Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter year ended March 31, 1997
Commission File Number 1-11998
FAC REALTY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
56-1819372
(I.R.S. EMPLOYER IDENTIFICATION NO.)
11000 Regency Parkway
Third Floor, East Tower
Cary, North Carolina
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
27511
(ZIP CODE)
(919) 462-8787
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of April 30, 1997, there were 12,247,655 shares of the Registrant's Common
Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
<PAGE>
FAC REALTY, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C> <C>
ITEM 1. Financial Statements (Unaudited) 3
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 25
ITEM 2. Changes in Securities 25
ITEM 3. Defaults Upon Senior Securities 25
ITEM 4. Submission of Matters to a Vote of Security Holders 26
ITEM 5. Other Information 26
ITEM 6. Exhibits and Reports on Form 8-K 26
Signatures
</TABLE>
2
PART I
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
INDEX TO UNAUDITED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996 4
Consolidated Statements of Operations for the three months ended March 31,
1997 and 1996 5
Consolidated Statements of Stockholders' Equity for the three months ended
March 31, 1997 6
Consolidated Statements of Cash Flows for the three months ended March 31,
1997 and 1996 7
Notes to Consolidated Financial Statements 8
3
</TABLE>
<PAGE>
16
FAC REALTY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED) (AUDITED)
------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
INCOME PRODUCING PROPERTIES (NOTES 2,3 AND 5):
Land $ 82,096 $ 77,011
Buildings and improvements 287,580 259,383
Deferred leasing and other charges 18,303 17,635
--------------------------------------------
387,979 354,029
Accumulated depreciation and amortization (39,590) (36,027)
--------------------------------------------
348,389 318,002
Properties under development 3,098 2,538
Properties held for sale (NOTE 2) 12,242 11,438
-----------------------------------------
363,729 331,978
OTHER ASSETS:
Cash and cash equivalents 5,484 7,034
Restricted cash 3,872 3,860
Tenant and other receivables 4,484 5,864
Deferred charges and other assets (NOTE 4) 10,486 9,876
============================================
$ 388,055 $ 358,612
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Debt on income properties (NOTE 5) $ 215,318 $ 173,695
Unsecured senior notes (NOTE 6) - 7,420
Other unsecured notes 441 2,542
Capital lease obligations 768 826
Accounts payable and other liabilities 9,299 9,537
--------------------------------------------
225,826 194,020
--------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY (NOTE 6):
Convertible preferred stock, Series A, 5,000,000 shares authorized,
800,000 issued and outstanding 19,162 19,162
Common stock, $0.01 par value, 45,000,000 shares authorized, 12,247,655
and 12,100,955 issued and outstanding , respectively 122 121
Additional paid-in capital 215,797 214,827
Accumulated Deficit (4,242) (1,820)
Dividends declared (65,652) (65,652)
Deferred compensation - Restricted Stock Plan (2,958) (2,046)
--------------------------------------------
162,229 164,592
============================================
$ 388,055 $ 358,612
============================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
FAC REALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
---------------------------------------------
<S> <C> <C>
RENTAL OPERATIONS: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Base rents $ 8,723 $ 8,450
Percentage rents 127 8
Property operating cost recoveries 2,941 2,703
Other income 131 98
---------------------------------------------
11,922 11,259
---------------------------------------------
Property operating costs:
Common area maintenance 1,280 1,201
Utilities 304 229
Real estate taxes 1,320 1,297
Insurance 191 216
Marketing 230 107
Other 148 132
---------------------------------------------
3,473 3,182
Depreciation and amortization 4,063 3,220
---------------------------------------------
7,536 6,402
---------------------------------------------
4,386 4,857
---------------------------------------------
OTHER EXPENSES:
General and administrative (NOTE 9) 2,288 1,298
Interest 3,534 3,147
---------------------------------------------
5,822 4,445
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,436) 412
Extraordinary loss on early extinguishment of debt (NOTE 4) (986) -
=============================================
NET INCOME (LOSS) $ (2,422) $ 412
=============================================
EARNINGS PER COMMON SHARE:
Income (loss) before extraordinary item $ (0.12) $ 0.03
Extraordinary item $ (0.08) -
---------------------------------------------
NET INCOME (LOSS) $ (0.20) $ 0.03
=============================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 11,836 11,815
=============================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
FAC REALTY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
DEFERRED
CONVERTIBLE COMMON ADDITIONAL COMPENSATION
PREFERRED STOCK PAID IN ACCUMULATED DIVIDEND RESTRICTED STOCK
STOCK CAPITAL DEFICIT DECLARED PLAN TOTAL
--------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 $ 19,162 $ 121 $ 214,827 $ (1,820) $ (65,652) $ (2,046) $ 164,592
Issuance of directors stock awards - - 7 - - - 7
Issuance of restricted stock awards - 1 963 - - (964) -
Compensation under restricted stock plan - - - - - 52 52
Net loss - - - (2,422) - - (2,422)
======================================================================================
BALANCE AT MARCH 31, 1997 $ 19,162 $ 122 $ 215,797 $ (4,242) $ (65,652) $ (2,958) $ 162,229
======================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
FAC REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
----------------------------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,422) $ 412
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 4,063 3,220
Extraordinary loss on early extinguishment of debt 986 -
Amortization of deferred financing costs 417 287
Compensation under restricted stock plan 52 -
Net changes in:
Tenant and other receivables 1,380 526
Deferred charges and other assets (164) 136
Accounts payable and other liabilities (238) (5,772)
----------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 4,074 (1,191)
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in income-producing properties (3,302) (3,460)
Acquisition of income-producing properties (32,421) -
Change in restricted cash (12) 404
----------------------------------
NET CASH USED IN INVESTING ACTIVITIES (35,735) (3,056)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt on income properties 117,000 6,000
Proceeds from other debt - 89
Deferred financing charges (1,860) (78)
Debt repayments (85,036) (462)
Net proceeds from sale of common stock 7 6
----------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 30,111 5,555
----------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,550) 1,308
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,034 1,655
==================================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,484 $ 2,963
==================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest (net of interest
capitalized of $476 and $612) $ 3,765 $ 3,558
==================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
FAC REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
FAC Realty, Inc. (the "Company"), formerly Factory Stores of America, Inc., was
incorporated on March 31, 1993 as a self-administrated and self-managed real
estate investment trust (REIT). The Company is principally engaged in the
development, ownership, acquisition, and operation of factory outlet and
community shopping centers. The Company's revenues are primarily derived under
real estate leases with national, regional and local retailing companies.
The properties owned by the Company consist of: (1) 21 enclosed and 12
unenclosed factory outlet centers in 20 states aggregating approximately
4,600,000 square feet; (2) five community shopping centers located in the
Raleigh, NC area aggregating approximately 600,000 square feet (see
Note 3); (3) two unenclosed factory outlet centers held
for sale aggregating approximately 150,000 square feet; (4) one former factory
outlet center which is being converted to commercial office use with
approximately 150,000 square feet that is held for sale; and (5) approximately
176 acres of outparcel land located near or adjacent to certain of the Company's
centers and is actively being marketed for lease or sale.
As the owner of real estate, the Company is subject to risks arising in
connection with the underlying real estate, including defaults under or
non-renewal of tenant leases, competition, inability to rent unleased space,
failure to generate sufficient income to meet operating expenses, as well as
debt service, capital expenditures and tenant improvements, environmental
matters, financing availability and changes in real estate and zoning laws. The
success of the Company also depends upon certain key personnel, the Company's
ability to maintain its qualification as a REIT, compliance with the terms and
conditions of the debt on its income properties and other debt instruments, and
trends in the national and local economy, including income tax laws,
governmental regulations and legislation and population trends.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, FSA Properties, Inc.,
which was formed on December 30, 1994 to hold the assets and liabilities of 18
of the Company's outlet centers and FSA Finance, Inc., a wholly owned subsidiary
formed on May 22, 1995 in connection with a $95 million securitized debt
offering (see Note 5). As of March 31, 1997, 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.
8
<PAGE>
FAC REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
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 month period ended March 31, 1997
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, 1996.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
INCOME-PRODUCING PROPERTIES
Income-producing properties are recorded at cost less accumulated depreciation.
Included in such costs are acquisition, development, construction, tenant
improvements, interest incurred during construction, certain capitalized
improvements and replacements and certain allocated overhead. Allocated overhead
is computed primarily on the basis of time spent by certain departments in
various operations and represents direct costs of the development department
which meet the definition of "indirect costs" in Statement of Financial
Accounting Standards No. 67, "Accounting for Costs and Initial Rental Operations
of Real Estate Projects."
Leasing charges, including tenant construction allowances and direct costs
incurred by the Company to obtain a lease, are deferred and amortized over the
related leases or terms appropriate to the expenditure.
Depreciation is provided utilizing the straight-line method over the estimated
useful lives ranging from 31.5 to 39 years for building and improvements, 15
years for land improvements and 5 to 10 years for equipment.
Certain improvements and replacements are capitalized when they extend the
useful life, increase capacity, or improve the efficiency of the asset. All
other repair and maintenance items are expensed as incurred.
Substantially all of the income-producing properties have been pledged to secure
the Company's debt.
9
<PAGE>
FAC REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Properties under development include costs related to new development and
expansions in process totaling approximately $3.1 million and $2.5 million at
March 31, 1997 and December 31, 1996, respectively. The pre-construction stage
of project development involves certain costs to secure land and zoning and
complete other initial tasks which are essential to the development of the
project. These costs are transferred to developments under construction when the
pre-construction tasks are completed. The Company charges operations for the
costs of unsuccessful development projects.
The Company adopted the Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Assets to be
Disposed Of" ("FAS 121") as of January 1, 1996. The pronouncement requires that
certain long-lived assets be reviewed for potential impairment when
circumstances indicate that the carrying amount of such assets may not be
recoverable. Additionally, FAS 121 requires that certain long-lived assets held
for disposition be reported at the lower of the carrying amount or fair value
less any selling costs.
Properties held for sale, at their expected net realizable values, have been
separately classified in the accompanying balance sheets at March 31, 1997 and
December 31, 1996. As a result of the Company's intent to sell three outlet
center properties, the Company recognized a charge to 1996 earnings of $5.0
million to reduce the carrying amount of these centers to their
estimated net realizable value.
INTEREST COSTS
Interest costs are capitalized related to income-producing properties under
construction, to the extent such assets qualify for capitalization. Total
interest capitalized was $0.5 million and $0.6 million for the three month
periods ended March 31, 1997 and 1996, respectively. Interest expense includes
amortization of deferred financing costs (see Note 4) and is net of
miscellaneous interest income on cash and escrow deposit balances.
RESTRICTED CASH
In connection with the sale of the $95 million securitized debt offering, the
lender required a holdback of a portion of the loan proceeds to fund certain
environmental and engineering work and to make certain lease related payments
that may be required in connection with the renewal or termination of certain
leases by a tenant at most of the factory outlet centers. Such holdback amounts
were approximately $3.9 million at March 31, 1997 and December 31, 1996.
10
<PAGE>
FAC REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company, as a lessor, has retained substantially all of the risks and
benefits of ownership and accounts for its leases as operating leases. Minimum
rental income is recognized on a straight-line basis over the term of the lease
and unpaid rents are included in rents and other receivables from tenants in the
accompanying balance sheets. Certain lease agreements contain provisions which
provide for rents based on a percentage of sales that are recognized ratably on
an estimated basis throughout the year. In addition, certain leases provide for
additional rents based on a percentage of sales volume above a specified
breakpoint and reimbursement of real estate taxes, insurance, advertising,
utilities and certain common area maintenance (CAM) costs. These additional
rents are reflected on the accrual basis. In lease agreements where the tenant
is not required to reimburse the Company for real estate taxes, insurance and
CAM costs, the Company has allocated a portion of the rental amount to tenant
recoveries. For tenants who are not obligated to pay directly or reimburse the
Company for utility costs related to their store, the Company has allocated a
portion of their rental revenue to offset the utility expense.
EARNINGS PER SHARE
Primary earnings per common share amounts are computed by dividing income less
preferred dividends by the weighted average number of common shares actually
outstanding for the three month periods ended March 31, 1997 and 1996 of
11,836,000 and 11,815,000, respectively, which exclude unvested restricted
shares. Under fully diluted earnings computation per share amounts would be
based on income divided by the weighted average number of common shares as
increased by the number of shares that would be outstanding assuming conversion
of the Convertible Preferred Stock. Fully diluted earnings per share amounts are
not presented because the effect of such inclusion would be to increase earnings
per share. Shares issuable under employee stock options and the warrant
agreements 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.
INCOME TAXES
The Company is taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended, commencing with the tax year ending December
31, 1993. As a REIT, the Company generally is not subject to federal income tax.
To maintain qualification as a REIT, the Company must distribute at least 95% of
its REIT taxable income to its stockholders and meet certain other requirements.
If the Company fails to qualify as a REIT in any taxable year, the Company will
be subject to federal income tax on its taxable income at regular corporate
rates. The Company may also be subject to certain state and local taxes on its
income and property and federal income and excise taxes on its undistributed
taxable income.
11
<PAGE>
FAC REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DIVIDENDS
There were no accrued dividends as of December 31, 1996 and no dividends were
declared during the three month period ended March 31, 1997.
RECLASSIFICATIONS
Certain 1996 financial statement amounts have been reclassified to conform with
1997 classifications. These reclassifications had no effect on net income or
total stockholders' equity as previously reported.
3. ACQUISITION
On March 27, 1997, the Company purchased five community centers located in the
Raleigh, North Carolina area for $32.3 million. Pro forma results of operations
for the three months ended March 31, 1997 and 1996 are set forth below which
assume the acquisition of the five properties aggregating 605,668 square feet of
retail and office space had been completed as of January 1, 1996. The pro forma
condensed statements of operations are not necessarily indicative of what actual
results of operations of the Company would have been assuming such transaction
had been completed as of January 1, 1996, nor does it purport to represent
results of operations of future periods (in thousands, except for per share
data).
PRO FORMA THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
------------------------- -------------
(Unaudited)
Revenues $ 13,215 $ 12,552
Property Operating Costs 3,809 3,518
Depreciation and amortization 4,265 3,422
General and administrative 2,313 1,323
Interest 4,160 3,773
---------------- ----------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM $ (1,332) $ 516
================ ======================
NET INCOME (LOSS) PER COMMON SHARE $ (0.11) $ 0.04
================ ======================
4. DEFERRED CHARGES AND OTHER ASSETS
DEFERRED FINANCING COSTS
Deferred financing costs, including fees and costs incurred to obtain financing,
are being amortized on a straight line basis over the terms of the respective
agreements. Unamortized deferred financing costs are charged to expense when the
associated debt is retired before the maturity date.
12
<PAGE>
FAC REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. DEFERRED CHARGES AND OTHER ASSETS (CONTINUED)
As described in Note 5, on February 19, 1997 the Company refinanced its existing
credit line and in connection therewith the related unamortized deferred
financing costs of $986,000 were written off as an extraordinary loss.
5. DEBT ON INCOME PROPERTIES
Debt on income properties consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-----------------------------------
(Unaudited) (Audited)
<S> <C> <C>
Class A Notes payable in 85 monthly principal payments ranging from
approximately $104 to $173 determined using various parameters plus
weighted average monthly interest payments at 7.42%. Unpaid
principal and accrued interest due June 1, 2002. $ 55,553 $ 55,907
Class B Notes - monthly interest payments at 7.78% with entire balance
due June 1, 2002. 20,000 20,000
Class C Notes - monthly interest payments at 8.31% with entire balance
due June 1, 2002. 17,000 17,000
Note payable to a financial institution with 45 monthly principal and
interest payments of approximately $59,000 at a stated rate of prime
plus 2 1/4% and one final payment of the entire principal balance
and unpaid accrued interest payable due on March 23, 1998. 5,765 5,788
Credit facility with a financial institution, $75,000,000 available as of
December 31, 1996, interest at a rate of LIBOR plus 2.75%, amount
outstanding paid in full in February 1997. - 75,000
Credit facility with a financial institution, $150,000,000 available as
of March 31, 1997, interest at a rate of LIBOR plus 2.25%. 117,000 -
-----------------------------------
$ 215,318 $ 173,695
===================================
</TABLE>
The Company obtained a $150,000,000 credit facility with Nomura Asset Capital
Corporation on February 19, 1997. The credit facility with Nomura is secured by
17 of the Company's centers plus an assignment of excess cash flow from the
properties currently secured under the $95 million rated debt securitization
(see Note 4). The credit facility is for a term of 2 years with a 1 year renewal
option and bears interest at the rate of 1 month LIBOR (London Interbank Offered
Rate) plus 2.25%. The proceeds from the credit facility will be used to fund
acquisitions, expansions of existing centers, repay indebtedness, and fund
operating activities, including the repurchase of the Company's stock. The
indebtedness repaid included $75,000,000
13
<PAGE>
FAC REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. DEBT ON INCOME PROPERTIES (CONTINUED)
of debt on income properties, $7,420,000 of unsecured senior notes and
$2,016,000 of other unsecured notes outstanding at December 31, 1996. The new
credit facility contains financial covenants relating to debt to total asset
value and net operating income to debt service coverage.
6. CONVERTIBLE PREFERRED STOCK AND UNSECURED SENIOR NOTES
On April 2, 1996, the Company executed a Note Purchase Agreement and other
related documents (collectively the "Agreements") with Gildea Management Company
("Gildea") and Blackacre Bridge Capital, L.L.C. ("Blackacre"), whereby Gildea
and Blackacre agreed to purchase in a private placement up to $25.0 million of
the Company's Exchangeable Notes (the "Exchangeable Notes") and $5.0 million of
its Senior Notes, both of which were unsecured. On April 3 and 29, 1996,
Exchangeable Notes with an aggregate principal amount of $10.0 million each were
sold pursuant to the Agreements.
Holders of the Exchangeable Notes, subject to certain conditions, were required
to exchange them for shares of the Company's Series A Convertible Preferred
Stock (the "Series A Preferred") at the rate of one share of Series A Preferred
for each $25 in principal amount of Exchangeable Notes, upon stockholder
approval of necessary amendments to the Company's Certificate of Incorporation
and authorization of the Series A Preferred. Each share of Series A Preferred is
convertible into shares of the Company's Common Stock at a conversion price
equal to the lower of $9 per share or the 30-day average price of the Company's
Common Stock on the NYSE following an announcement by the Company of the initial
funding, subject to certain limitations. Dividends on the Series A Preferred
will be paid quarterly on each Common Stock dividend payment date in an amount
equal to the dividends that would have been paid on the Common Stock then
issuable upon conversion of the Series A Preferred.
On August 1, 1996, the Company issued holders of the Exchangeable Notes 800,000
shares of the Company's Series A Preferred Stock in exchange for notes with an
aggregate principal amount of $20 million (net of issue cost of $838,000). The
800,000 shares of the Series A Preferred Stock are convertible, at the option of
the holders, into an aggregate of 2,222,222 shares of the Company's Common
Stock.
On April 29, 1996, $5 million of the Senior Notes were placed at 97% of their
face amount. On November 12, 1996, $2.5 million of the Senior Notes were placed
at 100% of their face amount. Under the Agreements, these notes mature on the
second anniversary of the initial funding and bear interest, payable quarterly,
at an annual rate of 11% during the first year and 13% thereafter until
maturity. The resulting discount ($150,000) on the Senior Notes is being
amortized to interest expense over the term of the notes. In March 1997, the
Company repaid the Senior Notes at their face amounts.
In connection with the issuance of the Exchangeable Notes and the initial $5
million of Senior Notes, on April 3, 1996 the Company issued the holder
detachable warrants for the purchase of 200,000 shares of Common Stock of the
Company. Each warrant entitles the holder, subject to certain conditions, to
purchase on or before April 3, 2003 one share of Common Stock of the Company at
a price equal to $9.50
14
<PAGE>
FAC REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. CONVERTIBLE PREFERRED STOCK AND UNSECURED SENIOR NOTES (CONTINUED)
per share, subject to adjustment under certain conditions. The warrants were
valued at an aggregate value of $6,000 at the issuance date. The $2.5 million of
Senior Notes have detachable warrants for the purchase of 100,000 shares of
Common Stock of the Company that were issued with terms and conditions similar
to the existing Senior Notes, except that each warrant entitles the holder to
purchase one share of Common Stock at a price equal to $8.375 per share. These
warrants were valued at an aggregate value of $3,000 at the issuance date.
7. COMMITMENTS AND CONTINGENCIES
On July 19, 1996, a purported class action lawsuit was filed in the United
States District Court for the Eastern District of North Carolina against the
Company, its former chairman and chief executive officer, J. Dixon Fleming, Jr.,
and a former president of the Company, David A. Hodson. The complaint seeks
certification of a class consisting of all persons (with certain exclusions) who
purchased common stock of the Company between December 16, 1993 and April 17,
1996, inclusive (the "Class Period"). The complaint alleges that, during the
Class Period, defendants made certain false or misleading statements to the
public concerning (1) earnings and funds from operations; (2) the Company's
ability to maintain dividends at prior levels; (3) the alleged maintenance of
dividends through borrowings rather than funds from operations; (4) the
Company's ability to close a proposed acquisition; (5) the alleged purchase of
certain properties from affiliates of the individual defendants at inflated
prices; and (6) alleged improper accounting practices.
On October 30, 1996, a second purported class action lawsuit was filed in the
United States District Court for the Eastern District of North Carolina against
the Company and Messrs. Fleming and Hodson, containing factual allegations and
legal claims similar to those asserted in the prior purported class action. The
plaintiffs in both actions seek unspecified monetary damages. The cases have
been consolidated and the Company has filed motions to dismiss both lawsuits,
which motions are currently pending.
The Company believes that it and the named former officers have substantial
defenses to the plaintiffs' claims and the Company intends to vigorously defend
the actions. However, no assurance can be given as to the ultimate outcome of
the litigation.
In addition, the Company is a party to certain legal proceedings relating to its
ownership, management and leasing of the properties, arising in the ordinary
course of business.
15
<PAGE>
FAC REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. OTHER RELATED PARTY TRANSACTIONS
During 1993, the Company acquired a 19 acre tract of land in a non-monetary
transaction from a partnership whose partners include two former executive
officers of the Company. The recorded value of the land was $748,000. In return
for the land, the Company assumed certain outstanding debt and the remaining
purchase price was settled by reducing amounts owed to the Company by a tenant
whose majority owners were also partners in the partnership. A review of this
and other transactions resulted in J. Dixon Fleming, Jr., the Company's former
Chairman and Chief Executive Officer, agreeing to permit the Company to satisfy
certain asset valuation issues by offsetting amounts otherwise owed to Mr.
Fleming pursuant to his employment agreement or by the acceptance from Mr.
Fleming of some other cash or value equivalent. The Company has recently entered
into an agreement with Mr. Fleming to sell to him the 19 acre land tract for the
sum of $750,000 which would substantially satisfy the asset valuation issues.
9. TERMINATED ACQUISITION
On August 25, 1995, the Company signed definitive agreements ("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.
Subsequent to the termination of the Agreements, RRI for itself and on behalf of
OPERS made a demand for payment with respect to a $5.0 million promissory note
(the "Note") issued by the Company in connection with the Company's proposed
purchase of the factory outlet centers and other properties owned by OPERS. The
Note was payable only upon the occurrence of certain conditions relating to
termination of the definitive acquisition agreements, some of which conditions
the Company asserts were not satisfied. After an unsuccessful attempt at
mediation of the dispute, RRI filed for binding arbitration of the matter to
settle the dispute. Following the arbitration hearing held in
late April 1997, the Company agreed to pay $2.9 million to RRI on behalf of
related entities of OPERS in settlement of all outstanding issues between the
Company and OPERS/RRI relating to the terminated merger. The settlement is
payable in installments with $725,000 payable by May 7, 1997 and
$725,000 payable on June 30, September 30 and December 31, 1997, respectively,
and is secured by a deed of trust on a community center.
The Company previously recorded a charge of $1.7 million in December 1995 in
connection with the termination. The remaining $1.2 million of the $2.9 million,
plus an estimate for the Company's legal fees, has been accrued for as
of March 31, 1997 and is included in general and administrative expenses.
10. NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt FAS No. 128 "Earnings per Share" and FAS No. 129
"Disclosure of Information about Capital Structures" in the fourth quarter of
1997. Neither of these new standards is expected to have any material effect on
the Company's consolidated financial statements.
16
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion should be read in conjunction with the
selected financial data included in this section and the consolidated financial
statements and notes thereto included in this report. Certain comparisons
between the periods have been made on a percentage basis and on a weighted
average square foot basis, which adjusts for square footage added at different
times during the year.
Certain statements under this caption, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," constitute
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). See "Forward-Looking Statements" included under this
section.
GENERAL OVERVIEW
The Company has grown by selectively expanding, developing and
acquiring factory outlet and community shopping centers. At March 31, 1997, the
Company operated 41 shopping centers with 5,471,000 square feet of GLA in 21
states, compared to 36 centers with 4,654,000 square feet of GLA at March 31,
1996. Weighted average square feet of GLA for the three months ended March 31,
1997 and 1996 was 4,872,000 and 4,499,000, respectively.
The Company was incorporated on March 31, 1993 and completed an Initial
Public Offering ("IPO") on June 10, 1993. Prior to completion of the IPO, the
Company owned four outlet centers in four states aggregating 701,000 square feet
of Gross Leasable Area ("GLA"). Upon completion of the IPO, 21 factory outlet
centers in eleven states were acquired from VF Corporation totaling 1,725,000
square feet of GLA. On November 1, 1993, the Company acquired a 167,000 square
foot center located near Opryland in Nashville, Tennessee. On December 23, 1993,
the Company completed a secondary offering of Common Stock and used the proceeds
to purchase six outlet centers in six states from the Willey Creek Group
aggregating 908,000 square feet. As of December 31, 1993, the Company owned 32
outlet centers in 21 states totaling 3,502,000 square feet of GLA.
During 1994, the Company began development of a 288,000 square foot
outlet center in Branson, Missouri, acquired three additional properties
totaling 449,000 square feet of GLA from the Willey Creek Group, and completed
expansions comprising 283,000 square feet of GLA in Iowa, Louisiana; Crossville,
Tennessee; North Bend, Washington; Arcadia, Louisiana; Boaz, Alabama; and
Nashville, Tennessee. By the end of 1994, the Company owned 35 outlet centers
aggregating 4,234,000 square feet of GLA, which represented a 21% increase over
the prior year end, and had one center under development.
During 1995, the Company delivered 109,000 square feet of expansion
space to tenants in Mesa, Arizona and Draper, Utah. In September 1995, the
Company completed an expansion of 28,000 square feet of GLA in Nashville,
Tennessee. Throughout 1995, the Company continued development of its 288,000
square foot outlet center in Branson, Missouri, with 207,000 square feet
available for delivery to tenants by December 31, 1995. The Company also began a
103,000 square foot expansion of its Smithfield, North Carolina factory outlet
center, with 48,000 square feet of the expansion space opening in November 1995;
and had commenced two additional expansions totaling 48,000 square feet in
Nebraska City, Nebraska and Story City, Iowa, which were being constructed
pursuant to commitments made to VF Corporation in connection with the purchase
of the VF Properties in June 1993. As of December 31, 1996, the Company had
satisfied its obligations to VF Corporation. The Company ended 1995 with
4,626,000 square feet of GLA, up 9% from the prior year end.
During 1996, the Company completed the remaining 81,000 square feet of
its 288,000 square foot outlet center in Branson, Missouri, and completed
expansions aggregating 158,000 square feet in Story City, Iowa; Nebraska City,
Nebraska; Smithfield, North Carolina; and Tupelo, Mississippi. The Company ended
1996 with 4,865,000 square feet of GLA, up 5.1% from the end of 1995.
In March 1997, the Company purchased five retail community shopping
centers located in the Raleigh, North Carolina area for $32,300,000. The centers
total 606,000 square feet and feature anchor tenants such as Winn Dixie, Food
Lion, K-Mart and Eckerd Drug. In April 1997, the Company commenced construction
on a 34,000 square foot expansion at its Crossville, Tennessee outlet center. In
addition, during 1997, the Company plans to begin construction on an expansion
at its Wilson, North Carolina center, totaling 44,000 square feet. Additionally,
the Company is
17
<PAGE>
currently in the predevelopment and marketing stage for a "power" outlet mall
located in Lake Carmel, New York. The project is planned to contain in excess of
500,000 square feet of GLA. If appropriate tenant interest is obtained and the
appropriate agreements, permits and approvals are received, the Company intends
to commence construction in 1998. No assurance can be given, however, that the
expansions or project will be developed and/or completed.
The Company receives rental revenue through base rent, percentage
rent, overage rent and expense recoveries from tenants and through miscellaneous
income including tenant lease buyouts. Base rent represents a minimum amount set
forth in the leases for which the tenants are contractually obligated, including
the amounts tenants are obligated to pay based on a percentage of the tenants'
gross sales in lieu of base rent. Percentage rent is a function of the sales
volumes of various tenants in excess of a negotiated sales "break point." For
sales in excess of the break point, tenants pay a specified percentage of these
sales as overage rent in addition to their base rent and other charges. Expense
recoveries from tenants relate to the portion of the property's operating costs
for which the tenants are obligated to reimburse the Company, 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 real estate taxes, insurance, utilities, common area
maintenance charges and contribute to the marketing fund, as of March 31, 1997,
approximately 20% of the leased GLA of the Company's centers is leased to
tenants whereby they are not obligated to reimburse the Company for real estate
taxes, insurance, utilities and common area maintenance expenses. In such
instances, the Company has allocated a portion of the base rent or percentage
rent to expense recoveries and utility expense.
At March 31, 1997, the Company had approximately 176 acres of
outparcels located near or adjacent to certain centers which are actively being
marketed for sale or as ground leases. As outparcels are sold and cash received,
these revenues are available for reinvestment.
SELECTED FINANCIAL DATA
The following information should be read in conjunction with the
consolidated financial statements and notes thereto included in this report.
Industry analysts generally consider Funds from Operations ("FFO") an
appropriate measure of performance for an equity REIT. FFO means net income
(computed in accordance with generally accepted accounting principles) excluding
gains or losses from debt restructuring and sales of property plus depreciation
and amortization and adjustments for unusual items. Management believes that
FFO, as defined herein, is an appropriate measure of the Company's operating
performance because reductions for depreciation and amortization charges are not
meaningful in evaluating the operating results of the Properties which have
historically been appreciating assets.
Beginning in 1996 the Company adopted a change in the definition of FFO
as promulgated by the National Association of Real Estate Investment Trusts
(NAREIT). Under the new definition, amortization of deferred financing costs and
depreciation of non-real estate assets, as defined, is not included in the
calculation of FFO.
"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 (i) do not represent cash flow from operations as
defined by generally accepted accounting principles, (ii) are not necessarily
indicative of cash available to fund all cash flow needs and (iii) should not be
considered as an alternative to net income for purposes of evaluating the
Company's operating performance or as an alternative to cash flow as a measure
of liquidity.
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<PAGE>
Other data that management believes is important in understanding
trends in its business and properties are also included in the following table
(in thousands, except per share data).
<TABLE>
<CAPTION>
FAC REALTY, INC.
THREE MONTHS ENDED MARCH 31,
------------------------------------
1997 1996
-------------- -------------------
<S> <C> <C>
OPERATING DATA:
Rental revenues $11,922 $11,259
Property operating costs 3,473 3,182
-------------- -------------------
8,449 8,077
Depreciation and amortization 4,063 3,220
General and administrative 2,288 1,298
Interest 3,534 3,147
Extraordinary loss on early extinguishment of debt (986) -
-------------- -------------------
Net income (loss) $ (2,422) $ 412
============== ===================
Per common share data:
Income (loss) before extraordinary item $ (0.12) $ 0.03
Extraordinary item (0.08) -
-------------- -------------------
Net income (loss) $ (0.20) $ 0.03
============== ===================
Weighted average common share outstanding 11,836 11,815
============== ===================
OTHER DATA:
EBITDA $ 7,511 $ 6,779
============== ===================
Funds from Operations (FFO):
Net income (loss) $(2,422) $ 412
Adjustments:
Straight line rent (114) (63)
Depreciation and amortization 3,999 3,146
Compensation under restricted stock award 52 -
Unusual items:
Non-recurring administrative costs 100 -
Merger termination costs 1,250 -
Extraordinary loss on early extinguishment of debt 986 -
-------------- -------------------
$ 3,851 $ 3,495
============== ===================
Weighted average shares outstanding - fully diluted 14,058 11,815
============== ===================
$ 0.27 $ 0.29
============== ===================
Funds Available for Distribution/Reinvestment:
Funds from Operations $ 3,851 $ 3,495
Adjustments:
Non-recurring administrative costs (100) -
Merger termination costs (1,250) -
Capitalized tenant allowances (243) (39)
Capitalized leasing costs (203) (114)
Recurring capital expenditures (212) (115)
-------------- -------------------
$ 1,843 $ 3,227
============== ===================
Funds Available for Distribution/Reinvestment per share $ 0.13 $ 0.27
============== ===================
Dividends declared on quarterly earnings $ - $ 3,007
============== ===================
Dividends declared on quarterly earnings per share $ - $ 0.25
============== ===================
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
FAC REALTY, INC.
MARCH 31,
------------------------------------
1997 1996
-------------- -------------------
<S> <C> <C>
BALANCE SHEET DATA:
Income-producing properties (before accumulated depreciation and
amortization) $403,319 $345,537
Total assets 388,055 355,452
Debt on income properties 215,318 176,492
Total liabilities 225,826 194,548
Total stockholders' equity 162,229 160,904
PORTFOLIO PROPERTY DATA:
Total GLA (at end of period) 5,471 4,654
Weighted average GLA 4,872 4,499
Number of properties (at end of period) 41 36
Occupancy (at end of year):
Operating 91.4% 91.1%
Development 67.3% 67.0%
Held for sale 45.7% 63.2%
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996.
The Company reported a net loss of $2.4 million, or $0.20 per common
share, for the three months ended March 31, 1997 compared to a net income of
$0.4 million or $0.03 per common share, for the comparable period in 1996. The
loss for 1997 resulted primarily from three factors: (a) an increase in general
and administrative expenses due to a non-recurring charge of $1.3 million for
the settlement of the arbitration with the Public Employees Retirement System of
Ohio (OPERS); (b) increased interest expense of $0.4 million, as a result of
higher borrowing levels; and (c) the Company incurred an extraordinary loss on
the early extinguishment of debt of $1.0 million.
FFO for the three months ended March 31, 1997 was $3.9 million, or $0.27
per share. This compares to $3.5 million, or $0.29 per share, for the same
period in 1996. Factors that had a positive impact on 1997 FFO were: (a) $0.3
million, or $0.02 per share, in improved property level performance as described
below and (b) $0.4 million, or $0.03 per share, in lowered general and
administrative expenses also described below. Factors that had a negative impact
on 1997 FFO were: (a) $0.4 million, or $0.03 per share, in higher interest
expense due to a higher average borrowing level plus (b) $0.04 per share
resulting from the dilutive effect of the increase in the weighted average
shares outstanding.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
were $7.5 million for the three months ended March 31, 1997, an increase of $0.7
million or 11%, from $6.8 million for the same period in 1996. The increase was
due to the decrease of $0.04 million in the general and administrative expenses
from 1996 after adjustment for non-recurring costs for both years and increased
property level performance of $0.03 million over 1996.
Base rent increased slightly to $8.7 million for the three months
ended March 31, 1997 from $8.5 million for the same period in 1996. Base
rent before the adjustment for straight line rent increased $0.2
million or 3% to $8.6 million for the three months ended March 31, 1997 when
compared to 1996, while the Company's weighted average square feet of GLA in
operation increased 8%. The increase in base rents from increased occupancy at
the operating and development centers was offset by declining rents on renewals
at certain properties and lower average center occupancy levels in the centers
held for sale. Base rental revenue for 1997 includes a charge to the reserve for
uncollectible tenant accounts of $0.1 million compared to the same amount in
1996.
Percentage rent increased $0.1 million for the three months
ended March 31, 1997 as compared to the same period in 1996. Percentage rent
represents amounts due from tenants based on a specified percentage of the
tenants sales in excess of a sales break point agreed to in the lease.
20
<PAGE>
Recoveries from tenants, representing contractual reimbursements from
tenants of certain common area maintenance, utilities, taxes, insurance and
marketing cost, increased in the three months ended March 31, 1997 to
$2.9 million from $2.7 million in the same period in 1996. On a weighted
average square foot basis, recoveries from tenants remained the same
at $0.60 for the three months ended March 31, 1997 when compared to the same
period in 1996. The average recovery of property operating expenses also
remained the same at 85%. Approximately 20% of the leased GLA is leased whereby
the Company is obligated to pay all utilities and operating expenses of the
applicable center.
Total tenant retail sales at the Company's outlet centers increased
7.9% for the three months ended March 31, 1997 compared to the same period
in 1996. Tenant sales on a comparative store basis increased approximately
2.3% in 1997 compared to 1996.
Other income was approximately $0.1 million in 1997 compared to the same
amount in 1996.
Operating expenses increased $0.3 million, or 9%, to $3.5 million in
1997 from $3.2 million in 1996. The increase in operating expenses was
principally due to the increase in the weighted average square feet in operation
in 1997 which rose 8% from 4.5 million square feet in 1996 to 4.9 million square
feet in 1997. On a weighted average square foot basis, operating expenses
increased 3% from $0.68 in 1996 to $0.70 in 1997.
General and administrative expenses for the three months ended March 31,
1997 included a charge of $1.3 million related to the settlement of the
termination of agreements entered into in 1995 to acquire the
factory outlet centers owned by Public Employees Systems of Ohio
(OPERS) and $0.1 million in other non-recurring charges. Exclusive of
these charges, general and administrative cost decreased
$0.4 million, or 32% to $0.9 million in 1997 from $1.3 million in 1996. The
decrease was due principally to the savings in miscellaneous corporate
administrative expenses.
Depreciation increased $0.6 million in 1997 primarily as a result of the
completion in 1996 of the center in Branson, Missouri and the expansions of the
Company's properties in Story City, Iowa, Nebraska City, Nebraska, Smithfield,
North Carolina and Tupelo, Mississippi. Amortization of deferred leasing and
other charges increased $0.2 million in 1997 mainly as a result of tenant
improvements for VF Corporation in 1996 pursuant to commitments made to VF
Corporation in connection with the purchase of the VF properties. On a weighted
average square foot basis, depreciation and amortization of income-producing
properties increased 17% to $0.82 in 1997 from $0.70 in 1996.
Interest expense for the three months ended March 31, 1997, net of
interest income of $0.02 million, increased by $0.4 million or 12%, to $3.5
million compared to $3.1 million, net of interest income of $0.01 million, in
1996. This increase resulted from higher borrowing levels in 1997 compared to
1996. On a weighted average basis, debt outstanding and the average interest
cost were approximately $186 million and 8.1%, respectively, in 1997 compared to
$176 million and 8.1%, respectively, in 1996. Amortization of deferred financing
cost amounted to $0.4 million in 1997 and $0.3 million in 1996. The Company
capitalized interest cost associated with its development projects of $0.5
million in 1997 and $0.6 million in 1996. Associated with the early
extinguishment of debt, the Company expensed the related unamortized loan costs
of $986,000 which has been classified as an extraordinary item in the
Consolidated Statements of Operations.
As part of the Company's ongoing strategic evaluation of its portfolio
of assets, the Company determined in 1995 to pursue the sale of certain
properties that currently are not fully consistent with or essential to the
Company's long-term strategies. Accordingly, in 1995 the Company recorded an
$8.5 million adjustment to the carrying value of three of the assets held for
sale. In 1996 the Company recorded an additional $5.0 million adjustment to the
carrying value of one of the assets held for sale. This non-cash adjustment was
charged to operations and represents the difference between the fair value less
costs to sell and the net book value of the assets. After recording the $13.5
million valuation adjustment, the net carrying value of assets currently being
marketed for sale at March 31, 1997 is $12.2 million. There is also $15.8
million of debt secured by the properties which is expected to be primarily
retired from the sale proceeds. For the three months ended March 31,
1997, these properties contributed approximately $0.3 million of revenue and
incurred a loss of $0.4 million after deducting related interest expense on
the debt associated with the properties. For the three months ended
March 31, 1996, these properties contributed approximately $1.0 million
of revenue and incurred a loss of $0.1 million after deducting related
interest expense. The reduction in the performance is principally due
to the lower occupancy level in 1997 as compared to 1996 existing at
certain centers held for sale.
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<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance at March 31, 1997 was
$5.5 million. Restricted cash, as reported in the financial statements, as of
such date, was $3.9 million. In connection with the Company's $95 million rated
debt securitization, the Company is required to escrow a portion of the loan
proceeds to fund certain environmental and engineering work and to make certain
lease related payments that may be required in connection with the renewal or
termination of certain leases by a tenant at most of the factory outlet centers.
Net cash provided by operating activities was $4.1 million for the three
months ended March 31, 1997. Net cash used in investing activities was $35.7
million for the same period in 1997. The primary use of these funds included:
$32.4 million to acquire the five North Carolina community shopping centers, as
previously described; and $3.2 million in costs related to the completion of a
development project; the completion of 158,000 square feet of expansion
projects; re-tenanting, lease renewal and leasing costs; predevelopment costs;
and normal recurring capital expenditures. Net cash provided by financing
activities was $30.1 million for the three months ended March 31, 1997. The
source of such funds was new borrowing, as described below, net of fees and
other costs related thereto. Funds generated through financing activities were
offset by payments of $0.5 million for scheduled debt principal repayment.
CAPITAL RESOURCES. The Company's management anticipates that cash
generated from operating performance will provide the necessary funds for
operating expenses, interest expense on outstanding indebtedness, dividends and
distributions in accordance with REIT federal income tax requirements and to
fund re-tenanting and lease renewal tenant improvement costs, as well as,
capital expenditures to maintain the quality of its existing centers. The
Company also believes that it has capital and access to capital resources,
including additional borrowings and issuances of debt or equity securities,
sufficient to pursue its strategic plans.
On February 19, 1997, the Company obtained a $150,000,000 credit
facility with Nomura Asset Capital Corporation. The credit facility with Nomura
is secured by 17 of the Company's centers plus an assignment of excess cash flow
from the properties currently secured under the $95 million rated debt
securitization. The credit facility is for a term of two years with a one year
renewal option and bears interest at the rate of one month LIBOR (London
Interbank Offered Rate) plus 2.25%. The proceeds from the credit facility will
be used to fund acquisitions, expansions of existing centers, repay
indebtedness, and fund operating activities, including the repurchase of the
Company's stock. The indebtedness repaid included the $75 million credit
facility, the $7.4 million of Senior Notes and a $2.0 million note payable
incurred in connection with the acquisition of the VF Properties. The new credit
facility contains financial covenants relating to debt to total asset value and
net operating income to debt service coverage.
CAPITAL EXPENDITURES. The Company's capital expenditures have included
expansions of existing centers and acquisitions of new properties.
During 1996 the Company delivered a 288,000 square foot outlet center in
Branson, Missouri and expansions of approximately 158,000 square feet at Story
City, Iowa, Nebraska City, Nebraska, Smithfield, North Carolina, and Tupelo,
Mississippi. The anticipated cost of these projects is $42.5 million of which
$41.7 million has been expended as of March 31, 1997 and has been reclassified
from the properties under development category for financial statement purposes.
The remaining $0.8 million of anticipated costs represent estimated tenant
buildouts and allowances. Additionally, the Company is currently in the
predevelopment and marketing stage for a property located in Lake Carmel, New
York. If appropriate tenant interest is obtained and the appropriate agreements,
permits and approvals are received, the Company intends to commence construction
in 1998.
During 1997, the Company plans to commence construction for expansions
at two existing centers, aggregating approximately 76,000 square feet, with an
estimated cost of $4.8 million.
Management's view of the current state of the shopping center industry
and its future direction is that value-
22
<PAGE>
oriented retail concepts are merging; for example, outlet centers are including
off-price tenants as well as outlet tenants, off-price centers have
manufacturers' outlets, community centers have destination tenants, and other
community centers have outlet or off-price tenants. With this backdrop,
management believes that a diversified shopping center portfolio will provide
an opportunity for growth. As part of the Company's diversification strategy,
a portion of the availability under the Nomura credit facility was used to
purchase five community centers in the Raleigh, NC area on March 27, 1997 for a
total purchase price of $32.3 million. The centers total approximately 606,000
square feet of GLA, are well-located and feature well-known regional tenants.
Management believes that there will be similar opportunities for the
acquisition of community shopping centers in the United States, and in
particular, the southeastern region of the country.
The Company's current acquisition, expansion and development plans are
subject to certain risk and uncertainties; including, but not limited to
economic conditions in the retail industry, future real estate market
conditions; the availability of financing; and the risk associated with the
Company's property development activities, such as the potential for cost
overruns, delays and the lack of predictability with respect to the financial
returns associated with these development activities. There can be no assurance
that the planned development and expansions will occur according to current
schedules or that, once commenced, such development and expansions will be
completed.
Based on current market conditions, the Company believes it will have
access to the capital resources or has adequate financial resources to fund
operating expenses, distributions to stockholders, acquisitions and planned
development and construction activities. The $27.5 million raised through the
private placement with Gildea and Blackacre was used to fund the 1996
developments and expansions, repay certain debt obligations, settle certain
costs incurred in connection with the termination of the OPERS factory outlet
acquisition agreements and provide additional working capital. At March 31,
1997, the $150 million Nomura credit facility had $33 million of unfunded
availability following the retirement of $84.5 million of debt which existed at
December 31, 1996 and the funding of the acquisition of the five community
centers in March 1997. The Company is in the process of reviewing various
financing alternatives for its planned development of the "power" outlet mall
located in Lake Carmel, New York, including a potential joint venture
arrangement.
The Board of Directors determined that the Company
would not pay a fourth quarter dividend for 1996. In addition, the Company
announced that future dividends will be equal to 95% of the Company's taxable
income which is the minimum dividend required to maintain its REIT status.
Determination of any dividends will be made annually following the review of the
Company's year-end financial results. The Company's decision is driven by its
goal to increase the total return to its shareholders through the use of
internal cash flow to "self-fund" some of its growth, such as expansions at
existing centers and strategic acquisitions. The Company also will strive to
reduce its borrowing levels and interest expense.
ECONOMIC CONDITIONS
Inflation has remained relatively low during the past three years with
certain segments of the economy experiencing disinflation, such as, apparel
pricing which has slowed the growth of tenant sales which adversely impact the
Company's revenue due to lower percentage and overage rents on some properties.
Additionally, weakness in the overall retail environment as it relates to tenant
sales volumes may have an impact on the Company's ability to renew leases at
current rental rates or to release space to other tenants. Although the decline
in sales does not affect base rental, aside from renewals, this weakness could
result in reduced revenue from percentage rent tenants, as well as, overage rent
paid to the Company. Both revenue items are directly impacted by sales volumes
and represented 5.4% of the Company's total revenue for the three months ended
March 31, 1997. Continuance of this trend may affect the Company's operating
centers (the "Properties") occupancy rate and the rental rates obtained and
concessions, if any, granted on new leases or re-leases of space, which may
cause fluctuations in the cash flow from the operation and performance of the
Properties. In the event of higher inflation, however, a majority of the
tenants' leases contain provisions designed to protect the Company from the
impact of inflation. Such provisions include clauses enabling the Company to
receive percentage rentals based on tenants' gross sales, which generally
increase as prices rise, and/or escalation clauses, which generally increase
rental rates during the terms of the leases. In addition, many of the leases are
for terms of less than ten years, which may enable the Company to replace
existing leases with new leases at higher base and/or percentage rentals if
rents of the existing leases are below the then-existing market rate.
23
<PAGE>
The majority of the Company's leases, other than those for anchors,
require the tenants to pay a proportionate share of operating expenses,
including marketing, common area maintenance, real estate taxes and insurance,
thereby reducing the Company's exposure to increases in costs and operating
expenses resulting from inflation. The Company's leases with two of its anchor
tenants, VF Factory Outlet and Carolina Pottery, which were executed prior to
June 1993, require the tenants to pay certain operating expenses and increases
in common area maintenance expenses, which reduces the Company's exposure to
increases in costs and operating expenses resulting from inflation. At March 31,
1997, 20% of the aggregate GLA of its centers was leased to non-anchor tenants
under gross leases, pursuant to which the Company is obligated to pay all
utilities and other operating expenses of the applicable center. The Properties
are subject to operating risks common to commercial real estate in general, any
and all of which may adversely affect occupancy or rental rates. The Properties
are subject to increases in operating expenses such as cleaning; electricity;
heating, ventilation and air conditioning; insurance and administrative
costs; and other general costs associated with security, landscaping, repairs
and maintenance. While the Company's tenants generally are currently obligated
to pay a portion of these escalating costs, there can be no assurance that
tenants will agree to pay such costs upon renewal or that new tenants will agree
to pay such costs. If operating expenses increase, the local rental market may
limit the extent to which rents may be increased to meet increased expenses
without decreasing occupancy rates.
Additionally, inflation may have a negative impact on some of the
Company's other operating items. Interest and general and administrative
expenses may be adversely affected by inflation as these specified costs could
increase at a rate higher than rents. Approximately 57% of the Company's debt on
income properties and notes payable as of March 31, 1997 bore interest at rates
that adjust periodically based on market conditions. Also, for tenant leases
with stated rent increases, inflation may have a negative effect as the stated
rent increases in these leases could be lower than the increase in inflation at
any given time.
Substantially all of the Company's existing tenants have met their lease
obligations and the Company continues to attract and retain quality tenants. The
Company intends to reduce operating and leasing risks by continually improving
its tenant mix, rental rates and lease terms by attracting creditworthy national
brand-name manufacturers, upscale, high-fashion manufacturers and new tenants
that offer a wide range of merchandise and amenities not previously offered.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-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. With respect to the Company's
expansion and development activities (including the potential development of a
site at Lake Carmel, New York), such forward looking statements are subject to a
number of risks and uncertainties, including the availability of financing on
favorable terms, the consummation of related property acquisitions, receipt of
zoning, land use, occupancy, government and other approvals, and the timely
completion of construction and leasing activities. With respect to the Company's
acquisition activities (including the North Hills acquisition), such forward
looking statements are subject to risks and uncertainties, including accuracy of
representations made in connection with such acquisitions, continuation of
occupancy levels, changes in economic conditions (including interest rate
levels) and real estate markets.
24
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
On August 25, 1995, the Company executed definitive written agreements
("Agreements") to acquire both the factory outlet centers owned by The Public
Employees Retirement System of Ohio ("OPERS") and the management and business
operations of the Charter Oak Group Ltd., a subsidiary of Rothschild Realty,
Inc., ("RRI"), subject to certain terms and conditions. On December 7, 1995, the
Company reported that RRI had terminated the Agreements and thus, the
acquisitions did not take place.
Subsequent to the termination of the Agreements, RRI for itself and on
behalf of OPERS made a demand for payment with respect to a $5 million
promissory note (the "Note") issued by the Company in connection with its
proposed purchase of the OPERS' centers and the management and business
operations of RRI's Charter Oak Group, Ltd. The Note was payable only upon the
occurrence of certain conditions relating to the termination of the Agreements
and the Company asserted that certain of the required conditions were not met.
After an unsuccessful attempt at mediation of the dispute, RRI filed for binding
arbitration of the matter to settle the dispute. Following the
arbitration hearing held in late April 1997, the Company agreed to pay $2.9
million to RRI on behalf of related entities of OPERS in settlement of all
outstanding issues between the Company and OPERS/RRI relating to the terminated
merger. The settlement is payable in installments with $725,000
payable by May 7, 1997 and $725,000 payable on June 30, September 30 and
December 31, 1997, respectively. The Company previously recorded a charge of
$1.7 million in December 1995 in connection with the termination. The remaining
$1.2 million, plus an estimate for the Company's legal fees, has been
accrued for as of March 31, 1997 and is included in general and
administrative expenses.
On July 19, 1996, a purported class action lawsuit was filed in the
United States District Court for the Eastern District of North Carolina against
the Company, its former chairman and chief executive officer, J. Dixon Fleming,
Jr., and a former president of the Company, David A. Hodson. The complaint seeks
certification of a class consisting of all persons (with certain exclusions) who
purchased common stock of the Company between December 16, 1993 and April 17,
1996, inclusive (the "Class Period"). The complaint alleges that, during the
Class Period, defendants made certain false or misleading statements to the
public concerning (1) earnings and funds from operations; (2) the Company's
ability to maintain dividends at prior levels; (3) the alleged maintenance of
dividends through borrowings rather than funds from operations; (4) the
Company's ability to close a proposed acquisition; (5) the alleged purchase of
certain properties from affiliates of the individual defendants at inflated
prices; and (6) alleged improper accounting practices.
On October 30, 1996, a second purported class action lawsuit was filed
in the United States District Court for the Eastern District of North Carolina
against the Company and Messrs. Fleming and Hodson, containing factual
allegations and legal claims similar to those asserted in the prior purported
class action. The plaintiffs in both actions seek unspecified monetary damages.
The cases have been consolidated and the Company has filed motions to dismiss
both lawsuits, which motions are currently pending.
The Company believes that it and the named officers have substantial
defenses to the plaintiffs' claims and the Company intends to vigorously defend
the actions. However, no assurance can be given as to the ultimate outcome of
the litigation.
In addition, the Company is a party to certain legal proceedings
relating to its ownership, management and leasing of the properties, arising in
the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
25
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On March 10, 1997, the Company filed a Report on Form 8-K reporting that
J. Dixon Fleming, Jr., Chairman of the Board of Directors, resigned from the
Board of Directors of Registrant effective February 20, 1997. In addition, the
Company reported that on February 19, 1997, the Company entered into a $150
million line of credit agreement with Nomura Asset Capital Corporation. The
Nomura line of credit facility replaced the Company's previous $75 million line
of credit.
On April 11, 1997, the Company filed a Report on Form 8-K reporting that
the Company consummated the acquisition of five community centers in and around
Raleigh, North Carolina, from North Hills Properties, Inc. for a total purchase
price of $32.3 million.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FAC REALTY, INC.
Date: May 14, 1997 By /s/ PATRICK M. MINIUTTI
-----------------------
Patrick M. Miniutti, Executive Vice President,
Chief Financial Officer and Director
27
<PAGE>
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