UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
September 30, 1996
For the quarter ended ---------------------------------------------------------
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
to
For the transition period from ---------------- ------------------
1-11998
Commission File number: ------------------------------------------------------
FAC Realty, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 56-1819372
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 N. Equity Drive, Smithfield, North Carolina 27577
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(Address of principal executive offices) (Zip Code)
(919) 934-9446
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(Registrant's telephone number, including area code)
Factory Stores of America, Inc.
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(Former name or former address, if changed since last report)
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 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.
(x) Yes ( ) No
The number of outstanding shares of Common Stock, $0.01 par value per share, as
of October 31, 1996 was 12,129,312.
1
<PAGE>
FAC REALTY, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the
Three Months ended September 30, 1996 and 1995 5
Consolidated Statements of Income for the
Nine Months ended September 30, 1996 and 1995 6
Consolidated Statement of Stockholders' Equity
for the Nine Months ended September 30, 1996 7
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1996 and 1995 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 33
2
<PAGE>
Part I. Financial Information
Item 1 - Financial Statements
FAC Realty, Inc.
Consolidated Balance Sheets
(in thousands except for share data)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Outlet Center Properties, at Cost
Land $ 75,793 $ 70,356
Building and Improvements 241,999 211,524
Equipment 4,210 3,826
--------- ---------
322,002 285,706
Less Accumulated Depreciation (27,463) (20,332)
------- -------
294,539 265,374
Properties Under Development 5,857 32,837
------- --------
300,396 298,211
Properties Held for Sale 23,820 24,509
-------- --------
Outlet Center Properties, Net 324,216 322,720
Cash and Cash Equivalents 10,619 1,655
Restricted Cash 3,847 4,806
Rents from Tenants and Other Receivables 4,380 5,245
Prepaid Expenses 378 607
Deferred Costs 18,270 16,208
Other Assets and Deposits 3,910 3,854
-------- -------
TOTAL ASSETS $365,620 $355,095
======== ========
</TABLE>
See accompanying notes
3
<PAGE>
Part I. Financial Information
Item 1 - Financial Statements
FAC Realty, Inc.
Consolidated Balance Sheets
(in thousands except for share data)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes Payable $101,691 $100,972
Bank Line of Credit 75,000 69,939
Unsecured Senior Notes 4,890 -
Capital Lease Obligations 753 797
Accounts Payable and Accrued Expenses 7,630 16,022
Dividends Payable - 6,025
Deferred Revenue and Tenant Security Deposits 1,737 854
---------- -----------
TOTAL LIABILITIES 191,701 194,609
Commitments and Contingencies - -
STOCKHOLDERS' EQUITY:
Convertible Preferred Stock, Series A 19,177 -
Stock Purchase Warrants 6 -
Common Stock, $0.01 Par Value, 49,000,000
Shares Authorized, 12,034,018 and 11,814,523
Shares Issued and Outstanding, respectively 120 118
Additional Paid In Capital 156,721 160,368
Retained Earnings - -
Deferred Compensation - Restricted Stock Plan (2,105) -
--------- -----------
TOTAL STOCKHOLDERS' EQUITY 154,742 160,486
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $365,620 $355,095
======== ========
</TABLE>
See accompanying notes
4
<PAGE>
Part I. Financial Information
Item 1 - Financial Statements
FAC Realty, Inc.
Consolidated Statements of Income - Unaudited
(in thousands except for per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1996 1995
---- ----
<S> <C> <C>
REVENUE:
Base and Percentage Rent $10,090 $10,150
Recoveries from Tenants 3,514 3,764
Other Income 484 101
------- -------
TOTAL REVENUE 14,088 14,015
EXPENSES:
Operating 5,288 4,711
General & Administrative 1,247 1,302
Depreciation and Amortization 3,960 3,117
Interest 3,772 2,766
------ ------
TOTAL EXPENSES 14,267 11,896
------ ------
(LOSS) INCOME FROM OPERATIONS (179) 2,119
Gain on Sale of Real Estate, Net of Tax 37 345
-------- --------
NET (LOSS) INCOME $ (142) $2,464
======== ======
EARNINGS PER COMMON SHARE $ (0.01) $ 0.21
======== =======
</TABLE>
See accompanying notes
5
<PAGE>
Part I. Financial Information
Item 1 - Financial Statements
FAC Realty, Inc.
Consolidated Statements of Income - Unaudited
(in thousands except for per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
---- ----
<S> <C> <C>
REVENUE:
Base and Percentage Rent $29,419 $29,548
Recoveries from Tenants 9,970 10,215
Other Income 954 574
-------- --------
TOTAL REVENUE 40,343 40,337
EXPENSES:
Operating 14,686 13,162
General & Administrative 3,955 3,727
Depreciation and Amortization 10,452 8,743
Interest 11,008 7,633
------- -------
TOTAL EXPENSES 40,101 33,265
------- ------
INCOME FROM OPERATIONS 242 7,072
Gain on Sale of Real Estate, Net of Tax 37 345
-------- --------
INCOME BEFORE EXTRAORDINARY ITEM 279 7,417
Extraordinary Item - Loss on Debt Extinguishment 103 -
--------- --------
NET INCOME $ 176 $ 7,417
======== =======
EARNINGS PER COMMON SHARE:
INCOME BEFORE EXTRAORDINARY ITEM $ 0.02 $ 0.63
EXTRAORDINARY ITEM (0.01) -
-------- ------
NET INCOME $ 0.01 $ 0.63
======= ======
</TABLE>
See accompanying notes
6
<PAGE>
Part I. Financial Information
Item 1 - Financial Statements
FAC Realty, Inc.
Consolidated Statement of Stockholders' Equity - Unaudited
Nine Months Ended September 30, 1996
(in thousands except for per share data)
<TABLE>
<CAPTION>
Deferred
Convertible Stock Additional Compensation
Preferred Purchase Common Paid In Retained Restricted
Stock Warrants Stock Capital Earnings Stock Plan Total
----- -------- ----- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 0 $0 $118 $160,368 $ 0 $ 0 $160,486
Issuance of Preferred Stock $19,177 - - - - - 19,177
Issuance of Directors
Stock Awards - - - 14 - - 14
Issuance of Restricted
Stock Awards - - 2 2,178 - (2,180) 0
Issuance of Stock
Purchase Warrants - 6 - - - - 6
Compensation under
Restricted Stock Plan - - - - - 75 75
Distributions to Stockholders
($.50 per share) - - - (5,839) (176) - (6,015)
Net Income for the Period - - - - 176 - 176
---------- ------ ------- ---------- ----- ---------- ---------
Balance at September 30, 1996 $ 19,177 $6 $120 $156,721 $ 0 ($2,105) $173,919
======== == ==== ======== ===== ======== ========
</TABLE>
See accompanying notes
7
<PAGE>
Part I. Financial Information
Item 1 - Financial Statements
FAC Realty, Inc.
Consolidated Statements of Cash Flows - Unaudited
(in thousands except for per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash Provided by Operating Activities $5,249 $ 16,145
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sale of Real Estate 215 554
Additions to Outlet Center Properties (9,508) (30,148)
Changes in Restricted Cash 959 (4,793)
Additions to Deferred Costs and Other Assets (5,685) (7,252)
---------- ---------
Net Cash Used in Investing Activities (14,019) (41,639)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Long Term Debt 32,129 95,311
Payable Related to Acquisition of Properties 0 (11,737)
Net (Payment) Borrowing under Bank Line of Credit 5,061 31,625
Principal Payments on Long-Term Debt:
Notes Payable (7,297) (70,592)
Capital Leases (133) (89)
Proceeds from the Sale of Common Stock, Net of
Stock Issuance Cost 14 12
Distributions to Stockholders (12,040) (17,721)
------- --------
Net Cash Provided by Financing Activities 17,734 26,809
------- --------
Net Increase in Cash and Cash Equivalents 8,964 1,315
Cash and Cash Equivalents, Beginning of Period 1,655 1,297
-------- -------
Cash and Cash Equivalents, End of Period $10,619 $ 2,612
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash Paid During Period for Interest (Net of Interest
Capitalized of $1,570 and $1,993, respectively) $ 11,537 $ 8,163
========= =======
</TABLE>
See accompanying notes
8
<PAGE>
FAC Realty, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and notes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting solely of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1996 are not necessarily indicative of results that may be
expected for a full fiscal year. For further information, refer to the financial
statements and accompanying footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1995.
Description of Business
FAC Realty, Inc. ("the Company") (formerly Factory Stores of America, Inc.) was
incorporated on March 31, 1993 as a self-administered and self-managed real
estate investment trust (REIT). The Company is principally engaged in the
development, ownership, acquisition and operation of factory outlet shopping
centers. The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, FSA Properties, Inc., which
was formed on December 30, 1994 to hold the assets and liabilities of 18 of the
Company's outlet centers and FSA Finance, Inc., formed on May 22, 1995 in
connection with the $95 million collateralized commercial mortgage notes. As of
September 30, 1996, the consolidated financial statements also include the
accounts of FAC Outparcels, Inc., a majority owned subsidiary formed on February
22, 1996 to hold certain outparcels which the Company is marketing for sale or
lease. All significant intercompany balances have been eliminated in
consolidation. As of September 30, 1996 and December 31, 1995, the Company's
portfolio consisted of 36 centers located in 21 states in the United States.
Outlet Center Properties
Outlet center properties are recorded at cost less accumulated depreciation. All
costs related to the improvement or replacement of shopping center properties
are capitalized. Maintenance and repairs are charged to expense as incurred.
Depreciation is computed using the straight-line method over the estimated
useful life of 31.5 years for buildings and improvements, 15 years for land
improvements and 5 to 15 years for equipment. Tenant improvements are amortized
over the initial terms of related leases, which range from 3 to 10 years, using
the straight-line method.
Outlet center properties include capitalized costs related to new developments
and expansions in process including construction, interest, taxes, insurance and
other costs totaling approximately $5.9 and $32.8 million at September 30, 1996
and December 31, 1995, respectively. Upon completion of construction, these
costs are amortized over the useful lives of the respective properties on a
straight-line basis.
9
<PAGE>
FAC Realty, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies - continued
Outlet Center Properties - continued
Net properties held for sale, at their expected net realizable values, have been
separately classified in the accompanying balance sheets as a result of the
Company's intent to sell five outlet center properties. (See Note 2).
The pre-construction stage of project development involves incurrence of certain
costs to secure land control and zoning and complete other initial tasks which
are essential to the development of the project. These costs are transferred to
developments under construction when the pre-construction tasks are completed.
The Company provides for the costs of potentially unsuccessful pre-construction
efforts by charges to operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results can differ from those estimates.
Impact of Recent Issued Accounting Standards
The Company adopted the Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Assets to be
Disposed Of" ("FAS 121") as of January 1, 1996. The pronouncement requires that
certain long-lived assets be reviewed for potential impairment when
circumstances indicate that the carrying amount of such assets may not be
recoverable. Additionally, FAS 121 requires that certain long-lived assets held
for disposition be reported at the lower of the carrying amount of fair value
less any selling costs. The impact of the adoption of this pronouncement did not
have a material effect on the Company's consolidated financial position or on
its results of operations.
Earnings Per Share
Primary earnings per share amounts are computed based on average number of
shares actually outstanding, 12,034,000 and 11,957,000 for the three and nine
months ended September 30, 1996 and 11,814,000 for both the three and nine
months ended September 30, 1995. Under fully diluted earnings computation per
share amounts would be based on an increased number of shares that would be
outstanding assuming conversion of the Convertible Preferred Stock and the
Exchangeable Notes while they were outstanding (See Note 4). Net income would be
adjusted for any dividends on the Convertible Preferred Stock and the interest
expense on the Exchangeable Notes. Fully diluted earnings per share amounts are
not presented because the effect of such inclusion would be to increase earnings
per share. Shares issuable under employee stock options and the warrant
agreement (See Note 4) are excluded from the weighted average number of shares
on the assumption that their effect is not dilutive because the market price of
the stock did not exceed the exercise price for the reporting period.
10
<PAGE>
FAC Realty, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies - continued
Reclassification
Certain 1995 financial statements amounts have been reclassified to conform with
1996 classification. These reclassifications had no effect on net income or
stockholders' equity as previously reported.
2. Properties Held for Sale
As part of the Company's ongoing strategic evaluation of its portfolio of
assets, the Directors of the Company authorized management in 1995 to pursue the
sale of certain properties that were not fully consistent with or essential to
the Company's long-term strategies. Under generally accepted accounting
principles ("GAAP"), assets held for the long-term production of income are
recorded at their historical cost, adjusted for depreciation. However, when a
decision is made to dispose of certain assets, the carrying value of those
assets is computed using their net realizable value.
Accordingly, in 1995 the Company recorded an $8.5 million adjustment to the
carrying value of three of the assets held for sale as required under GAAP. The
net carrying value of assets currently being marketed for sale at September 30,
1996 is $23.8 million. There is also $21.6 million of debt secured by the
properties which is expected to be retired from the sale proceeds. For the nine
month period ended September 30, 1996, these properties contributed
approximately $3.0 million of revenue and incurred a loss of ($276,000) after
deducting related interest expense on the debt associated with the properties.
For the nine month period ended September 30, 1995 these properties contributed
approximately $3.7 million of revenue and $146,000 of net income after deducting
related interest expense.
The Company has begun the process of marketing the properties and no sales
agreements have been completed to date. Management plans to evaluate all
properties on a regular basis in accordance with its strategy for growth and in
the future may identify other properties for disposition or may decide to defer
the pending disposition of those assets now held for sale.
3. Restricted Cash
In connection with the sale of the $95 million collateralized commercial
mortgage notes, the lender required a holdback of a portion of the loan proceeds
to fund certain environmental and engineering work and to make certain lease
related payments that may be required in connection with the renewal or
termination of certain leases by a tenant at most of the factory outlet centers.
Such holdback amounts to approximately $3.8 million at September 30, 1996.
4. Notes Payable
In January 1996, the Company borrowed an aggregate of $6.0 million under two
separate short-term promissory notes from Bank One, Dayton at prime plus 1% to
meet certain cash requirements for certain
11
<PAGE>
FAC Realty, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
4. Notes Payable - continued
costs arising from the termination of the OPERS factory outlet acquisition
agreements, ongoing construction and the payment of a portion of the dividends
to stockholders for the fourth quarter of 1995. These promissory notes were
repaid on April 30, 1996 with a portion of the proceeds from the new $75 million
credit facility discussed below.
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 million of the
Company's Exchangeable Notes (the "Exchangeable Notes") and $5 million of its
Senior Notes, both of which would be unsecured.
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. Each share of Series A
Preferred will be convertible into shares of the Company's Common Stock at a
conversion price equal to $9.00 per share (the "Conversion Price"). 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 (the
"Common Stock Equivalent Dividend").
On August 1, 1996, the Company issued holders of the Exchangeable Notes 800,000
shares of the Company's Series A Preferred in exchange for notes with an
aggregate principal amount of $20 million (net of issue cost of $823,000). The
800,000 shares of the Series A Preferred are convertible, at the option of the
holder, into 2,222,222 shares of the Company's Common Stock.
Under the Note Purchase Agreement, the Senior Notes were placed at 97% of their
face amount, mature on the second anniversary of the initial funding of the
Exchangeable Notes, and bear interest, payable quarterly, at an annual rate of
11% during the first year and 13% thereafter until maturity. As of September 30,
1996, unsecured Senior Notes in the amount of $5.0 million (net of discount of
$156,000) were sold pursuant to the Note Purchase Agreement. The resulting
discount on the Senior Notes is being amortized to interest expense over the
term of the notes.
In connection with the issuance of the Exchangeable Notes and the Senior Notes,
on April 3, 1996 the Company issued Blackacre 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.
12
<PAGE>
FAC Realty, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
4. Notes Payable - continued
In lieu of the remaining $5.0 million Exchangeable Note commitment, on November
12, 1996, the Company issued to designees of Blackacre additional Senior Notes
in the amount of $2.5 million. The Senior Notes were issued at face value with
detachable warrants for the purchase of 100,000 shares of Common Stock of the
Company. The Senior Notes and warrants were issued with terms and conditions
similar to the existing Senior Notes and warrants. Each warrant entitles the
holder to purchase one share of Common Stock at a price equal to $8.375 per
share.
Bank Line of Credit
On April 30, 1996, the Company closed on a new $75 million credit facility from
Bank One, Dayton. The terms of the credit facility are for a period of two years
bearing interest at a rate of LIBOR plus 2.75%. The $75 million credit facility
contains various financial covenants which include maintaining minimum interest
coverage, debt service coverage, debt to market capitalization ratio, debt to
market value ratio, funded debt to tangible capital funds ratio and modified net
income ratio as well as maintaining a minimum net worth of $165 million which is
deemed to include the $20 million of Convertible Preferred Stock. Additionally,
the covenants preclude the Company from paying dividends in excess of 85% of
FFO, as defined in the Company's Prospectus dated December 16, 1993, for any
fiscal quarter. The new credit facility was used to refinance the Company's
existing line of credit and repay $6 million in short-term promissory notes. As
a result, the Company expensed the related unamortized loan costs of $103,000
which has been classified as an extraordinary item in the accompanying
consolidated statements of income.
5. Commitments and Contingencies
VF Corporation Expansions
The agreement pursuant to which the Company acquired 21 of the properties in
1993 from the VF Corporation requires, 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 provides
for periodic payments to VF Corporation aggregating approximately $21.7 million
if the expansions of the VF properties are not completed on a timely basis. This
amount is reduced as the expansions of the VF centers are completed. Three
expansions totaling approximately 97,000 square feet were completed in 1994 and
two additional expansions approximating 100,000 square feet were completed in
1995. As of September 30, 1996, the Company has completed two additional
expansions in Story City, Iowa and Nebraska City, Nebraska totalling 48,000
square feet and is nearing completion of a 58,000 square foot expansion at its
Tupelo, Mississippi outlet center. The Company has to complete two more
expansions to satisfy its remaining obligation under its commitment to VF
Corporation. If all these expansions are not completed as planned under the
terms of the original commitment, payments of $4.5 million to VF Corporation
would be due and payable of which $2.0 million is reflected in the financial
statements as a short term note payable bearing interest at 8% per annum due and
payable on December 31, 1996. The $2.0 million obligation to VF Corporation
represents tenant allowances with respect to the final three expansions
13
<PAGE>
FAC Realty, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
5. Commitments and Contingencies - continued
VF Corporation Expansions - continued
uncompleted as of September 30, 1996. Under the terms of the agreement, at
completion of an expansion at a particular center and upon payment to VF
Corporation of the tenant allowance, VF Corporation will renew its lease for its
original term as of that date. Although the agreement required completion of all
expansions by June 1996, the Company and VF Corporation are presently in
negotiation to amend that requirement.
Developments and Expansions
As of September 30, 1996 the Company has delivered a 288,000 square foot outlet
center in Branson, Missouri and expansions of approximately 48,000 square feet
at Story City, Iowa and Nebraska City, Nebraska. The anticipated cost of these
projects is $35.9 million of which $33.0 million has been expended as of
September 30, 1996 and has been reclassified from the properties under
development category for financial statement purposes. The remaining $2.9
million anticipated cost represents estimated tenant buildouts and allowances.
The Company is currently expanding Smithfield, North Carolina and Tupelo,
Mississippi at a total estimated cost of approximately $6.4 million of which
$4.5 million has been expended. Additionally, the Company is currently in the
pre-development and marketing stage for a property located in Lake Carmel, New
York. If appropriate tenant interest is indicated, the Company anticipates
delivery of this property by the summer of 1998.
Terminated Acquisition
In 1995, the Company signed definitive agreements to acquire the factory outlet
centers owned by The Public Employees Retirement System of Ohio ("OPERS") and
the management and business operations of the Charter Oak Group, Ltd., a
subsidiary of Rothschild Realty, Inc., ("RRI") subject to certain conditions. On
December 7, 1995, the Company reported that RRI had terminated the agreements
under which the Company would have acquired the properties owned by OPERS and
the management and business operations of the Charter Oak Group, Ltd.
RRI for itself and on behalf of OPERS has made a demand for payment with respect
to a $5.0 million promissory note (the "Note") issued by the Company in
connection with the Company's proposed purchase of the factory outlet centers
and other properties owned by OPERS. The Note is payable only upon the
occurrence of certain conditions relating to termination of the definitive
acquisition agreements, some of which conditions the Company asserts were not
satisfied. The Company's management intends to continue to pursue negotiations
with RRI to settle this claim. To date, these discussions have focused on
payment by the Company of a portion of the actual costs incurred by RRI, OPERS
and certain affiliates in connection with the transaction. If these settlement
discussions fail, management intends to defend vigorously any ensuing
arbitration or litigation. While no assurance can be given as to the outcome of
any such arbitration or litigation, the Company believes it has meritorious
defenses to the payment of the Note.
14
<PAGE>
FAC Realty, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
6. Restricted Stock Plan
The Company established the Factory Stores of America, Inc. 1996 Restricted
Stock Plan (the "Restricted Plan") to give the Executive Compensation Committee
("Committee") more flexibility in designing equity- based compensation
arrangements to attract, motivate and retain executives and other key employees.
The Company has reserved 350,000 shares of Common Stock for issuance thereunder.
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 a three-year vesting schedule commencing on the first anniversary of
the date of grant. The Restricted Plan also permits the Committee to customize
the vesting schedule by deferring the commencement date, lengthening the
standard vesting period and/or conditioning vesting upon the achievement of
specified performance goals. In 1996, the Company granted and issued 218,208
shares of restricted stock to certain executive officers and other key employees
at no purchase cost to the employees. 180,000 shares granted to two executive
officers will vest in five equal annual installments, provided each executive
continues to be employed by the Company, commencing on the later to occur of (i)
the average closing price of the Common Stock of the New York Stock Exchange
being $16.00 or more per share for any five consecutive trading days or (ii)
December 14, 2001. Vesting on 2,000 shares will occur in two equal annual
installments commencing February, 1996. The remaining 36,208 shares will vest in
three equal installments commencing at various dates starting in April, 1997.
The employees are entitled to receive dividends on unvested shares of restricted
stock with the exception of the two executive officers who are entitled only if
such dividends are reinvested (on an after-tax basis) to purchase additional
shares of Common Stock. The market price for the shares on the date of issue was
$2.18 million. The issuance of the shares has been reflected in the Company's
financial statements as an increase to Common Stock and Additional Paid In
Capital of $2,000 and $2,178,000, respectively, with an offsetting amount in the
stockholders' equity section labeled deferred compensation. The deferred
compensation expense will be recognized as compensation expense ratably over the
vesting periods.
In October, the Company granted and issued 94,384 shares of restricted stock
to certain executive officers at no purchase cost to the employees, 90,000
shares will vest over ten years, 27,000 shares in August 1999 and 9,000
shares annually thereafter. The remaining 4,384 shares will vest in three
equal installments commencing in August 1997.
7. Subsequent Events
Dividend Declaration
On October 17, 1996, the Board of Directors declared a dividend of $0.25 per
share on its common and preferred stock outstanding, payable to stockholders of
record on October 29, 1996. The total amount of the common dividend, $3,018,132
was paid on November 12, 1996. Pursuant to the terms of the Series A Convertible
Preferred Stock, dividends of $555,556 were paid on November 12, 1996 to the
preferred stockholders.
15
<PAGE>
FAC Realty, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the accompanying
unaudited consolidated financial statements and notes thereto. These financial
statements include all adjustments which are, in the opinion of management,
necessary to reflect a fair statement of the results for the interim periods
presented.
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 Part II -- Other Information, Item 5.
General Overview
The Company has grown by selectively expanding, developing and acquiring factory
outlet centers. At September 30, 1996, the Company operated 36 factory outlet
centers with 4,757,000 square feet of GLA in 21 states, compared to 35 centers
with 4,334,000 square feet of GLA at September 30, 1995. Weighted average square
feet of GLA for the nine months ended September 30, 1996 and 1995 was 4,617,000
and 4,288,000, respectively.
The Company was incorporated on March 31, 1993 and completed the IPO on June 10,
1993. Prior to completion of the IPO, the Company owned four outlet centers in
four states totaling 700,000 square feet of GLA. Upon completion of the IPO, 21
factory outlet centers were acquired totaling 1.7 million feet of GLA. On
November 1, 1993, the Company acquired a 167,500 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 the six
Willey Creek Properties.
During 1994, the Company began development of a 288,000 square foot outlet
center in Branson, Missouri and on June 30, 1994 acquired three additional
properties totalling 449,300 square feet of GLA from the Willey Creek Group.
Additionally, expansions comprising 273,500 square feet of GLA were completed in
Iowa, Louisiana; Crossville, Tennessee; North Bend, Washington; Arcadia,
Louisiana; and Nashville, Tennessee. Also during the year, the Company's Boaz,
Alabama center was retrofitted to change the facade and add an additional 9,000
square feet of GLA. By the end of 1994 the Company owned approximately 4.2
million square feet of GLA which represented a 21% increase over year end 1993.
In addition, expansion projects in Mesa, Arizona and Draper, Utah were nearing
completion.
During 1995, the Company delivered approximately 100,000 square feet of
expansion space to tenants in Mesa, Arizona and Draper, Utah. Additionally, the
Nashville Center, located in Nashville, Tennessee, is a factory outlet center
being developed in four phases. In September 1995, the Company opened Phase III
which contains approximately 26,000 square feet of GLA. Phase I, which contains
approximately 167,500 square feet of GLA, opened in October 1993 and phase II,
containing approximately 92,000 square feet of GLA opened in August 1994.
16
<PAGE>
FAC Realty, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
General Overview - continued
During the second quarter of 1995, the Company began expansion of its
Smithfield, North Carolina factory outlet center. When completed, the expansion
project will add an additional 103,000 square feet of GLA to the existing
center. Approximately 48,000 square feet of this expansion opened in November
1995 with the remainder opening in October of 1996.
Throughout 1995 and 1996, the Company continued development of the new 288,000
square foot outlet center in Branson, Missouri. This center, which was delivered
in the third quarter of 1996 is the Company's largest development to date, is
more than 71% committed and features a wide range of nationally-recognized
manufacturers including Reading China & More, VF Factory Outlet, Westpoint
Stevens, and Spiegel.
As of September 30, 1996, the Company has completed two additional expansions
totaling 48,000 square feet (Nebraska City, Nebraska - 26,300 square feet; Story
City, Iowa - 21,700 square feet) and is nearing completion of a 58,000 square
foot expansion at its Tupelo, Mississippi outlet center, which are being
constructed pursuant to commitments made to VF Corporation in connection with
the purchase of the VF Properties in June 1993.
The Company receives rental revenue through base rent, percentage rent, overage
rent and expense recoveries from tenants. Base rent represents a minimum amount
set forth in the leases for which the tenants are contractually obligated.
Percentage rent represents an amount the tenants are obligated to pay based on a
percentage of the tenants' gross sales in lieu of base rent. Overage rent is a
function of the sales volumes of various tenants. At the time a lease is
negotiated a "break point" is agreed to in the lease. For sales in excess of the
breakpoint, tenants pay a specified percentage of these sales as overage rent in
addition to their base rent. Expense recoveries from tenants relate to the
portion of the property's operating expenses for which the tenants are obligated
to reimburse the Company, including marketing, real estate taxes, insurance,
utilities 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 centers' real estate
taxes, insurance, utilities, common area maintenance charges and contribute to
the marketing fund, as of September 30, 1996, approximately 24% of the leased
GLA of the Company's factory outlet centers is leased to tenants whereby the
Company is obligated to pay all utilities and other operating expenses of the
applicable factory outlet center.
17
<PAGE>
FAC Realty, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
General Overview - continued
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 adjustment 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 of the company have been
retroactively restated so that reported FFO in 1996 will be 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.
FFO and EBITDA do not represent cash generated from operating activities in
accordance with generally accepted accounting principles, are not necessarily
indicative of cash available to fund cash needs and should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flow as a measure of liquidity.
Results of Operations
Nine Months Ended September 30, 1996 compared to the Nine Months Ended September
30, 1995.
The Company reported income from operations of $242,000, or $0.02 per share, for
the nine months ended September 30, 1996 compared to $7.1 million, or $0.60 per
share, for the comparable period in 1995. Income from operations for the 1996
nine month period was less than that of 1995 by $6.8 million, or $0.58 per
share. As more fully described below, this reduction was primarily due to higher
interest expense, depreciation and amortization charges, operating costs and
lower recoveries from tenants of operating expenses and reduced contribution
from the properties held for sale.
18
<PAGE>
FAC Realty, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Results of Operations - continued
FFO for the nine months ended September 30, 1996 was $11.1 million, or $0.83 per
share, assuming full dilution. This compares to $15.7 million, or $1.33 per
share, for the nine months ended September 30, 1995. Factors that had a negative
impact on 1996 FFO and contributed to the decrease were: (a) $2.8 million, or
$0.24 per share, in higher interest expense due to a higher average borrowing
level; (b) $1.5 million, or $0.13 per share, in higher property operating cost
on a weighted average square foot basis due to higher property insurance and
center marketing cost as well as lower recoveries of operating expenses from
tenants as described below; (c) $0.4 million, or $0.04 per share, in reduced
contribution from properties held for sale plus (d) the dilutive effect ($0.10
per share) of the increase in the weighted average shares outstanding
principally the result of the issuance of the Convertible Preferred Stock.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were
$21.7 million for the nine months ended September 30, 1996, a decrease of $2.1
million, or 9%, from $23.8 million for the same period in 1995. The decrease was
due primarily to the higher property operating cost and reduced recoveries from
tenants noted above and lower contribution from the Company's properties held
for sale.
Base and percentage rent for the nine month period decreased slightly to $29.4
million in 1996 from $29.5 million in 1995. Percentage rent includes both
percentage and overage rent amounts due from tenants. Base rent before
adjustment for straight line rent and the provision for doubtful accounts
increased $0.1 million or 0.4% to $27.1 million for the nine month period in
1996 when compared to 1995, although the Company's weighted average square feet
of GLA in operation increased 8%. This is primarily the result of conversion of
certain leases from base rent to percentage only in certain centers that are
experiencing a downward trend in tenant sales or center occupancy, declining
rents on renewals at certain properties and lower average center occupancy
levels principally attributable to the centers held for sale. Base rental
revenue for the period ended September 30, 1996 includes a charge to the reserve
for uncollectible tenant accounts of $393,000. There was not a similar reserve
charge taken in the nine months ended September 30, 1995.
Percentage and overage rent increased $0.8 million or 42%, to $2.8 million for
the period ended September 30, 1996 compared to 1995. Percentage rent represents
amounts whereby the tenants are obligated to pay based solely on a percentage of
the tenants' gross sales in lieu of base rents. Overage rent represents amounts
due from tenants based on a specified percentage of the tenants sales in excess
of a breakpoint agreed to in the lease. On a weighted average square foot basis,
percentage and overage rent increased for the period ended September 30, 1996
32% to $0.61 in 1996 from $0.46 in 1995, reflecting in part the conversion of
certain leases described above. Additionally, $0.3 million of the increase
resulted from how the Company recognizes estimated revenues for percentage and
overage rents. The percentage rents, which are based on expected sales levels
for the tenants, are recorded in equal monthly amounts over the year similar to
the treatment of base rent. For overage rent purposes, the Company recognizes
each revenue ratably over the year based on expected sales levels for the
tenants estimated to have sales in excess of their breakpoint. This methodology
reduces fluctuation in rent recognition from quarter to quarter.
19
<PAGE>
FAC Realty, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Results of Operations - continued
Recoveries from tenants, representing contractual reimbursements from tenants of
certain common area maintenance, utilities, taxes, insurance and marketing cost,
decreased for the period ended September 30, 1996 to $10.0 million from $10.2
million in 1995. On a weighted average square foot basis, recoveries from
tenants decreased to $2.16 for the nine months in 1996 from $2.38 in 1995, or
9%. For the nine month period ended September 30, 1996, the average recovery of
property operating expenses decreased from 78% in 1995 to 68% in 1996. The
reduction in the recovery percentage was the result of: (a) property operating
expenses increasing as discussed below, (b) a decrease in the average portfolio
occupancy percent for the nine month period from 91.6% in 1995 to 88.9% in 1996
(excluding properties under development), and (c) the conversion of certain
leases from triple net to percentage only as stated above. Approximately 24% of
the leased GLA is leased whereby the Company is obligated to pay all utilities
and operating expenses of the applicable factory outlet center as compared to
16% in September of 1995.
Other income for the nine month period was $1.0 million in 1996 compared to $0.6
million in 1995 and primarily represented higher interest income and lease
termination settlements.
Operating expenses increased $1.5 million, or 12%, to $14.7 million in 1996 from
$13.2 million in 1995. The increase was higher than the 8% increase in the
Company's weighted average square feet of GLA in operation of 4.6 million square
feet in 1996 from 4.3 million square feet in 1995. The increase in operating
expenses was principally due to an increase in the weighted average cost per
square foot to operate the properties. On a weighted average square foot basis,
operating expenses increased 4% from $3.07 for the nine months in 1995 to $3.18
in 1996. This was due principally to a $0.11 per square foot increase in 1996
operating cost attributable to center marketing ($0.05), property insurance
($0.03) and CAM cost ($0.02).
General and administrative cost for the nine month period increased $0.3
million, or 12%, to $4.0 million in 1996 from $3.7 million in 1995. The increase
was due principally to lower capitalization of leasing and related costs ($0.6
million), higher personnel costs ($0.1 million) and professional fees ($0.5
million) offset by the savings associated with the termination in December of
1995 of the 1996 NASCAR motorsports program and plane lease ($1.3 million). On a
weighted average square foot basis, general and administrative expenses
decreased 1.4% to $0.86 for the nine month period in 1996 from $0.87 in 1995.
Depreciation and amortization increased as a result of the larger portfolio of
properties in operation during 1996. On a weighted average square foot basis,
depreciation and amortization increased 11% to $2.26 in 1996 from $2.04 in 1995
reflecting the higher land and construction costs on the Company's recent
projects and more tenant demands such as increased tenant improvements.
Interest expense for the nine months ended September 30, 1996 increased by $3.4
million, or 44%, to $11.0 million compared to $7.6 million for the same period
in 1995. This increase resulted from higher borrowing levels in 1996 compared to
1995 and the infusion in April, 1996 of $20 million in capital from Gildea
Management Company, initially in the form of Exchangeable Notes, as more fully
described in footnote 4 of Part 1, "Notes to Consolidated Financial Statements".
On a weighted average basis
20
<PAGE>
FAC Realty, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Results of Operations - continued
(excluding the Exchangeable Notes), debt outstanding and the average interest
cost were approximately $179.2 million and 8.2%, respectively, for the nine
month period in 1996 compared to $135.4 million and 8.7%, respectively, in 1995.
Amortization of deferred financing cost amounted to $1.0 million for the nine
month period in 1996 and $0.8 million in 1995. The Company capitalized interest
cost associated with its development projects of $1.6 million for the nine month
period in 1996 and $2.0 million in 1995. Associated with the refinancing of the
Company's existing line of credit, the Company expensed the related unamortized
loan costs of $103,000 which has been classified as an extraordinary item in the
Consolidated Statements of Income.
As part of the Company's ongoing strategic evaluation of its portfolio of
assets, the Directors of the Company authorized management in 1995 to pursue the
sale of certain properties that were not fully consistent with or essential to
the Company's long-term strategies. Under generally accepted accounting
principles ("GAAP"), assets held for the long-term production of income are
recorded at their historical cost, adjusted for depreciation. However, when a
decision is made to dispose of certain assets, the carrying value of those
assets is computed using their net realizable value.
Accordingly, in 1995 the Company recorded an $8.5 million adjustment to the
carrying value of three of the assets held for sale as required under GAAP. The
net carrying value of assets currently being marketed for sale at September 30,
1996 is $23.8 million. There is also $21.6 million of debt secured by the
properties which is expected to be retired from the sale proceeds. For the nine
month period ended September 30, 1996, these properties contributed
approximately $3.0 million of revenue and incurred a loss of ($276,000) after
deducting related interest expense on the debt associated with the properties.
For the nine month period ended September 30, 1995, these properties contributed
approximately $3.7 million of revenue and $146,000 of net income after deducting
related interest expense on the debt associated with the properties. 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 has begun the process of marketing the properties and no sales
agreements have been completed to date. Management plans to evaluate all
properties on a regular basis in accordance with its strategy for growth and in
the future may identify other properties for disposition or may decide to defer
the pending disposition of those assets now held for sale.
Three Months Ended September 30, 1996 Compared to the Three Months Ended
September 30, 1995
The Company reported a loss from operations of ($0.2 million), or $(0.01) per
share, for the three months ended September 30, 1996 compared to income of $2.1
million, or $0.18 per share, for the comparable period in 1995. Income from
operations for the 1996 nine month period was less than that of 1995 by $2.3
million, or $0.19 per share. As more fully described below, this reduction was
primarily due to higher interest expense, depreciation and amortization charges,
operating costs and lower recoveries from tenants of operating expenses.
21
<PAGE>
FAC Realty, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Results of Operations - continued
FFO for the three months ended September 30, 1996 was $3.8 million, or $0.27 per
share, on a fully diluted basis. This compares to $5.2 million, or $0.44 per
share, for the three months ended September 30, 1995. Factors that had a
negative impact on 1996 FFO and contributed to the decrease were: (a) $1.0
million, or $0.07 per share, in higher interest expense due to a higher average
borrowing level; (b) $0.7 million, or $0.05 per share, in reduction in revenue
from the decrease in expense recoveries from tenants as a percentage of property
operating expenses and higher property operating cost as described below plus
(d) the dilutive effect ($0.04 per share) of the increase in the weighted
average shares outstanding principally the result of the issuance of the
Convertible Preferred Stock. Earnings before interest, taxes, depreciation and
amortization (EBITDA) were $7.6 million for the three months ended September 30,
1996, a decrease of $0.7 million, or 9.0%, from $8.3 million in 1995. The
decrease was due primarily to the reduction in expense recoveries from tenants
and higher property operating cost on a weighted average square foot basis as
detailed below.
Base and percentage rent was unchanged at $10.1 million for the three months
ended September 30, 1996. Base rent before adjustment for straight line rent and
reserve for doubtful accounts increased $0.1 million or 0.7% to $9 million in
1996 when compared to 1995, although the Company's weighted average square feet
of GLA in operation increased 9.4% to 4.7 million square feet. This is primarily
the result of the reasons noted in the discussion of the results for the nine
month periods. Base rental revenue in 1996 includes a charge to the reserve for
uncollectible tenant accounts of $136,000. There was not a similar reserve
charge taken in the three months ended September 30, 1995.
Percentage rent increased $0.4 million or 50%, to $1.2 million for the third
quarter in 1996 as compared to the third quarter 1995, principally for the
reasons noted in the discussion of the nine month results.
Recoveries from tenants decreased in the third quarter 1996 by $0.3 million. On
a weighted average square foot basis, recoveries from tenants decreased to $0.74
for the three months in 1996 from $0.87 in 1995, or 15%. For the three month
period ended September 30, 1996, the average recovery of property operating
expenses decreased from 80% in 1995 to 67% in 1996. The reduction in the
recovery percentage was the result of a decrease in the average portfolio
occupancy percent for the three months from 91.4% in 1995 to 87.3% in 1996
(excluding properties under development), higher operating cost and the
conversion of certain triple net leases to percentage only as mentioned above.
Other income of $0.5 million the third quarter in 1996 primarily represented
interest income and lease termination settlements.
Operating expenses increased $0.6 million, or 12%, to $5.3 million in the third
quarter 1996 from $4.7 million in 1995. The increase was greater than the 9%
increase in the growth in the Company's weighted average square feet of GLA in
operation of 4.7 million square feet in 1996 from 4.3 million square feet in
1995. On a weighted average square foot basis, operating expenses were $1.11 for
the three months in 1996 compared to $1.09 in 1995. The increase was due
primarily to higher center marketing cost for the 1996 quarter.
22
<PAGE>
FAC Realty, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Results of Operations - continued
General and administrative cost was approximately $1.2 million in the third
quarter 1996 and $1.3 million in 1995. On a weighted average square foot basis,
general and administrative expenses decreased 13% to $0.26 for the three months
in 1996 from $0.30 in 1995. Components of general and administrative cost
experienced increases which were due principally to lower capitalization of
leasing and related costs ($0.3 million) and higher professional fees ($0.2
million) which were offset by the savings associated with the termination of the
1996 NASCAR motorsports program ($0.3 million) and leased plane costs ($0.1
million).
Depreciation and amortization increased as a result of the larger portfolio of
properties in operation during 1996. On a weighted average square foot basis,
depreciation and amortization increased 16% to $0.83 in 1996 from $0.72 in 1995
reflecting the higher land and construction costs on the Company's recent
projects and more tenant demands such as increased tenant improvements.
Interest expense for the three months ended September 30, 1996 increased by $1.0
million, or 37%, to $3.8 million compared to $2.8 million for the same period in
1995. This increase resulted from higher borrowing levels in 1996 compared to
1995 and the infusion in April 1996 of $20 million in Convertible Preferred
Stock from Gildea Management Company, initially in the form of Exchangeable
Notes. On a weighted average basis (excluding of the Exchangeable Notes), debt
outstanding and the average interest cost were approximately $182.7 million and
8.3%, respectively, for the period in 1996 compared to $154.2 million and 8.2%,
respectively, in 1995. Amortization of deferred financing cost amounted to $0.4
million in 1996 and $0.3 million in 1995. The Company capitalized interest cost
associated with its development projects of $0.5 million in 1996 and $0.7
million in 1995.
For the three month period ended September 30, 1996, the properties held for
sale contributed approximately $1.0 million of revenue and incurred a loss of
($119,000) after deducting related interest expense on the debt associated with
the properties. For the three month period ended September 30, 1995, these
properties contributed approximately $1.1 million of revenue and incurred a loss
of ($115,000) after deducting related interest expense on the debt associated
with the properties.
Liquidity and Capital Resources
The Company's cash and cash equivalents balance at September 30, 1996 was
approximately $10.6 million compared to $1.6 million at December 31, 1995. The
increase is due principally to the infusion of $20 million of Convertible
Preferred Stock from Gildea Management Company in April, 1996. Restricted cash,
as reported in the financial statements, is approximately $3.8 million. In
connection with the Company's $95 million rated debt securitization, the Company
is required to escrow a portion of the securitization 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.
23
<PAGE>
FAC Realty, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Liquidity and Capital Resources - continued
Net cash provided by operating activities was $5.2 million for the nine months
ended September 30, 1996. Net cash used in investing activities was $14.0
million for the nine months ended September 30, 1996. The primary use of these
funds included: $9.5 million in construction cost, principally $8.6 million for
properties currently under development, $0.3 million toward completion of 1995
expansion projects and $0.6 million towards normal recurring capital
expenditures; $1.4 million for new financing costs; $4.2 million for
re-tenanting, lease renewal and leasing costs; offset partially by $1.0 million
reduction in restricted cash. Net cash provided by financing activities was
$17.7 million for the nine months ended September 30, 1996. The principal source
of such funds was $37.2 million of new borrowings, as described below. Funds
generated through financing activities were offset by payments of $7.4 million
towards scheduled debt principal repayment and $12.0 million for distribution to
stockholders.
On August 25, 1995, the Company signed definitive agreements to acquire the
factory outlet centers owned by The Public Employees Retirement System of Ohio
(OPERS) and the management and business operations of the Charter Oak Group,
Ltd., a subsidiary of Rothschild Realty, Inc., ("RRI") subject to certain
conditions. On December 7, 1995, the Company reported that RRI had terminated
the agreements under which the Company would have acquired the properties owned
by OPERS and the management and business operations of the Charter Oak Group,
Ltd.
As a result of the Company's pursuit of the acquisition, the Company incurred
direct costs approximating $4.5 million related to the performance of due
diligence and indirect obligations of $2.0 million associated with certain
severance agreements. As of September 30, 1996, approximately $2.7 million of
the obligations remain outstanding.
In January 1996, the Company borrowed an aggregate of $6.0 million under two
separate short-term promissory notes from Bank One, Dayton at prime plus 1% to
meet certain cash requirements for certain costs arising from the termination of
the OPERS factory outlet acquisition agreements, ongoing construction and the
payment of a portion of the dividends to stockholders for the fourth quarter of
1995. These promissory notes were repaid on April 30, 1996 with a portion of the
proceeds from the new $75 million credit facility discussed below.
As more fully described in footnote 4 of Part I, Item 1 "Notes to Consolidated
Financial Statements", 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 million of the Company's Exchangeable Notes (the
"Exchangeable Notes") and $5 million of its Senior Notes, both of which would be
unsecured.
In April, Exchangeable Notes with aggregate principal amounts of $20 million
(net of issue cost of $823,000) and unsecured Senior Notes in the amount of $5.0
million (net of discount of $156,000) were sold pursuant to the Note Purchase
Agreement.
24
<PAGE>
FAC Realty, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Liquidity and Capital Resources - continued
On August 1, 1996, the Company issued holders of the Exchangeable Notes 800,000
shares of the Company's Series A Preferred in exchange for notes with an
aggregate principal amount of $20 million. The 800,000 shares of the Series A
Preferred are convertible, at the option of the holder, into 2,222,222 shares of
the Company's Common Stock.
In lieu of the remaining $5.0 million Exchangeable Note commitment, on November
12, 1996, the Company issued to designees of Blackacre additional Senior Notes
in the amount of $2.5 million. The Senior Notes were issued at face value with
detachable warrants for the purchase of 100,000 shares of Common Stock of the
Company. The Senior Notes and warrants were issued with terms and conditions
similar to the existing Senior Notes and warrants. Each warrant entitles the
holder to purchase one share of Common Stock at a price equal to $8.375 per
share.
On April 30, 1996, the Company closed on a $75 million credit facility from Bank
One, Dayton. The terms of the credit facility are for a period of two years
bearing interest at a rate of LIBOR plus 2.75%. The new credit facility was used
to refinance the Company's existing line of credit and repay $6 million in
short-term promissory notes. The $75 million credit facility contains various
financial covenants which include maintaining minimum interest coverage, debt
service coverage, debt to market capitalization ratio, debt to market value
ratio, funded debt to tangible capital funds ratio and modified net income ratio
as well as maintaining a minimum net worth of $165 million which is deemed to
include the $20 million of Convertible Preferred Stock. Additionally, the
covenants preclude the Company from paying dividends in excess of 85% of FFO, as
defined in the agreement, for any fiscal quarter. At September 30, 1996, the
Company was in compliance with all such covenants.
As of September 30, 1996 the Company has delivered a 288,000 square foot outlet
center in Branson, Missouri and expansions of approximately 48,000 square feet
at Story City, Iowa and Nebraska City, Nebraska. The anticipated cost of these
projects is $35.9 million of which $33.0 million has been expended as of
September 30, 1996 and has been reclassified from the properties under
development category for financial statement purposes. The remaining $2.9
million anticipated cost represents estimated tenant buildouts and allowances.
The Company is currently expanding Smithfield, North Carolina and Tupelo,
Mississippi at a total estimated cost of approximately $6.4 million of which
$4.5 million has been expended. Additionally, the Company is currently in the
pre-development and marketing stage for a property located in Lake Carmel, New
York. If appropriate tenant interest is indicated, the Company anticipates
delivery of this property by the summer of 1998.
In addition, the agreement pursuant to which the Company acquired 21 of the
properties in 1993 from the VF Corporation requires, 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 provides for periodic payments to VF Corporation aggregating
approximately $21.7 million if the expansions of the VF properties are not
completed on a timely basis. This amount is reduced as the expansions of the VF
centers are completed. Three expansions totaling approximately 97,000 square
feet were completed in 1994 and
25
<PAGE>
FAC Realty, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Liquidity and Capital Resources - continued
two additional expansions approximating 100,000 square feet were completed in
1995. As of September 30, 1996, the Company has completed two additional
expansions in Story City, Iowa and Nebraska City, Nebraska, as described above,
and is nearing completion of a 58,000 square foot expansion at its Tupelo,
Mississippi outlet center. The Company is required to complete two more
expansions to satisfy its remaining obligation under its commitment to VF
Corporation. If all these expansions are not completed as planned under the
terms of the original commitment, payments of $4.5 million to VF Corporation
would be due and payable, of which $2.0 million is reflected in the accompanying
financial statements as a short term note payable. The $2.0 million obligation
to VF Corporation represents tenant allowances with respect to the final three
expansions uncompleted as of September 30, 1996. Under the terms of the
agreement, at completion of an expansion at a particular center and upon payment
to VF Corporation of the tenant allowance, VF Corporation would renew its lease
for its original term as of that date. Although the agreement required
completion of all expansions by June 1996, the Company and VF Corporation are
presently in negotiation to amend that requirement.
Although total tenant retail sales at Company centers increased 7.7% in the
first nine months of 1996 compared to 1995, tenant sales on a comparative store
basis decreased approximately 3.5% in 1996 compared to 1995, as compared to a
1.3% decline for the industry as reported by Value Retail News. Lower tenant
sales may have a continuing adverse effect on tenant plans for new store
openings or lease renewals and which may adversely affect the Company's ability
to capitalize and defer a portion of its direct leasing and development overhead
costs to the extent that the Company does not reduce such overhead costs and
may have an adverse impact on earnings.
The Company's current 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 expansion 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, distributions to stockholders, and planned development and
construction activities. The $27.5 million raised through the private placement
with Gildea and Blackacre is being used to fund the 1996 developments and
expansions, repay certain debt obligations, settle the remaining obligations
associated with the termination of the OPERS factory outlet acquisition
agreements and provide additional working capital. Operating cash flow is
expected to provide sufficient funds for dividends and distributions in
accordance with REIT federal income tax requirements. In addition, the Company
anticipates retaining enough operating cash to fund re-tenanting and lease
renewal tenant improvement costs, as well as, capital expenditures to maintain
the quality of its existing centers.
26
<PAGE>
FAC Realty, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Liquidity and Capital Resources - continued
The terms of the $75 million credit facility limit the amount of distributions
to common stockholders which the Company may make in any fiscal quarter. On
April 9, 1996, July 2, 1996 and October 17, 1996 the Board of Directors declared
cash dividends of $0.25 per share. This represents a dividend payout ratio as a
percentage of Funds from Operations ("FFO") of 90.2% for the nine month period
ended September 30, 1996. Under the FFO definition as prescribed in the credit
agreement, this represents a dividend payout ratio of 80.2%, which is in
compliance with the terms of the credit facility. The Board anticipates
reviewing its dividend policy on a quarterly basis in light of actual results of
operation, compliance with loan covenants, and other factors.
27
<PAGE>
FAC Realty, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Liquidity and Capital Resources - continued
In May 1995, NAREIT issued an interpretive letter providing guidance as to the
use and intent of its definition of FFO. Among other things, the letter
clarifies that the amortization of deferred financing costs and depreciation of
assets not uniquely significant to real estate should be excluded from total
depreciation and amortization added back to net income in calculating FFO. All
REIT's are encouraged to implement the recommendations of the letter no later
than fiscal periods beginning in 1996. The Company cautions that the calculation
of FFO may vary from entity to entity and as such the presentation of FFO by the
Company may not be comparable to other similarly entitled measures of other
reporting companies. The Company has adopted the new NAREIT definition of FFO
beginning January 1, 1996. Below is a calculation of FFO for the nine months
ended September 30, 1996 and 1995 under the old method and under the new
definition as if the Company had adopted such definition as of January 1, 1995.
Nine Months Ended September 30
(In thousands)
<TABLE>
<CAPTION>
New Method Old Method
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 176 $ 7,417 $ 176 $ 7,417
Extraordinary item - loss on debt
extinquishment 103 - 103 -
Gain on sale of real estate (37) (345) (37) (345)
Interest on Exchangeable Notes 553 - 553 -
Compensation under restricted stock plan 75 - 75 -
Add: Depreciation and amortization of
assets related to real estate 10,247 8,608 10,247 8,608
Other depreciation and amortization - - 205 135
Amortization of deferred finance cost - - 1,044 830
------------ ------------ --------- --------
Funds From Operations $ 11,117 $15,680 $ 12,366 $16,645
========= ======= ========= =======
Weighted Average Shares Outstanding -
Fully Diluted 13,425 11,814 13,425 11,814
========== ======== ========== ========
</TABLE>
28
<PAGE>
FAC Realty, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Economic Conditions
Inflation has remained relatively low during the past three years, with certain
segments of the economy such as apparel, experiencing disinflation. The trend in
lower apparel pricing 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 adverse impact on the Company's
ability to renew leases at current rental rates or to release space to other
tenants. 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. The
majority of the leases 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 properties are
subject to operating risks common to commercial retail real estate in general
including the potential adverse impact of external factors, such as inflation,
consumer confidence, unemployment rates and consumer tastes and preferences, any
and all of which may adversely affect occupancy or rental rates. While the
properties are subject to increases in operating expenses, the Company's tenants
generally are currently obligated to pay a portion of these escalating costs;
however, 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.
29
<PAGE>
FAC Realty, Inc.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
As more fully described in footnote 4 of Part I, Item 1 "Notes to Consolidated
Financial Statements", 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 million of the Company's Exchangeable Notes (the
"Exchangeable Notes") and $5 million of its Senior Notes, both of which would be
unsecured.
In April, 1996, Exchangeable Notes with an aggregate principal amount of $20
million and unsecured Senior Notes in the amount of $5 million were sold
pursuant to the Note Purchase Agreement.
On August 1, 1996, the Company issued holders of the Exchangeable Notes 800,000
shares of the Company's Series A Preferred in exchange for notes with an
aggregate principal amount of $20 million. The 800,000 shares of the Series A
Preferred are convertible, at the option of the holder, into 2,222,222 shares of
the Company's Common Stock.
In lieu of the remaining $5.0 million Exchangeable Note commitment, on November
12, 1996, the Company issued to designees of Blackacre additional Senior Notes
in the amount of $2.5 million. The Senior Notes were issued at face value with
detachable warrants for the purchase of 100,000 shares of Common Stock of the
Company. The Senior Notes and warrants were issued with terms and conditions
similar to the existing Senior Notes and warrants. Each warrant entitles the
holder to purchase one share of Common Stock at a price equal to $8.375 per
share.
Item 5. Other Information
Dividend Declaration
On October 17, 1996, the Board of Directors declared a dividend of $0.25 per
share on its common and preferred stock outstanding, payable to stockholders of
record on October 29, 1996. The total amount of the common dividend, $3,018,132
was paid on November 12, 1996. Pursuant to the terms of the Series A Convertible
Preferred Stock dividends of $555,556 were paid on November 12, 1996 to the
preferred stockholder. The Board intends to review its dividend policy on a
quarterly basis in light of actual results of operations, compliance with loan
covenants, and other factors.
Forward-Looking Statements
Certain statements in this Form 10-Q 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-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;
30
<PAGE>
FAC Realty, Inc.
Item 5. Other Information - continued
Forward-Looking Statements - continued
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.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Exhibit Description
3.1 Articles of Amendment of Factory Stores of America, Inc., dated
July 1, 1996. (1)
3.2 Certificate of Designation, Preferences and Rights of the Series A
Convertible Preferred Stock of FAC Realty, Inc., dated July 1,
1996. (1)
10.1 Note Purchase Agreement by and among Factory Stores of
America, Inc. and Blackacre Bridge Capital, L.L.C. and Gildea
Management Company dated April 2, 1996. (2)
(1) Incorporated by reference from Registrant's Form 8-K Report dated June 27,
1996 and made a part hereof by such reference.
(2) Incorporated by reference from the Registrant's Form 8-K Report dated April
2, 1996 and made a part hereof by such reference.
b) Reports on Form 8-K
On April 17, 1996, the Company filed a Current Report on Form 8-K dated April 2,
1996, reporting that the Company entered into an agreement with Blackacre Bridge
Capital, L.L.C. and Gildea Management Company providing for the issuance of up
to $25 million in unsecured exchangeable notes (the "Exchangeable Notes") and up
to $5 million in unsecured senior notes (the "Senior Notes"). No financial
statements were filed with this Form 8-K.
On July 10, 1996, the Company filed a current report on Form 8-K dated June 27,
1996, reporting that at the June 27, 1996 Annual Meeting of Stockholders of
Factory Stores of America, Inc. (the "Company")
31
<PAGE>
FAC Realty, Inc.
Item 6. Exhibits and Reports on Form 8-K - continued
the requisite number of shares of Common Stock of the Company were voted in
favor of each of the proposals presented for stockholder approval. Specifically,
the stockholders (i) elected seven directors to serve until the Company's 1997
Annual Meeting; (ii) amended the Company's 1993 Employee Stock Incentive Plan to
increase the number of shares of Common Stock reserved for issuance thereunder,
(iii) amended the Company's Second Restated Certificate of Incorporation (the
"Charter") to authorize preferred stock and approved the issuance of the
Company's Series A Convertible Preferred Stock (the "Series A Preferred Stock")
and the issuance of Common Stock upon conversion of the Series A Preferred
Stock, and (iv) amended the Charter to change the Company's corporate name to
"FAC Realty, Inc.". No financial statements were filed with this Form 8-K.
32
<PAGE>
FAC Realty, Inc.
Signatures
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
FAC Realty, Inc.
<TABLE>
<CAPTION>
<S> <C>
Date: November 13, 1996 By /s/ Patrick M. Miniutti
------------------------
Patrick M. Miniutti
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 1996 By /s/ John N. Nelli
------------------
John N. Nelli
Senior Vice President, Chief Accounting Officer and
Treasurer
(Principal Accounting Officer)
</TABLE>
33
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 14,466
<SECURITIES> 0
<RECEIVABLES> 5,191
<ALLOWANCES> 811
<INVENTORY> 0
<CURRENT-ASSETS> 15,377
<PP&E> 351,679
<DEPRECIATION> 27,463
<TOTAL-ASSETS> 365,620
<CURRENT-LIABILITIES> 9,367
<BONDS> 0
0
19,177
<COMMON> 120
<OTHER-SE> 154,622
<TOTAL-LIABILITY-AND-EQUITY> 365,620
<SALES> 39,389
<TOTAL-REVENUES> 40,380
<CGS> 0
<TOTAL-COSTS> 14,686
<OTHER-EXPENSES> 14,407
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,008
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (103)
<CHANGES> 0
<NET-INCOME> 176
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
