<PAGE>
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
For the quarter ended June 30, 1996
-------------------------------------------
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ------------------- to ------------------------
Commission File number: 1-11998
-------------------------------
FAC Realty, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 56-1819372
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 N. Equity Drive, Smithfield, North Carolina 27577
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(919) 934-9446
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Factory Stores of America, Inc.
- --------------------------------------------------------------------------------
(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 July 29, 1996 was 12,032,859.
1
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FAC REALTY, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
<S> <C> <C>
Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the
Three Months ended June 30, 1996 and 1995 5
Consolidated Statements of Income for the
Six Months ended June 30, 1996 and 1995 6
Consolidated Statement of Stockholders' Equity
for the Six Months ended June 30, 1996 7
Consolidated Statements of Cash Flows for the
Six Months ended June 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 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29
ITEM 5. OTHER INFORMATION 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 32
Signatures 34
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
FAC REALTY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except for share data)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Outlet Center Properties, at Cost
Land $ 77,563 $ 70,356
Building and Improvements 236,767 211,524
Equipment 4,663 3,826
--------- ---------
318,993 285,706
Less Accumulated Depreciation (24,649) (20,332)
--------- ---------
294,344 265,374
Properties Under Development 5,271 32,837
--------- ---------
299,615 298,211
Properties Held for Sale 24,050 24,509
--------- ---------
Outlet Center Properties, Net 323,665 322,720
Cash and Cash Equivalents 12,373 1,655
Restricted Cash 4,415 4,806
Rents from Tenants and Other Receivables 4,441 5,245
Prepaid Expenses 674 607
Deferred Costs 16,879 16,208
Other Assets and Deposits 3,722 3,854
--------- ---------
TOTAL ASSETS $ 366,169 $ 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>
JUNE 30, 1996 DECEMBER 31, 1995
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes Payable $100,117 $100,972
Bank Line of Credit 75,000 69,939
Exchangeable Notes 19,216 0
Unsecured Senior Notes 4,864 0
Captial Lease Obligations 799 797
Accounts Payable and Accrued Expenses 7,344 16,022
Dividends Payable 0 6,025
Deferred Revenue and Tenant Security Deposits 982 854
----------- -----------
TOTAL LIABILITIES 208,322 194,609
Commitments and Contingencies - -
STOCKHOLDERS' EQUITY:
Stock Purchase Warrants 6 -
Common Stock, $0.01 Par Value, 50,000,000
Shares Authorized, 12,032,024 and 11,814,523
Shares Issued and Outstanding, respectively 120 118
Additional Paid In Capital 159,853 160,368
Retained Earnings 0 0
Deferred Compensation - Restricted Stock Plan (2,132) 0
---------- -------------
TOTAL STOCKHOLDERS' EQUITY 157,847 160,486
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $366,169 $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 JUNE 30,
1996 1995
<S> <C> <C>
REVENUE:
Base Rent $8,910 $9,288
Percentage Rent 841 603
Recoveries from Tenants 3,339 3,467
Other Income 286 199
------- -------
TOTAL REVENUE 13,376 13,557
EXPENSES:
Operating 4,805 4,342
General & Administrative 1,287 1,254
Depreciation and Amortization 3,272 3,109
Interest 4,003 2,564
------ ------
TOTAL EXPENSES 13,367 11,269
------ ------
INCOME BEFORE EXTRAORDINARY ITEM 9 2,288
EXTRAORDINARY ITEM - LOSS ON DEBT
EXTINQUISHMENT 103 0
------- ----------
NET <LOSS>INCOME $ (94) $2,288
======== ======
EARNINGS PER COMMON SHARE:
INCOME BEFORE EXTRAORDINARY ITEM $0.00 $0.19
EXTRAORDINARY ITEM (0.01) 0.00
-------- ------
NET <LOSS> INCOME $(0.01) $0.19
======= =====
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 12,022 11,814
====== ======
</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>
SIX MONTHS ENDED JUNE 30,
1996 1995
REVENUE:
<S> <C> <C>
Base Rent $17,709 $18,231
Percentage Rent 1,620 1,167
Recoveries from Tenants 6,456 6,451
Other Income 470 473
------ ------
TOTAL REVENUE 26,255 26,322
EXPENSES:
Operating 9,398 8,451
General & Administrative 2,708 2,425
Depreciation and Amortization 6,492 5,626
Interest 7,236 4,867
------ ------
TOTAL EXPENSES 25,834 21,369
------ ------
INCOME BEFORE EXTRAORDINARY ITEM 421 4,953
EXTRAORDINARY ITEM - LOSS ON DEBT
EXTINQUISHMENT 103 0
------- ----------
NET INCOME $ 318 $4,953
======= ======
EARNINGS PER COMMON SHARE:
INCOME BEFORE EXTRAORDINARY ITEM $ 0.04 $ 0.42
EXTRAORDINARY ITEM (0.01) 0.00
------- ------
NET INCOME $ 0.03 $ 0.42
======= ======
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 11,919 11,814
====== ======
</TABLE>
See accompanying notes
6
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
FAC REALTY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996
(in thousands except for per share data)
<TABLE>
<CAPTION>
DEFERRED
STOCK ADDITIONAL COMPENSATION
PURCHASE COMMON PAID IN RETAINED RESTRICTED
WARRANTS STOCK CAPITAL EARNINGS STOCK PLAN TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $ 0 $118 $160,368 $ 0 $ 0 $160,486
Issuance of Stock Awards - - 6 - - 6
Net Income for the Quarter - - - 412 - 412
------ ------- ------------ ---- --------- ----------
BALANCE AT MARCH 31, 1996 0 118 160,374 412 0 160,904
Issuance of Restricted Stock Awards - 2 2,168 - (2,170) 0
Issuance of Stock PurchaseWarrants 6 - - - - 6
Compensation under Restricted Stock Plan - - - - 38 38
Distributions to Stockholders - - (2,689) (318) - (3,007)
($.25 per share)
Net Loss for the Quarter - - - (94) - (94)
------ ------- ------------ ------ ---------- ------------
BALANCE AT JUNE 30, 1996 $6 $120 $159,853 $ 0 ($2,132) $157,847
== ==== ======== ===== ======== ========
</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>
SIX MONTHS ENDED JUNE 30,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Cash (Used in ) Provided by Operating Activities $(6,211) $ 7,217
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sale of Real Estate 10 0
Additions to Outlet Center Properties (5,745) (18,548)
Changes in Restricted Cash 391 (4,781)
Additions to Deferred Costs and Other Assets (3,000) (6,424)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (8,344) (29,753)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Long Term Debt 105,155 95,311
Payable Related to Acquisition of Properties 0 (11,737)
Net (Payment) Borrowings under Bank Line of Credit (69,939) 21,519
Principal Payments on Long-Term Debt:
Notes Payable (6,855) (70,199)
Capital Leases (87) (50)
Proceeds from the Sale of Common Stock, Net of Stock
Issuance Cost 6 6
Distributions to Stockholders (3,007) (11,696)
--------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,273 23,154
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,718 618
Cash and Cash Equivalents, Beginning of Period 1,655 1,297
-------- -------
Cash and Cash Equivalents, End of Period $12,373 $ 1,915
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash Paid During Period for Interest (Net of Interest
Capitalized of $1,098 and $1,325, respectively) $ 7,811 $ 5,635
======== =======
</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 six month periods ended June
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 in contemplation of issuance of the $95 million
collateralized commercial mortgage notes and FSA Finance, Inc., formed on May
22, 1995 in connection with the $95 million collateralized commercial mortgage
notes. As of June 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 June 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 5 to 10 years, using
the straight-line method.
9
<PAGE>
FAC REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES - CONTINUED
OUTLET CENTER PROPERTIES - CONTINUED
Outlet center properties include capitalized costs related to new developments
and expansions in process including construction, interest, taxes, insurance and
other costs totaling approximately $5.3 and $32.8 million at June 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.
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.
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 June 30, 1996
is $24.1 million. There is also $21.7 million of debt which is expected to be
retired from the sale proceeds. For the six month period ended June 30, 1996,
these properties contributed approximately $2.0 million of revenue and incurred
a loss of ($257,000) after deducting related interest expense on the debt
associated with the properties.
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 $4.4 million at June 30, 1996.
11
<PAGE>
FAC REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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, will be
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").
Under the Note Purchase Agreement, the Senior Notes will be 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.
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.
As of June 30, 1996, Exchangeable Notes with aggregate principal amounts of $20
million (net of issue cost of $784,000) 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. The resulting discount on the Senior Notes is being
amortized to interest expense over the term of the notes.
12
<PAGE>
FAC REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. NOTES PAYABLE - CONTINUED
NOTES PAYABLE - 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.
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 Exchangeable Notes. 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
Under the terms of 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 June 30, 1996, the Company is nearing
completion of two additional expansions in Story City, Iowa and Nebraska City,
Nebraska and has commenced a 63,000 square foot expansion at its Tupelo,
Mississippi outlet center. The Company plans to complete two more expansions to
satisfy its remaining obligation under its commitment to VF Corporation. Based
on the Company's estimates to complete the expansions, management believes that
there will be no remaining liability to VF Corporation when these expansions are
completed. If all these expansions are not completed as planned under the terms
of the original commitment, payments of $9.1 million to VF
13
<PAGE>
FAC REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES - CONTINUED
VF CORPORATION EXPANSIONS - CONTINUED
Corporation would be due and payable, $5.3 million of which is associated with
the three expansions currently under construction. Although the agreement
required completion of the expansion plan by June, 1996, the Company and VF
Corporation are presently in negotiation to extend that requirement for up to 12
months. The Company and VF Corporation have reached an agreement as to such
extension and are currently in the process of preparing final documents
evidencing the same.
DEVELOPMENTS AND EXPANSIONS
As of June 30, 1996 the Company has delivered approximately 281,000 square feet
of its 288,000 square foot outlet center in Branson, Missouri. The anticipated
cost of this center is $32.3 million of which $28.7 million has been expended as
of June 30, 1996. The Company is currently expanding Smithfield, North Carolina;
Story City, Iowa; Nebraska City, Nebraska; and Tupelo, Mississippi at a total
estimated cost of approximately $11.7 million of which $4.9 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 (Brewster). If
appropriate tenant interest is indicated, the Company anticipates developing
this property by the spring 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
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 April, 1996, the Company granted and issued 217,049 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 35,049 shares will vest in three equal
installments commencing 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 current
market price for the shares on the date of issue was $2,170,490. 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 $2,170 and
$2,168,320, 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.
7. SUBSEQUENT EVENTS
DIVIDEND DECLARATION
On July 2, 1996, the Board of Directors declared a dividend of $0.25 per share
payable to stockholders of record as of July 15, 1996. The total amount of the
dividend, $3,008,215 was paid on August 7, 1996. Pursuant to the terms of the
Exchangeable Notes, interest of $483,970 was paid on August 7, 1996 to the
noteholders.
15
<PAGE>
FAC REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 30, 1996, the Company operated 36 factory outlet centers
with 4,703,000 square feet of GLA in 21 states, compared to 35 with 4,334,000
square feet of GLA at June 30, 1995. Weighted average square feet of GLA for the
six months ended June 30, 1996 and 1995 was 4,562,000 and 4,269,000,
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. Phase I, which contains approximately 167,500
square feet of GLA, opened in October 1993 and was acquired by the Company in
November 1993. Phase II, containing approximately 92,000 square feet of GLA
opened in August
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FAC REALTY, INC.
NOTES TO CONSOLIDATED FIANNCIAL STATEMENTS
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
GENERAL OVERVIEW - CONTINUED
1994. In September 1995, the Company opened Phase III which contains
approximately 26,000 square feet of GLA.
Throughout 1995, the Company continued development of the new 288,000 square
foot outlet center in Branson, Missouri. This center, which 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, at an average rent of over
$14.40 per square foot for non-anchor tenants. At June 30, 1996, approximately
281,000 square feet of the Branson center was available for delivery to tenants.
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 scheduled to open in the fall of 1996.
As of June 30, 1996, the Company is nearing completion of two additional
expansions totaling 48,000 square feet (Nebraska City, Nebraska - 26,300 square
feet; Story City, Iowa - 21,700 square feet) and has commenced a 63,000 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
break point, 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., the tenants are obligated to pay certain
increases in common area maintenance expenses and their pro-rata share of
insurance expense and real estate taxes, and certain operating expenses. While
many of the Company's leases are triple net leases or require tenants to pay
increases in utilities and operating expenses, as of June 30, 1996,
approximately 24% of the aggregate GLA of its factory outlet centers is leased
to tenants under gross leases or percentage only leases, whereby the Company is
obligated to pay all utilities and other operating expenses of the applicable
factory outlet center.
17
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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 are 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.
The Company holds approximately 148 acres of undeveloped land in outparcels, of
which approximately 50 acres are considered prime real estate sites, that are
actively being marketed for lease or sale. As outparcels are sold and cash
received, these revenues are available for dividends or other cash needs of the
Company.
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FAC REALTY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995.
The Company reported net income before extraordinary item of $421,000, or $0.04
per share, for the six months ended June 30, 1996 compared to $5.0 million, or
$0.42 per share, for the comparable period in 1995. Net income before
extraordinary item for 1996 was less than that of 1995 by $4.5 million, or $0.38
per share. As more fully described below, this reduction was primarily due to
higher interest expense, depreciation and amortization charges, operating costs
and lower contribution from the properties held for sale.
FFO for the six months ended June 30, 1996 was $7.2 million or $0.56 per share.
This compares to $10.5 million, or $0.89 per share, for the six months ended
June 30, 1995. Factors that had a negative impact on 1996 FFO and contributed to
the decrease were: (a) $1.9 million, or $0.15 per share, in higher interest
expense due to a higher average borrowing level; (b) $0.5 million, or $0.04 per
share, in reduced contribution from properties held for sale; (c) $0.4 million,
or $0.03 per share, in higher property operating cost on a weighted average
square foot basis due to higher real estate taxes, property insurance and center
marketing and (d) $0.3 million, or $0.02 per share, in higher general and
administrative cost as described below. Earnings before interest, taxes,
depreciation and amortization (EBITDA) were $14.1 million for the six months
ended June 30, 1996, a decrease of $1.3 million, or 9%, from $15.4 million in
1995; The decrease was due primarily to the higher property operating costs and
general and administrative costs noted above and lower contribution from the
Company's properties held for sale.
Base rent before adjustment for straight line rent and the provision for
doubtful accounts remained flat at $17.9 million in 1996 when compared to 1995,
although the Company's weighted average square feet of GLA in operation
increased 7%. This is primarily the result of conversion of certain base rent
leases to percentage only leases and lower average center occupancy levels
principally attributable to the centers held for sale. Base rental revenue in
1996 includes a charge to the reserve for uncollectible tenant accounts of
$260,000. There was not a reserve charge taken in the six months ended June 30,
1995.
Percentage rent increased $0.5 million or 39%, to $1.6 million in 1996 compared
to 1995. On a weighted average square foot basis, percentage rents increased 30%
to $0.36 in 1996 from $0.27 in 1995, reflecting in part the 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. Percentage
rent includes amounts the tenants are obligated to pay based solely on a
percentage of the tenants' gross sales in lieu of base rents. Overage rents
represents amounts due from tenants based on a specified percentage of the
tenants sales in excess of a breakpoint agreed to in the lease.
Recoveries from tenants, representing contractual reimbursements from tenants of
certain common area maintenance, utilities, taxes, insurance and marketing cost,
remained flat in 1996 at $6.5 million. On a weighted average square foot basis,
recoveries from tenants decreased to $1.42 for the six months in
19
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FAC REALTY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS - CONTINUED
1996 from $1.51 in 1995, or 6%. For the six month period ended June 30, 1996,
the average recovery of property operating expenses decreased from 76% in 1995
to 69% 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 six month period from 91.7% in 1995
to 89.5% in 1996 (excluding properties under development), and (c) the
conversion of certain leases from triple net to percentage only as stated above.
Other income was $0.5 million in 1996 and 1995 and primarily represented
interest income, lease termination settlements and other miscellaneous property
level income.
Operating expenses increased $0.9 million, or 11%, to $9.4 million in 1996 from
$8.5 million in 1995. The increase was higher than the 7% 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 $1.98 for the six months in 1995 to $2.06
in 1996. This was due principally to a $0.07 per square foot increase in 1996 in
property taxes ($0.03), insurance ($0.02) and center marketing ($0.02).
General and administrative cost increased $0.3 million, or 12%, to $2.7 million
in 1996 from $2.4 million in 1995. The increase was due principally to lower
capitalization of leasing and related costs ($0.3 million), higher personnel
costs ($0.1 million) and professional fees ($0.4 million) offset by the savings
associated with the termination in December of 1995 of the 1996 NASCAR
motorsports program and plane lease ($0.6 million). On a weighted average square
foot basis, general and administrative expenses increased 4.5% to $0.59 for the
six month period in 1996 from $0.57 in 1995.
Depreciation and amortization increased as a result of the larger portfolio of
properties in operation during 1996.
Interest expense for the six months ended June 30, 1996 increased by $2.4
million, or 49%, to $7.2 million compared to $4.9 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, "Note to Consolidated Financial Statements".
On a weighted average basis (excluding the Exchangeable Notes), debt outstanding
and the average interest cost were approximately $177.5 million and 8.1%,
respectively, in 1996 compared to $129.9 million and 8.7%, respectively, in
1995. Amortization of deferred financing cost amounted to $0.7 million in 1996
and $0.6 million in 1995. The Company capitalized interest cost associated with
its development projects of $1.1 million in 1996 and $1.3 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.
20
<PAGE>
FAC REALTY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS - CONTINUED
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 June 30, 1996
is $24.1 million. There is also $21.7 million of debt which is expected to be
retired from the sale proceeds. For the six month period ended June 30, 1996,
these properties contributed approximately $2.0 million of revenue and incurred
a loss of ($257,000) after deducting related interest expense on the debt
associated with the properties. For the six month period ended June 30, 1995,
these properties contributed approximately $2.6 million of revenue and $261,000
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 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 JUNE 30, 1996 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 1995
The Company reported net income before extraordinary item of $9,000, or $0.00
per share, for the three months ended June 30, 1996 compared to $2.3 million, or
$0.19 per share, for the comparable period in 1995. Net income before
extraordinary item for 1996 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 and depreciation and amortization charges and lower
recoveries from tenants of operating expenses and reduced contribution from the
properties held for sale.
FFO for the three months ended June 30, 1996 was $3.7 million or $0.27 per
share. This compares to $5.2 million, or $0.44 per share, for the three months
ended June 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) $0.5
million, or $0.04 per share, in reduction in revenue from the decrease in
expense recoveries from tenants as a percentage of property operating expenses
as described below and (c) $0.3 million, or $0.02 per share, in reduced
contribution from the properties held for sale. The contribution of $0.4
million, or $0.03 per share from the Company's new development in Branson,
Missouri helped offset some of the decrease. Earnings before interest, taxes,
depreciation and amortization (EBITDA) were $7.3 million for the three months
21
<PAGE>
FAC REALTY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS - CONTINUED
ended June 30, 1996, a decrease of $0.7 million, or 8.5%, from $8.0 million in
1995. The decrease was due primarily to the lower contribution of the Company's
properties held for sale and reduction in expense recoveries from tenants as
noted above.
Base rent before adjustment for straight line rent and reserve for doubtful
accounts remained flat at $9.0 million in 1996 when compared to 1995, although
the Company's weighted average square feet of GLA in operation increased 9% to
4.7 million square feet. This is primarily the result of the reasons noted in
the discussion of the results for the six month periods ended June 30, 1996 and
1995. Base rental revenue in 1996 includes a charge to the reserve for
uncollectible tenant accounts of $130,000. There was not a reserve charge taken
in the three months ended June 30, 1995.
Percentage rent increased $0.2 million or 39%, to $0.8 million in 1996. On a
weighted average square foot basis, percentage rents increased 28% to $0.18 in
1996 from $0.14 in 1995, reflecting in part the conversion of certain base rent
leases to percentage only in certain centers that are experiencing a downward
trend in tenant sales or center occupancy.
Recoveries from tenants, decrease in 1996 by $0.1 million. On a weighted average
square foot basis, recoveries from tenants decreased to $0.72 for the three
months in 1996 from $0.81 in 1995, or 11%. For the three month period ended June
30, 1996, the average recovery of property operating expenses decreased from 80%
in 1995 to 70% 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 91.3% in 1995 to 88.8% in 1996 (excluding properties under development),
and (c) the conversion of certain triple net leases to percentage only as
mentioned above.
Other income of $0.3 million in 1996 was slightly higher than the $0.2 million
in 1995 and primarily represented interest income, lease termination settlements
and other miscellaneous property level income.
Operating expenses increased $0.5 million, or 11%, to $4.8 million in 1996 from
$4.3 million in 1995. The increase was in line with the 9% increase 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 $1.03 for the three months in 1996 compared
to $1.01 in 1995. the increase was due primarily to higher maintenance cost for
the 1996 quarter.
General and administrative cost was approximately $1.3 million in 1996 and 1995.
On a weighted average square foot basis, general and administrative expenses
decreased 6% to $0.28 for the three months in 1996 from $0.29 in 1995.
Components of general and administrative cost experienced increases which were
due principally to lower capitalization of leasing and related costs ($0.2
million) and higher professional fees ($0.1 million) which were offset by the
savings associated with the
22
<PAGE>
FAC REALTY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS - CONTINUED
termination in December of 1995 of the 1996 NASCAR motorsports program ($0.3
million) and lower personnel costs ($0.1 million).
Depreciation and amortization increased as a result of the larger portfolio of
properties in operation during 1996.
Interest expense for the three months ended June 30, 1996 increased by $1.4
million, or 56%, to $4.0 million compared to $2.6 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. On a weighted
average basis (excluding of the Exchangeable Notes), debt outstanding and the
average interest cost were approximately $178.9 million and 8.1%, respectively,
in 1996 compared to $142.5 million and 8.7%, 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 $0.8 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.
For the three month period ended June 30, 1996, the properties held for sale
contributed approximately $1.0 million of revenue and incurred a loss of
($147,000) after deducting related interest expense on the debt associated with
the properties. For the three month period ended June 30, 1995, these properties
contributed approximately $1.3 million of revenue and $111,000 of net income
after deducting related interest expense on the debt associated with the
properties. The reduction in performance is principally due to the lower
occupancy levels existing at certain centers.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance at June 30, 1996 was
approximately $12.4 million. The increase is due principally to the infusion of
$20 million of capital from Gildea Management Company in April, 1996. Restricted
cash, as reported in the financial statements, is approximately $4.4 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.
Net cash used in operating activities was $6.2 million for the six months ended
June 30, 1996 principally resulting from the $6.0 million distribution of the
fourth quarter 1995 dividend to stockholders and the reduction of $8.7 million
in accounts payable with the use of funds received from Gildea Management
Company. Net cash used in investing activities was $8.3 million for the six
months ended June 30, 1996. The primary use of these funds included: $5.7
million in construction cost, principally $5.2 million for properties currently
under development and $0.3 million toward
23
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FAC REALTY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
completion of 1995 expansion projects; $1.3 million for new financing costs;
$1.7 million for re- tenanting, lease renewal and leasing costs; offset by $0.4
million reduction in restricted cash. Net cash provided by financing activities
was $25.3 million for the six months ended June 30, 1996. The principal source
of such funds was $105.2 million of new borrowings, as described below. Funds
generated through financing activities were offset by payments of $69.9 million
to refinance existing debt, $6.9 million towards scheduled debt principal
repayment and $3.0 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 June 30, 1996, approximately $3.3 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.
As of June 30, 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.
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.
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 $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
Exchangeable Notes. Additionally, the covenants preclude the Company from paying
dividends in excess of 85% of FFO, as defined in the agreement, 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 of June 30, 1996 the Company has delivered approximately 281,000 square feet
of its 288,000 square foot outlet center in Branson, Missouri. The anticipated
cost of this center is $32.3 million of which $28.7 million had been expended as
of June 30, 1996. The Company is currently expanding Smithfield, North Carolina;
Story City, Iowa; Nebraska City, Nebraska; and Tupelo, Mississippi at a total
estimated cost of approximately $11.7 million of which $4.9 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 developing this property
by the spring 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 two additional expansions approximating 100,000
square feet were completed in 1995. As of June 30, 1996, the Company is nearing
completion of two additional expansions in Story City, Iowa and Nebraska City,
Nebraska as described above and has commenced a 63,000 square foot expansion at
its Tupelo, Mississippi outlet center.
The Company plans to complete two more expansions to satisfy its remaining
obligation under its commitment to VF Corporation. Based on the Company's
estimates to complete the expansions, management believes that there will be no
remaining liability to VF Corporation when these
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
expansions are completed. If all these expansions are not completed as planned
under the terms of the original commitment, payments of $9.1 million to VF
Corporation would be due and payable, $5.3 million of which is associated with
the three expansions currently under construction. Although the agreement
required completion of the expansion plan by June, 1996, the Company and VF
Corporation are presently in negotiation to extend that requirement for up to 12
months. The Company and VF Corporation have reached an agreement as to such
extension and are currently in the process of preparing final documents
evidencing the same.
The Company's current expansion and development plans are subject to certain
risk and uncertainties; including, but not limited to, 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 has adequate
financial resources to fund operating expenses, distributions to stockholders,
and planned development and construction activities. The $30 million raised
through the private placement with Gildea and Blackacre will be 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.
The terms of the $75 million credit facility limit the amount of distributions
to stockholders which the Company may make in any fiscal quarter. On April 9,
1996 and July 2, 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 89.8% for the six month period ended June 30, 1996. 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.
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
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 amortizations 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 encourage 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 six months
ended June 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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
(IN THOUSANDS)
NEW METHOD OLD METHOD
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 318 $ 4,953 $ 318 $ 4,953
Extraordinary item - loss on debt
extinquishment 103 - 103 -
Interest on Exchangeable Notes 462 - 462 -
Compensation under restricted stock plan - - 38 -
Add: Depreciation and amortization of
assets related to real estate 6,357 5,536 6,357 5,536
Other depreciation and amortization - - 135 90
Amortization of deferred finance cost - - 668 556
------------ ------------ ---------- ---------
Funds From Operations $ 7,240 $10,489 $ 8,081 $11,135
======== ======= ======== =======
Weighted Average Shares Outstanding -
Fully Diluted 12,841 11,814 12,841 11,814
======== ======== ======== ========
</TABLE>
27
<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.
Substantially all of the Company's existing tenants have met their
lease obligations. The Company intends to reduce operating and leasing risks by
working to improve its tenant mix, rental rates and lease terms by attracting
creditworthy national brand-name manufacturers, high-fashion manufacturers and
new tenants that offer a wide range of merchandise and amenities not previously
offered at the Properties.
28
<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.
As of June 30, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 27, 1996, the Annual Meeting of Stockholders of the Company was held at
which the following matters were submitted to and the requisite number of shares
of Common Stock of the Company were voted on by the stockholders, with the
results set forth below:
a) The following persons were elected to the Board of Directors to serve
as directors until the next annual meeting of stockholders in 1997 and
until their respective successors are duly elected and qualified. Each
person received the number of votes set forth next to their names
below:
PROPOSAL 1 - ELECTION OF DIRECTORS
VOTES VOTES VOTES
NAME FOR AGAINST ABSTAINING
- ---- --- ------- ----------
J. Dixon Fleming, Jr. 11,019,585 -0- 364,042
C. Cammack Morton 10,978,220 -0- 405,407
Robert O. Amick 10,994,371 -0- 389,255
B. Mayo Boddie, Sr. 10,996,874 -0- 386,752
J. Richard Futrell, Jr. 10,978,525 -0- 405,102
John W. Gildea 11,000,180 -0- 383,447
Theodore E. Haigler, Jr. 10,993,942 -0- 389,685
29
<PAGE>
FAC REALTY, INC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - CONTINUED
PROPOSAL 2 - THE STOCK PLAN AMENDMENT
b) The stockholders approved the Stock Plan Amendment to the 1993 Employee
Stock Incentive Plan to increase the number of shares of Common Stock
reserved for issuance thereunder from 525,000 to 1,100,000. The votes
cast for and against and the number of abstentions are set forth below:
VOTES VOTES VOTES
FOR AGAINST ABSTAINING
Votes to Approve the
Stock Plan Amendment 10,406,435 827,433 149,759
PROPOSAL 3 - AMENDMENT OF THE CHARTER TO AUTHORIZE PREFERRED STOCK AND APPROVAL
OF ISSUANCE OF CONVERTIBLE PREFERRED STOCK AND UNDERLYING COMMON
STOCK
c) The stockholders approved the Charter Amendments whereby authorizing
the Board of Directors of the Company to reclassify any unissued
portion of the authorized shares of capital stock to proved for the
issuance of shared in other classed or series, including other classed
or series of common stock or preferred stock of the Company, to
establish the number of shares in each class or series and to fix the
designation and any preferences, conversion other rights, voting
powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption of such class or series, and such
other subjects or matters with respect to such class or series as may
be fixed by resolution of the Board of Directors, Except as otherwise
required by applicable law, regulation or stock exchange rules, shares
of stock classified or reclassified by the Board of Directors pursuant
to the Charter Amendments could be issued without further action by the
stockholders and on such terms and for such consideration as may be
determined by the Board of Directors. Additionally, the stockholders
approved the issuance of Series A Preferred Stock, having a liquidation
preference senior to that of the Common Stock and convertible without
additional consideration into Common Stock.
VOTES VOTES VOTES
FOR AGAINST ABSTAINING
VOTES TO APPROVE THE
CHARTER AMENDMENT 6,275,935 873,185 209,767
30
<PAGE>
FAC REALTY, INC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - CONTINUED
PROPOSAL 4 - AMENDMENT TO THE CHARTER TO CHANGE THE NAME OF THE COMPANY
d) The stockholders approved the Amendment to the Charter to change its
corporate name to FAC Realty, Inc..
VOTES VOTES VOTES
FOR AGAINST ABSTAINED
Votes to Approve the
Name Change 10,925,176 330,295 128,156
ITEM 5. OTHER INFORMATION
DIVIDEND DECLARATION
On July 2, 1996, the Board of Directors declared a dividend of $0.25 per share
payable to stockholders of record as of July 15, 1996. The total amount of the
dividend, $3,008,215 was paid on August 7, 1996. 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. Pursuant to the terms of the
Exchangeable Notes, interest of $483,970 was paid on August 7, 1996 to the
Noteholders.
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; 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.
31
<PAGE>
FAC REALTY, INC.
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"). The Exchangeable
Notes will be mandatorily exchangeable into shares of the Company's convertible
preferred stock ("Convertible Preferred") upon stockholder approval of requisite
amendments to the Company's Second Restated Certificate of Incorporation. Each
$25 in principal amount of the Exchangeable Notes will be mandatorily
exchangeable into shares of the Company's Convertible Preferred which will be
convertible into shares of the Company's Common Stock, par value $0.01 per share
(the "Common Stock") at a conversion price equal to the lower of $9.00 per share
or a per share price based on a thirty-day average price for the Company's
Common Stock. The Convertible Preferred will have limited voting rights and have
noncumulative dividends equal to those of the Common Stock. In the event
stockholder approval is not obtained, the Exchangeable Notes will be convertible
at the option of the holder into shares of Common Stock of the Company.
As of June 30, 1996, the Company had issued $20 million in aggregate principal
amount of Exchangeable Notes and $5 million in unsecured Senior Notes. No
financial statements were filed with this Form 8-K.
32
<PAGE>
FAC REALTY, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - CONTINUED
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") 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.
33
<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.
DATE: AUGUST 9, 1996 By (signature of John N. Nelli)
John N. Nelli
Chief Financial Officer and Senior Vice
President-Finance(Principal Financial Officer
and Accounting Officer)
34
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 16,788
<SECURITIES> 0
<RECEIVABLES> 5,130
<ALLOWANCES> 689
<INVENTORY> 0
<CURRENT-ASSETS> 17,488
<PP&E> 348,314
<DEPRECIATION> 24,649
<TOTAL-ASSETS> 366,169
<CURRENT-LIABILITIES> 8,326
<BONDS> 0
0
0
<COMMON> 120
<OTHER-SE> 157,727
<TOTAL-LIABILITY-AND-EQUITY> 366,169
<SALES> 25,785
<TOTAL-REVENUES> 26,255
<CGS> 0
<TOTAL-COSTS> 9,398
<OTHER-EXPENSES> 9,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,236
<INCOME-PRETAX> 421
<INCOME-TAX> 0
<INCOME-CONTINUING> 421
<DISCONTINUED> 0
<EXTRAORDINARY> 103
<CHANGES> 0
<NET-INCOME> 318
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
