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 September 30, 1997
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 Identification No.)
Incorporation or Organization)
11000 Regency Parkway
Third Floor, East Tower
Cary, North Carolina 27511
(Address of Principal Executive Offices) (Zip Code)
(919) 462-8787
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of September 30, 1997, there were 12,224,229 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
Page No.
--------
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures
<PAGE>
PART I
Item 1. Financial Statements (Unaudited)
Index to Unaudited Financial Statements
Page No.
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 ......................................................... 4
Consolidated Statements of Operations for the three months
ended September 30, 1997 and 1996 ........................................ 5
Consolidated Statements of Operations for the nine months
ended September 30, 1997 and 1996 ........................................ 6
Consolidated Statements of Stockholders' Equity for the
nine months ended September 30, 1997 ..................................... 7
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 ........................................ 8
Notes to Consolidated Financial Statements .................................. 9
3
<PAGE>
FAC REALTY, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited) (Audited)
-------------------------
(in thousands)
<S> <C> <C>
Assets
Income producing properties (Notes 2,3 and 5):
Land $ 81,892 $ 77,011
Buildings and improvements 290,167 259,383
Deferred leasing and other charges 21,071 17,635
-------------------------
393,130 354,029
Accumulated depreciation and amortization (46,764) (36,027)
-------------------------
346,366 318,002
Properties under development 6,332 2,538
Properties held for sale (Note 2) 12,259 11,438
-------------------------
364,957 331,978
Other assets:
Cash and cash equivalents 6,643 7,034
Restricted cash 3,846 3,860
Tenant and other receivables 3,695 5,864
Deferred charges and other assets (Note 4) 9,703 9,876
-------------------------
$ 388,844 $ 358,612
=========================
Liabilities and Stockholders' Equity
Liabilities:
Debt on income properties (Note 5) $ 217,576 $ 173,695
Unsecured senior notes (Note 6) -- 7,420
Other unsecured notes 293 2,542
Capital lease obligations 1,214 826
Accounts payable and other liabilities 6,772 9,537
-------------------------
225,855 194,020
-------------------------
Commitments and contingencies (Note 8)
Stockholders' equity (Note 7):
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, 12,224,229
and 12,100,955 issued and outstanding , respectively 122 121
Additional paid-in capital 215,216 214,827
Accumulated Deficit (3,794) (1,820)
Dividends declared (65,652) (65,652)
Deferred compensation - Restricted Stock Plan (2,065) (2,046)
-------------------------
162,989 164,592
-------------------------
$ 388,844 $ 358,612
=========================
</TABLE>
See accompanying notes.
4
<PAGE>
FAC REALTY, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended September 30,
1997 1996
---------------------
<S> <C> <C>
Rental operations: (in thousands, except per share data)
Revenues:
Base rents $ 9,972 $ 8,741
Percentage rents 127 215
Property operating cost recoveries 3,197 2,862
Other income 318 247
---------------------
13,614 12,065
---------------------
Property operating costs:
Common area maintenance 1,683 1,763
Utilities 400 365
Real estate taxes 1,405 1,297
Insurance 131 215
Marketing 290 225
Other 87 55
---------------------
3,996 3,920
Depreciation and amortization 3,908 3,960
---------------------
7,904 7,880
---------------------
5,710 4,185
---------------------
Other expenses:
General and administrative (Note 9) 1,127 828
Interest 4,254 3,499
---------------------
5,381 4,327
---------------------
Income (loss) before extraordinary item 329 (142)
Extraordinary loss on early extinguishment of debt (Note 4) -- --
---------------------
Net income (loss) $ 329 $ (142)
=====================
Earnings per common share:
Income (loss) before extraordinary item $ 0.03 $ (0.01)
Extraordinary item $ 0.00 --
---------------------
Net income (loss) $ 0.03 $ (0.01)
=====================
Weighted average number of common shares outstanding 11,815 12,034
=====================
</TABLE>
See accompanying notes.
5
<PAGE>
FAC REALTY, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended September 30,
1997 1996
-----------------------
<S> <C> <C>
Rental operations: (in thousands, except per share data)
Revenues:
Base rents $ 28,509 $ 25,656
Percentage rents 380 405
Property operating cost recoveries 9,317 8,483
Other income 805 517
-----------------------
39,011 35,061
-----------------------
Property operating costs:
Common area maintenance 4,832 4,890
Utilities 877 795
Real estate taxes 4,136 3,890
Insurance 407 644
Marketing 843 614
Other 163 175
-----------------------
11,258 11,008
Depreciation and amortization 11,608 10,452
-----------------------
22,866 21,460
-----------------------
16,145 13,601
-----------------------
Other expenses:
General and administrative (Note 9) 5,120 2,788
Interest 12,013 10,534
-----------------------
17,133 13,322
-----------------------
Income (loss) before extraordinary item (988) 279
Extraordinary loss on early extinguishment of debt (Note 4) (986) (103)
-----------------------
Net (loss) income $ (1,974) $ 176
=======================
Earnings per common share:
Income (loss) before extraordinary item $ (0.09) $ 0.02
Extraordinary item $ (0.08) (0.01)
-----------------------
Net (loss) income $ (0.17) $ 0.01
=======================
Weighted average number of common shares outstanding 11,828 11,816
=======================
</TABLE>
See accompanying notes
6
<PAGE>
FAC REALTY, INC.
Consolidated Statements of Stockholders' Equity
Nine Months ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Deferred
Convertible Additional Compensation
Preferred Common Paid in Accumulated Dividend Restricted
Stock Stock Capital Deficit Declared Stock Plan Total
-----------------------------------------------------------------------------------------
(in thousands)
<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 -- -- 45 -- -- -- 45
Issuance of restricted stock awards -- 3 2,345 -- -- (2,348) --
Cancellation of restricted stock awards (2) (1,641) 1,643 --
Repurchase of common stock (360) (360)
Compensation under restricted stock plan -- -- -- -- -- 686 686
Net loss for the period -- -- -- (1,974) -- -- (1,974)
-----------------------------------------------------------------------------------------
Balance at September 30, 1997 $ 19,162 $ 122 $215,216 $(3,794) $(65,652) $(2,065) $ 162,989
=========================================================================================
</TABLE>
See accompanying notes.
7
<PAGE>
FAC REALTY, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
1997 1996
------------------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (1,974) $ 176
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation and amortization 11,608 10,452
Extraordinary loss on early extinguishment of debt 986 103
Amortization of deferred financing costs 1,168 1,093
Compensation under restricted stock plan 686 75
Net changes in:
Tenant and other receivables 2,100 865
Deferred charges and other assets (295) 1,112
Accounts payable and other liabilities (2,696) (8,392)
------------------------
Net cash provided by operating activities 11,583 5,484
------------------------
Cash flows from investing activities:
Investment in income-producing properties (11,895) (13,750)
Acquisition of income-producing properties (32,421) --
Change in restricted cash 14 959
------------------------
Net cash used in investing activities (44,302) (12,791)
------------------------
Cash flows from financing activities
Proceeds from debt on income properties 120,590 5,061
Proceeds from exchangeable notes -- 20,000
Proceeds from other debt -- 4,939
Deferred financing charges (1,877) (2,289)
Net debt (repayments) / borrowings (86,070) 586
Net proceeds from sale of common stock 45 14
Repurchase of common stock (360) --
Distributions to stockholders -- (12,040)
------------------------
Net cash provided by financing activities 32,328 16,271
------------------------
Net (decrease) increase in cash and cash equivalents (391) 8,964
Cash and cash equivalents at beginning of period 7,034 1,655
------------------------
Cash and cash equivalents at end of period $ 6,643 $ 10,619
========================
Supplemental disclosures of cash flow information
Cash paid during the period for interest (net of interest
capitalized of $1,224 and $1,570) $ 10,969 $ 9,488
========================
</TABLE>
See accompanying notes.
8
<PAGE>
FAC REALTY, INC.
Notes to Consolidated Financial Statements
September 30, 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 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) 33 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 outlet centers held for sale
aggregating approximately 150,000 square feet; (4) one former outlet center
which has been converted to commercial office use with approximately 150,000
square feet that is held for sale; and (5) approximately 156 acres of outparcel
land located near or adjacent to certain of the Company's centers and are being
marketed for lease or sale.
As the owner of real estate, the Company is subject to risks arising in
connection with the underlying real estate, including defaults under or
non-renewal of tenant leases, competition, inability to rent unleased space,
failure to generate sufficient income to meet operating expenses, as well as
debt service, capital expenditures and tenant improvements, environmental
matters, financing availability and changes in real estate and zoning laws. The
success of the Company also depends upon certain key personnel, the Company's
ability to maintain its qualification as a REIT, compliance with the terms and
conditions of the debt on its income properties and other debt instruments, and
trends in the national and local economy, including income tax laws,
governmental regulations and legislation and population trends.
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 in May 1995 in connection with a $95 million securitized debt offering
(see Note 5). As of September 30, 1997, the consolidated financial statements
also include the accounts of FAC Eastgate, Inc., a wholly owned subsidiary
formed in March 1997 to hold one of the community centers. All significant
intercompany balances have been eliminated in consolidation.
9
<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 and nine month periods ended
September 30, 1997 are not necessarily indicative of results that may be
expected for a full fiscal year. For further information, refer to the audited
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 and tenant
improvement expenditures, interest incurred during construction, certain
capitalized improvements and replacements and certain allocated overhead.
Allocated overhead is computed primarily on the basis of time spent by certain
departments in various operations and represents direct costs of the development
and construction departments 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 of approximately 30 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.
10
<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 $6.3 million and $2.5 million at
September 30, 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 Long-Lived 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 September 30, 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 $0.3 million and $0.5 million for the three month
periods ended September 30, 1997 and 1996, respectively. Total interest
capitalized for the nine month periods ending September 30, 1997 and 1996 was
$1.2 million and $1.6 million, 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 outlet centers. Such holdback amounts were
approximately $3.8 and $3.9 million at September 30, 1997 and December 31, 1996,
respectively.
11
<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 September 30, 1997 and 1996 of
11,815,000 and 12,034,000, respectively, which exclude unvested restricted
shares. For the nine month periods ended September 30, 1997 and 1996, the
weighted average number of shares outstanding were 11,828,000 and 11,957,000,
respectively. Under the 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 for the nine months ended September 30, 1997.
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.
12
<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 nine month period ended September 30, 1997.
Reclassifications
Certain 1996 financial statement amounts have been reclassified to conform with
1997 classifications. These reclassifications had no effect on net income (loss)
or total stockholders' equity as previously reported.
3. Acquisition and Development
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 nine months ended September 30, 1997 and 1996 are set forth below which
assume the acquisition of the five properties aggregating approximately 606,000
square feet of retail and office space had been completed as of January 1, 1996.
The pro forma condensed statements of operations are not necessarily indicative
of what actual results of operations of the Company would have been assuming
such transaction had been completed as of January 1, 1996, nor do they purport
to represent results of operations of future periods (in thousands, except for
per share data).
<TABLE>
<CAPTION>
Pro forma nine months ended
September 30, 1997 September 30, 1996
--------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Revenues $ 40,304 $ 38,938
Property operating costs 11,594 12,015
Depreciation and amortization 11,810 11,058
General and administrative 5,145 2,863
Interest 12,639 12,412
--------------------------------------------------------------------
Income (loss) before extraordinary item $ (884) $ 590
====================================================================
Net income (loss) per common share $ (0.07) $ 0.05
====================================================================
</TABLE>
13
<PAGE>
FAC REALTY, INC.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. Acquisition and Development (continued)
On October 7, 1997, the Company entered into an agreement to purchase ten
shopping centers located in North Carolina and Virginia, totaling 1.2 million
square feet, and to assume third party management of an additional 1.0 million
square feet of community shopping centers. The centers to be purchased are owned
primarily by Roy O. Rodwell, Chairman and Co-Founder of Atlantic Real Estate
Corporation ("ARC"), a privately held real estate development company based in
Durham, North Carolina and John M. Kane, Chairman of Kane Realty Corporation, a
real estate development and brokerage company based in Raleigh, North Carolina,
in a transaction valued at $72.1 million. The purchase of two of the shopping
centers is subject to the final approval of partnerships either under the
control of Mr. Rodwell or Mr. Kane as managing partners.
In exchange for their equity ownership interests in the community centers, Mr.
Rodwell, Mr. Kane and related parties will receive 1.68 million share-equivalent
partnership units in a newly created partnership between the Company and the
sellers. The number of partnership units to be issued to the sellers was based
on a $9.50 price per share of the Company's Common Stock. Of the units to be
issued, 391,067 will remain unissued until the completion of certain performance
requirements. As part of the purchase price, the Company will also assume
approximately $56.1 million of fixed rate debt on the properties to be acquired.
On September 22, 1997, the Company and ARC jointly created a limited liability
company named Atlantic Realty LLC to develop and manage retail community and
neighborhood shopping centers in North Carolina. The Company and ARC will own
Atlantic Realty LLC equally, with the Company serving as managing member
overseeing its operations. Atlantic Realty LLC currently has plans to develop
nearly one million square feet, including outparcels, over the next several
years.
The acquisition and development of the above properties are subject to, among
other things, completion of due diligence and various contingencies, including
those inherent in development projects, such as zoning, leasing and financing.
There can be no assurance that all of the above transactions will be
consummated.
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.
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.
14
<PAGE>
FAC REALTY, INC.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
5. Debt on Income Properties
Debt on income properties consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 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 $ 54,825 $ 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 six monthly principal and
interest payments of approximately $59 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 5,736 5,788
Credit facility with a financial institution, $75,000 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, $127,000 available as of
September 30, 1997, interest at a rate of LIBOR plus 2.25% 120,015 --
-----------------------------
$217,576 $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
21 of the Company's centers plus an assignment of excess cash flow from the
properties currently secured under the $95 million rated debt securitization.
The credit facility is for a term of 2 years with a 1 year renewal option and
bears interest at the rate of 1 month LIBOR (London Interbank Offered Rate) plus
2.25%. The proceeds from the credit facility will be used to fund acquisitions,
expansions of existing centers, repay indebtedness, and fund operating
activities, including the repurchase of the Company's stock. The indebtedness
repaid included $75,000,000 of debt on income properties, $7,420,000 of
unsecured senior notes and $2,016,000 of other unsecured notes outstanding at
December 31, 1996. The new credit facility contains financial covenants relating
to debt to total asset value and net operating income to debt service coverage.
15
<PAGE>
FAC REALTY, INC.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
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 has been
amortized to interest expense over the term of the notes. In March 1997, the
Company repaid the Senior Notes at their face amounts.
16
<PAGE>
FAC REALTY, INC.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
6. Convertible Preferred Stock and Unsecured Senior Notes (continued)
In connection with the issuance of the Exchangeable Notes and the initial $5
million of Senior Notes, on April 3, 1996 the Company issued the holder
detachable warrants for the purchase of 200,000 shares of Common Stock of the
Company. Each warrant entitles the holder, subject to certain conditions, to
purchase on or before April 3, 2003 one share of Common Stock of the Company at
a price equal to $9.50 per share, subject to adjustment under certain
conditions. The warrants were valued at an aggregate value of $6,000 at the
issuance date. The $2.5 million of Senior Notes have detachable warrants for the
purchase of 100,000 shares of Common Stock of the Company that were issued with
terms and conditions similar to the existing Senior Notes, except that each
warrant entitles the holder to purchase one share of Common Stock at a price
equal to $8.375 per share. These warrants were valued at an aggregate value of
$3,000 at the issuance date.
7. Employee Stock Option Plan
The Company established an employee Stock Incentive Plan (the "Stock Incentive
Plan") in 1993 for the purpose of attracting and retaining the Company's
executive officers and other employees. A maximum of 1,100,000 shares of common
stock is reserved for issuance under the Stock Incentive Plan. The Stock
Incentive Plan allows for the grant of "incentive" and "nonqualified" options
(within the meaning of the Internal Revenue Code) that are exercisable at a
price no less than the closing price of the Common Stock on the New York Stock
Exchange on the trading day immediately preceding the date of grant.
The options generally become exercisable on a pro rata basis over a period of
four to five years from the grant date. As of September 30, 1997 and December
31, 1996, options outstanding were 1,046,463 and 1,047,500 shares, respectively,
of which 530,451 shares and 512,820 shares, respectively, were exercisable. As
of September 30, 1997, no stock options had been exercised.
17
<PAGE>
FAC REALTY, INC.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
8. Commitments and Contingencies
On July 19 and October 30, 1996, two purported class action lawsuits were filed
in the United States District Court for the Eastern District of North Carolina
against the Company, its former chairman and chief executive officer, J. Dixon
Fleming, Jr., and a former president of the Company, David A. Hodson. The
complaints sought certification of a class consisting of all persons (with
certain exclusions) who purchased common stock of the Company between December
16, 1993 and April 17, 1996, inclusive (the "Class Period"). The complaints
alleged that, during the Class Period, defendants made certain false or
misleading statements to the public concerning (1) earnings and funds from
operations; (2) the Company's ability to maintain dividends at prior levels; (3)
the alleged maintenance of dividends through borrowings rather than funds from
operations; (4) the Company's ability to close a proposed acquisition; (5) the
alleged purchase of certain properties from affiliates of the individual
defendants at inflated prices; and (6) alleged improper accounting practices.
The cases were consolidated and the Company filed motions to dismiss both
lawsuits.
On November 5, 1997, the court granted the motions to dismiss and entered
judgment for defendants. The time for plaintiffs to seek reconsideration or to
file appeals has not yet run. The Company believes that dismissal of the case
was appropriate and that it and the named former officers have substantial
defenses to the plaintiffs' claims, and the Company will continue to vigorously
defend the actions in the event that plaintiffs seek reconsideration or file
appeals.
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.
9. 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. Subsequent to September 30,
1997, the Company sold to Mr. Fleming the 19 acre land tract for the sum of
$750,000 which substantially satisfied the asset valuation issues.
18
<PAGE>
FAC REALTY, INC.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
10. 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, secured by a deed of trust on
a community center, is payable in installments with $2,175,000 paid through
September 30, 1997 the remaining $725,000 is payable on December 31, 1997. The
Company previously recorded a charge of $1.7 million in December 1995 in
connection with the termination. The remaining $1.2 million of the $2.9 million,
plus an estimate for the Company's legal fees, has been accrued for as of
September 30, 1997 and is included in general and administrative expenses.
11. 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.
19
<PAGE>
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 September 30, 1997,
the Company operated 41 shopping centers with 5,504,000 square feet of Gross
Leasable Area ("GLA") in 21 states, compared to 36 centers with 4,757,000 square
feet of GLA at September 30, 1996. Weighted average square feet of GLA for the
nine months ended September 30, 1997 and 1996 were 5,286,000 and 4,617,000
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 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 137,000 square feet of expansion
space to tenants in Mesa, Arizona, Draper, Utah and 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 approximately 606,000 square feet and feature anchor tenants such as Winn
Dixie, Food Lion, K-Mart and Eckerd Drug. In September 1997, the Company
completed construction of a 32,000-square foot expansion at its Crossville,
Tennessee outlet center. In addition, during 1997, the Company began
construction on a 44,000-square foot Winn Dixie at its Wilson, North Carolina
center. Additionally, the Company is 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
20
<PAGE>
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. At September 30, 1997,
the Company had 5,504,000 square feet of GLA, an increase of 16% as compared to
4,757,000 square feet of GLA at September 30, 1996.
At September 30, 1997, the Company had approximately 156 acres of
outparcels located near or adjacent to certain centers, which are being marketed
for sale or as ground leases. As outparcels are sold and cash received, these
revenues are available for reinvestment.
Pending acquisition and development activities are discussed below at
"Recent Developments".
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 September 30,
1997, approximately 22 % of the leased GLA of the Company's centers is leased to
tenants who are not obligated to reimburse the Company for real estate taxes,
insurance, utilities and common area maintenance expenses. In such instances,
the Company has allocated a portion of the base rent or percentage rent to
expense recoveries and utility expense.
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 is defined as 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 its
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.
"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.
21
<PAGE>
FFO and EBITDA (i) do not represent cash flow from operations as
defined by generally accepted accounting principles, (ii) are not necessarily
indicative of cash available to fund all cash flow needs and (iii) should not be
considered as an alternative to net income for purposes of evaluating the
Company's operating performance or as an alternative to cash flow as a measure
of liquidity.
Other data that management believes is important in understanding
trends in its business and properties are also included in the following table
(in thousands, except per share data).
<TABLE>
<CAPTION>
FAC Realty, Inc. FAC Realty, Inc.
Three months ended Nine months ended
September 30, September 30,
------------------------------------------------------
1997 1996 1997 1996
------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Data:
Rental revenues $ 13,614 $ 12,065 $ 39,011 $ 35,061
Property operating costs 3,996 3,920 11,258 11,008
------------------------------------------------------
9,618 8,145 27,753 24,053
Depreciation and amortization 3,908 3,960 11,608 10,452
General and administrative 1,127 828 5,120 2,788
Interest 4,254 3,499 12,013 10,534
Extraordinary loss on early extinguishment of debt 0 0 986 103
------------------------------------------------------
Net (loss) income $ 329 ($ 142) $ (1,974) $ 176
======================================================
Per common share data:
Income (loss) before extraordinary item $ 0.03 (0.01) $ (0.09) $ 0.02
Extraordinary item 0.00 0.00 (0.08) (0.01)
------------------------------------------------------
Net (loss) income $ 0.03 (0.01) $ (0.17) $ 0.01
======================================================
Weighted average common share outstanding 11,815 12,034 11,828 11,957
======================================================
Other Data:
EBITDA $ 8,703 $ 7,392 $ 24,714 $ 21,340
======================================================
Funds From Operations (FFO):
Net (loss) income $ 329 ($ 142) $ (1,974) $ 176
Adjustments:
Straight line rent (215) -- (448) --
Depreciation and amortization 3,789 3,890 11,328 10,247
Compensation under stock awards 212 75 731 75
(Gain)/loss on sale of real estate (25) (37) 10 (37)
Interest on Exchangeable Notes -- 91 -- 553
Unusual items:
Non-recurring administrative costs -- -- 100 --
Merger termination costs -- -- 1,250 --
Extraordinary loss on early extinguishment of debt -- -- 986 103
------------------------------------------------------
Funds From Operations (FFO): $ 4,090 $ 3,877 $ 11,983 $ 11,117
======================================================
Funds From Operations per share - assuming full dilution
$ 0.29 $ 0.27 $ 0.85 $ 0.83
======================================================
Weighted average shares outstanding - fully diluted 14,037 14,256 14,050 13,425
======================================================
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
FAC Realty, Inc. FAC Realty, Inc.
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
---------------------------------------------------
<S> <C> <C> <C> <C>
Funds available for Distribution / Reinvestment
Funds From Operations $ 4,090 $ 3,877 $ 11,983 $ 11,117
Adjustments:
Non-recurring administrative costs -- -- (100) --
Merger termination costs -- -- (1,250) --
Capitalized tenant allowances (274) (38) (1,127) (133)
Capitalized leasing costs (221) (112) (824) (384)
Recurring capital expenditures (166) (19) (531) (172)
---------------------------------------------------
Funds available for Distribution / Reinvestment $ 3,429 $ 3,708 $ 8,151 $ 10,428
===================================================
Funds available for Distribution / Reinvestment
per share $ 0.24 $ 0.26 $ 0.58 $ 0.78
---------------------------------------------------
Dividends declared on earnings $ 0.00 $ 3,387 $ 0.00 $ 9,955
---------------------------------------------------
Dividends declared on earnings per share $ 0.00 $ 0.25 $ 0.00 $ 0.75
---------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FAC Realty, Inc.
September 30,
1997 1996
----------------------------
Balance Sheet Data:
<S> <C> <C>
Income-producing properties (before
accumulated depreciation and amortization) $ 411,721 $ 351,679
----------------------------
Total Assets 388,844 365,620
============================
Debt on income properties 217,576 176,691
----------------------------
Total liabilities 225,855 191,701
============================
----------------------------
Total stockholders' equity 162,989 154,742
============================
Portfolio Property Data:
Total GLA (at end of period) 5,504 4,757
Weighted average GLA 5,286 4,617
Number of properties (at end of period) 41 36
Occupancy (at end of period)
Operating 93.3% 91.5%
Development 79.1% 64.9%
Held for sale 52.8% 50.2%
</TABLE>
23
<PAGE>
Results of Operations
Nine months Ended September 30, 1997 compared to the Nine months Ended September
30, 1996.
The Company reported a net loss of $2.0 million, or $0.17 per common
share, for the nine months ended September 30, 1997 compared to a net income of
$0.2 million, or $0.01 per common share, for the comparable period in 1996. The
loss for 1997 resulted primarily from four factors: (a) an increase in
depreciation and amortization of $1.2 million as described below; (b) an
increase in general and administrative expenses of $2.3 million inclusive of a
non-recurring charge of $1.3 million for the settlement of the arbitration with
the Public Employees Retirement System of Ohio (OPERS); (c) increased interest
expense of $1.5 million, as a result of higher borrowing levels; and (d) the
Company incurred an extraordinary loss on the early extinguishment of debt of
$1.0 million. These amounts were offset by increases in NOI of $3.7 million as
described below.
FFO for the nine months ended September 30, 1997 was $12.0 million, or
$0.85 per share. This compares to $11.1 million, or $0.83 per share, for the
same period in 1996. The factor that had a positive impact on 1997 FFO was an
increase in NOI of $3.3 million before the adjustment for straight line rent, or
$0.23 per share, as described below. Factors that had a negative impact on 1997
FFO were: (a) $2.0 million, or $0.14 per share, in higher interest expense due
to a higher average borrowing level, exclusive of interest on exchangeable
notes, and (b) $0.3 million, or $0.03 per share, in increased general and
administrative expenses, exclusive of compensation under restricted stock awards
and non-recurring administrative and merger termination costs, described below.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
were $24.7 million for the nine months ended September 30, 1997, an increase of
$3.4 million or 16%, from $21.3 million for the same period in 1996. The
increase was due to the increase in NOI of $3.7 million, including adjustment
for straight line rent, offset by the increase of $0.3 million in the general
and administrative expenses from 1996 exclusive of compensation under restricted
stock awards and non-recurring administrative and merger termination costs, also
described below.
Base rent increased to $28.5 million for the nine months ended September
30, 1997 from $25.7 million for the same period in 1996. Base rent before the
adjustment for straight line rent increased $2.4 million or 9% to $28.1 million
for the nine months ended September 30, 1997 when compared to 1996, while the
Company's weighted average square feet of GLA in operation increased 14.5%. The
increase in base rents resulted from increased GLA in operation and from
increased occupancy at the operating and development centers and was offset by
declining rents on renewals at certain properties. Base rental revenue in each
of the nine months ended September 30, 1997 and 1996 included a charge to the
reserve for uncollectible tenant accounts of $0.4 million.
Percentage rent remained unchanged at $0.4 million for the nine months
ended September 30, 1997 consistent with 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.
Recoveries from tenants, representing contractual reimbursements from
tenants of certain common area maintenance, utilities, taxes, insurance and
marketing cost, increased in the nine months ended September 30, 1997 to $9.3
million from $8.5 million in the same period in 1996. On a weighted average
square-foot basis, recoveries from tenants decreased 4% to $1.76 in 1997 from
$1.84 in 1996. The average recovery of property operating expenses for the nine
month period ended September 30, 1997 increased to 83% from 77% for the same
period in 1996. With respect to approximately 22% of the leased GLA, the Company
is obligated to pay all utilities and operating expenses of the applicable
center.
Total tenant retail sales at the Company's outlet centers increased 2.4%
for the nine months ended September 30, 1997 compared to the same period in
1996. Tenant sales on a comparative store basis increased approximately 1.0% in
1997 compared to 1996.
Other income increased $0.3 million to $0.8 million in 1997 compared to
$0.5 million in 1996 primarily as a result of increased tenant lease buyouts.
Operating expenses increased $0.3 million, or 2%, to $11.3 million in
1997 from $11.0 million in 1996. The increase in operating expenses was
principally due to the increase in the weighted average square feet in operation
in 1997, which rose 14% from 4.6 million square feet in 1996 to 5.3 million
square feet in 1997. On a weighted average
24
<PAGE>
square-foot basis, operating expenses decreased 11% from $2.38 in 1996 to $2.13
in 1997.
General and administrative expenses for the nine months ended September
30, 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), $0.1 million in other
non-recurring charges and $0.7 million in compensation under restricted stock
awards. Exclusive of these charges, general and administrative expense increased
$0.3 million, or 11% to $3.0 million in 1997 from $2.7 million in 1996. The
increase was primarily attributable to the increase in weighted average GLA and
to the increased staffing during the period necessary to carry out the strategic
growth plans of the Company.
Depreciation increased $1.2 million in 1997 primarily as a result of the
completion in 1996 of the center in Branson, Missouri, the expansions of the
Company's properties in Story City, Iowa, Nebraska City, Nebraska, Smithfield,
North Carolina and Tupelo, Mississippi, and the acquisition in March 1997 of the
five community shopping centers. Amortization of deferred leasing and other
charges increased $0.1 million in 1997 primarily as a result of increased tenant
improvements. On a weighted average square-foot basis, depreciation and
amortization of income-producing properties decreased 4% to $2.14 in 1997 from
$2.22 in 1996 due primarily to the $5 million adjustment in carrying value of
one income-producing property in the fourth quarter of 1996.
Interest expense for the nine months ended September 30, 1997, net of
interest income of $0.4 million, increased by $1.5 million or 14%, to $12.0
million compared to $10.5 million, net of interest income of $0.5 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 $206.8 million and 8.0%, respectively, in 1997 compared
to $179.2 million and 8.2%, respectively, in 1996. Amortization of deferred
financing cost amounted to $1.2 million in 1997 and $1.0 million in 1996. The
Company capitalized interest cost associated with its development projects of
$1.2 million in 1997 and $1.6 million in 1996. Associated with the early
extinguishment of debt, the Company expensed the related unamortized loan costs
of $1.0 million in 1997 as compared to $0.1 million in 1996, which have 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 the fourth quarter of 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 September 30, 1997 is $12.2
million. There is also $12.3 million of debt secured by the properties which is
expected to be retired primarily from the sale proceeds. For the nine months
ended September 30, 1997, these properties contributed approximately 0.9 million
of revenue and incurred a loss of $0.8 million after deducting related interest
expense on the debt associated with the properties. For the nine months ended
September 30, 1996, these properties contributed approximately $1.8 million of
revenue and incurred a loss of $0.7 million after deducting related interest
expense. The reduction in the performance is principally due to the lower
average occupancy level in 1997 as compared to 1996 existing at certain centers
held for sale.
The Company has begun the process of marketing these properties and no
sales agreements have been completed to date. Management plans to evaluate all
properties on a regular basis in accordance with its strategy for growth and in
the future may identify other properties for disposition or may decide to defer
the pending disposition of those assets now held for sale.
Three Months Ended September 30, 1997 compared to the Three Months Ended
September 30, 1996.
The Company reported a net income of $0.3 million, or $0.03 per common
share, for the three months ended September 30, 1997 compared to a net loss of
$0.1 million or $0.01 per common share, for the comparable period in 1996. The
gain for 1997 resulted primarily from $1.5 million in increased NOI offset by:
(a) an increase in general and administrative expenses of $0.3 million as
described below; and (b) increased interest expense of $0.8 million as a result
of higher borrowing.
25
<PAGE>
FFO for the three months ended September 30, 1997 was $4.1 million, or
$0.29 per share. This compares to $4.0 million, or $0.27 per share, for the same
period in 1996. The factor that had a positive impact on 1997 FFO was $1.5
million, or $0.13 per share, in increased NOI as described below. Factors that
had a negative impact on 1997 FFO were: (a) $0.2 million, or $0.01 per share, in
increased general and administrative expenses from 1996, exclusive of
compensation under restricted stock awards of $0.2 million for the quarter ended
September 30, 1997 and 0.1 for the same period in 1996, and (b) $0.8 million, or
$0.06 per share, in higher interest expense.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
were $8.7 million for the three months ended September 30, 1997, an increase of
$1.3 million or 18 %, from $7.4 million for the same period in 1996. The
increase was due to increased NOI of $1.5 million over 1996, offset by an
increase of $0.3 million in general and administrative expenses in 1997.
Base rent increased to $10.0 million for the three months ended September
30, 1997 from $8.7 million for the same period in 1996. Base rent before the
adjustment for straight line rent increased $0.8 million or 9% to $9.8 million
for the three months ended September 30, 1997 when compared to 1996, while the
Company's weighted average square feet of GLA in operation increased 16%. The
increase in base rents resulted from increased GLA in operation and from
increased occupancy at the operating and development centers, which 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 decreased $0.1 million for the three months ended
September 30, 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.
Recoveries from tenants, representing contractual reimbursements from
tenants of certain common area maintenance, utilities, taxes, insurance and
marketing costs, increased for the three months ended September 30, 1997 to $3.2
million compared to $2.9 million in 1996. On a weighted average square-foot
basis, recoveries from tenants decreased 3% to $0.58 for the three months ended
September 30, 1997 when compared to $0.61 for the same period in 1996. The
average recovery of property operating expenses increased from 73% in 1996 to
80% in 1997. With respect to approximately 22% of the leased GLA, the Company is
obligated to pay all utilities and operating expenses of the applicable center.
Total tenant retail sales at the Company's outlet centers increased 1.3%
for the three months ended September 30, 1997 compared to the same period in
1996. Tenant sales on a comparative store basis increased approximately 1.3% in
1997 compared to 1996. A significant portion of the increase is attributable to
the increase in the weighted average GLA of outlet centers in operation for 1997
as compared to 1996.
Other income increased $0.1 million to $0.3 million in 1997 compared to
$0.2 million in 1996 primarily as a result of increased tenant lease buyouts.
Operating expenses increased $0.1 million, or 3%, to $4.0 million in
1997 from $3.9 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 17% from 4.7 million square feet in 1996 to 5.5 million
square feet in 1997. On a weighted average square-foot basis, operating
expenses, decreased from $0.83 in 1996 to $0.73 in 1997.
General and administrative expenses for the three months ended September
30, 1997 increased $0.1 million, or 22% to $1.1 million in 1997 from $0.9
million in 1996, exclusive of compensation under restricted stock of $0.2 and
$0.1 for the quarters ended September 30, 1997 and 1996, respectively. The
increase was primarily attributable to the increase in weighted average GLA and
to the increased staffing during the period necessary to carry out the strategic
growth plans of the Company.
Depreciation decreased $0.1 million in 1997 over 1996 due primarily to
the $5 million adjustment in carrying value of one income-producing property in
the fourth quarter of 1996. Amortization of deferred leasing and other charges
remained unchanged at $0.4 million for the three months ended September 30, 1997
and 1996. On a weighted average square-foot basis, depreciation and amortization
of income-producing properties decreased from $0.84 in 1996 to $0.71 in 1997.
26
<PAGE>
Interest expense for the three months ended September 30, 1997, net of
interest income of $0.1 million, increased by $0.8 million or 23%, to $4.3
million compared to $3.5 million, net of interest income of $0.3 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 $216.5 million and 7.9%, respectively, in 1997 compared
to $182.7 million and 8.3%, respectively, in 1996. Amortization of deferred
financing cost amounted to $0.4 million in 1997 as compared to the same amount
in 1996. The Company capitalized interest costs associated with its development
projects of $0.3 million in 1997 and $0.5 million in 1996.
For the three months ended September 30, 1997, the properties held for
sale contributed approximately $0.3 million of revenue and incurred a loss of
$0.2 million after deducting related interest expense on the debt associated
with the properties. For the three months ended September 30, 1996, these
properties contributed approximately $0.5 million of revenue and incurred a loss
of $0.3 million after deducting related interest expense. The reduction in
revenue is principally due to the lower average occupancy level in 1997 as
compared to 1996 existing at certain centers held for sale, while the reduction
in net loss in 1997 as compared to 1996 is principally due to lower depreciation
in 1997 resulting from prior asset valuation adjustments.
Liquidity and Capital Resources
The Company's cash and cash equivalents balance at September 30, 1997
was $6.6 million. Restricted cash, as reported in the financial statements, as
of such date, was $3.8 million. In connection with the Company's $95 million
rated debt securitization, the Company was 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 $11.6 million for the nine
months ended September 30, 1997. Net cash used in investing activities was $44.7
million for the same period in 1997. The primary use of these funds included:
$32.3 million to acquire the five North Carolina community shopping centers, as
previously described; $0.4 million to repurchase the Company's stock; and $7.7
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 $32.7 million for
the nine months ended September 30, 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 debt repayments of
$86.1 million.
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. At September 30, 1997, the $150
million Nomura credit facility had $30 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 proceeds from the credit facility will be used to fund acquisitions
and expansions of existing centers. The 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 cost of these projects was approximately $42.5 million, all of
which has been expended as of September 30, 1997 and has been reclassified from
the properties under development category for financial statement purposes.
27
<PAGE>
In September 1997, the Company completed construction on a 32,000-square
foot expansion at its Crossville, Tennessee center. The Company began
construction on an expansion at its Wilson, North Carolina center, consisting of
a 44,000 square-foot Winn Dixie. The cost of this project is estimated at $2.5
million, of which $0.8 million has been expended as of June 1997. 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. No assurance can be given,
however, that the project will be developed and/or completed.
Management's view of the current state of the shopping center industry
and its future direction is that value-oriented retail concepts are merging. For
example, outlet centers are including off-price tenants as well as outlet
tenants, off-price centers have manufacturers' outlets, and community centers
have destination tenants and/or 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.
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, acquisitions and planned development and construction
activities. At September 30, 1997, the $150 million Nomura credit facility had
$30 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 potential joint
venture arrangements.
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 and adversely affected 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 a decline in
sales does not affect base rental, aside from renewals, such 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% of the Company's total revenue for the nine months ended
September 30, 1997. Continuance of a decline in sales may affect the Company's
operating centers' 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
operating centers. In the event of higher inflation, however, a majority of the
tenants' leases contain provisions designed to protect the Company from the
impact of inflation. Such provisions include clauses enabling the Company to
receive percentage rentals based on tenants' gross sales, which generally
increase as prices rise, and/or escalation clauses, which generally increase
rental rates during the terms of the leases. In addition, many of the leases are
for terms of less than ten years, which may enable the Company to replace
existing leases with new leases at higher base and/or percentage rentals if
rents of the existing leases are below the then-existing market rate.
The majority of the Company's leases, other than those for anchors,
require the tenants to pay a proportionate share of operating expenses,
including marketing, common area maintenance, real estate taxes and insurance,
thereby reducing the Company's exposure to increases in costs and operating
expenses resulting from inflation. The Company's leases with two of its anchor
tenants, VF Factory Outlet and Carolina Pottery, which were executed prior to
June 1993, also require the tenants to pay certain operating expenses and
increases in common area maintenance expenses. At
28
<PAGE>
September 30, 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 operating centers (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 55% of the Company's debt on
income properties and notes payable as of June 30, 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.
Recent Developments
On October 7, 1997, the Company entered into an agreement to purchase
ten shopping centers located in North Carolina and Virginia, totaling 1.2
million square feet, and to assume third party management of an additional 1.0
million square feet of community shopping centers. The centers to be purchased
are owned primarily by Roy O. Rodwell, Chairman and Co-Founder of Atlantic Real
Estate Corporation ("ARC"), a privately held real estate development company
based in Durham, North Carolina and John M. Kane, Chairman of Kane Realty
Corporation, a real estate development and brokerage company based in Raleigh,
North Carolina, in a transaction valued at $72.1 million. The purchase of two of
the shopping centers is subject to the final approval of partnerships either
under the control of Mr. Rodwell or Mr. Kane as managing partners.
In exchange for their equity ownership interests in the community
centers, Mr. Rodwell, Mr. Kane and related parties will receive 1.68 million
share-equivalent partnership units in a newly created partnership between the
Company and the sellers. The number of partnership units to be issued to the
sellers was based on a $9.50 price per share of the Company's Common Stock. Of
the units to be issued, 391,067 will remain unissued until the completion of
certain performance requirements. As part of the purchase price, the Company
will also assume approximately $56.1 million of fixed rate debt on the
properties to be acquired.
On September 22, 1997, the Company and ARC jointly created a limited
liability company named Atlantic Realty LLC to develop and manage retail
community and neighborhood shopping centers in North Carolina. The Company and
ARC will own Atlantic Realty LLC equally, with the Company serving as managing
member overseeing its operations. Atlantic Realty LLC currently has plans to
develop nearly one million square feet, including outparcels, over the next
several years.
The acquisition and development of the above properties are subject to,
among other things, completion of due diligence and various contingencies,
including those inherent in development projects, such as zoning, leasing and
financing. There can be no assurance that all of the above transactions will be
consummated.
On December 15, 1997, the Company's stockholders will vote on a proposal
to reincorporate the Company from Delaware to Maryland. Thereafter, the Company
intends to convert to an UPREIT. An UPREIT is a real estate investment trust
that holds substantially all of its assets through a partnership (the "Operating
Partnership") in which the REIT is the general partner. Initially, the Company
would indirectly own all of the interests in the Operating Partnership. If the
shareholders approve the proposal, the reincorporation and the UPREIT conversion
are expected to
29
<PAGE>
reduce the Company's annual state franchise tax obligations by approximately
$338,000 annually commencing with the 1998 taxable year, provided such states do
not alter their current tax laws. Although difficult to estimate, the one-time
cost of the transaction is expected to be approximately $200,000, consisting
primarily of the payment of state transfer taxes and related legal fees. In
addition, the UPREIT structure may enable the Company to acquire properties on a
tax-deferred basis for certain sellers, which may improve the Company's ability
to acquire properties on favorable economic terms. See "--Forward-Looking
Statements" below.
No assurances can be made that the stockholders will approve the
proposal or, if approved, that the UPREIT conversion would lead to improved
acquisition opportunities. Moreover, the UPREIT conversion may require certain
third-party consents, which may not be obtained. The Company's stockholders are
encouraged to review the Company's proxy statement, which was mailed to
shareholders of record on November 7, 1997, for more information about the
proposal.
Forward-Looking Statements
Certain statements in this Form 10-Q, 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, 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.
30
<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, secured by a deed of trust on a community center, is payable in
installments with $2,175,00 paid through September 30, 1997, the remaining
$725,000 is payable on December 31, 1997. The Company previously recorded a
charge of $1.7 million in December 1995 in connection with the termination. The
remaining $1.2 million of the $2.9 million, plus an estimate for the Company's
legal fees, has been accrued for as of September 30, 1997 and is included in
general and administrative expenses.
On July 19 and October 30, 1996, two purported class action lawsuits
were filed in the United States District Court for the Eastern District of North
Carolina against the Company, its former chairman and chief executive officer,
J. Dixon Fleming, Jr., and a former president of the Company, David A. Hodson.
The complaints sought certification of a class consisting of all persons (with
certain exclusions) who purchased common stock of the Company between December
16, 1993 and April 17, 1996, inclusive (the "Class Period"). The complaints
alleged that, during the Class Period, defendants made certain false or
misleading statements to the public concerning (1) earnings and funds from
operations; (2) the Company's ability to maintain dividends at prior levels; (3)
the alleged maintenance of dividends through borrowings rather than funds from
operations; (4) the Company's ability to close a proposed acquisition; (5) the
alleged purchase of certain properties from affiliates of the individual
defendants at inflated prices; and (6) alleged improper accounting practices.
The cases were consolidated and the Company filed motions to dismiss both
lawsuits.
On November 5, 1997, the court granted the motions to dismiss and
entered judgment for defendants. The time for plaintiffs to seek reconsideration
or to file appeals has not yet run. The Company believes that dismissal of the
case was appropriate and that it and the named former officers have substantial
defenses to the plaintiffs' claims, and the Company will continue to vigorously
defend the actions in the event that plaintiffs seek reconsideration or file
appeals. 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 and use of proceeds
None
Item 3. Defaults Upon Senior Securities
None
31
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On November 7, 1997, the Company gave notice that a special meeting of
stockholders of FAC Realty, Inc. will be held at the Company's offices, 11000
Regency Parkway, Suite 300, Cary, North Carolina 27511, on December 15, 1997 at
10:00 a.m. local time, to consider and vote on a proposal to approve the
reincorporation of the Company from the State of Delaware to the State of
Maryland. Only stockholders of record at the close of business on October 31,
1997 will be entitled to notice of and to vote at the special meeting or any
adjournment thereof.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (Edgar Filing Only)
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on September 9, 1997 reporting a
change in the Company's certifying accountant.
32
<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: November 14, 1997 By /s/
----------------------------------------------
Patrick M. Miniutti, Executive Vice President,
Chief Financial Officer and Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from FAC Realty's
quarterly report for the period ended September 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,489
<SECURITIES> 0
<RECEIVABLES> 3,695
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,887
<PP&E> 411,721
<DEPRECIATION> (46,764)
<TOTAL-ASSETS> 388,844
<CURRENT-LIABILITIES> 6,772
<BONDS> 219,083
0
19,162
<COMMON> 122
<OTHER-SE> 143,705
<TOTAL-LIABILITY-AND-EQUITY> 388,844
<SALES> 0
<TOTAL-REVENUES> 39,011
<CGS> 0
<TOTAL-COSTS> 22,866
<OTHER-EXPENSES> 5,120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,013
<INCOME-PRETAX> (988)
<INCOME-TAX> 0
<INCOME-CONTINUING> (988)
<DISCONTINUED> 0
<EXTRAORDINARY> (986)
<CHANGES> 0
<NET-INCOME> (1,974)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> 0
</TABLE>
