member overseeing its operations.
As of March 31, 1998, the Company has invested $2.5 million in this joint
venture. The investment in Atlantic will be accounted for under the equity
method of accounting as major decisions must be agreed to by both the Company
and ARC. As of March 31, 1998, Atlantic had total assets of approximately $8.1
million and debt of $5.6 million. The joint venture had no other operations.
During 1997, the Company entered into a joint venture, known as Mount
Pleasant FAC LLC, with AJS Group, to develop a 425,000-square foot
retail/entertainment shopping center in Mount Pleasant, South Carolina.
Construction on the center is expected to begin May 1998, with completion
targeted for May 1999. As of March 31, 1998, the Company has invested $1.3
million in this joint venture. This 50% investment in the
31
<PAGE>
joint venture is accounted for under the equity method of accounting as major
decisions must be agreed to by both the Company and the AJS Group. The joint
venture had approximately $4.8 million of assets and $3.5 of debt at March 31,
1998. The joint venture had no other operations.
During 1998, the Company entered into a joint venture, known as Wakefield
Commercial LLC, primarily to develop two community shopping centers. The two
retail centers, one approximately 200,000 square feet and the other
approximately 300,000 square feet, will be located on 65 acres within a 500-acre
parcel of land zoned for commercial use. The Company will perform all leasing,
property management and marketing functions for the two centers. The Company
will hold a 50% interest in the venture, which is accounted for under the equity
method of accounting as major decisions must be agreed to by both the Company
and its venture partner. As of March 31, 1998, the Company had invested $0.6
million in this joint venture and had advanced the joint venture $4.7 million.
The advances carry interest at 11% per annum. The joint venture had no other
operations.
The acquisition and development of the above properties are subject to,
among other things, completion of due diligence and various contingencies,
including those inherent in development projects, such as zoning, leasing and
financing. There can be no assurance that all of the above transactions will be
consummated.
The Company receives rental revenue through base rent, percentage rent, and
expense recoveries from tenants and through other income including tenant lease
buyouts and management fee income. Base rent represents a minimum amount set
forth in the leases for which the tenants are contractually obligated, including
the amounts tenants are obligated to pay based on a percentage of the tenants'
gross sales in lieu of base rent. Percentage rent is a function of the sales
volumes of various tenants in excess of a negotiated sales "break point". For
sales in excess of the break point, tenants pay a specified percentage of these
sales as percentage rent in addition to their base rent and other charges.
Expense recoveries from tenants relate to the portion of the property's
operating costs for which the tenants are obligated to reimburse the Company,
and may include, real estate taxes, insurance, and common area maintenance
charges. Pursuant to leases with the Company's two major anchor tenants, VF
Factory Outlet, Inc. ("VFFO") and Carolina Pottery Retail Group, Inc., these
anchor tenants are obligated to pay only certain increases in common area
maintenance expenses and their pro-rata share of insurance expense and real
estate taxes, and certain of the operating expenses. While many of the Company's
leases are triple net leases, whereby the tenants are obligated for their
pro-rata share of the real estate taxes, insurance, common area maintenance
charges and contribute to the marketing fund, as of December 31, 1997,
approximately 21% of the leased GLA of the Company's factory outlet centers is
leased to tenants who are not obligated to reimburse the Company for real estate
taxes, insurance, utilities and common area maintenance expenses. In such
instances, the Company has allocated a portion of the base rent to expense
recoveries.
The Company has approximately 182 acres of outparcels located near or
adjacent to certain centers which may be marketed for sale or as ground leases
from time to time. As outparcels are sold and cash received, these revenues are
available for reinvestment.
Results of Operations
Year Ended December 31, 1997 compared to the Year Ended December 31, 1996.
The Company reported a net loss of $1.4 million, or $0.12 per common share,
for the year ended December 31, 1997 compared to a net loss of $6.1 million, or
$0.55 per common share, for the comparable period in 1996. The loss for 1997
resulted primarily from the following factors: (a) an increase in depreciation
and amortization of $1.9 million as described below; (b) increased interest
expense of $2.2 million, as a result of higher borrowing levels; and (c) the
Company incurred an extraordinary loss on the early extinguishment of debt of
$1.0 million in 1997 compared to $0.1 million in 1996. These amounts were offset
by increases in NOI of $4.9 million as described below. In 1996, the Company
recorded a $5 million charge to operations as a result of an adjustment to the
carrying value of a certain property as described below.
FFO for the year ended December 31, 1997 increased $1.4 million, or 9.5%,
to $16.2 million from $14.8 million for the same period in 1996. The factors
that had a positive impact on 1997 FFO were an increase in NOI of $3.9 million
before the adjustment for straight line rent (net $1.0 million) and a $0.5
million decrease in general and administrative expenses exclusive of
compensation under restricted stock awards and non-recurring administrative and
merger termination costs, as described below. The factor that had a negative
impact on 1997
32
<PAGE>
FFO was $2.8 million in higher interest expense due to higher average
borrowing levels, net of interest on exchangeable notes of $0.6 million in 1996.
Earnings before interest, taxes, depreciation and amortization (EBITDA) was
$33.7 million for the year ended December 31, 1997, an increase of $5.4 million
or 19%, from $28.3 million for the same period in 1996. The increase was due to
the increase in NOI of $4.9 million, including adjustment for straight line rent
and a decrease of $0.5 million in the general and administrative expenses from
1996 exclusive of compensation under restricted stock awards and non-recurring
administrative and merger termination costs, described below.
Base rent increased to $38.5 million for the year ended December 31, 1997
from $34.1 million for the same period in 1996. Base rent before the adjustment
for straight line rent increased $3.4 million to $37.9 million for the year
ended December 31, 1997 when compared to 1996, while the Company's weighted
average square feet of GLA in operation increased 13%. The increase in base
rents resulted from increased GLA in operation and from increased occupancy at
the operating and development centers and was offset by declining rents on
renewals at certain properties. Base rental revenue in each of the years ending
December 31, 1997 and 1996 included a charge to the reserve for uncollectible
tenant accounts of $0.5 million.
Percentage rent increased 33% to $0.8 million in 1997 from $0.6 million in
1996. The increase is due primarily to the percentage rent attributable to the
community centers acquired in March 1997.
Recoveries from tenants, representing contractual reimbursements from
tenants of certain common area maintenance, real estate taxes and insurance
costs, increased in the year ended December 31, 1997 to $12.7 million from $11.8
million in the same period in 1996. On a weighted average square-foot basis,
recoveries from tenants decreased 6% to $2.38 in 1997 from $2.52 in 1996. The
average recovery of property operating expenses for the year ended December 31,
1997 decreased to 81% from 84% for the same period in 1996. With respect to
approximately 21% of the leased GLA, the Company is obligated to pay all
utilities and operating expenses of the applicable center.
Total tenant retail sales at the Company's centers increased 4.9% for the
year ended December 31, 1997 compared to the same period in 1996. Tenant sales
on a comparative store basis increased approximately 1.2% in 1997 compared to
1996.
Other income increased $1.0 million to $1.7 million in 1997 compared to
1996 primarily as a result of increased tenant lease buyouts of $0.7 million and
third party property management fee income of $0.3 million.
Operating expenses increased $1.7 million, or 12%, to $15.7 million in 1997
from $14.0 million in 1996. The increase in operating expenses was principally
due to the increase in the weighted average square feet in operation in 1997,
which rose 13% to 5.3 million square feet in 1997 from 4.7 million square feet
in 1996. On a weighted average square-foot basis, operating expenses decreased
1% to $2.96 in 1997 from $2.98 in 1996.
General and administrative expenses for the year ended December 31, 1997
included a charge of $1.3 million related to the settlement of the termination
of agreements entered into in 1995 to acquire the factory outlet centers owned
by Public Employees Retirement System of Ohio (OPERS), $0.3 million in other
non-recurring charges and $0.5 million in compensation under restricted stock
awards. General and administrative expenses in 1996 included $0.9 million in
non-recurring administrative expenses and $0.4 million in compensation under
restricted stock awards. Exclusive of these charges in 1997 and 1996, general
and administrative expense decreased $0.5 million, or 10% to $4.4 million in
1997 from $4.9 million in 1996.
Depreciation increased $1.7 million in 1997 primarily as a result of the
completion in 1996 of the center in Branson, Missouri, the expansions of the
Company's properties in Story City, Iowa; Nebraska City, Nebraska; Smithfield,
North Carolina and Tupelo, Mississippi, and the acquisition in March 1997 of the
five community shopping centers. Amortization of deferred leasing and other
charges increased $0.1 million in 1997 primarily as a result of increased tenant
improvements. On a weighted average square-foot basis, depreciation and
amortization of income-producing properties decreased 1% to $2.86 in 1997 from
$2.89 in 1996.
Interest expense for the year ended December 31, 1997, net of interest
income of $0.6 million, increased by $2.2 million or 15%, to $16.4 million
compared to $14.2 million, net of interest income of $0.6 million, in 1996. This
increase resulted from higher borrowing levels in 1997 compared to 1996. On a
weighted average
33
<PAGE>
basis, debt outstanding and the average interest cost were approximately $211
million and 8.0%, respectively, in 1997 compared to $180.0 million and 8.2%,
respectively, in 1996. Amortization of deferred financing costs amounted to $1.6
million in 1997 and $1.4 million in 1996. The Company capitalized interest cost
associated with its development projects of $1.5 million in 1997 and $2.0
million in 1996. In conjunction with the early extinguishment of debt, the
Company expensed the related unamortized loan costs of $1.0 million in 1997 as
compared to $0.1 million in 1996, which has been classified as an extraordinary
item in the Consolidated Statements of Operations.
As part of the Company's ongoing strategic evaluation of its portfolio of
assets, the Company determined 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. Accordingly, in 1995 and 1996 the Company recorded an $8.5
and $5.0 million adjustment to the carrying value of three assets ultimately
held for disposition. After recording the $13.5 million valuation adjustment,
the net carrying value of such assets at December 31, 1997 is $12.5 million.
There is also $12.3 million of debt secured by the properties which is expected
to be retired primarily from the sale proceeds. For the year ended December 31,
1997, these properties contributed approximately $1.1 million of revenue and
incurred a loss of $1.1 million after deducting related interest expense on the
debt associated with the properties. For the year ended December 31, 1996, such
properties contributed approximately $2.1 million of revenue and incurred a loss
of $1.0 million after deducting related interest expense. The reduction in the
performance is principally due to the lower average occupancy level in 1997 as
compared to 1996.
As of December 31, 1997, two of these properties were under contract.
Management periodically evaluates income producing properties for potential
impairment when circumstances indicate that the carrying amount of such assets
may not be recoverable.
Year ended December 31, 1996 compared to year ended December 31, 1995.
The Company reported a net loss of $6.1 million, or $0.55 per common share,
for the year ended December 31, 1996 compared to a net loss of $13.1 million, or
$1.11 per common share, for the comparable period in 1995. The loss for 1996
resulted in part from three factors. First, the Company took a charge against
earnings of $5.0 million to reduce the carrying amount of a certain property.
Second, the Company accrued severance costs and other non-recurring
administrative costs of $0.9 million. Third, the Company incurred an
extraordinary loss on the early extinguishment of debt of $0.1 million.
Excluding similar charges for 1995 and the charge of $4.5 million related to the
termination of agreements to acquire the factory outlet centers owned by the
OPERS in 1995, net income for 1995 exceeded that of 1996 by $2.0 million. As
more fully described below, the differential is primarily due to an increase in
depreciation and amortization of $1.9 million in 1996 over 1995.
FFO for 1996 increased $2.1 million, or 16.5%, to $14.8 million from $12.7
million for the same period in 1995. Factors that had a positive impact on 1996
FFO were: (a) $1.1 million in improved property level performance as described
below and (b) $3.8 million in lower general and administrative expenses also as
described below. Factors that had a negative impact on 1996 FFO were: (a) $2.7
million in higher interest expense due to a higher average borrowing level; and
(b) $0.1 million in higher depreciation and amortization expense on non real
estate assets.
Earnings before interest, taxes, depreciation and amortization (EBITDA) was
$28.3 million in 1996, an increase of $3.9 million, or 16%, from $24.4 million
for the same period in 1995. The increase was due primarily to the decrease in
the general and administrative expenses from 1995 after adjustment for
non-recurring administrative costs for both years.
Base rent decreased slightly, to $34.1 million in 1996 from $34.6 million
in 1995. However, base rent before the adjustment for straight line rent
increased $0.5 million or 1.5% to $34.5 million in 1996 when compared to 1995,
while the Company's weighted average square feet of GLA in operation increased
8%. The increase in base rents from increased occupancy at certain of the
Company's properties was offset by declining rents on renewals at certain other
properties and lower average center occupancy levels in the centers held for
sale. Base rental revenue for 1996 includes a charge to the reserve for
uncollectible tenant accounts of $0.5 million compared to $0.6 million in 1995.
Percentage rent remained unchanged at $0.6 million in 1996 compared to the
same amount in 1995.
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Recoveries from tenants, representing contractual reimbursements from
tenants of certain common area maintenance, real estate taxes, and insurance
costs, increased in 1996 to $11.8 million from $11.1 million in 1995. On a
weighted average square foot basis, recoveries from tenants decreased to $2.52
in 1996 from $2.55 in 1995, or 1%. The average recovery of property operating
expenses increased from 81% in 1995 to 84% in 1996. The increase in the recovery
percentage was the result of new development and expansions which were leased
primarily on a triple net basis. Approximately 21% of the Company's GLA is
leased whereby the Company is obligated to pay all utilities and operating
expenses of the applicable factory outlet center as compared to 18% in 1995.
Although total tenant retail sales at Company centers increased 7.6% in the
year ended December 31, 1996 compared to 1995, tenant sales on a comparative
store basis decreased approximately 1.8% in 1996 compared to 1995, as compared
to a 1.3% increase for the industry as reported by the International Council of
Shopping Centers. Lower tenant sales may have a continuing adverse effect on
tenant plans for new store openings or lease renewals.
Other income was approximately $0.7 million in 1996 compared to $0.9
million in 1995. The decrease was primarily due slightly higher lease
termination settlements and a decrease in gain on sale of real estate ($0.3
million in 1995).
Operating expenses increased $0.4 million, or 3%, to $14.0 million in 1996
from $13.6 million in 1995. The increase in operating expenses was principally
due to the increase in the weighted average square feet in operation in 1996
which rose 8% from 4.3 million square feet in 1995 to 4.7 million square feet in
1996. On a weighted average square-foot basis, operating expenses actually
decreased 5% from $3.15 in 1995 to $2.98 in 1996. This was due principally to a
$0.21 per square foot decrease in marketing costs, which are recorded net of
tenant contributions to the marketing of the Company's centers.
General and administrative expenses in 1996 included non-recurring
administrative costs of $0.9 million and a non-cash charge of $0.4 million for
restricted stock issued principally for bonuses, whereas 1995 included a charge
of $6.5 million related to the termination of agreements entered into in 1995 to
acquire the factory outlet centers owned by OPERS and certain other
non-recurring charges. Exclusive of these charges, general and administrative
cost decreased $3.9 million, or 44%, to $4.9 million in 1996 from $8.8 million
in 1995. The decrease was due principally to the savings of $3.7 million
associated with the termination of the Company's sponsorship of a NASCAR
motorsports program and $0.2 million related to the termination of the lease on
the Company's airplane.
Of the $0.9 million in non-recurring administrative costs incurred in 1996,
$0.8 million related to severance costs accrued as of December 31, 1996 in
conjunction with the resignation of the Company's chief executive officer. Such
costs were accrued pursuant to the terms of his employment agreement entered
into in December 1995. Concurrently, the Company settled a $0.6 million
valuation issue related to the Company's purchase in 1993 of a 19-acre tract of
land, acquired in a non-monetary transaction from a partnership in which the
former officer was a general partner, by agreeing to resell the land to him for
the original purchase price in an all-cash transaction. The consummation of this
transaction is secured by the unpaid severance amounts due to the former
officer. Also in settling the terms of the former officer's severance and
non-competition restrictions, $0.25 million of his severance was applied to
certain advertising expenses incurred by the Company.
Depreciation increased $0.9 million in 1996, primarily as a result of the
completion of the Nebraska outlet center in Branson, Missouri and the expansions
of the Company's properties in Nebraska City, Nebraska, Smithfield, North
Carolina and Tupelo, Mississippi. Buildings and improvements classified as
income-producing properties increased $36.9 million in 1996 from 1995.
Amortization of deferred leasing and other charges increased $1.0 million in
1996 and deferred leasing and other charges classified as income-producing
properties increased $4.2 million in 1996 from 1995. On a weighted average
square foot basis, depreciation and amortization of income-producing properties
increased 7% to $2.89 in 1996 from $2.70 in 1995.
Interest expense for the year ended December 31, 1996, net of interest
income of $0.6 million, increased by $3.3 million, or 30%, to $14.2 million
compared to $10.9 million, net of interest income of $0.2 million, in 1995. This
increase resulted from higher borrowing levels in 1996 compared to 1995 and $0.6
million from the infusion in April, 1996 of $20 million in capital from Gildea
Management Company, initially
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in the form of Exchangeable Notes, as more fully described in Note 7 of the
"Notes to Consolidated Financial Statements". On a weighted average basis,
excluding the Exchangeable Notes, debt outstanding and the average interest cost
were approximately $180.0 million and 8.2%, respectively, in 1996 compared to
$147.1 million and 8.3%, respectively, in 1995. Amortization of deferred
financing cost amounted to $1.4 million in 1996 and $1.6 million in 1995. The
Company capitalized interest cost associated with its development projects of
$2.0 million in 1996 and $2.6 million in 1995. Associated with the refinancing
of the Company's existing line of credit, the Company expensed the related
unamortized loan costs of $0.1 million which has been classified as an
extraordinary item in the Consolidated Statements of Operations.
As part of the Company's ongoing strategic evaluation of its portfolio of
assets, the Company determined 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. Accordingly, in 1995 the Company recorded an $8.5 million
adjustment to the carrying value of three of the properties held for sale. In
1996 the Company recorded an additional $5.0 million adjustment to the carrying
value of one of the assets held for sale. This non-cash adjustment was charged
to operations and represents the difference between the fair value less costs to
sell and net book value of the assets. After recording the $13.5 million
valuation adjustment, the net carrying value of assets currently being marketed
for sale at December 31, 1996 is $11.4 million. There was also $15.8 million of
debt secured by the properties at December 31, 1996 which is expected to be
retired from the sale proceeds. 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 incurred a loss of $0.5
million after deducting related interest expense. The reduction in the
performance is principally due to the lower occupancy level in 1996 as compared
to 1995 existing at certain centers held for sale.
The Company began the process of marketing the properties and no sales
agreements had been completed at December 31, 1996. 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.
Liquidity and Capital Resources
The Company's cash and cash equivalents balance at December 31, 1997 was
$4.9 million. Restricted cash, as reported in the financial statements, as of
such date, was $3.9 million. In connection with the Company's $95 million rated
debt securitization, the Company is required to escrow 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.
Net cash provided by operating activities was $13.0 million for the year
ended December 31, 1997. Net cash used in investing activities was $62.2 million
for 1997. The primary use of these funds included: $32.4 million to acquire the
five North Carolina community shopping centers as previously described, $15.0
million invested in income-producing properties as follows: $1.6 million for
completion of a development project in 1997, $3.9 million in construction and
development of projects in process, $5.7 million towards normal recurring
capital expenditures; and $3.8 million for re-tenanting, lease renewal and
leasing costs. The Company loaned $8.5 million against a property to be acquired
from Konover & Associates South and $2.3 million to a joint venture partner as
an advance against development projects to be contributed to five joint
ventures. During 1997, the Company also invested $4.3 million in a newly created
joint ventures. Net cash provided by financing activities was $47.1 million for
the year ended December 31, 1997. The principal source of such funds was $135.9
million of new borrowing, as described below, net of $2.3 million in fees and
other costs related thereto. Funds generated through financing activities were
offset by payments of $86.5 million towards scheduled debt principal repayment.
Capital Resources. The Company's management anticipates that cash generated
from operating performance will provide the necessary funds for operating
expenses, interest expense on outstanding indebtedness, dividends and
distributions in accordance with REIT federal income tax requirements and to
fund re-tenanting and lease renewal tenant improvement costs, as well as,
capital expenditures to maintain the quality of its existing centers. The
Company also believes that it has capital and access to capital resources,
including additional borrowings and issuances of debt or equity securities,
sufficient to pursue its strategic plans.
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In February 1997, the Company obtained a $150 million credit facility with
Nomura Asset Capital corporation. The credit facility with Nomura is secured by
21 of the Company's centers plus an assignment of excess cash flow from the
properties currently secured under the $95 million rated debt securitization.
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 were 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 a $75 million credit facility, $7.4 million of Senior Notes and
a $2.0 million note payable incurred in connection with the acquisition of the
VF Properties. The new credit facility contains financial covenants relating to
debt to total asset value and net operating income to debt service coverage.
On March 11, 1998, the Company closed on a $75 million, 15-year permanent
credit facility secured by 11 properties previously securing the $150 million
revolving credit facility. The loan is at an effective rate of 7.73% and is
amortized on a 338-month basis. The proceeds were used to pay down certain
borrowings outstanding on the $150 million Nomura credit facility obtained by
the Company in 1997.
On February 24, 1998, Prometheus Southeast Retail, LLC ("PSR"), a real
estate investment affiliate of Lazard Freres Real Estate Investors, LLC,
entered into a definitive agreement (the "Stock Purchase Agreement") with the
Company to make a $200 million strategic investment in the Company (the
"Transaction"). PSR has committed to purchase $200 million in newly issued
common shares of the Company at a purchase price of $9.50 per share. The
investment can be made in stages, at the Company's option, through March 30,
2000 allowing the Company to obtain capital as needed to fund its future
acquisition and development plans as well as retire debt. Upon completion of
funding, PSR will own an equity interest in the Company of approximately 60%, on
a diluted basis, not including any further issuance of Operating Partnership
Units for transactions under contract or transactions into which the Company may
enter in the future.
As part of the Transaction, three representatives of Lazard will be
nominated to the Company's Board of Directors, which will have a total number of
nine directors.
On March 23, 1998, the Company issued 2,350,000 shares of its common stock
to PSR for a total consideration of $22.3 million (the "Initial Purchase") as
part of the First Closing. In the event that the Second Closing does not occur
by September 30, 1998 or the Stock Purchase Agreement is terminated prior to the
Second Closing (other than as a result of PSR's material breach of the Stock
Purchase Agreement), PSR has an option under the Stock Purchase Agreement to
require that the Company repurchase the shares of Common Stock acquired in the
Initial Purchase at a price equal to the purchase price thereof, together with
any accrued dividends (the "Put Option"). The Put Option may also be exercised
at any time within two months after the earlier to occur of the date that the
Company fails to receive stockholder approval of the Transaction, the date the
Stock Purchase Agreement is terminated prior to the Second Closing and August
31, 1998. The Company does not have the right to require PSR to exercise the Put
Option. Therefore, in the event that stockholder approval of the Transaction is
not obtained and PSR does not exercise the Put Option within two months, the
shares of Common Stock issued to PSR in the Initial Purchase will remain
outstanding and the Put Option will expire.
If the stockholders approve the Transaction, PSR would have the right,
pursuant to a Contingent Value Right Agreement, to receive on January 1, 2004
payment in cash or stock of an aggregate amount equal to the lesser of (a) (i)
21,052,632 shares multiplied by $19 per shares ($400 million) less (ii) the
dividends paid to PSR through January 1, 2004 and less (iii) the fair market
value of the shares purchased and (b) 4,500,000 multiplied by the fair market
value on such date.
Whether or not the Transaction is fully consummated, the Company will
reimburse PSR for its expenses in connection with the Transaction, including
expenses of monitoring the Company and of performing its duties under the
Transaction Documents. These expenses and Transaction expenses incurred by the
Company are estimated to aggregate approximately $3.3 million, exclusive of a
claim by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") of a
"success based" advisory fee. The Company believes that DLJ, which rendered a
fairness opinion to the Company, but was not requested to perform any other
services in connection with the Transaction, is not entitled to any additional
fees or consideration. DLJ, however, has notified the Company that it believes
it is entitled to additional "success based" advisory fees under the terms of
its engagement letter with the Company dated May 23, 1997. As of the date
hereof, there has been no resolution of the disagreement.
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Provided that PSR is not in material default under the Stock Purchase
Agreement, has not breached any of its representations and warranties in any
material respect and has satisfied in all material respects its covenants
relating to the Initial Purchase, the Company will pay PSR a break-up fee of
$2,250,000 (the "Break-up Fee") in the event that the Stock Purchase Agreement
is terminated any time prior to the Second Closing. The Break-up Fee, therefore,
will be payable to PSR if the stockholders do not approve the Transaction. In
addition, in the event that a competing transaction is entered into by the
Company on any date on or prior to the one-year anniversary of the date that the
Stock Purchase Agreement is terminated, the Company will pay PSR an additional
$3,000,000 (the "Topping Fee"). Notwithstanding the foregoing, if a Topping Fee
is payable to PSR and PSR profits on the sale of the shares purchased in the
Initial Purchase in connection with a competing transaction, then PSR must pay
the Company the amount by which such profit, the Break-up Fee and the Topping
Fee exceed $7,750,000.
Each of the Company's and PSR's obligations to effect the Second Closing
and the Subsequent Closings are subject to various mutual and unilateral
conditions, including, without limitation, the following: (i) stockholder
approval of the Transaction; (ii) the continued qualification of the Company as
a REIT for federal income tax purposes; (iii) the receipt of an opinion of
counsel to the effect that the Company is a "domestically controlled" REIT; (iv)
the continuing correctness of the representations and warranties in the Stock
Purchase Agreement, (v) the receipt of any consents necessary for the
Transaction, and (vi) various other customary conditions. In addition, PSR is
not obligated to fund more than $100 million of the Transaction unless a
significant portion of the Konover & Associates South transaction, as described
below, is consummated.
Capital Expenditures. The Company's capital expenditures have included
expansions of existing centers and acquisitions of new properties.
Management's view of the current state of the shopping center industry and
its future direction is that value-oriented retail concepts are merging; for
example, outlet centers are including off-price tenants as well as outlet
tenants, off-price centers have manufacturers' outlets, community centers have
destination tenants, and other community centers have outlet or off-price
tenants. With this backdrop, management believes that a diversified shopping
center portfolio will provide an opportunity for growth. As part of the
Company's diversification strategy, a portion of the availability under the
Nomura credit facility was used to purchase five community centers in the
Raleigh, NC area on March 27, 1997 for a total purchase price of $32.4 million.
The centers total approximately 606,000 square feet of GLA, are well-located and
feature well-known regional tenants. Management will continue to pursue similar
opportunities for the acquisition of community shopping centers in the United
States, and in particular, the southeastern region of the country as evidenced
by Rodwell/Kane and the announcement of the Konover & Associates South
transaction described below.
In 1997, the Company completed construction on a 32,000 square foot
expansion at its Crossville, Tennessee Center. The Company began construction on
an expansion at its Wilson, North Carolina Center consisting of a 44,000 square
foot Winn Dixie. The cost of this project was estimated at $2.45 million of
which $1.8 million has been expanded as of December 31, 1997. During 1996, the
Company delivered 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 cost of
these projects was $42.5 million all of which has been expended as of December
31, 1997.
On February 24, 1998, the Company entered into definitive agreements with
affiliates of Konover & Associates South, a privately held real estate
development firm based in Boca Raton, Florida, to acquire 11 community shopping
centers totaling approximately 2.0 million square feet and valued at nearly $100
million. The purchase equates to approximately $24 million in equity, consisting
of the issuance of Units, at $9.50 per Unit, and/or cash, plus the assumption of
approximately $76 million in debt. At closing, $17 million of the equity will be
paid in the form of Units or cash. The remaining $7 million will be paid in cash
over a three-year period with interest at 7.75% per annum.
As part of the transaction, the Company intends to operate under the name
"Konover Property Trust". The Company will remain listed on the New York Stock
Exchange and intends to change its ticker symbol from FAC to KPT, pending formal
approval by the shareholders in July, 1998. The Company will continue to operate
the Konover & Associates South office in Boca Raton, Florida due to its
strategic location in the Southeast.
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Simon Konover, founder of both Konover & Associates South and Konover &
Associates, Inc., a $500 million plus real estate company headquartered in West
Hartford, Connecticut, will become Chairman of the Board of the Company upon
completion of the transaction. He will not become an executive officer of the
Company.
On October 7, 1997, the Company entered into agreements to purchase nine
shopping centers located in North Carolina and Virginia, (the "Rodwell/Kane
Properties") totaling 1.0 million square feet, and to assume third-party
management of an additional 1.2 million square feet of community shopping
centers. The centers to be purchased are owned primarily by Roy O. Rodwell,
Chairman and Co-Founder of Atlantic Real Estate Corporation ("ARC"), a privately
held real estate development company based in Durham, North Carolina and John M.
Kane, Chairman of Kane Realty Corporation, a real estate development and
brokerage company based in Raleigh, North Carolina, in a transaction valued at
$63.3 million.
As of March 31, 1998, the acquisition of seven of the nine centers
discussed above had closed. The acquisition of the eighth center closed on May
14, 1998. The ninth and final center will be managed by the Company and is
expected to be acquired in the year 2000. Its acquisition prior to the year 2000
would trigger an onerous loan assumption fee.
In exchange for their equity ownership interests in the community centers,
Mr. Rodwell, Mr. Kane and related parties will receive approximately 1.2 million
Units in the Operating Partnership and approximately $3.0 million in cash. The
number of Units to be issued to the sellers was based on a $9.50 price per share
of the Company's Common Stock. Of the Units to be issued, approximately 0.3
million Units will remain unissued, as well as the holdback of cash in the
amount of approximately $0.8 million, until the completion of certain
performance requirements. As part of the purchase price, the Company will also
assume approximately $48.8 million of fixed-rate debt on the properties to be
acquired.
During 1997, the Company and Atlantic Real Estate Corporation ("ARC")
jointly created a limited liability company named Atlantic Realty LLC
("Atlantic") to develop and manage retail community and neighborhood shopping
centers in North Carolina. Atlantic currently has plans to develop nearly one
million square feet, including outparcels, over the next several years. The
Company and ARC own Atlantic equally, with the Company serving as managing
member overseeing its operations. As of March 31, 1998, the Company has invested
$2.5 million in this joint venture. The investment in Atlantic will be accounted
for under the equity method of accounting as major decisions must be agreed to
by both the Company and ARC. As of March 31, 1998, Atlantic had total assets of
approximately $8.1 million and debt of $5.6 million. The joint venture had no
other operations.
During 1997, the Company also entered into a joint venture, known as Mount
Pleasant FAC LLC, with AJS Group, to develop a 425,000-square foot
retail/entertainment shopping center in Mount Pleasant, South Carolina.
Construction on the center is expected to begin May 1998, with completion
targeted for May 1999. As of March 31, 1998, the Company has invested $1.3
million in this joint venture. This 50% investment in the joint venture will be
accounted for under the equity method of accounting as major decisions must be
agreed to by both the Company and the AJS Group. The joint venture had
approximately $4.8 million of assets and $3.5 of debt at March 31, 1998. The
joint venture had no other operations.
During 1998, the Company entered into a joint venture, known as Wakefield
Commercial LLC, primarily to develop two community shopping centers. The two
retail centers, one approximately 200,000 square feet and the other
approximately 300,000 square feet, will be located on 65 acres within a 500-acre
parcel of land zoned for commercial use. The Company will perform all leasing,
property management and marketing functions for the two centers. The Company
holds a 50% in the venture, which is accounted for under the equity method of
accounting as major decisions must be agreed to by both the Company and its
venture partners. As of March 31, 1998, the Company had invested $0.6 million in
this joint venture and had advanced the joint venture $4.7 million. The advances
carry interest at 11% per annum. The joint venture had no other operations.
The Company is currently in the pre-development and marketing stage for a
property located Lake Carmel, New York. If appropriate tenant interest is
obtained and the appropriate agreements, permits and approvals are received, the
Company intends to commence construction in the Fall of 1998.
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The Company's current acquisition, expansion and development plans are
subject to certain risk and uncertainties; including, but not limited to
economic conditions in the retail industry, future real estate market
conditions; the availability of financing; and the risk associated with the
Company's property development activities, such as the potential for cost
overruns, delays and the lack of predictability with respect to the financial
returns associated with these development activities. There can be no assurance
that the planned development and expansions will occur according to current
schedules or that, once commenced, such development and expansions will be
completed.
Based on current market conditions, the Company believes it will have
access to the capital resources or has adequate financial resources to fund
operating expenses, potential distributions to stockholders, acquisitions and
planned development and construction activities. At March 31, 1998, the Company
has available $87.8 under its $150 million Nomura credit facility following the
retirement of $72.3 million of debt which existed at December 31, 1997.
The Company is in the process of reviewing various financing alternatives
for its planned development of the "power" outlet mall located in Lake Carmel,
New York, including a potential joint venture arrangement. The planned
development of nearly one million square feet of community and neighborhood
shopping centers in North Carolina with ARC, the development of a
retail/entertainment shopping center in Mt. Pleasant, South Carolina, and the
development of two community shopping centers in Wakefield, North Carolina will
be completed in joint ventures and will be financed in part by a traditional
bank construction loan.
The Company previously announced that dividends declared will be equal to
95% of the Company's taxable income, which is the minimum dividend required to
maintain its REIT status. Determination of any dividends will be made annually
following the review of the Company's year-end financial results. The Company's
decision is driven by its goal to increase the total return to its shareholders
through the use of internal cash flow to "self-fund" some of its growth, such as
expansions at existing centers and strategic acquisitions. The Company also will
strive to reduce its borrowing levels and interest expense. The Board of
Directors determined that the Company would not declare a dividend for 1997.
Impact of Year 2000 Issue
The "Year 2000" issue is a general term used to describe the various
problems that may result from the improper processing of dates and calculations
involving years by many computers throughout the world as the Year 2000 is
approached and reached. The Company has reviewed the impact of Year 2000 issues
and does not expect any remedial actions taken with respect thereto to
materially adversely affect its business, operations or financial condition.
FASB Statement No. 128
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128, "Earnings Per Share," which is effective for financial statements for
periods ending after December 15, 1997. FASB Statement No. 128 requires the
restatement of prior period earnings per share and requires the disclosure of
additional supplemental information detailing the calculation of earnings per
share.
FASB Statement No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. It is computed using the weighted average number of shares of Common
Stock and the dilutive effect of options, warrants and convertible securities
outstanding, using the "treasury stock" method. Earnings per share data is
required for all periods for which an income statement or summary of earnings is
presented, including summaries outside the basic financial statements. All
earnings per share amounts for all periods presented have, where appropriate,
been restated to conform to the FASB Statement No. 128 requirements.
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Recent Developments
Lazard Freres Transaction
On February 24, 1998, Prometheus Southeast Retail, LLC ("PSR"), a real
estate investment affiliate of Lazard Freres Real Estate Investors, LLC, entered
into a definitive agreement (the "Stock Purchase Agreement") with the Company to
make a $200 million strategic investment in the Company (the "Transaction"). PSR
has committed to purchase $200 million in newly issued common shares of the
Company at a purchase price of $9.50 per share. The investment can be made in
stages, at the Company's option, through March 30, 2000 allowing the Company to
obtain capital as needed to fund its future acquisition and development plans as
well as retire debt. Upon completion of funding, PSR will own an equity interest
in the Company of approximately 60%, on a diluted basis, not including any
further issuance of Operating Partnership Units for transactions under contract
or transactions into which the Company may enter in the future.
As part of the Transaction, three representatives of Lazard will be
nominated to the Company's Board of Directors, which will have a total number of
nine directors.
On March 23, 1998, the Company issued 2,350,000 shares of its common stock
to PSR for a total consideration of $22.3 million (the "Initial Purchase") as
part of the First Closing. In the event that the Second Closing does not occur
by September 30, 1998 or the Stock Purchase Agreement is terminated prior to the
Second Closing (other than as a result of PSR's material breach of the Stock
Purchase Agreement), PSR has an option under the Stock Purchase Agreement to
require that the Company repurchase the shares of Common Stock acquired in the
Initial Purchase at a price equal to the purchase price thereof, together with
any accrued dividends (the "Put Option"). The Put Option may also be exercised
at any time within two months after the earlier to occur of the date that the
Company fails to receive stockholder approval of the Transaction, the date the
Stock Purchase Agreement is terminated prior to the Second Closing and August
31, 1998. The Company does not have the right to require PSR to exercise the Put
Option. Therefore, in the event that stockholder approval of the Transaction is
not obtained and PSR does not exercise the Put Option within two months, the
shares of Common Stock issued to PSR in the Initial Purchase will remain
outstanding and the Put Option will expire.
If the stockholders approve the Transaction, PSR would have the right,
pursuant to a Contingent Value Right Agreement, to receive on January 1, 2004
payment of an aggregate amount equal to the lesser of (a) (i) 21,052,632 shares
multiplied by $19 per share ($400 million) less (ii) the dividends paid to PSR
through January 1, 2004 and less (iii) the fair market value of the shares
purchased and (b) 4,500,000 multiplied by the fair market value on such date.
Whether or not the Transaction is fully consummated, the Company will
reimburse PSR for its expenses in connection with the Transaction, including
expenses of monitoring the Company and of performing its duties under the
Transaction Documents. These expenses and Transaction expenses incurred by the
Company are estimated to aggregate approximately $3.3 million, exclusive of a
claim by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") of a
"success based" advisory fee. The Company believes that DLJ, which rendered a
fairness opinion to the Company, but was not requested to perform any other
services in connection with the Transaction, is not entitled to any additional
fees or consideration. DLJ, however, has notified the Company that it believes
it is entitled to additional "success based" advisory fees under the terms of
its engagement letter with the Company dated May 23, 1997. As of the date
hereof, there has been no resolution of the disagreement.
Provided that PSR is not in material default under the Stock Purchase
Agreement, has not breached any of its representations and warranties in any
material respect and has satisfied in all material respects its covenants
relating to the Initial Purchase, the Company will pay PSR a break-up fee of
$2,250,000 (the "Break-up Fee") in the event that the Stock Purchase Agreement
is terminated any time prior to the Second Closing. The Break-up Fee, therefore,
will be payable to PSR if the stockholders do not approve the Transaction. In
addition, in the event that a competing transaction is entered into by the
Company on any date on or prior to the one-year anniversary of the date that the
Stock Purchase Agreement is terminated, the Company will pay PSR an additional
$3,000,000 (the "Topping Fee"). Notwithstanding the foregoing, if a Topping Fee
is payable to PSR and PSR profits on the sale of the shares purchased in the
Initial Purchase in connection with a competing transaction, then PSR must pay
the Company the amount by which such profit, the Break-up Fee and the Topping
Fee exceed $7,750,000.
41
<PAGE>
Each of the Company's and PSR's obligations to effect the Second Closing
and the Subsequent Closings are subject to various mutual and unilateral
conditions, including, without limitation, the following: (i) stockholder
approval of the Transaction; (ii) the continued qualification of the Company as
a REIT for federal income tax purposes; (iii) the receipt of an opinion of
counsel to the effect that the Company is a "domestically controlled" REIT; (iv)
the continuing correctness of the representations and warranties in the Stock
Purchase Agreement, (v) the receipt of any consents necessary for the
Transaction, and (vi) various other customary conditions. In addition, PSR is
not obligated to fund more than $100 million of the Transaction unless a
significant portion of the Konover & Associates South transaction, as described
below, is consummated.
Konover & Associates South Transaction
On February 24, 1998, the Company entered into definitive agreements with
affiliates of Konover & Associates South, a privately held real estate
development firm based in Boca Raton, Florida, to acquire 11 community shopping
centers totaling approximately 2.0 million square feet and valued at nearly $100
million. The purchase equates to approximately $24 million in equity, consisting
of the issuance of Units, at $9.50 per Unit, and/or cash, plus the assumption of
approximately $76 million in debt. At closing, $17 million of the equity will be
paid in the form of Units or cash. The remaining $7 million will be paid in cash
over a three-year period with interest at 7.75% per annum.
As part of the transaction, the Company intends to operate under the name
"Konover Property Trust". The Company will remain listed on the New York Stock
Exchange and intends to change its ticker symbol from FAC to KPT, pending formal
approval by the shareholders in July, 1998. The Company will continue to operate
the Konover & Associates South office in Boca Raton, Florida due to its
strategic location in the Southeast.
Simon Konover, founder of both Konover & Associates South and Konover &
Associates, Inc., a $500 million plus real estate company headquartered in West
Hartford, Connecticut, will become Chairman of the Board of the Company upon
completion of the transaction. He will not become an executive officer of the
Company.
Other
On January 7, 1998, the Company completed the purchase of a 55,909 square
foot shopping center located in Danville, VA. This Food Lion anchored center was
purchased for $3.1 million.
On March 11, 1998, the Company closed on a $75 million, 15-year permanent
credit facility secured by 11 properties previously securing its $150 million
revolving credit facility. The loan is at an effective rate of 7.73% and is
amortized on a 338-month basis. The proceeds were used to pay down certain
outstandings on the $150 million Nomura credit facility.
As of March 31, 1998, seven of the nine Kane/Rodwell Centers had closed. An
eighth center is expected to close in second quarter of 1998. The ninth and
final center will be managed by the Company and is expected to be acquired in
the year 2000. The loan assumption fee is currently unreasonable, however, the
loan is prepayable in the year 2000.
42
<PAGE>
Economic Conditions
Inflation has remained relatively low during the past three years with
certain segments of the economy experiencing disinflation, such as, apparel
pricing which has slowed the growth of tenant sales which adversely impacts the
Company's revenue due to lower percentage and overage rents on some properties.
Additionally, weakness in the overall retail environment as it relates to tenant
sales volumes may have an impact on the Company's ability to renew leases at
current rental rates or to release space to other tenants. Although the decline
in sales does not effect base rental, aside from renewals, this weakness could
result in reduced revenue from percentage rent tenants, as well as, overage rent
paid to the Company. Both revenue items are directly impacted by sales volumes
and represented 5.4% of the Company's total revenue in 1997. Continuance of this
trend may affect the Company's operating centers (the "Properties") occupancy
rate and the rental rates obtained and concessions, if any, granted on new
leases or re-leases of space, which may cause fluctuations in the cash flow from
the operation and performance of the Properties. In the event of higher
inflation, however, a majority of the tenants' leases contain provisions
designed to protect the Company from the impact of inflation. Such provisions
include clauses enabling the Company to receive percentage rentals based on
tenants' gross sales, which generally increase as prices rise, and/or escalation
clauses, which generally increase rental rates during the terms of the leases.
In addition, many of the leases are for terms of less than ten years, which may
enable the Company to replace existing leases with new leases at higher base
and/or percentage rentals if rents of the existing leases are below the
then-existing market rate.
The majority of the Company's leases, other than those for anchors, require
the tenants to pay a proportionate share of operating expenses, including
marketing, common area maintenance, real estate taxes and insurance, thereby
reducing the Company's exposure to increases in costs and operating expenses
resulting from inflation. The Company's leases with two of its anchor tenants,
VF Factory Outlet and Carolina Pottery, which were executed prior to June 1993,
require the tenants to pay certain operating expenses and increases in common
area maintenance expenses, which reduces the Company's exposure to increases in
costs and operating expenses resulting from inflation. At December 31, 1997, 21%
of the aggregate GLA of its factory outlet centers was leased to non-anchor
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. The Properties are subject to operating risks common to commercial real
estate in general, any and all of which may adversely affect occupancy or rental
rates. The Properties are subject to increases in operating expenses such as
cleaning; electricity; heating, ventilation and air conditioning ("HVAC");
insurance and administrative costs; and other general costs associated with
security, landscaping, repairs and maintenance. While the Company's tenants
generally are currently obligated to pay a portion of these escalating costs,
there can be no assurance that tenants will agree to pay such costs upon renewal
or that new tenants will agree to pay such costs. If operating expenses
increase, the local rental market may limit the extent to which rents may be
increased to meet increased expenses without decreasing occupancy rates.
Additionally, inflation may have a negative impact on some of the Company's
other operating items. Interest and general and administrative expenses may be
adversely affected by inflation as these specified costs could increase at a
rate higher than rents. Approximately 61% of the Company's debt on income
properties and notes payable as of December 31, 1997 bore interest at rates that
adjust periodically based on market conditions. Following the closing of the $75
million permanent debt facility described above, and the receipt of proceeds
from sale of common shares to PSR, also described above, the Company's exposure
to floating rate debt will be significantly reduced. Also, for tenant leases
with stated rent increases, inflation may have a negative effect as the stated
rent increases in these leases could be lower than the increase in inflation at
any given time.
Substantially all of the Company's existing tenants have met their lease
obligations and the Company continues to attract and retain quality tenants. The
Company intends to reduce operating and leasing risks by continually improving
its tenant mix, rental rates and lease terms by attracting creditworthy national
brand-name manufacturers, upscale, high-fashion manufacturers and new tenants
that offer a wide range of merchandise and amenities not previously offered.
Forward-Looking Statements
Certain statements in this Form 10-K and in the future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases, and in oral statements made by or with the approval of an authorized
executive officer constitute "forward-looking statements" under the Reform Act.
Such forward-
43
<PAGE>
looking statements involve known and unknown risks, uncertainties and other
factors, which may cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: real estate market conditions;
availability of financing; general economic conditions, including conditions in
the retail segments of the economy such as, inflation, consumer confidence,
unemployment rates and consumer tastes and preferences; the amount of, and rate
of growth in, the Company's ability to reduce, or limit the increase in, such
expenses, and the impact of unusual items resulting from the Company's ongoing
evaluation of its business strategies, portfolio and organizational structure;
difficulties or delays in the completion of expansions of existing projects or
development of new projects; and, the effect of competition from other factory
outlet centers. With respect to the Company's expansion and development
activities (including the potential development of a site at Lake Carmel, New
York), such forward looking statements are subject to a number of risks and
uncertainties, including the availability of financing on favorable terms, the
consummation of related property acquisitions, receipt of zoning, land use,
occupancy, government and other approvals, and the timely completion of
construction and leasing activities. With respect to the Company's acquisition
activities), such forward looking statements are subject to risks and
uncertainties, including accuracy of representations made in connection with
such acquisitions, continuation of occupancy levels, changes in economic
conditions (including interest rate levels) and real estate markets.
Item 8 - Financial Statements and Supplementary Data
The response to this Item is submitted in a separate section of this
report.
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
44
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
<TABLE>
<CAPTION>
Name Age Principal Occupation Director Since
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
C. Cammack Morton 46 President and Chief Executive Officer 1996
of the Company
Patrick M. Miniutti 50 Executive Vice President and Chief 1996
Financial Officer of the Company
Robert O. Amick 65 President of The Amick Group 1993
William D. Eberle 74 Chairman of Manchester 1997
Associates, LTD.
J. Richard Futrell, Jr. 67 Former Chairman and Chief Executive 1993
Officer of Centura Banks, Inc.
John W. Gildea 54 Managing Director of Gildea Management 1996
Company and Advisor for The Network
Funds
Theodore E. Haigler, Jr. 73 Former President and Chief Executive 1993
Officer of Burroughs-Wellcome Co.
</TABLE>
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.
William D. Eberle, was a founder of Boise Cascade and is Chairman of
Manchester Associates, Ltd. a venture of capital and international consulting
firm and Of Counsel to the law firm of Kaye, Scholer, Fireman, Hay & Handler.
Mr. Eberle is also Chairman of the Board of America Service Group Inc., a health
care services company, Showscan Entertainment, Inc., a movie-based software and
technology company, and Barry's Jewelry, Inc., a retail jewelry chain, and is a
director of Ampco-Pittsburgh Corp., a steel fabrication equipment company,
Fiberboard Corporation, a timber manufacturer, Mitchell Energy and Development,
a gas and oil company, and Mid-States PLC, an auto parts distributor
headquartered in Nashville, Tennessee.
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 Securities Corporation. Mr. Gildea also has been
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.
45
<PAGE>
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.
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 46 President and Chief Executive Officer
Patrick M. Miniutti 50 Executive Vice President and Chief Financial
Officer
William H. Neville 53 Executive Vice President and Chief Operating
Officer
Christopher G. Gavrelis 44 Executive Vice President - Management
Connell L. Radcliff 43 Senior Vice President - Development
Linda M. Swearingen 33 Senior Vice President - Finance/ Investor
Relations
Sona A. Thorburn 32 Vice President and Chief Accounting Officer
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.
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, a public REIT that
owns regional shopping malls. 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.
William H. Neville, has served as Executive Vice President and Chief
Operating Officer since September 1997. Before joining the Company, Mr. Neville
was Regional President of Horizon Group Realty, a real estate investment trust
specializing in outlet centers, from January 1996 to July 1997. Prior to joining
Horizon, Mr. Neville was President of Charter Oak Partners a subsidiary of
Rothschild, the largest privately held developer of outlet centers. He also
served as Executive Vice President and early in the Company's history was Vice
President of leasing. Mr. Neville spent nearly ten years at The Rouse Company, a
mall developer, most
46
<PAGE>
notably as the first Vice President, General Manager of South Street Seaport.
During his shopping center career, he also served as a Vice President of leasing
at L. J. Hooker Corporation, a mall developer.
Christopher G. Gavrelis joined the Company in December 1995. Mr. Gavrelis
was named Senior Vice President in January 1996 and promoted to Executive Vice
President in January 1998. Prior to his affiliation with the Company, Mr.
Gavrelis was Vice President - Property Management of the Charter Oak Group for
approximately four years. From 1989 to 1991, Mr. Gavrelis served as regional
property manager for McArthur/Glen Realty Corporation (now HGI Realty, Inc.), a
company engaged in the development and operation of factory outlet centers. From
1986 to 1989, Mr. Gaverlis worked for May Centers, Inc. as General Manager and
later as Development Director for a super regional mall located in Annapolis,
Maryland. He started his career in 1978 with Developers General Corporation, a
Baltimore, Maryland firm engaged in commercial and residential real estate. Mr.
Gavrelis is responsible for the Company's management and administration
activities.
Connell L. Radcliff has served as Senior Vice President of Development
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 partner with The Shopping Center Group, a real
estate brokerage firm specializing in national tenant representation. Prior to
his duties there, Mr. Radcliff was with New Market Development (now Cousins
Market Centers) as regional leasing director. Mr. Radcliff is responsible for
the Company's development activities.
Linda M. Swearingen was promoted from Vice President to Senior Vice
President of Finance/Investor Relations in January 1998. Prior to being named
Vice President in May 1996, Ms. Swearingen was Director of Leasing for the
Company, a position she had held since July 1993. From 1990 to 1993, Ms.
Swearingen served as Assistant Vice President - Commercial Real Estate for Bank
One Dayton.
Sona A. Thorburn has served as Vice President and Chief Accounting Officer
since joining the Company in 1997. Prior to joining the Company, Ms. Thorburn
was a manager with the accounting firm of Ernst & Young LLP, where she was
employed for eight years. At Ernst & Young, Ms. Thorburn supervised audits for a
variety of clients, including the Company.
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, based solely on the
information furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1997, all such
filing requirements were complied with, except that the exchange of unvested
shares of Restricted Stock for Repurchase Options described at "Executive
Compensation - Executive Compensation Committee Report - Restricted Stock" was
reported late by Messrs. Morton, Miniutti, Neville, Gavrelis, and Radcliff and
Ms. Thorburn.
Item 11. Executive Compensation
The following table sets forth the compensation of the Chief Executive
Officer and the four most highly compensated executive officers other than the
Chief Executive Officer who were serving as executive officers at December 31,
1997 (collectively, the Named Executive Officers).
47
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation Awards
----------------------------------------------------------------
Restricted Securities All Other
Salary Bonus Stock Underlying Compensation
Name and Principal Position Year ($) ($) Awards($) Options(#)(10) ($)
- --------------------------- ---- ------ --- --------- -------------- ---
<S> <C> <C> <C> <C> <C> <C>
C. Cammack Morton 1997 336,072 (4) 670,538(5) (11) 33,467(12)
President and Chief Executive 1996 287,692 (4) 1,019,250(5) 300,000(11) 3,570(13)
Officer 1995 11,458(1) -- -- -- --
Patrick M. Miniutti 1997 230,871 (4) 346,726(6) (11) 19,000(12)
Executive Vice President and 1996 70,769(2) (4) 819,313(6) 200,000(11) 50,000(13)
Chief Financial Officer -- -- -- -- --
William H. Neville 1997 65,059(3) (4) 205,800(7) 50,000 --
Executive Vice President and 1996 -- -- -- -- --
Chief Operating Officer 1995 -- -- -- -- --
Christopher G. Gavrelis 1997 160,962 (4) 94,163 (11) 11,915(12)
Executive Vice President - 1996 129,742 (4) 214,750(8) 35,000(11) 1,163(13)
Management 1995 5,208(1) -- -- -- --
Connell L. Radcliff 1997 185,555 (4) 101,138(9) -- 13,712(12)
Senior Vice President - 1996 181,923 (4) 39,750(9) -- 3,750(13)
Development 1995 158,654 41,250 -- 18,000 3,332(14)
</TABLE>
(1) Messrs. Morton and Gavrelis joined the Company in December 1995 and,
therefore, their salary for 1995 represents only a portion of the year.
(2) Mr. Miniutti joined the Company in August 1996 and, therefore, his salary
for 1996 represents only a portion of the year.
(3) Mr. Neville joined the Company in September, 1997 and, therefore, his
salary for 1997 represents only a portion of the year.
(4) Bonuses for all of the officers of the Company for 1997 and 1996 were paid
in the form of shares of restricted Common Stock ("Restricted Stock") or
options to purchase Restricted Stock based on the market price of Common
Stock on the last day of the applicable calendar year. The shares of
Restricted Stock paid as bonuses vest all at once ("cliff vesting") after
three years. In consideration of the three-year vesting period, Restricted
Stock bonus amounts are set at 150% of an equivalent cash bonus determined
under the Company's MBO Plan. See "--Executive Compensation Committee
Report."
(5) Mr. Morton receives a portion of his base annual salary, his periodic
increases in base annual salary, his annual bonus and his long-term
incentive compensation in the form of Restricted Stock or options to
purchase Restricted Stock, as follows:
(a) 30,000 shares, with a value of $198,750 ($6.625 per share), were
granted on March 1, 1997, subject to a one-year cliff vest, as part of
Mr. Morton's base annual salary;
(b) 6,000 shares, with a value of $39,750 ($6.625 per share), were granted
on March 1, 1997, subject to a three-year cliff vest, as an increase
in Mr. Morton's base annual salary;
(c) An option to purchase 48,500 shares, with a value of $338,288 ($7.75
per share) net of a 10% exercise price, was granted as of December 31,
1997, subject to a three-year cliff vest, as Mr. Morton's 1997 bonus;
(d) 18,000 shares, with a value of $119,250 ($6.625 per share), were
granted as of December 31, 1996, subject to a three-year cliff vest,
as Mr. Morton's 1996 bonus;
(e) 90,000 shares, with a value of $900,000 ($10.00 per share), were
granted in 1996 to Mr. Morton as long-term incentive compensation.
These shares were replaced with a grant of 150,000 shares, with a
value of $993,750 ($6.625 per share), on March 1, 1997. These
restricted shares vest in ten equal installments commencing March 1,
1997.
(f) On November 11, 1997, Mr. Morton was awarded an additional 21,000
shares of Restricted Stock, and each unvested share of Restricted
Stock then owned by Mr. Morton was exchanged for an option to
repurchase a share of Restricted Stock at an exercise price of 10% of
the fair market value of a share of Common Stock on the date awarded
(the Repurchase Options). The additional 21,000 shares of Restricted
Stock were awarded so that, after taking into account the exercise
price of the Repurchase Options, the value of such options would equal
the value of Mr. Morton's unvested Restricted Shares prior to the
exchange. See -- Executive
48
<PAGE>
Compensation Committee Report, "Restricted Stock."
During 1997 the Company repurchased, pursuant to provisions in its
1996 Restricted Stock Plan (the "Restricted Plan"), 7,500 shares of
Restricted Stock to cover the income tax liability on Restricted Stock
that vested in 1997. At December 31, 1997, the aggregate number of Mr.
Morton's shares of Restricted Stock and shares issuable upon exercise
of his Repurchase Options was 266,000 with a value of $1,860,788
($7.75 per share) net of the cost to exercise. Dividends or dividend
equivalents are payable on such Restricted Stock and shares underlying
such Repurchase Options with the exception of the unvested portion of
the 150,000 Repurchase Options granted as long-term compensation.
(6) Mr. Miniutti receives a portion of his base annual salary, his periodic
increases in base annual salary, his annual bonus and his long-term
incentive compensation in the form of Restricted Stock or options to
repurchase restricted stock, as follows:
(a) 15,000 shares, with a value of $99,375 ($6.625 per share), were
granted on March 1, 1997, subject to a one-year cliff vest, as part of
Mr. Miniutti's base annual salary;
(b) 4,500 shares, with a value of $29,813 ($6.625 per share), were granted
on March 1, 1997, subject to a three-year cliff vest, as an increase
in Mr. Miniutti's base annual salary;
(c) An option to purchase 28,500 shares, with a value of $198,788 ($7.75
per share) net of a 10% exercise price, was granted as of December 31,
1997, subject to a three-year cliff vest, as Mr. Miniutti's 1997
bonus;
(d) 6,500 shares, with a value of $43,063 ($6.625 per share), were granted
as of December 31, 1996, subject to a three-year cliff vest, as Mr.
Miniutti's 1996 bonus;
(e) 90,000 shares, with a value of $776,250 ($8.625 per share), were
granted in 1996 to Mr. Miniutti as long-term incentive compensation.
These shares were replaced with a grant of 120,000 shares, with a
value of $795,000 ($6.625 per share), on March 1, 1997. These
restricted shares vest in ten equal installments commencing March 1,
1997.
(f) On November 11, 1997, Mr. Miniutti was awarded an additional 15,000
shares of Restricted Stock, and each unvested share of Restricted
Stock then owned by Mr. Miniutti was exchanged for a Repurchase
Option. The additional 15,000 shares of Restricted Stock were awarded
so that, after taking into account the exercise price of the
Repurchase Options, the value of such options would equal the value of
Mr. Morton's unvested Restricted Shares prior to the exchange. See --
Executive Compensation Committee Report, "Restricted Stock."
During 1997 the Company repurchased, pursuant to its Restricted Plan, 6,000
shares of Restricted Stock to cover the income tax liability on Restricted
Stock that vested in 1997. At December 31, 1997, the aggregate number of
Mr. Miniutti's shares of Restricted Stock and shares issuable upon exercise
of his Repurchase Options was 183,500 with a value of $1,283,788 ($7.75 per
share) net of the cost to exercise. Dividends or dividend equivalents are
payable on such Restricted Stock and shares underlying such Repurchase
Options with the exception of the unvested portion of the 120,000
Repurchase Options granted as long-term compensation.
(7) Mr. Neville receives his annual bonus and his long-term incentive
compensation in the form of restricted stock or an option to purchase
restricted stock, as follows:
(a) An option to purchase 8,000 shares, with a value of $55,800 ($7.75 per
share) net of a 10% exercise price, was granted as of December 31,
1997, subject to a three-year cliff vest, as Mr. Neville's
proportionate 1997 bonus;
(b) 20,000 shares, with a value of $150,000 ($7.50 per share), were
granted on September 8, 1997 to Mr. Neville as long-term incentive
compensation. These restricted shares vest in three equal installments
commencing March 1, 1998.
(C) On November 11, 1997, Mr. Neville was awarded an additional 2,250
shares of Restricted Stock, and each unvested share of Restricted
Stock then owned by Mr. Neville was exchanged for a Repurchase Option.
The additional 2,250 shares of Restricted Stock were awarded so that,
after taking into account the exercise price of the Repurchase
Options, the value of such options would equal the value of Mr.
Neville's unvested Restricted Shares prior to the exchange. See --
Executive Compensation Committee Report, "Restricted Stock."
At December 31, 1997, the aggregate number of shares of Restricted Stock
issuable upon exercise of Mr. Neville's Repurchase Options was 30,250 with
a value of $211,550 ($7.75 per share) net of the cost to exercise. Dividend
equivalents are payable on all of the shares underlying Mr. Neville's
Repurchase Options.
(8) Mr. Gavrelis receives his annual bonus and his long-term incentive
compensation in the form of Restricted Stock or options to purchase
Restricted Stock, as follows:
(a) An option to purchase 13,500 shares, with a value of $94,163 ($7.75
per share) net of a 10% exercise price, was granted as of December 31,
1997, subject to a three-year cliff vest, as Mr. Gavrelis's 1997
bonus;
49
<PAGE>
(b) 6,000 shares, with a value of $39,750 ($6.625 per share), were granted
as of December 31, 1996, subject to a three-year cliff vest, as Mr.
Gavrelis's 1996 bonus;
(c) 16,667 shares, with a value of $175,000 ($10.50 per share), were
granted on February 28, 1996 to Mr. Gavrelis as long-term incentive
compensation. These restricted shares vest in three equal installments
commencing January 1, 1997.
(d) On November 11, 1997, Mr. Gavrelis was awarded an additional 1,350
shares of Restricted Stock, and each unvested share of Restricted
Stock then owned by Mr. Gavrelis was exchanged for Repurchase Options.
The additional 1,350 shares of Restricted Stock were awarded so that,
after taking into account the exercise price of the Repurchase
Options, the value of such options would equal the value of Mr.
Gavrelis's unvested Restricted Shares prior to the exchange. See --
Executive Compensation Committee Report, "Restricted Stock."
During 1997 the Company repurchased, pursuant to provisions in its
Restricted Plan, 2,778 shares of Restricted Stock to cover the income tax
liability on Restricted Stock that vested in 1997. At December 31, 1997,
the aggregate number of Mr. Gavrelis's shares of Restricted Stock and
shares issuable upon exercise of Repurchase Options was 34,739 with a value
of $249,086 ($7.75 per share) net of the cost to exercise. Dividends or
dividend equivalents are payable on all of such Restricted Stock and the
shares underlying Mr. Gavrelis's Repurchase Options.
(9) Mr. Radcliff received his annual bonus in the form of Restricted Stock or
an option to purchase Restricted Stock, as follows:
(a) An option to purchase 14,500 shares, with a value of $101,138 ($7.75
per share), was granted as of December 31, 1997 net of a 10% exercise
price, subject to a three-year cliff vest, as Mr. Radcliff's 1997
bonus;
(b) 6,000 shares, with a value of $39,750 ($6.625 per share), were granted
as of December 31, 1996, subject to a three-year cliff vest, as Mr.
Radcliff's 1996 bonus.
(C) On November 11, 1997, Mr. Radcliff was awarded an additional 700
shares of Restricted Stock, and each unvested share of Restricted
Stock then owned by Mr. Radcliff was exchanged for Repurchase Options.
The additional 700 shares of Restricted Stock were awarded so that,
after taking into account the exercise price of the Repurchase
Options, the value of such options would equal the value of Mr.
Radcliff's unvested Restricted Shares prior to the exchange. See --
Executive Compensation Committee Report, "Restricted Stock."
At December 31, 1997, the aggregate number of shares of Restricted Stock
issuable upon exercise of Mr. Radcliff's Repurchase Options was 21,200 with
a value of $148,038 ($7.75 per share) net of the cost to exercise. Dividend
equivalents are payable on all of the shares underlying Mr. Radcliff's
Repurchase Options.
(10) Excludes options to purchase shares of Restricted Stock, which options have
an exercise price equal to 10% of a share's fair market value on the date
of grant. Such options are reported under the "Restricted Stock Awards"
column of the Summary Compensation Table.
(11) Stock options granted in 1996 were canceled in 1997 and new options for the
same number of shares were issued in 1997. See "--Executive Compensation
Committee Report--Report on Repricing of Options" for additional
information.
(12) In 1997 Messrs. Morton, Miniutti, Gavrelis and Radcliff received
distributions from the cancellation of a Split Dollar Insurance Plan in the
amounts of $29,746, $15,000, $10,000 and $10,000, respectively, as well as
matching contributions to the Company's 401(k) Retirement and Savings Plan
of $3,721, $4,000, $1,915 and $3,712, respectively.
(13) In 1996 Messrs. Morton, Gavrelis and Radcliff received matching
contributions to the Company's 401(k) Retirement and Savings Plan of
$3,570, $1,163 and $3,750, respectively. In addition, in 1996, Mr. Miniutti
received an allowance for relocation expenses of $50,000.
(14) In 1995 Mr. Radcliff received matching contributions to the Company's
401(k) Retirement and Savings Plan of $3,332.
50
<PAGE>
The following table provides information regarding the stock options
granted during 1997 to the Named Executive Officers:
Option Grants in Last Fiscal Year(1)
<TABLE>
<CAPTION>
Individual Grants
- -------------------------------------------------------------------------------------------------------------------------------
Number of Potential Realizable
Securities Percent of Total Value at Assumed
Underlying Options Granted Annual Rates of Stock
Options to Employees Exercise Price Appreciation for
Granted in Fiscal Year Price Expiration Option Term ($)(2)
------------------
Name (#) (%) ($) Date 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
C. Cammack Morton 300,000(3) 46.5 $5.625 4/1/07 1,061,260 2,689,44,
Patrick M. Miniutti 200,000(4) 31.0 $5.625 4/1/07 707,506 1,792,960
William H. Neville 50,000(5) 7.8 $7.50 9/7/07 235,835 597,653
Christopher G. Gavrelis 35,000(4) 5.4 $5.625 4/1/07 123,814 313,768
</TABLE>
(1) Excludes Repurchase Options, which options have an exercise price equal to
10% of a share's fair market value on the date of grant. Such options are
reported under the "Restricted Stock Awards" column of the Summary
Compensation Table.
(2) In accordance with SEC rules, these columns show gains that might exist for
the respective options, assuming the market price of the Company's Common
Stock appreciates from the date of grant over a period of ten years at
annualized rates of five and ten percent, respectively. The actual value,
if any, on stock option exercises will depend on the future performance of
the Company?s Common Stock, as well as the option holders continued
employment through the four-year vesting period. There can be no assurance
that the value, if any, ultimately realized by the executive will be at or
near the values shown above.
(3) 100,000 option shares vested upon grant with the remainder at 25% per year.
These stock options represent the replacement of option shares issued in
1996 and canceled in 1997. See "-- Executive Compensation Committee Report
-- Report on Repricing of Options" for additional information.
(4) 20% vested upon grant with the remainder at 25% per year. These stock
options represent the replacement of option shares issued in 1996 and
canceled in 1997. See ""-- Executive Compensation Committee Report--Report
on Repricing of Options" for additional information.
The following table sets forth certain information concerning the number of
shares of Common Stock underlying options held by each of the Named Executive
Officers and the value of such options at December 31, 1997:
Fiscal Year-End Option Values(1)
Number of Value of Unexercised
Securities Underlying In-the-money
Unexercised Options Options at
at Fiscal Fiscal Year-End
Year-End (#) ($)
Exercisable/ Exercisable/
Name Unexercisable (2) Unexercisable (3)
- ---- ----------------- -----------------
C. Cammack Morton 100,000/200,000 212,500/425,000
Patrick Miniutti 40,000/160,000 85,000/340,000
William H. Neville 10,000/40,000 2,500/10,000
Christopher G. Gavrelis 7,000/28,000 14,875/59,500
Connell L. Radcliff 43,400/19,850 --/--
51
<PAGE>
(1) Excludes Repurchase Options, which options have an exercise price equal to
10% of a share's fair market value on the date of grant. Such options are
reported under the "Restricted Stock Awards" column of the Summary
Compensation Table.
(2) Future exercisability is subject to vesting and the optionee remaining
employed by the Company.
(3) Value is calculated by subtracting the exercise price from the fair market
value of the securities underlying the option at fiscal year-end and
multiplying the results by the number of in-the-money options held. Fair
market value was based on closing market price of the Common Stock at
December 31, 1997 ($7.75).
Employment Agreements
Annual Compensation and Basic Terms. The Company is a party to employment
agreements with Messrs. Morton, Miniutti, Gavrelis and Neville. The agreements
with Messrs. Morton, Miniutti and Neville currently continue through February
29, 2001. The term is automatically extended for an additional year on March 1,
1999 and each year thereafter, subject to the right of either party to terminate
as of the end of the then-existing three-year term by giving written notice at
least 30 days before the March 1 extension date. The agreement with Mr. Gavrelis
continues through March 1, 1999. If the employment of any executive is
terminated due to the change of control of the Company, an additional two years
will be added to the unexpired term of the respective agreements. 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. The employment
agreements provide for base annual cash salaries as follows: Mr. Morton -
$330,000; Mr. Miniutti - $225,000; Mr. Neville - $225,000; and Mr. Gavrelis -
$170,000. In addition, Messrs. Morton and Miniutti receive Restricted Stock as
part of their base annual compensation, based on an equivalent cash value of
approximately $200,000 and $100,000, respectively. The number of restricted
shares issued annually is adjusted on March 1st of each year based on the
previous year-end market price of the stock. Such Restricted Stock is 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 is 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 the greater of (i) 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, Miniutti and Neville, the
product of the number of years representing the unexpired term of the agreement
and an amount equal to the average bonus paid to such executive over the three
years immediately prior to termination, and in the case of Mr. Gavrelis, a pro
rata portion of any incentive compensation or bonus payable for the years of
termination and (iii) certain other accrued benefits.
Long-Term Compensation. As of March 1, 1997, in recognition of the
increases in their responsibilities and after consultation with an independent
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 were issued pursuant to the Company's 1996
Restricted Stock Plan. These restricted shares 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. Neville was
awarded 20,000 shares of Restricted Stock, which vests in three equal annual
installments commencing March 1, 1998, provided he continues to be employed by
the Company. Mr. Gavrelis was awarded 16,667 shares of Restricted Stock, which
vest in three equal annual installments commencing December 14, 1996, provided
that he continues to be employed by the Company.
In addition, the employment agreements for Messrs. Morton, Miniutti,
Neville and Gavrelis provide for the grant of options to purchase 300,000,
200,000, 50,000 and 35,000 shares of Common Stock, respectively. For information
regarding such options, see the table captioned "Option Grants in Last Fiscal
Year" above and "-- Executive Compensation Committee Report--Report on Repricing
of Options" below.
52
<PAGE>
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, all non-vested Restricted Stock will become immediately
vested.
In addition, upon the occurrence of a change in control of the Company (as
defined in the Stock Incentive Plan), all non-vested stock options granted
thereunder become immediately vested and exercisable in full. Change in control
generally is defined under the Stock Incentive Plan to occur at such time as any
person or group beneficially owns at least 25% of the outstanding Common Stock.
Each of the five executive officers who have employment agreements with the
Company have entered into waivers providing that the Lazard Investment and the
Konover Transaction will not trigger any obligation under their employment
agreements except to the extent that such transactions automatically extend the
term of their employment agreements.
Executive Compensation Committee Report
Executive Officer Compensation Policies. The goals of the Executive
Compensation Committee (the "Committee") with respect to the compensation of the
Company's executive officers are to (i) provide a competitive total compensation
package that enables the Company to attract and retain qualified executives,
(ii) align the compensation of such executives with the Company's overall
business strategies and (iii) provide each executive officer with a significant
equity stake in the Company, which serves to align compensation with the
interests of stockholders. To this end, the Committee determines executive
compensation consistent with a philosophy of compensating executive officers
based on their responsibilities and the Company's performance in attaining
financial and non-financial objectives.
The primary components of the Company's executive compensation
program are: (i) base salaries, (ii) performance-based annual bonuses, (iii)
stock options and (iv) restricted stock. The more senior the position the
greater the compensation that varies with performance and the greater the
portion that is in the form of options or restricted stock.
Base Salaries. Base salaries for the Company?s Named Executive Officers, as
well as changes in such salaries, are based upon recommendations of the Chief
Executive Officer, taking into account such factors as competitive industry
salaries; a subjective assessment of the nature of the position; the
contribution and experience of the officer; and the length of the officer's
service. Under the Chief Executive Officer's direction, the Chief Operating
Officer reviews all salary recommendations with the Committee, which then
approves or disapproves such recommendations. The Chief Executive Officer
reviews any salary recommendations for the Chief Operating Officer with the
Committee. The Committee has engaged a national executive compensation
consultant for the purpose of obtaining comparative information and advice on
each of the components of executive compensation. The Committee believes that
the majority of the Company's executive officers are at or near the average for
base salaries and total compensation as compared to that of the Company's peers.
The Committee would like to increase base salaries to the 75th percentile level
in the future. See Employment Agreements - Annual Compensation and Basic Terms.
Bonuses. Annual bonuses are determined under a Management By Objectives
(MBO) plan based on Company and individual performance. The weighting between
Company performance and individual performance is determined on the basis of
position and responsibilities. Performance targets are determined for both
Company performance and individual performance. Achieving the targets would
ordinarily result in bonuses ranging from 5% to 60% of base salary, with maximum
bonuses ranging from 10% to 70% of base salary for performance achievements
greater than the targets. All officers of the Company receive 100% of their
bonus in the form of restricted stock with a three-year cliff vest. In
consideration therefor, each officer receives shares equal to 150% of the value
of the appropriate cash bonus; the number of shares is determined using the
total bonus amount divided by the stock price at the day of issuance.
53
<PAGE>
Stock Options. 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 currently reserved for issuance under the Stock
Incentive Plan (see "Proposal Five" below relating to the proposed increase to
2,800,000 shares). 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. All of the Company's executive officers are eligible to receive options
to purchase shares of Common Stock granted under the Stock Incentive Plan. The
Committee believes that stock option grants are a valuable motivating tool and
provide a long-term incentive to management. The Committee also believes that
issuing stock options to executives benefits the Company's stockholders by
encouraging executives to own the Company's stock, thus aligning executive
compensation with stockholder interests. Options for 645,000 shares were granted
during 1997. (See Option Grants in Last Fiscal Year" above.)
Restricted Stock. The Company established a restricted stock plan (the
"Restricted Plan") in 1996, reserving 350,000 shares of Common Stock for
issuance thereunder, to give the 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 align more closely the financial interests of management with that of the
stockholders. In 1998 and 1997, the Company reserved in the aggregate an
additional 1,150,000 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. During 1997, the Company granted 248,752 shares of Restricted
Stock, net of replacement shares, to officers and other key employees.
In 1997, the Company amended the Restricted Plan so that officers would not
have to sell their shares of Restricted Stock to meet their tax obligations
incurred upon the vesting of such shares. The amendment provides that Restricted
Stock may be awarded to certain officers in the form of an option to purchase
Restricted Stock at 10% of the market price of the Common Stock on the date of
grant of the option. Under the Restricted Plan all of the officers' previously
unvested shares of Restricted Stock as of November 11, 1997 were replaced with
options to purchase such shares. The options vest on the same schedules as the
shares of Restricted Stock that they replaced. Under the Restricted Plan,
holders of options to purchase Restricted Stock will also be entitled to cash
payments equal to the value of the dividends that would have been paid on the
shares underlying such options. The executives may exercise the options at any
time after vesting and within 15 years of the date of grant. All future grants
to officers under the Restricted Plan will be in the form of an option to
purchase Restricted Stock.
Chief Executive Officer's Compensation. C. Cammack Morton's compensation
for 1997 as the Company's President and Chief Executive Officer consisted of an
annual base cash salary of $330,000, which is subject to periodic increases in
the form of Restricted Stock, subject to three-year cliff vesting, to be
determined by the Committee in its discretion based upon (i) a qualitative and
quantitative review of the performance of the Company (including consideration
of factors such as funds from operations) and Mr. Morton and (ii) the
compensation of executives with similar responsibilities employed by companies
similar in size and generally considered to be comparable to the Company. Mr.
Morton has agreed to take such raises. In addition, Mr. Morton was granted
36,000 shares of Restricted Stock in 1997 as part of his base compensation,
which had a market value at date of grant of $238,500. Such shares are subject
to one-year (30,000 shares) and three-year (6,000 shares) cliff vesting. Also,
consistent with the intent of the bonus plan discussed above, the Committee
granted a bonus to Mr. Morton for 1997 in the form of an option to purchase
48,500 shares of Restricted Stock subject to a three-year cliff vest, which had
a market value at date of grant of $338,288, net of a 10% exercise price. The
bonus was based on the Company's exceeding the target increase in FFO for 1997.
Section 162(m) of the Internal Revenue Code. The Company does not expect
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), to
affect the deductibility for federal income tax purposes of the compensation of
the Company's executive officers in 1997. In the future, the Company intends to
review periodically the applicability of Section 162(m) to the Company's
compensation programs, including
54
<PAGE>
its potential impact on stock options and Restricted Stock awarded to executive
officers, and, if considered appropriate, to develop a policy with respect to
the Company's compliance with Section 162(m).
Report on Reproaching of Options. The Executive Compensation Committee
determined that the granting of new stock options to certain senior executives
would promote its goals of aligning executive and stockholder interests and
retaining qualified executives. However, due in part to the issuance of stock
options to former officers, the Company did not have sufficient unreserved
options under the Stock Incentive Plan to grant new stock options. Therefore,
the Company requested that certain officers allow their previously granted stock
options, of which in the aggregate 37% had vested, to be canceled in exchange
for new options. The executive officers accepted the Company's re-issuance offer
although their proportion of vested versus unvested stock options decreased by
28% on average.
<TABLE>
<CAPTION>
Number of Length of Original
Securities Market Price of Exercise Price at Option Term
Underlying Stock at Time of Time of Remaining at Date
Options Reprised Reproaching or Reproaching or New Exercise of Reproaching or
Name Date or Amended (#) Amendment ($) Amendment ($) Price ($) Amendment
- ---- ---- -------------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
C. Cammack Morton 4/97 300,000 5.625 10.25 5.625 8.8 years
Patrick M. Miniutti 4/97 200,000 5.625 8.625 5.625 9.4 years
Christopher G. Gavrelis 4/97 35,000 5.625 10.25 5.625 8.8 years
Michaela M. Twomey 4/97 35,000 5.625 8.875 5.625 9.4 years
Susan M. Crusoe 4/97 25,000 5.625 10.25 5.625 8.8 years
</TABLE>
The Executive Compensation Committee consists of John W. Gildea, Chairman,
William D. Eberle, J. Richard Futrell, Jr., Robert O. Amick, and Theodore E.
Haigler, Jr.
The foregoing report should not be deemed incorporated by reference by any
general statement incorporating by reference this Annual Report on Form 10-K
into any filing under the Securities Act of 1933, as amended, or under the
Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates this information by reference and shall not
otherwise be deemed filed under such acts.
Compensation Committee Interlocks and insider Participation
During 1997, the following individuals (none of whom was or had been an
officer or employee of the Company) served on the Company's Executive
Compensation Committee: Messrs. Gildea, Eberle, Futrell, Amick and Haigler. No
member of the Executive Compensation Committee was or is an officer or employee
of the Company. 51
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of March 23, 1998 by: (a) each Named
Executive Officer; (b) each director; (c) current executive officers and
directors as a group; and (d) each person or group known by the Company to
beneficially own more than five percent of the Common Stock. 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.
55
<PAGE>
Amount and Nature
of Beneficial Percent
Ownership of Class (1)
C. Cammack Morton ............................. 214,715 1.5%
Patrick M. Miniutti ........................... 118,400 *
William H. Neville ............................ 17,417 *
Christopher G. Gavrelis ....................... 19,671 *
Connell L. Radcliff ........................... 128,541 *
Robert O. Amick ............................... 5,544 *
William D. Eberle ............................. 6,095 *
J. Richard Futrell, Jr ........................ 5,044 *
John W. Gildea ................................ 886,777(2) 5.9%
Theodore E. Haigler, Jr ....................... 5,354 *
All current executive officers and directors as
a group (12) .................................. 1,421,229 9.1%
Jeffrey B. Citron ............................. 807,222(3) 5.4%
Prometheus Southeast Retail LLC(4) ............ 2,350,000 16.5%
(1) An asterisk (*) indicates less than one percent. The total number of shares
outstanding used in calculating this percentage assumes that (i) no options
to purchase shares of Common Stock are exercised; (ii) no warrants to
purchase shares of common stock are exercised and (iii) no shares of
Preferred Stock are converted to shares of Common Stock; provided that the
following shares of Common Stock are deemed outstanding: (x) those Isabel
within 60 days upon exercise of options or warrants held by the persons(s)
shown in this table and (y) those Isabel upon conversion of Preferred Stock
held by the person(s) shown in this table.
(2) Includes (i) 4,000 shares held by Mr. Glide's spouse as custodian for their
children as to which Mr. Gildea has sole voting power only and as to which
he disclaims beneficial ownership, (ii) 111,111 shares of Common Stock
presently Isabel upon conversion of Preferred Stock as to which Mr. Gildea
has sole voting and dispositive power, and (iii) 766,666 shares of Common
Stock presently issuable upon conversion of Preferred Stock and warrants
owned by Network Fund III, Ltd. (Network), with respect to which Mr. Gildea
has shared dispositive power only. Mr. Gildea is a director of Network and
a Managing Director of Gildea Management Company, which has an investment
advisory agreement with Network.
(3) Includes 547,222 shares issuable upon conversion of outstanding preferred
stock and 260,000 shares issuable upon conversion of outstanding warrants.
Jeffery B. Citrin possesses only investment control with respect to 272,222
of such shares. Mr. Citrin's address is 950 Third Avenue, 17th Floor, New
York, New York 10022. Information based on Schedule 13D dated July 22,
1996.
(4) As discussed at "Proposal Two," Investor purchased 2,350,000 shares on
March 23, 1998 pursuant to the Stock Purchase Agreement. If the
Stockholders approve Proposal Two, Investor will be obligated to purchase
an additional 18,602,632 shares of Common Stock. Assuming no other changes
in the number of outstanding shares of Common Stock, the Investor would
then own 62.6% of the outstanding shares of Common Stock. Investor's
address is 30 Rockefeller Plaza, 63rd Floor, New York, New York 10020.
Item 13. Certain Relationships and Related 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
transaction resulted in J. Dixon Fleming, Jr., the Company's
56
<PAGE>
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. During the fourth quarter
of 1997, the Company sold to Mr. Fleming, the 19 acre tract for the sum of
$750,000, which substantially satisfied the asset valuation issues.
PART IV
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
----
Reports of independent auditors F-2
Consolidated balance sheets as of December 31, 1997 and 1996 F-4
Consolidated statements of operations for the years ended
December 31, 1997, 1996 and 1995 F-5
Consolidated statements of stockholders' equity for years
ended December 31, 1997, 1996 and 1995 F-6
Consolidated statements of cash flows for the years
ended December 31, 1997, 1996 and 1995 F-7
Notes to consolidated financial statements F-8
(a)(2) Included with this report is the following consolidated financial
statement schedule:
Schedule III - Real Estate and Accumulated Depreciation F-23
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:
FAC 10K Exhibit List
Exhibit # Title
- --------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws of the Company
3.3 Amended and Restated Agreement of Limited Partnership of the Operating
Partnership
4.1 Specimen Common Stock Certificate
4.2 Warrant Agreement between the Company and Blackacre (2)
57
<PAGE>
4.3 Warrant Agreement between the Company and Blackacre (2)
4.4 Warrant Agreement between the Company and National Union Fire Insurance
Company of Pittsburgh (2)
4.5 Warrant Agreement between the Company and Network Fund III, Ltd. (2)
4.6 Indenture by and between FSA Finance, Inc., as issuer, Bank One,
Columbus, National Association, as trustee, and Fleet Management and
Recovery Corporation, as master servicer (3)
4.7 Master Servicing Agreement by and between FSA Finance, Inc., as issuer,
Bank One, Columbus, National Association, as trustee (FN1) and Fleet
Management and Recovery Corporation, as master servicer (3)
4.8 Specimen copies of the various types of Class A, B, C and R Notes (3)
4.9 Mortgage Note given by FSA Properties, Inc., as maker, in favor of the
Travelers Insurance Company, as payee (3)
4.10 Deed of Trust, Mortgage, Security Agreement, Fixture Filing, Financing
Statement and Assignment of Leases and Rents by and between FSA
Properties, Inc., as mortgagor, and the Travelers Insurance Company as
mortgagee (3)
4.11 Gap Note given by FSA Properties, Inc., as maker, in favor of The
Travelers Insurance Company, as payee (3)
4.12 Mortgage Loan Purchase Agreement by and between The Travelers Insurance
Company, as seller, and FSA Finance, Inc., as purchaser (3)
4.13 Loan Agreement between FAC Mortgage LLC as Borrower and Nomura Asset
Capital Corporation as Lender
4.14 Agreement to Furnish Certain Instruments Defining the Rights of Long-Term
Debt Holders
10.1 Employment Agreement between the Company and C. Cammack Morton
10.2 Employment Agreement between the Company and Patrick M. Miniutti
10.3 Employment Agreement between the Company and William H. Neville
10.4 Employment Agreement between the Company and Sona A. Thorburn
10.5 Employment Agreement between the Company and Christopher G. Gavrelis
10.6 Factory Stores of America, Inc. Amended and Restated 1993 Employee Stock
Option Plan (4)
10.7 1995 Outside Directors' Stock Award Plan
10.8 Factory Stores of America, Inc. 1996 Restricted Stock Plan (4)
10.9 Restricted Stock Agreement between the Company and C. Cammack Morton
10.10 Restricted Stock Agreement between the Company and Patrick M. Miniutti
10.11 Restricted Stock Agreement between the Company and Christopher G.
Gavrelis
10.12 Incentive Stock Option Agreement between the Company and C. Cammack
Morton
10.13 Incentive Stock Option Agreement between the Company and Patrick M.
Miniutti
58
<PAGE>
10.14 Nonqualified Stock Option Agreement between the Company and Patrick M.
Miniutti
10.15 Line of Credit Agreement between FAC Realty, Inc. and Nomura Asset
Capital Corporation, dated February 19, 1997
10.16 First Amendment to the Master and Exchange Option Agreement, dated as of
March 16, 1998 by and among the Company, FAC Realty, L.P. and the
Contributors listed therein (6)
- --------------------------------
(FN1) Bank One, Columbus, resigned as trustee effective December 10, 1997, and
the issuer has appointed First Union Bank as the successor trustee
effective December 10, 1997.
10.17 Assignment of Interest in Master Agreement and Exchange Option Agreement,
and Consent of Limited Partners dated December 22, 1997 (6)
10.18 Exchange Option Agreement dated as of October 1, 1997, by and among
Carolina FAC, Limited Partnership, FAC Realty, Inc. and the Owners of the
Properties and Interests listed therein (6)
10.19 Master Agreement, dated as of October 1, 1997, by and among FAC Realty,
Inc., Carolina FAC, Limited Partnership, and the other signatories listed
therein (6)
10.20 Amended and Restated Stock Purchase Agreement, dated as of March 23,
1998, between the Company and the Investor (6)
10.21 Stockholders Agreement, dated February 24, 1998, among the Company and
the Investor (6)
10.22 Registration Rights Agreement, dated February 24, 1998 between the
Company and the Investor (6)
10.23 Contingent Value Right Agreement, dated February 24, 1998, among the
Company and the Investor (6)
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young, LLP
23.2 Consent of Arthur Andersen, LLP
27.1 Financial Data Schedule (electronic filing only)
27.2 Restated 1996 Financial Data Schedules (electronic filing only)
23.3 Restated Fourth Quarter 1997 Financial Data Schedule (electronic filing
only)
- --------------------------------
(1) Incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 (File No. 333-39491)
(2) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1995
(3) Incorporated herein by reference to the Company's Current Report on Form
8-K dated May 23, 1995
(4) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1996
(5) Incorporated herein by reference to the Company's Current Report on Form
8-K dated February 19, 1997
(6) Incorporated herein by reference to the Company's Current Report on Form
8-K dated March 23, 1998
59
<PAGE>
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.
FAC Realty Trust, Inc.
By /S/ Patrick M. Miniutti
-------------------------------
Patrick M. Miniutti
Director, Exec. Vice President and
Chief Financial Officer
60
<PAGE>
FAC REALTY TRUST, INC.
Audited Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995
Index to Audited Consolidated Financial Statements
Reports of Independent Auditors..............................................2-3
Consolidated Balance Sheets as of December 31, 1997 and 1996...................4
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995...............................................................5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and1995.............................................6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995............................................7
Notes to Consolidated Financial Statements.....................................8
Schedule III - Real Estate and Accumulated Depreciation.......................35
<PAGE>
Report of Independent Public Accountants
To FAC Realty Trust, Inc.:
We have audited the accompanying consolidated balance sheet of FAC Realty Trust,
Inc. (a Maryland corporation) as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FAC Realty Trust,
Inc. as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Our audit of FAC Realty Trust, Inc. was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. Schedule III
included with consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule as of, and for the year ended
December 31, 1997, has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, is fairly stated in
all material respects in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Raleigh, North Carolina,
February 11, 1998 (except for the matters discussed in
Note 15, as to which date is March 31, 1998).
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
FAC Realty Trust, Inc.
We have audited the accompanying consolidated balance sheet of FAC Realty Trust,
Inc. as of December 31, 1996 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements 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 Trust, Inc. at December 31, 1996 and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Raleigh, North Carolina,
January 31, 1997, except for the first paragraph
of Note 11 and the last two sentences of the first
as to which the date is March 27, 1997.
<PAGE>
FAC REALTY TRUST, INC
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------------
(in thousands)
<S> <C> <C>
Assets
Income producing properties:
Land $ 81,233 $ 77,011
Buildings and improvements 292,726 259,383
Deferred leasing and other charges 21,366 17,635
------------------------
395,325 354,029
Accumulated depreciation and amortization (50,134) (36,027)
------------------------
345,191 318,002
Properties under development 6,456 2,538
Properties held for sale 12,490 11,438
Investment in joint ventures 4,283 --
Other assets:
Cash and cash equivalents 4,872 7,034
Restricted cash 3,858 3,860
Tenant and other receivables 7,167 5,864
Deferred charges and other assets 8,851 9,876
Notes receivable 10,458 --
------------------------
$ 403,626 $ 358,612
========================
Liabilities and Stockholders' Equity
Liabilities:
Debt on income properties $ 232,575 $ 173,695
Unsecured senior notes -- 7,420
Other unsecured notes 197 2,542
Capital lease obligations 1,131 826
Accounts payable and other liabilities 6,796 9,537
------------------------
240,699 194,020
------------------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, Series A, 5,000,000 shares authorized, and 19,162 19,162
800,000 issued and outstanding in 1997 and 1996
Stock purchase warrants 9 9
Common stock, $0.01 par value, 45,000,000 shares authorized and 119 121
11,904,182 and 12,100,267 issued and outstanding in 1997 and 1996,
respectively
Additional paid-in capital 145,332 147,346
Accumulated deficit (1,416) --
Deferred compensation - Restricted Stock Plan (279) (2,046)
------------------------
162,927 164,592
------------------------
$ 403,626 $ 358,612
========================
</TABLE>
See accompanying notes.
4
<PAGE>
FAC REALTY TRUST, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
-------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Rental operations:
Revenues:
Base rents $ 38,535 $ 34,099 $ 34,584
Percentage rents 755 633 616
Property operating cost recoveries 12,726 11,757 11,065
Other income 1,710 681 864
--------------------------------
53,726 47,170 47,129
--------------------------------
Property operating costs:
Common area maintenance 6,609 5,864 5,549
Utilities 1,173 1,074 939
Real estate taxes 5,863 5,098 4,733
Insurance 616 684 589
Marketing 1,294 1,001 1,838
Other 116 254 --
--------------------------------
15,671 13,975 13,648
Depreciation and amortization 15,652 13,802 11,900
--------------------------------
31,323 27,777 25,548
--------------------------------
22,403 19,393 21,581
--------------------------------
Other expenses:
General and administrative 6,397 6,199 15,279
Interest 16,436 14,175 10,903
--------------------------------
22,833 20,374 26,182
--------------------------------
(430) (981) (4,601)
--------------------------------
Property adjustments:
Adjustment to carrying value of assets -- (5,000) (8,500)
--------------------------------
(5,981) (8,500)
--------------------------------
Loss before extraordinary item (430) (5,981) (13,101)
Extraordinary loss on early extinguishment of debt (986) (103) --
--------------------------------
Net loss $ (1,416) $ (6,084) $(13,101)
--------------------------------
Loss before extraordinary item $ (430) $ (5,981) $(13,101)
Preferred stock dividends -- (368) --
--------------------------------
Loss before extraordinary item applicable to common $ (430) $ (6,349) $(13,101)
stockholders
Extraordinary loss on early extinguishment of debt (986) (103) --
--------------------------------
Net loss applicable to common shareholders $ (1,416) $ (6,452) $(13,101)
--------------------------------
Basic and diluted loss per common share:
Loss before extraordinary item applicable to common
stockholders $ (0.04) $ (0.54) $ (1.11)
Extraordinary item (0.08) (0.01) --
--------------------------------
Net loss applicable to common stockholders $ (0.12) $ (0.55) $ (1.11)
================================
Weighted average number of common shares outstanding 11,824 11,817 11,814
================================
</TABLE>
See accompanying notes.
5
<PAGE>
FAC REALTY TRUST, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
(in thousands except for share amounts)
<TABLE>
<CAPTION>
Deferred
Convertible Stock Additional Compensation
Preferred Purchase Common Paid in Accumulated Restricted
Stock Warrants Stock Capital Deficit Stock Plan Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ -- $ -- $ 118 $ 203,222 $ -- $ -- $ 203,340
Issuance of 924 shares of directors stock -- -- -- 18 -- -- 18
Net loss -- -- -- -- (13,101) -- (13,101)
Common dividends declared ($2.52 per share) -- -- -- (42,872) 13,101 -- (29,771)
--------------------------------------------------------------------------------
Balance at December 31, 1995 -- -- 118 160,368 -- -- 160,486
Issuance of 800,000 shares of convertible 19,162 -- -- -- -- -- 19,162
preferred stock
Issuance of 3,152 shares of directors stock -- -- -- 29 -- -- 29
Issuance of 372,592 shares of restricted stock -- -- 4 3,334 -- (3,338) --
Issuance of 200,000 stock purchase warrants -- 9 -- -- -- -- 9
Compensation under stock plans -- -- -- -- -- 392 392
Cancellation of 90,000 shares of restricted stock -- -- (1) (899) -- 900 --
Net loss -- -- -- -- (6,084) -- (6,084)
Preferred dividends declared ($0.46 per share) -- -- -- (368) -- -- (368)
Common dividends declared ($0.75 per share) -- -- -- (15,118) 6,084 -- (9,034)
--------------------------------------------------------------------------------
Balance at December 31, 1996 19,162 9 121 147,346 -- (2,046) 164,592
--------------------------------------------------------------------------------
Issuance of 7,300 shares of directors stock -- -- -- 45 -- -- 45
Issuance of 384,852 shares of restricted stock -- -- 3 2,600 -- (2,603) --
Compensation under stock plans -- -- -- -- -- 493 493
Cancellation of 180,000 shares of restricted -- -- (2) (1,641) -- 1,643 --
stock
Exchange of 390,884 shares of restricted stock
for options to repurchase -- -- (3) (2,641) -- 2,234 (410)
restricted stock
Repurchase of 17,353 shares common stock -- -- -- (377) -- -- (377)
Net loss -- -- -- -- (1,416) -- (1,416)
--------------------------------------------------------------------------------
Balance at December 31, 1997 $ 19,162 $ 9 $ 119 $ 145,332 $ (1,416) $ (279) $ 162,927
================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
FAC REALTY TRUST, INC
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,416) $ (6,084) $ (13,101)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Adjustment to carrying value of assets -- 5,000 8,500
Depreciation and amortization 15,652 13,802 11,900
Extraordinary loss on early extinguishment of debt 986 103 --
Amortization of deferred financing costs 1,562 1,422 1,552
Compensation under restricted stock plan 493 392 --
Net changes in:
Tenant and other receivables (1,303) (619) 828
Deferred charges and other assets 139 122 3,968
Accounts payable and other liabilities (3,151) (6,489) 8,431
-----------------------------------
Net cash provided by operating activities 12,962 7,649 22,078
-----------------------------------
Cash flows from investing activities:
Investment in income-producing properties (15,025) (18,234) (46,048)
Acquisition of income-producing properties (32,421) -- --
Investment in joint ventures (4,283) -- --
Increase in notes receivable (10,458) -- --
Change in restricted cash 2 946 (4,806)
-----------------------------------
Net cash used in investing activities (62,185) (17,288) (50,854)
-----------------------------------
Cash flows from financing activities:
Proceeds from debt on income properties 135,856 5,061 139,672
Proceeds from exchangeable notes -- 20,000 --
Proceeds from other debt -- 9,580 582
Deferred financing charges (1,947) (2,289) (4,361)
Debt repayments (86,516) (1,936) (71,294)
Payable related to acquisition of properties -- -- (11,737)
Repurchase of common stock (360) -- --
Distributions to stockholders -- (15,427) (23,746)
Other 28 29 18
-----------------------------------
Net cash provided by financing activities 47,061 15,018 29,134
-----------------------------------
Net (decrease) increase in cash and cash equivalents (2,162) 5,379 358
Cash and cash equivalents at beginning of year 7,034 1,655 1,297
-----------------------------------
Cash and cash equivalents at end of year $ 4,872 $ 7,034 $ 1,655
===================================
Supplemental disclosures of cash flow information
Cash paid during the year for interest (net of interest
capitalized of $1,525 in 1997, $1,974 in 1996 and $2,567
in 1995) $ 14,505 $ 15,347 $ 9,848
===================================
Dividend declared not paid $ -- $ -- $ 6,025
===================================
</TABLE>
See accompanying notes.
7
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements
December 31, 1997
1. Organization and Basis of Presentation
Organization
FAC Realty Trust, Inc. (the "Company"), formerly Factory Stores of America,
Inc., and FAC Realty, 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 acquisition, development, ownership and
operation of community and outlet shopping centers. The Company's revenues are
primarily derived from real estate leases with national, regional and local
retailing companies.
On December 17, 1997, the following shareholder approval, the Company changed
its domicile from the State of Delaware to the State of Maryland. The
reincorporation was accomplished through the merger of FAC Realty, inc. into its
Maryland subsidiary, FAC Realty Trust, Inc. (the "Company"). Following the
reincorporation on December 18, 1997, the Company reorganized as an umbrella
partnership real estate investment trust (an "UPREIT)"). The Company then
contributed to FAC Properties, L.P., a Delaware, limited partnership (the
"Operating Partnership") substantially all of its assets and liabilities, except
for legal title to 18 properties, which remains in a wholly owned subsidiary of
the Company. In exchange for the Company's assets, the Company received limited
partnership interest ("Units") in the Operating Partnership in an amount and
designation that corresponded to the number and designation of outstanding
shares of capital stock of the Company at the time. The Company is the sole
general partner of the Operating Partnership. As additional limited partners are
admitted to the Operating Partnership in exchange for the contribution of
properties, the Company's percentage ownership in the Operating Partnership will
decline. As the Company issues additional shares of capital stock, it will
contribute the proceeds for that capital stock to the Operating Partnership in
exchange for a number of Units equal to the number of shares that the Company
issues. The Company conducts substantially all of its business and owns
substantially all of its assets (either directly or through subsidiaries)
through the Operating Partnership such that a Unit is economically equivalent to
a share of the Company's common stock.
An UPREIT may allow the Company to offer Units in the Operating Partnership in
exchange for ownership interests from tax-motivated sellers. Under certain
circumstances, the exchange of Units for a seller's ownership interest will
enable the Operating Partnership to acquire assets while allowing the seller to
defer the tax liability associated with the sale of such assets. Effectively,
this allows the Company to use Units instead of stock to acquire properties,
which provides an advantage over non-UPREIT entities.
As of December 31, 1997, the properties owned by the Company consist of: (1) 28
community shopping centers in 15 states aggregating approximately 3,090,000
square feet; (2) 10 outlet centers in 9 states aggregating approximately
2,120,000 square feet; (3) two outlet centers aggregating approximately 150,000
square feet and one former factory outlet center which has been converted to
commercial office use with approximately 150,000 square feet that are held for
sale; and (4) approximately 182 acres of outparcel land located near or adjacent
to certain of the Company's centers and are 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.
8
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements (continued)
1. Organization and Basis of Presentation (continued)
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Minority interests in entities that
are not wholly owned are not significant. All significant intercompany balances
have been eliminated in consolidation.
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 and tenant
improvement expenditures, 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 (SFAS) 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, 5 to 15 years for land
improvements.
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.
The Company periodically reviews its income producing properties for potential
impairment when circumstances indicate that the carrying amount of such assets
may not be recoverable.
Properties under development include costs related to new development and
expansions in process totaling approximately $6.5 million and $2.5 million at
December 31, 1997 and 1996, respectively. The pre-construction stage of project
development involves certain costs to secure land and zoning and to 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.
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of," which requires impairment losses to be recorded on each
long-lived asset used in operations when indicators of impairment are present
and the undiscounted cashflows estimated to be generated by each of those assets
are less than the asset's carrying amount. The Company adopted the Statement in
1995.
Properties Held for Sale
As part of the Company's ongoing strategic evaluation of its portfolio of
assets, management has been authorized to pursue the sale of certain properties
that currently are not fully consistent with or essential to the Company's
long-term strategies. 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
9
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
the pending disposition of those assets now held for sale. In accordance with
SFAS No. 121, assets held for sale are valued at the lower of carrying value or
fair value less selling costs. Accordingly, in 1996 and 1995, the Company
recorded a non-cash $5.0 million and $8.5 million adjustment to the carrying
value of the properties held for sale. The Company continues to operate the
properties and has begun the process of marketing these properties.
As of December 31, 1997, two of the properties held for sale are under contract.
After recording the $5.0 million and $8.5 million valuation adjustment in 1996
and 1995, respectively, the net carrying value of assets currently being
marketed for sale at December 31, 1997 and 1996 are $12.5 million and $11.4
million, respectively. There is also $12.2 million of debt associated with these
properties held for sale.
The following summary financial information pertains to the properties held for
sale for the year ended December 31 (in thousands):
1997 1996 1995
---- ---- ----
Revenues $ 1,100 $ 2,100 $ 3,000
Net loss after operating
and interest expenses $ (1,100) $ (1,000) $ (500)
============= =============== ============
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 $1.5 million, $2.0 million and $2.6 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Interest expense
includes amortization of deferred financing costs (see Note 4) 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
were approximately $3.9 million at December 31, 1997 and 1996.
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 tenant and other receivables 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.
10
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Amounts allocated to property operating cost recoveries from base rent were $3.8
million in 1997, $3.1 million in 1996 and $3 million in 1995. 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.
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.
Environmental Matters
Substantially all of the Properties have been subjected to Phase I environmental
audits. Such audits have not revealed nor is management aware of any
environmental liability that management believes would have a material adverse
impact on the Company's financial position or results of operations. In
accordance with a certain mortgage agreement, the lender required to place in
escrow $281,000 to be used to perform possible remediation work on a property,
which management believes will not be required based on the results of the
environmental audits.
Earnings/(Loss) Per Common Share
The Company has adopted the provisions of SFAS No. 128, "Earnings Per Share".
Under SFAS No. 128, basic earnings per share ("EPS") and diluted EPS replace
primary EPS and fully diluted EPS. Basic EPS is calculated by dividing the
income available to common stockholders by the weighted-average number of shares
outstanding. Diluted EPS reflects the potential dilution that could occur if
options or warrants to purchase common shares were exercised and preferred stock
was converted into common shares ("potential common shares"). All prior periods
presented have been restated. For the years ended December 31, 1997, 1996 and
1995, basic and diluted EPS are computed based on a weighted-average number of
shares outstanding of 11,824,000, 11,817,000 and 11,814,000, respectively.
Potential common shares have been excluded from diluted EPS for 1997, 1996 and
1995 because the effect would be antidilutive.
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 and 1995, distributions were paid of $0.75 per share and $2.52 per
share, respectively. The ordinary income, return of capital and long-term gain
portions of such distributions for each year are indicated in the table below:
1996 1995
---------------- ---------------
Ordinary income 24.7% 0.0%
Return of capital 74.9 98.8
Long-term gains 0.4 1.2
================ ===============
100.0% 100.0%
================ ===============
There were no dividends paid or accrued for the year ended December 31, 1997.
11
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Reclassifications
Certain 1996 and 1995 financial statement amounts have been reclassified to
conform with 1997 classifications. These reclassifications had no effect on net
loss or stockholders' equity as previously reported.
3. Investment in Joint Ventures
The Company and Atlantic Real Estate Corporation ("ARC") jointly created a
limited liability company named Atlantic Realty LLC ("Atlantic") to develop and
manage retail community and neighborhood shopping centers in North Carolina.
Atlantic currently has plans to develop nearly one million square feet,
including outparcels over the next several years. The Company and ARC own
Atlantic equally, with the Company serving as managing member overseeing its
operations. The investment in Atlantic will be accounted for under the equity
method of accounting. As of December 31, 1997, Atlantic had purchased land and
building for development totaling approximately $3.5 million and did not have
any other operations. Atlantic had total assets of approximately $3.7 million
and debt of approximately $2.3 million at December 31, 1997.
The Company has entered into a joint venture with an unrelated third party,
known as Mount Pleasant FAC, LLC, to develop a 425,000 square foot
retail/entertainment shopping center in Mount Pleasant, South Carolina.
Construction on the center is expected to begin May, 1998, with completion
targeted for May, 1999. As of December 31, 1997, the Company has invested $2.8
million in this joint venture. This 50% investment in the joint venture will be
accounted for under the equity method of accounting. The joint venture had
approximately $2.8 million of assets and $0.6 of debt at December 31, 1997. The
joint venture had no other operations.
4. Deferred Charges and Other Assets
Deferred charges and other assets, net of accumulated amortization of $4,267 and
$2,892 at December 31, 1997 and 1996 as of December 31, are summarized as
follows (in thousands):
1997 1996
------------------------------------
Deferred financing costs, net $5,531 $ 5,915
Prepaid expenses 248 518
Other assets, net 3,072 3,443
====================================
$8,851 $ 9,876
====================================
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.
Other Assets
During 1993, as part of the VF acquisition (see Note 12), 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 $2.8 and
$3.1 million at December 31, 1997 and 1996, 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.
12
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements (continued)
5. Notes Receivable
In December 1997, the Company advanced $8.5 million to Konover & Associates
South ("Konover") (see Note 15) which was used to prepay certain Konover debt on
a shopping center at a discount. The note receivable is secured by the shopping
center and will be repaid upon the purchase of the shopping center from Konover.
Additionally, in October, 1997, the Company advanced $2.3 million to the
partners in ARC who control certain land parcels which the Company plans to
co-develop in joint ventures with ARC (see Note 3). The note receivable is
secured by the partners' interest in properties to be acquired by the Company
(see Note 11) and will be converted to equity in the joint ventures formed.
6. Debt on Income Properties
Debt on income properties consists of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
$150,000 credit facility with Nomura Asset Capital Corporation, interest at a rate of
LIBOR plus 2.25% (7.9% at December 31, 1997) (a) $134,545 $ --
Class A Mortgage Notes - payable in 85 monthly principal payments ranging from
approximately $104 to $173 determined using various parameters plus weighted
average monthly interest payments at 7.51%. Unpaid principal and accrued interest
due June, 2002 (b) 54,583 55,907
Class B Mortgage Notes - monthly interest payments at 7.87% with entire balance due
June, 2002 (b) 20,000 20,000
Class C Mortgage Notes - monthly interest payments at 8.4% with entire balance due
June, 2002 (b) 17,000 17,000
Note payable to a financial institution with 45 monthly principal and interest
payments of approximately $59 with interest of prime rate (8.5% at December
31, 1997) plus 2 1/4% with entire balance repaid from proceeds from PSR
funding (see
Note 15) 5,711 5,788
$2,500 credit facility with a financial institution, interest at prime rate plus 1/2% 736 --
$75,000 credit facility with a financial institution repaid in February 1997 (c) - 75,000
----------------------------
$ 232,575 $ 173,695
============================
</TABLE>
(a) The Company obtained a $150 million credit facility with Nomura Asset
Capital Corporation ("Nomura") in February 1997. The credit facility with
Nomura is secured by 21 of the Company's centers plus an assignment of
excess cash flow from the properties held by FSA Properties, Inc. The
Nomura credit facility is for a term of 2 years with a 1 year renewal
option. The proceeds from the credit facility were used to fund
acquisitions, expansions of existing centers, repay indebtedness, and fund
operating activities, including the purchase of the common stock. The
indebtedness repaid included $75 million of debt on income properties, $7.5
million of unsecured senior notes and $2.0 million of other unsecured notes
outstanding at December 31, 1996. As a result of this transaction, the
Company expensed the unamortized deferred financing costs of $986,000
related to its previous credit facility as an extraordinary item in the
accompanying consolidated statements of operations for the year ended
December 31, 1997. The new credit facility contains financial covenants
relating to debt to total asset value and net operating income to debt
service coverage. All financial convenants were satisfactorily met for the
year ended December 31, 1997. The balance was repaid in part subsequent to
December 31, 1997 and 11 centers were released as collateral to secure the
new permanent facility (see Note 15).
(b) In 1995, the Company's wholly owned subsidiary, FSA Finance, Inc. closed a
$95 million rated debt securitization (the "Mortgage Notes"). The total
offering of $95 million consisted of $58 million of Class A Mortgage Notes
rated "AA"; $20 million of Class B Mortgage Notes rated "A"; and $17
million of Class C Mortgage Notes rated "BBB". The Mortgage Notes are
secured by a cross-collateralized mortgage which covers 18 factory outlet
centers owned by FSA Properties, Inc.
13
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements (continued)
6. Debt on Income Properties (continued)
(b) Mortgage 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.
(c) In April, 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 unamortized deferred financing costs of
$103,000 as an extraordinary item in the accompanying consolidated
statements of operations for the year ended December 31, 1996.
Combined aggregate principal maturities of notes payable are as follows (in
thousands):
1998 $ 8,007
1999 136,226
2000 1,810
2001 1,952
2002 84,580
=================
$ 232,575
=================
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,
1997. 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.
7. 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 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.
14
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements (continued)
7. Convertible Preferred Stock and Unsecured Senior Notes (continued)
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. No dividends were accrued or paid on the Series A Preferred Stock in
1997.
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 placed
at 100% of their face amount. In March 1997, the Company repaid the Senior Notes
at their face amounts from the proceeds of the Nomura credit facility.
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.
8. Stock Option and Compensation Plans
Employee Stock Incentive Plan
The Company has established a stock option plan which provides for the issuance
of 1,100,000 shares through the grant of qualified and nonqualified options to
officers and employees at exercise prices not less than market value on the date
of grant. Generally, options vest proportionately over a period of four to five
years from the date of grant and are exercisable for 10 years from the date of
grant.
A summary of changes in outstanding options is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------------
Avg. Avg. Avg.
Shares Price Shares Price Shares Price
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year 1,047,500 $15.01 432,500 $22.72 330,500 $23.00
Options granted, at market 645,000 $ 5.78 615,000 $23.00 102,000 $21.50
Canceled (949,250) $13.43 -- -- -- --
Exercised -- -- -- -- -- --
-------------------------------------------------------------------------
Balance, end of year 743,250 $ 9.29 1,047,500 $15.01 432,500 $22.65
=========================================================================
Exercisable, end of year 281,800 $13.14 512,820 $13.14 317,080 $22.72
=========================================================================
Weighted Average Fair Value of
Options Granted During the Year $ 4.80 $ 5.34 $11.32
=========================================================================
</TABLE>
15
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements (continued)
8. Stock Option and Compensation Plans (continued)
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Weighted Average
Remaining Contractual
Exercise Prices Shares Life in Years Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 23.00 123,250 5.5 114,200
$ 21.50 18,000 7.1 7,200
$ 7.50 50,000 9.3 10,000
$ 5.63 552,000 9.8 150,400
------- -------
743,250 281,800
======= =======
</TABLE>
The fair value of each option granted in 1997, 1996, and 1995 is estimated using
the Black-Scholes option pricing model with the following assumptions:
1997 1996 1995
-------------------------------------
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 10.40% 10.40% 10.40%
Risk-free interest rate 6.80% 6.99% 7.74%
Expected life in years 5 10 10
Restricted Stock Plan
The Company's shareholders' approved a restricted stock plan in 1996 whereby the
Company can award up to 500,000 shares of common stock to employees. Generally,
awards under the plan vest at the end of the restriction period, which is
typically three years. The awards are recorded at market value on the date of
grant as unearned compensation expense and amortized over the restriction
periods. Generally, recipients are eligible to receive dividends on restricted
stock issued. Restricted stock and annual expense information is as follows (in
thousands, except share amounts):
1997 1996
--------------------
Number of restricted shares awarded 444,852 42,592
Award date - average fair value per share $ 6.62 $ 10.73
Number of restricted shares exchanged for options to
repurchase restricted stock 390,884 --
Restricted shares repurchased
17,353 --
Restricted shares outstanding at December 31, 1997 79,207 42,592
Annual expense, net $ 493 $ 392
====================
On November 11, 1997, the Company adopted a plan whereby members of the
Company's executive management exchanged a total of 390,884 shares of restricted
stock previously awarded to them for the right to repurchase such shares.
Holders of these repurchase rights have no voting rights, but are entitled to
receive a dividend equivalent, an amount equal to any cash dividends paid to
common stockholders. Recipients of the repurchase rights may exercise their
rights at any time beginning the date the restricted stock subject to the
repurchase right becomes vested and ending 15 years from the date of vesting.
The exercise price is 10% of the fair market value of the restricted stock
subject to the repurchase right determined on the date of grant of the
repurchase right. There is no effect on the amount of compensation to be
recorded as a result of the exchange as the effective value of the restricted
stock granted is the same as the value of the discounted repurchase right. At
December 31, 1997, no repurchase rights were exercisable.
During 1997, the Company's Independent Directors, upon the recommendation of the
Executive Compensation Committee, which in turn received recommendations from an
executive compensation consulting firm, approved a long-term incentive program
for two senior executive officers. Pursuant to such program, 270,000 shares of
restricted stock with a value of $1,788,750 were awarded to the senior executive
officers replacing 180,000 shares previously awarded in 1996 with a value of
$1,643,000. In 1996, 90,000 shares of restricted stock previously granted to the
former chairman and chief executive officer of the Company, valued at $900,000,
were cancelled upon his resignation.
16
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements (continued)
8. Stock Option and Compensation Plans (continued)
Employee Stock Purchase Plan
During 1997, the Company adopted an Employee Stock Purchase Plan (ESPP) to
provide all full-time employees an opportunity to purchase shares of its common
stock through payroll deductions over a six-month subscription period. A total
of 25,000 shares are available for award under this plan. The purchase price is
equal to 85% of the fair market value on either the first or last day of the
subscription period, which ever is lower. The initial subscription period began
July 1, 1997 and ended on December 31, 1997 on which date 6,530 shares of common
stock were issued to employees at a price of $5.21 per common share.
Pro Forma Information
During 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123). In accordance
with the provisions of SFAS No. 123, the Company has elected to apply APB
Opinion No. 25 and related Interpretations in accounting for its stock option,
restricted stock, and employee stock purchase plan. Had the Company elected to
recognize compensation cost for these plans based on the fair value at the date
of grant, as prescribed by SFAS No. 123, net income and net income per share
would have been reduced by the pro forma amounts indicated in the table below
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------
Reported Proforma Reported Proforma Reported Proforma
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net loss available to
common stockholders $ (1,416) $ (2,481) $ (6,349) $ (7,481) $(13,101) $ (13,860)
Net loss per share $ (0.12) $ (0.21) $ (0.55) $ (0.63) $ (1.11) $ (1.17)
</TABLE>
Other Plans
The Company offers the FAC Realty Trust, Inc. 401(k) and Profit Sharing Plan
(the "Plan"), a tax qualified defined contribution plan to its employees. 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,
1997, 1996 and 1995, the Company contributed $102,579, $64,084 and $59,710,
respectively, as a matching contribution and there was no profit sharing
contribution made by the Company.
9. Leases
The Company leases certain signage and equipment under capital lease agreements
which expire beginning in 1998 through 2007. Amortization of assets acquired
through capital leases is included with depreciation and amortization expense in
the accompanying statements 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 for the year ended December 31, 1995. As of December 31,
1995, the lease was canceled at a cost of approximately $180,000.
17
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements (continued)
9. Leases (continued)
Aggregate future minimum lease payments under capital and operating leases
having remaining terms in excess of one year as of December 31, 1997, are as
follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-----------------------------
<S> <C> <C>
1998 $ 404 $ 356
1999 304 276
2000 280 206
2001 248 154
2002 167 100
Thereafter 48 72
-----------------------------
1,451 $ 1,164
==============
Less amounts representing interest ranging from 8% to 13% 320
===============
Present value of minimum lease payments $ 1,131
===============
</TABLE>
10. Tenant Lease Agreements
The Company is the lessor of retail stores under operating leases with initial
terms that expire from 1998 to 2017. 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,
1997, are as follows (in thousands):
1998 $ 35,659
1999 30,998
2000 24,748
2001 18,281
2002 14,048
Thereafter 28,806
---------
$ 152,540
=========
For the years ended December 31, 1997, 1996 and 1995 rental revenue from a
single major tenant, VF Corporation, comprised approximately 11%, 14% and 14%,
respectively, of total rental revenue.
11. Acquisitions
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, 1997 and 1996 are set forth below which assume
the acquisition of the five properties aggregating 606,000 square feet of retail
and office space had been completed as of January 1, 1996. 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, 1996, nor does it purport to represent
results of operations of future periods (in thousands, except for per share
data).
18
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements (continued)
11. Acquisitions (continued)
Pro forma year ended December 31,
1997 1996
-----------------------------------
(Unaudited) (Unaudited)
-----------------------------------
Revenues $ 55,019 $ 52,302
Property Operating Costs 16,042 15,279
Depreciation 15,854 14,610
General and administrative 6,422 6,338
Interest 17,062 16,678
Property sales and adjustments -- 4,963
======== ========
Loss before extraordinary item $ (361) $ (5,566)
======== ========
Loss per share $ (0.03) $ (0.47)
======== ========
On October 7, 1997, the Company entered into an agreement to purchase nine
shopping centers located in North Carolina and Virginia, totaling 1.0 million
square feet, and to assume third party management of an additional 1.2 million
square feet of community shopping centers. The centers to be purchased are
valued at $63.3 million. The purchase of the shopping centers was subject to the
final approval of respective partnerships holding the properties which has been
received, as well as holders of mortgage notes on the shopping centers which has
been received on all properties except for one. The remaining shopping center
will be managed by the Company until either approval is received or the mortgage
is retired.
In exchange for their equity ownership interests in the community centers,
the sellers will receive approximately 1.2 million share-equivalent partnership
units in the Operating Partnership and approximately $2.9 million in cash. The
number of Units to be issued to the sellers was based on a $9.50 price per share
of the Company's Common Stock. Of the Units to be issued, approximately 0.5
million will remain unissued until the completion of certain performance
requirements and the acquisition of the remaining shopping center noted above.
As part of the purchase price, the Company will also assume approximately $49.4
million of primarily fixed rate debt on the properties to be acquired.
As of October 1997, the Company has been managing the properties and, in return,
receives a management fee, as defined. In 1997, the Company recorded net
management fees of approximately $300,000 (see Note 15).
12. Commitments and Contingencies
Under the terms of its 1993 purchase agreement to acquire the VF Properties from
VF Corporation, 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. On December 10, 1996, the Company
and VF Factory Outlet, Inc. ("VFFO"), an 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. The Company
remained obligated to pay a tenant allowance for two centers and will provide
for VFFO's benefit nine additional billboards at three center locations selected
by VFFO for at least three years ending July, 2000. 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. In 1997, the Company paid VFFO
$2,016,000 for tenant allowances (see Note 4).
19
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements (continued)
12. Commitments and Contingencies (continued)
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 1998.
On July 19 and October 30, 1996, two purported class action lawsuits were 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
complaints sought 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 complaints
alleged 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.
The cases were consolidated and the Company filed motions to dismiss both
lawsuits.
In November, 1997, the court granted the motions to dismiss and entered judgment
for defendants. The time for plaintiffs to file appeals has expired without
appeal.
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. Management does not expect the resolution of these matters to have a
significant impact on the Company's financial position or results of operations.
13. 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 or by the acceptance from Mr.
Fleming of some other cash or value equivalent. In 1997, the Company entered
into an agreement with Mr. Fleming and sold to him the 19-acre land tract for
the sum of $750,000.
In 1997, 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 was entitled to a lump sum distribution of the value of
the remaining term of the agreement. The Company charged $767,000 to general and
administrative expense in 1996 for the remaining value of his contract.
20
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements (continued)
14. Terminated Acquisition
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 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 was payable only upon the concurrence of certain
conditions relating to the termination of the Agreements and the Company
asserted that certain of the required conditions were not met. After an
unsuccessful attempt at mediation of the dispute, RRI filed for binding
arbitration of the matter to settle the dispute. Following the arbitration
hearing held in late April 1997, the Company agreed to pay $2.9 million to RRI
on behalf of related entities of OPERS in settlement of all outstanding issues
between the Company and OPRES/RRI relating to the terminated merger. The Company
recorded a charge of $1.7 million in December 1995 in connection with the
termination. The remaining $1.2 million of the $2.9 million settlement, plus an
estimate for the Company's legal fees was charged to operations in 1997. All
amounts due to OPERS/RRI have been paid.
15. Subsequent Events
On January 7, 1998, the Company completed the purchase of a 55,909 square foot
shopping center located in Danville, VA. This Food Lion anchored center was
purchased for $3.1 million.
On February 24, 1998, Prometheus Southeast Retail, LLC, ("PSR") a real estate
investment affiliate of Lazard Freres Real Estate Investors, LLC entered into a
definitive agreement with the Company to make a $200 million strategic
investment in the Company. PSR has committed to purchase $200 million in newly
issued common shares of the Company at a purchase price of $9.50. The investment
will be made in stages through the end of 1999 allowing the Company to obtain
capital as needed to fund its future acquisition and development plans as well
as retire debt. On March 23, 1998, the Company received the first installment
totaling $22.3 million which represents 2,350,000 common shares. Upon completion
of funding, PSR will own an equity interest in the Company of approximately 60%,
on a fully diluted basis, not including any further issuance of Units for
transactions under contract or transactions the Company may enter into in the
future. As part of the transaction, three representatives of Lazard will be
nominated to the Company's Board of Directors, bringing the total number of
directors to nine.
On February 24, 1998, the Company announced the execution of definitive
agreements with Konover, a privately held real estate development firm based in
Boca Raton, Florida, to acquire 11 community shopping centers totaling
approximately 2.0 million square feet and valued at nearly $100 million. The
purchase equates to approximately $24 million in equity consisting of the
issuance of Units at $9.50 per unit, and/or cash, plus the assumption of
approximately $76 million in debt. At closing, $17 million of the equity will be
paid in the form of Units or cash. The remaining $7 million will be paid in cash
over a three-year period with interest at 7.75% per annum.
As part of the transaction, the Company intends to operate under the name
"Konover Property Trust". The Company will remain listed on the New York Stock
Exchange and intends to change its ticker symbol, from FAC to KPT pending formal
approval by shareholders in June, 1998. Additionally, the current employees of
Konover will join the Company as a result of the transaction. The new employees
include development, leasing, property management, administrative and accounting
professionals. The Company will continue to operate the Konover office in Boca
Raton due to its strategic location in the Southeast.
21
<PAGE>
FAC REALTY TRUST, INC.
Notes to Consolidated Financial Statements (continued)
15. Subsequent Events (continued)
Simon Konover, founder of Konover & Associates, a $500 million real estate plus
company headquartered in West Hartford, Connecticut, will become Chairman of the
Board of the Company upon completion of the transaction. He will not be an
executive officer of the Company.
On March 11, 1998, the Company closed on a $75 million, 15-year permanent credit
facility secured by 11 properties previously securing the $150 million revolving
credit facility. The loan is at an effective rate of 7.73% and is amortized on a
338-month basis. The proceeds were used to pay down certain outstandings on the
$150 million Nomura credit facility.
As of March 31, 1998, seven of the nine centers discussed in Note 11 had closed.
An eighth center is expected to close in second quarter of 1998. The ninth and
final center will be managed by the Company and is expected to be acquired in
the year 2000. The loan assumption fee is currently unreasonable, however, the
loan is prepayable in the year 2000.
16. Quarterly Information (Unaudited)
Selected quarterly financial data for the four quarters in 1997 and 1996 is as
follows (in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter ended
-----------------------------------------------------
March 31 June 30 September 30 December 31
-----------------------------------------------------
<S> <C> <C> <C> <C>
1997:
Total revenue $ 11,922 $ 13,475 $ 13,614 $ 14,715
====================================================
Net (loss) income applicable
to common shareholders $ (2,422) $ 119 $ 329 $ 558
====================================================
Basic earnings (loss) per common share:
(Loss) income before extraordinary items $ (0.12) $ 0.01 $ 0.03 $ 0.04
Extraordinary item (0.08) -- -- --
====================================================
Net (loss) income $ (0.20) $ 0.01 $ 0.03 $ 0.04
====================================================
Diluted earnings (loss) per common share:
(Loss) income before extraordinary item $ (0.12) $ 0.01 $ 0.02 $ 0.04
Extraordinary item (0.08) -- -- --
====================================================
Net (loss) income $ (0.20) $ 0.01 $ 0.02 $ 0.04
====================================================
1996:
Total revenue $ 11,261 $ 11,736 $ 12,065 $ 12,108
====================================================
Net income (loss) applicable
to common shareholders $ 412 $ (94) $ (510) $ (6,260)
====================================================
Basic and Diluted
Earnings per common share:
Income (loss) before extraordinary items $ 0.03 $ (0.01) $ (0.04) $ (0.52)
Extraordinary item -- -- -- (0.01)
====================================================
Net income (loss) $ 0.03 $ (0.01) $ (0.04) $ (0.53)
====================================================
</TABLE>
22
<PAGE>
FAC Realty Trust, Inc.
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Cost Capitalized Adjustment to Net Realizable
Initial Cost to Companany Subsequent to Acquisition Value
- ------------------------------------------------------------------------------------------------------------------------------------
Description Encumbrances Land Bldg. and Land Bldg. and Land Bldg. and
Imprvmts Imprvmts. Imprvmts.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Boaz, AL 5,193,054 34,998 42,004 4,232 1,138,129
- ------------------------------------------------------------------------------------------------------------------------------------
Casa Grande, AZ 5,751,418 2,220,397 10,557,446 390,154 (1,362,190) (6,037,810)
- ------------------------------------------------------------------------------------------------------------------------------------
Mesa, AZ 2,986,648 1,399,858 7,060,705 47,797 3,379,757
- ------------------------------------------------------------------------------------------------------------------------------------
Tucson, AZ 1,117,314 772,231 3,572,837 20,215 156,035
- ------------------------------------------------------------------------------------------------------------------------------------
Lathrop, CA 5,711,373 2,842,636 7,048,844 1,465,246 (1,148,083) (3,751,917)
- ------------------------------------------------------------------------------------------------------------------------------------
Vacaville, CA 35,675,827 30,008,142 49,464,506 872,040
- ------------------------------------------------------------------------------------------------------------------------------------
Graceville, FL 2,539,121 556,765 2,544,654 201,068
- ------------------------------------------------------------------------------------------------------------------------------------
Lake Park, GA 3,806,559 1,128,056 4,801,250 39,827
- ------------------------------------------------------------------------------------------------------------------------------------
West Frankfort, IL 952,464 471,041 2,130,358 8,945
- ------------------------------------------------------------------------------------------------------------------------------------
Story City, IA 2,646,945 601,802 2,737,481 22,653 2,032,760
- ------------------------------------------------------------------------------------------------------------------------------------
Carrollton, KY 1,034,889 340,190 1,555,641 70,865
- ------------------------------------------------------------------------------------------------------------------------------------
Georgetown, KY 8,722,314 937,490 6,510,116 40,761
- ------------------------------------------------------------------------------------------------------------------------------------
Hanson, KY 833,406 308,876 1,408,641 3,300
- ------------------------------------------------------------------------------------------------------------------------------------
Arcadia, LA 1,263,847 404,864 1,856,173 3,492 1,561,120
- ------------------------------------------------------------------------------------------------------------------------------------
Iowa, LA 3,443,524 627,061 2,860,591 2,382,847
- ------------------------------------------------------------------------------------------------------------------------------------
Kittery, ME 2,108,930 355,080 2,485,826 98,547
- ------------------------------------------------------------------------------------------------------------------------------------
Branson, MO 13,486,815 5,702,365 24,600,479 31,999 686,237
- ------------------------------------------------------------------------------------------------------------------------------------
Lebanon, MO 2,142,765 403,915 1,889,710 16,109
- ------------------------------------------------------------------------------------------------------------------------------------
Tupelo, MS 1,424,309 430,765 1,956,158 11,484 1,106,554
- ------------------------------------------------------------------------------------------------------------------------------------
Nebraska City, NE 2,457,878 400,684 1,813,050 16,225 1,728,151
- ------------------------------------------------------------------------------------------------------------------------------------
Las Vegas, NV 9,826,865 7,158,719 18,761,605 162,387
- ------------------------------------------------------------------------------------------------------------------------------------
Conway, NH 701,910 324,652 2,277,122 107,941 (151,997) (1,048,003)
- ------------------------------------------------------------------------------------------------------------------------------------
Lake George, NY 1,815,483 975,466 4,441,445 328,567
- ------------------------------------------------------------------------------------------------------------------------------------
Smithfield, NC 24,553,566 77,667 9,064,651 1,262,314 7,290,072
- ------------------------------------------------------------------------------------------------------------------------------------
Crossville, TN 2,665,068 519,239 2,415,619 11,389 2,255,001
- ------------------------------------------------------------------------------------------------------------------------------------
Nashville, TN 25,877,039 5,947,579 10,078,170 665,849 5,024,214
- ------------------------------------------------------------------------------------------------------------------------------------
Tri-Cities, TN 3,340,193 353,983 5,648,812 651,897 26,479
- ------------------------------------------------------------------------------------------------------------------------------------
Union City, TN 970,781 296,580 1,343,859 2,983 88,011
- ------------------------------------------------------------------------------------------------------------------------------------
Corsicana, TX 1,172,219 336,335 1,533,169 37,892
- ------------------------------------------------------------------------------------------------------------------------------------
Hempstead, TX 1,235,241 375,487 1,711,282 (99,997) 20,000
- ------------------------------------------------------------------------------------------------------------------------------------
LaMarque, TX 7,647,188 4,066,414 11,864,248 26,711
- ------------------------------------------------------------------------------------------------------------------------------------
Livingston, TX 1,474,727 354,381 1,615,979 35,331
- ------------------------------------------------------------------------------------------------------------------------------------
Mineral Wells, TX 1,487,331 315,944 1,441,675 2,819
- ------------------------------------------------------------------------------------------------------------------------------------
Sulphur Springs, TX 2,357,042 512,898 2,326,326 62 88,308
- ------------------------------------------------------------------------------------------------------------------------------------
Draper, UT 3,330,163 718,188 4,294,019 54,556 4,286,444
- ------------------------------------------------------------------------------------------------------------------------------------
North Bend, WA 9,597,907 8,428,229 12,052,296 41,432 13,542,535
- ------------------------------------------------------------------------------------------------------------------------------------
Eastgate, NC 736,000 688,256 3,153,235 (416,436) 4,310
- ------------------------------------------------------------------------------------------------------------------------------------
Tower, NC 4,487,202 659,677 4,459,411 7,087 67,106
- ------------------------------------------------------------------------------------------------------------------------------------
Northridge, NC 7,966,044 1,428,493 8,872,975 14,774 102,472
- ------------------------------------------------------------------------------------------------------------------------------------
Gateway, NC 3,062,894 816,566 3,246,925 8,628 32,619
- ------------------------------------------------------------------------------------------------------------------------------------
MacGregor, NC 6,667,781 1,428,513 7,694,110 14,742 89,251
- ------------------------------------------------------------------------------------------------------------------------------------
224,272,044 85,730,482 255,193,403 2,377,377 50,996,922 (2,662,270) (10,837,730)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Gross Amount at which
Carried at Close of Period
- -----------------------------------------------------------------------------------------------------------------------
Description Land Bldg. and Total Accumulated Date of
Imprvmts. Depreciation Construction
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Boaz, AL 39,230 1,180,133 1,219,363 224,514
- -----------------------------------------------------------------------------------------------------------------------
Casa Grande, AZ 858,207 4,909,790 5,767,997 1,482,293
- -----------------------------------------------------------------------------------------------------------------------
Mesa, AZ 1,447,655 10,440,462 11,888,117 1,478,046
- -----------------------------------------------------------------------------------------------------------------------
Tucson, AZ 792,446 3,728,872 4,521,318 548,286
- -----------------------------------------------------------------------------------------------------------------------
Lathrop, CA 1,694,553 4,762,173 6,456,726 564,141
- -----------------------------------------------------------------------------------------------------------------------
Vacaville, CA 30,008,142 50,336,546 80,344,688 7,065,284
- -----------------------------------------------------------------------------------------------------------------------
Graceville, FL 556,765 2,745,722 3,302,487 391,731
- -----------------------------------------------------------------------------------------------------------------------
Lake Park, GA 1,128,056 4,841,077 5,969,133 2,035,470
- -----------------------------------------------------------------------------------------------------------------------
West Frankfort, IL 471,041 2,139,303 2,610,344 308,527
- -----------------------------------------------------------------------------------------------------------------------
Story City, IA 624,455 4,770,241 5,394,696 582,748
- -----------------------------------------------------------------------------------------------------------------------
Carrollton, KY 340,190 1,626,506 1,966,696 228,231
- -----------------------------------------------------------------------------------------------------------------------
Georgetown, KY 937,490 6,550,877 7,488,367 1,532,353
- -----------------------------------------------------------------------------------------------------------------------
Hanson, KY 308,876 1,411,941 1,720,817 203,579
- -----------------------------------------------------------------------------------------------------------------------
Arcadia, LA 408,356 3,417,293 3,825,649 558,650
- -----------------------------------------------------------------------------------------------------------------------
Iowa, LA 627,061 5,243,438 5,870,499 778,227
- -----------------------------------------------------------------------------------------------------------------------
Kittery, ME 355,080 2,584,373 2,939,453 299,903
- -----------------------------------------------------------------------------------------------------------------------
Branson, MO 5,734,364 25,286,716 31,021,080 1,649,746 1995
- -----------------------------------------------------------------------------------------------------------------------
Lebanon, MO 403,915 1,905,819 2,309,734 281,594
- -----------------------------------------------------------------------------------------------------------------------
Tupelo, MS 442,249 3,062,712 3,504,961 387,316
- -----------------------------------------------------------------------------------------------------------------------
Nebraska City, NE 416,909 3,541,201 3,958,110 455,907
- -----------------------------------------------------------------------------------------------------------------------
Las Vegas, NV 7,158,719 18,923,992 26,082,711 2,666,995
- -----------------------------------------------------------------------------------------------------------------------
Conway, NH 172,655 1,337,060 1,509,715 230,560
- -----------------------------------------------------------------------------------------------------------------------
Lake George, NY 975,466 4,770,012 5,745,478 491,518
- -----------------------------------------------------------------------------------------------------------------------
Smithfield, NC 1,339,981 16,354,723 17,694,704 4,377,840
- -----------------------------------------------------------------------------------------------------------------------
Crossville, TN 530,628 4,670,620 5,201,248 785,367
- -----------------------------------------------------------------------------------------------------------------------
Nashville, TN 6,613,428 15,102,384 21,715,812 2,366,330
- -----------------------------------------------------------------------------------------------------------------------
Tri-Cities, TN 1,005,880 5,675,291 6,681,171 1,555,967
- -----------------------------------------------------------------------------------------------------------------------
Union City, TN 299,563 1,431,870 1,731,433 207,867
- -----------------------------------------------------------------------------------------------------------------------
Corsicana, TX 336,335 1,571,061 1,907,396 224,199
- -----------------------------------------------------------------------------------------------------------------------
Hempstead, TX 275,490 1,731,282 2,006,772 246,694
- -----------------------------------------------------------------------------------------------------------------------
LaMarque, TX 4,066,414 11,890,959 15,957,373 1,632,396
- -----------------------------------------------------------------------------------------------------------------------
Livingston, TX 354,381 1,651,310 2,005,691 234,544
- -----------------------------------------------------------------------------------------------------------------------
Mineral Wells, TX 315,944 1,444,494 1,760,438 213,454
- -----------------------------------------------------------------------------------------------------------------------
Sulphur Springs, TX 512,960 2,414,634 2,927,594 349,440
- -----------------------------------------------------------------------------------------------------------------------
Draper, UT 772,744 8,580,463 9,353,207 1,259,813
- -----------------------------------------------------------------------------------------------------------------------
North Bend, WA 8,469,661 25,594,831 34,064,492 3,479,677
- -----------------------------------------------------------------------------------------------------------------------
Eastgate, NC 271,820 3,157,545 3,429,365 81,001
- -----------------------------------------------------------------------------------------------------------------------
Tower, NC 666,764 4,526,517 5,193,281 114,990
- -----------------------------------------------------------------------------------------------------------------------
Northridge, NC 1,443,267 8,975,447 10,418,714 232,987
- -----------------------------------------------------------------------------------------------------------------------
Gateway, NC 825,194 3,279,544 4,104,738 86,311
- -----------------------------------------------------------------------------------------------------------------------
MacGregor, NC 1,443,255 7,783,361 9,226,616 204,561
- -----------------------------------------------------------------------------------------------------------------------
85,445,589 295,352,595 380,798,184 42,099,057
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------
Life on
Which
Depreciation
in Latest
- ----------------------------------- Income
Description Date Acquired Statements if
Computed (1)
- ---------------------------------------------------
<S> <C> <C>
Boaz, AL 1993 5-31.5 yrs.
- ---------------------------------------------------
Casa Grande, AZ 1994 5-31.5 yrs.
- ---------------------------------------------------
Mesa, AZ 1993 5-31.5 yrs.
- ---------------------------------------------------
Tucson, AZ 1993 5-31.5 yrs.
- ---------------------------------------------------
Lathrop, CA 1994 5-31.5 yrs.
- ---------------------------------------------------
Vacaville, CA 1993 5-31.5 yrs.
- ---------------------------------------------------
Graceville, FL 1993 5-31.5 yrs.
- ---------------------------------------------------
Lake Park, GA 1993 5-31.5 yrs.
- ---------------------------------------------------
West Frankfort, IL 1993 5-31.5 yrs.
- ---------------------------------------------------
Story City, IA 1993 5-31.5 yrs.
- ---------------------------------------------------
Carrollton, KY 1993 5-31.5 yrs.
- ---------------------------------------------------
Georgetown, KY 1993 5-31.5 yrs.
- ---------------------------------------------------
Hanson, KY 1993 5-31.5 yrs.
- ---------------------------------------------------
Arcadia, LA 1993 5-31.5 yrs.
- ---------------------------------------------------
Iowa, LA 1993 5-31.5 yrs.
- ---------------------------------------------------
Kittery, ME 1993 5-31.5 yrs.
- ---------------------------------------------------
Branson, MO 5-31.5 yrs.
- ---------------------------------------------------
Lebanon, MO 1993 5-31.5 yrs.
- ---------------------------------------------------
Tupelo, MS 1993 5-31.5 yrs.
- ---------------------------------------------------
Nebraska City, NE 1993 5-31.5 yrs.
- ---------------------------------------------------
Las Vegas, NV 1993 5-31.5 yrs.
- ---------------------------------------------------
Conway, NH 1993 5-31.5 yrs.
- ---------------------------------------------------
Lake George, NY 1993 5-31.5 yrs.
- ---------------------------------------------------
Smithfield, NC 1993 5-31.5 yrs.
- ---------------------------------------------------
Crossville, TN 1993 5-31.5 yrs.
- ---------------------------------------------------
Nashville, TN 1993 5-31.5 yrs.
- ---------------------------------------------------
Tri-Cities, TN 1993 5-31.5 yrs.
- ---------------------------------------------------
Union City, TN 1993 5-31.5 yrs.
- ---------------------------------------------------
Corsicana, TX 1993 5-31.5 yrs.
- ---------------------------------------------------
Hempstead, TX 1993 5-31.5 yrs.
- ---------------------------------------------------
LaMarque, TX 1994 5-31.5 yrs.
- ---------------------------------------------------
Livingston, TX 1993 5-31.5 yrs.
- ---------------------------------------------------
Mineral Wells, TX 1993 5-31.5 yrs.
- ---------------------------------------------------
Sulphur Springs, TX 1993 5-31.5 yrs.
- ---------------------------------------------------
Draper, UT 1993 5-31.5 yrs.
- ---------------------------------------------------
North Bend, WA 1993 5-31.5 yrs.
- ---------------------------------------------------
Eastgate, NC 1997 5-31.5 yrs.
- ---------------------------------------------------
Tower, NC 1997 5-31.5 yrs.
- ---------------------------------------------------
Northridge, NC 1997 5-31.5 yrs.
- ---------------------------------------------------
Gateway, NC 1997 5-31.5 yrs.
- ---------------------------------------------------
MacGregor, NC 1997 5-31.5 yrs.
- ---------------------------------------------------
- ---------------------------------------------------
</TABLE>
(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 to 10 years.
(2) Aggregate cost of the real estate property for federal income tax purposes
is approximately $304, 877,000.
23
<PAGE>
FAC Realty Trust, Inc.
Notes to Consolidated Financial Statements (continued)
The changes in total real estate for years ended December 31, 1997, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $ 345,890,739 $ 340,166,756 $ 308,586,835
Developed or acquired properties 30,619,827 10,339,504 24,819,456
Improvements 6,550,712 547,694 15,474,668
Adjustment to net realizable value -- (5,000,000) (8,500,000)
Sales (2,263,094) (163,215) (214,203)
================================================
Balance, end of period $ 380,798,184 $ 345,890,739 $ 340,166,756
================================================
</TABLE>
The changes in accumulated depreciation for years ended December 31, 1997, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $ 31,198,623 $ 20,386,741 $ 12,561,252
Developed or acquired properties 7,561,802 8,865,743 6,857,428
Improvements 3,684,308 1,946,139 968,061
Sales (345,676) -- --
===========================================
Balance, end of period $ 42,099,057 $ 31,198,623 $ 20,386,741
===========================================
</TABLE>
24
