UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the quarter ended March 31, 1996
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File number: 1-11998
Factory Stores of America, Inc.
(Exact name of registrant as specified in its charter)
Delaware 56-1819372
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 N. Equity Drive, Smithfield, North Carolina 27577
(Address of principal executive offices) (Zip Code)
(919) 934-9446
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
(x) Yes ( ) No
The number of outstanding shares of Common Stock, $0.01 par value per share, as
of April 30, 1996 was 12,026,013.
1
<PAGE>
FACTORY STORES OF AMERICA, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Income for the
three months ended March 31, 1996 and 1995 5
Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 1996 6
Consolidated Statements of Cash Flows for the
three months ended March 31, 1996 and 1995 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
</TABLE>
2
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Part I. Financial Information
Item 1 - Financial Statements
Factory Stores Of America, Inc.
Consolidated Balance Sheets
(in thousands except for per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------------------- ---------------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
OUTLET CENTER PROPERTIES, AT COST
LAND $71,211 $70,356
BUILDING AND IMPROVEMENTS 215,283 211,524
EQUIPMENT 3,994 3,826
----------------------- ---------------------
290,488 285,706
LESS ACCUMULATED DEPRECIATION (22,499) (20,332)
----------------------- ---------------------
267,989 265,374
PROPERTIES UNDER DEVELOPMENT 30,755 32,837
----------------------- ---------------------
298,744 298,211
PROPERTIES HELD FOR SALE, NET OF RESERVE
OF $8,500 24,294 24,509
----------------------- ---------------------
OUTLET CENTER PROPERTIES, NET 323,038 322,720
CASH AND CASH EQUIVALENTS 2,963 1,655
RESTRICTED CASH 4,402 4,806
RENTS FROM TENANTS AND OTHER RECEIVABLES 4,719 5,245
PREPAID EXPENSES 603 607
DEFERRED COSTS 16,023 16,208
OTHER ASSETS AND DEPOSITS 3,704 3,854
----------------------- ---------------------
TOTAL ASSETS $355,452 $355,095
======================= =====================
</TABLE>
See accompanying notes
<PAGE>
Part I. Financial Information
Item 1 - Financial Statements
Factory Stores Of America, Inc.
Consolidated Balance Sheets
(in thousands except for per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------------------- ---------------------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE $106,553 $100,972
NOTES PAYABLE TO BANK UNDER LINE OF CREDIT 69,939 69,939
CAPITAL LEASE OBLIGATIONS 844 797
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 15,921 16,022
DIVIDENDS PAYABLE 0 6,025
DEFERRED REVENUE AND TENANT SECURITY DEPOSITS 1,291 854
----------------------- ---------------------
TOTAL LIABILITIES 194,548 194,609
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
COMMON STOCK, $0.01 PAR VALUE, 50,000,000 SHARES
AUTHORIZED, 11,814,975 AND 11,814,523 SHARES
ISSUED AND OUTSTANDING, RESPECTIVELY 118 118
ADDITIONAL PAID IN CAPITAL 160,374 160,368
RETAINED EARNINGS 412 0
----------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 160,904 160,486
----------------------- ---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $355,452 $355,095
======================= =====================
</TABLE>
See accompanying notes
4
<PAGE>
Part I. Financial Information
Item 1 - Financial Statements
Factory Stores Of America, Inc.
Consolidated Statements of Income - Unaudited
(in thousands except for per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------------------------------------
1996 1995
------------------- --------------------
<S> <C> <C>
REVENUE:
BASE RENT $8,799 $8,944
PERCENTAGE RENT 779 563
RECOVERIES FROM TENANTS 3,117 2,984
OTHER INCOME 184 274
------------------- --------------------
TOTAL REVENUE 12,879 12,765
EXPENSES:
OPERATING 4,593 4,110
GENERAL & ADMINISTRATIVE 1,421 1,168
DEPRECIATION AND AMORTIZATION 3,220 2,518
INTEREST 3,233 2,304
------------------- --------------------
TOTAL EXPENSES 12,467 10,100
------------------- --------------------
NET INCOME $412 $2,665
=================== ====================
EARNINGS PER COMMON SHARE
NET INCOME $0.03 $0.23
=================== ====================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 11,815 11,813
=================== ====================
</TABLE>
See accompanying notes
5
<PAGE>
Part I. Financial Information
Item 1 - Financial Statements
Factory Stores Of America, Inc.
Consolidated Statement of Stockholders' Equity - Unaudited
Three Months Ended March 31, 1996
(in thousands except for per share data)
<TABLE>
<CAPTION>
Additional
Common Paid in Retained
Stock Capital Earnings Total
---------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $118 $160,368 $0 $160,486
Issuance of stock awards 6 6
Net income for the quarter 412 412
---------------- ------------------ ----------------- -----------------
Balance at March 31, 1996 $118 $160,374 $412 $160,904
================ ================== ================= =================
</TABLE>
See accompanying notes
6
<PAGE>
Part I. Financial Information
Item 1 - Financial Statements
Factory Stores Of America, Inc.
Consolidated Statements of Cash Flows - Unaudited
(in thousands except for per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------------------
1996 1995
--------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ($1,229) $8,187
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALE OF REAL ESTATE 0 0
ADDITIONS TO OUTLET CENTER PROPERTIES (2,718) (11,701)
CHANGES IN RESTRICTED CASH 404 0
ADDITIONS TO DEFERRED COSTS AND OTHER
ASSETS (783) (742)
--------------------- -------------------
NET CASH USED IN INVESTING
ACTIVITIES (3,097) (12,443)
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF NOTES PAYABLE 6,089 305
PAYABLE RELATED TO ACQUISITION OF PROPERTIES 0 (11,737)
NET BORROWINGS (PAYMENTS) UNDER BANK
REVOLVING LINE OF CREDIT 0 22,346
PRINCIPAL PAYMENTS ON LONG-TERM DEBT:
NOTES PAYABLE (419) (54)
CAPITAL LEASES (42) (24)
PROCEEDS FROM THE SALE OF COMMON STOCK,
NET OF STOCK ISSUANCE COST 6 0
DISTRIBUTIONS TO STOCKHOLDERS 0 (5,671)
--------------------- -------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 5,634 5,165
--------------------- -------------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,308 909
CASH AND CASH EQUIVALENTS, BEG. OF PERIOD 1,655 1,297
--------------------- -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $2,963 $2,206
===================== ===================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING PERIOD FOR INTEREST(NET OF INTEREST
CAPITALIZED OF $612 AND $628 , RESPECTIVELY) $3,564 $2,817
===================== ===================
</TABLE>
See accompanying notes
7
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Factory Stores of America
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and notes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting solely of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1996
are not necessarily indicative of results that may be expected for a full fiscal
year. For further information, refer to the financial statements and
accompanying footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1995.
Description of Business
Factory Stores of America, Inc. ("the Company") was incorporated on March 31,
1993 as a self-administered and self-managed real estate investment trust
(REIT). The Company is engaged in the development, ownership, acquisition and
operation of factory outlet shopping centers. The accompanying consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries, FSA Properties, Inc., which was formed on December 30, 1994 to
hold the assets and liabilities of 18 of the Company's outlet centers in
contemplation of issuance of the $95 million collateralized commercial mortgage
notes and FSA Finance, Inc., formed on May 22, 1995 in connection with the $95
million collateralized commercial mortgage notes. As of March 31, 1996, the
consolidated financial statements also include the accounts of FSA Outparcels,
Inc., a majority owned subsidiary formed on February 22, 1996 to hold certain
outparcels of which the Company is marketing for sale or lease. All significant
intercompany balances have been eliminated in consolidation. As of March 31,
1996 and December 31, 1995, the Company's portfolio consisted of 36 centers
located in 21 states in the United States.
Outlet Center Properties
Outlet center properties are recorded at cost less accumulated depreciation. All
costs related to the improvement or replacement of shopping center properties
are capitalized. Maintenance and repairs are charged to expense as incurred.
Depreciation is computed using the straight-line method over the estimated
useful life of 31.5 years for buildings and improvements, 15 years for land
improvements and 5 to 15 years for equipment. Tenant improvements are amortized
over the initial terms of related leases, which range from 5 to 10 years, using
the straight-line method.
8
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Factory Stores of America
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies - continued
Outlet Center Properties - continued
Outlet center properties include capitalized costs related to new developments
and expansions in process including construction, interest, taxes, insurance and
other costs totaling approximately $30.8 and $32.8 million at March 31, 1996 and
December 31, 1995, respectively. Upon completion of construction, these costs
are amortized over the useful lives of the respective properties on a
straight-line basis.
Net properties held for sale, at their expected net realizable values, have been
separately classified in the accompanying balance sheets as a result of the
Company's intent to sell five outlet center properties. (See Note 2).
The pre-construction stage of project development involves incurrence of certain
costs to secure land control and zoning and complete other initial tasks which
are essential to the development of the project. These costs are transferred to
developments under construction when the pre-construction tasks are completed.
The Company provides for the costs of potentially unsuccessful pre-construction
efforts by charges to operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results can differ from those estimates.
Impact of Recent Issued Accounting Standards
The Company adopted the Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Assets to be
Disposed Of" ("FAS 121") as of January 1, 1996. The pronouncement requires that
certain long-lived assets be reviewed for potential impairment when
circumstances indicate that the carrying amount of such assets may not be
recoverable. Additionally, FAS 121 requires that certain long-lived assets held
for disposition be reported at the lower of the carrying amount of fair value
less any selling costs. The impact of the adoption of this pronouncement did not
have a material effect on the Company's consolidated financial position or on
its results of operations.
9
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Factory Stores of America
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies - continued
Reclassification
Certain 1995 financial statements amounts have been reclassified to conform with
1996 classification. These reclassifications had no effect on net income or
stockholders' equity as previously reported.
2. Properties Held for Sale
As part of the Company's ongoing strategic evaluation of its portfolio of
assets, the Directors of the Company authorized management in 1995 to pursue the
sale of certain properties that were not fully consistent with or essential to
the Company's long-term strategies. Under generally accepted accounting
principles ("GAAP"), assets held for the long-term production of income are
recorded at their historical cost, adjusted for depreciation. However, when a
decision is made to dispose of certain assets, the carrying value of those
assets is computed using their net realizable value.
Accordingly, in 1995 the Company recorded an $8.5 million adjustment to the
carrying value of three of the assets held for sale as required under GAAP. The
net carrying value of assets currently being marketed for sale at March 31, 1996
is $24.3 million. There is also $21.8 million of debt which is expected to be
retired from the sale proceeds. For the three month period ended March 31, 1996,
these properties contribute about $1.0 million of revenue and incurred a loss of
($99,000) after deducting related interest expense on the debt associated with
the properties.
The Company has begun the process of marketing the properties and no sales
agreements have been completed to date. Management plans to evaluate all
properties on a regular basis in accordance with its strategy for growth and in
the future may identify other properties for disposition or may decide to defer
the pending disposition of those assets now held for sale.
3. Restricted Cash
In connection with the sale of the $95 million collateralized commercial
mortgage notes, the lender required a holdback of a portion of the loan proceeds
to fund certain environmental and engineering work and to make certain lease
related payments that may be required in connection with the renewal or
termination of certain leases by a tenant at most of the factory outlet centers.
Such holdback amounts of approximately $4.4 million are included in cash and
cash equivalents in the consolidated balance sheet at March 31, 1996.
10
<PAGE>
Factory Stores of America
Notes to Consolidated Financial Statements
(Unaudited)
4. Notes Payable
In January 1996, the Company borrowed an aggregate of $6.0 million under two
separate short-term promissory notes from Bank One, Dayton at prime plus 1% to
meet certain cash requirements for certain costs arising from the termination of
the OPERS factory outlet acquisition agreements, ongoing construction and the
payment of a portion of the dividends to stockholders for the fourth quarter of
1995.
5. Commitments and Contingencies
VF Corporation Expansions
Under the terms of the agreement pursuant to which the Company acquired 21 of
the properties in 1993 from the VF Corporation requires, subject to certain
conditions, that the Company complete during the three years following the
acquisition, the expansion of ten properties by an aggregate of at least 320,000
square feet of gross building area (approximately 288,000 square feet of GLA).
The agreement provides for periodic payments to VF Corporation aggregating
approximately $21.7 million if the expansions of the VF properties are not
completed on a timely basis. This amount is reduced as the expansions of the VF
centers are completed. Three expansions totaling approximately 97,000 square
feet were completed in 1994 and two additional expansions approximating 100,000
square feet were completed in 1995. As of March 31, 1996, the Company has
commenced two additional expansions in Story City, Iowa and Nebraska City,
Nebraska. The Company plans to complete three more expansions to satisfy its
remaining obligation under its commitment to VF Corporation. Based on the
Company's estimates to complete the expansions, management believes that there
will be no remaining liability to VF Corporation when these expansions are
completed. If all these expansions are not completed as planned under the terms
of the original commitment, payments of $9.3 million to VF Corporation would be
due and payable, $3.5 million of which is associated with the two expansions
currently under construction. Although the agreement requires completion of the
expansion plan by June, 1996, the Company and VF Corporation are presently in
negotiation to extend that requirement for up to 12 months. The Company and VF
Corporation have reached an agreement as to such extension and are currently in
the process of preparing final documents evidencing the same.
Developments and Expansions
As of March 31, 1996 the Company has delivered approximately 232,500 square feet
of its 288,000 square foot outlet center in Branson, Missouri. The anticipated
cost of this center is $32.3 million of which $27.4 million had been expended as
of March 31, 1996. The Company is currently expanding Smithfield, North
Carolina; Story City, Iowa; and Nebraska City, Nebraska at a total
11
<PAGE>
Factory Stores of America
Notes to Consolidated Financial Statements
(Unaudited)
5. Commitments and Contingencies - continued
Developments and Expansions - continued
estimated cost of approximately $9.7 million. Additionally, the Company is
currently in the pre-development and marketing stage for a property located in
Lake Carmel, New York (Brewster). If appropriate tenant interest is indicated,
the Company anticipates developing this property by the spring of 1998.
Terminated Acquisition
In 1995, the Company signed definitive agreements to acquire the factory outlet
centers owned by The Public Employees Retirement System of Ohio ("OPERS") and
the management and business operations of the Charter Oak Group, Ltd., a
subsidiary of Rothschild Realty, Inc., ("RRI")subject to certain conditions. On
December 7, 1995, the Company reported that RRI had terminated the agreements
under which the Company would have acquired the properties owned by OPERS and
the management and business operations of the Charter Oak Group, Ltd.
RRI for itself and on behalf of OPERS has made a demand for payment with respect
to a $5.0 million promissory note (the "Note") issued by the Company in
connection with the Company's proposed purchase of the factory outlet centers
and other properties owned by OPERS. The Note is payable only upon the
occurrence of certain conditions relating to termination of the definitive
acquisition agreements, some of which conditions the Company asserts were not
satisfied. The Company's management intends to continue to pursue negotiations
with RRI to settle this claim. To date, these discussions have focused on
payment by the Company of a portion of the actual costs incurred by RRI, OPERS
and certain affiliates in connection with the transaction. RRI has represented
these costs to be approximately $1.3 million. If these settlement discussions
fail, management intends to defend vigorously any ensuing arbitration or
litigation. While no assurance can be given as to the outcome of any such
arbitration or litigation the Company believes it has meritorious defenses to
the payment of the Note.
6. Subsequent Events
$30 Million Private Placement
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 have agreed to purchase in a private placement of up to $25
million of the Company's Exchangeable Notes (the "Exchangeable Notes")
12
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Factory Stores of America
Notes to Consolidated Financial Statements
(Unaudited)
6. Subsequent Events - continued
$30 Million Private Placement - continued
and $5 million of its Senior Notes, both of which will be unsecured.
Holders of the Exchangeable Notes, subject to certain conditions, will be
required to exchange them for shares of the Company's Series A Convertible
Preferred Stock (the "Series A Preferred") at the rate of one share of Series A
Preferred for each $25 in principal amount of Exchangeable Notes 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 will be convertible into shares of the Company's Common Stock at a
conversion price equal to $9.00 per share (the "Conversion Price"). Dividends on
the Series A Preferred will be paid quarterly on each Common Stock dividend
payment date in an amount equal to the dividends that would have been paid on
the Common Stock then issuable upon conversion of the Series A Preferred (the
"Common Stock Equivalent Dividend").
If the Exchangeable Notes are not exchanged for shares of Series A Preferred,
the Exchangeable Notes will be convertible at their principal amount into shares
of the Company's Common Stock at the Conversion Price, subject to certain
limitations. Unless sooner exchanged into Series A Preferred or converted into
Common Stock the Exchangeable Notes will mature on December 31, 1996 and bear
interest, payable quarterly on each Common Stock dividend payment date, equal in
amount to the Common Stock Equivalent Dividend.
Under the Note Purchase Agreement, if the Company elects to issue the Senior
Notes, they will be placed at 97% of their face amount, mature on the second
anniversary of the initial funding of the Exchangeable Notes, and bear interest,
payable quarterly, at an annual rate of 11% during the first year and 13%
thereafter until maturity.
In connection with the issuance of the Exchangeable Notes and the Senior Notes,
the Company issued Blackacre 200,000 Warrants to purchase 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.
13
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Factory Stores of America
Notes to Consolidated Financial Statements
(Unaudited)
6. Subsequent Events - continued
$30 Million Private Placement - continued
As of April 30, 1996, Exchangeable Notes with aggregate principal amounts of $20
million and unsecured Senior Notes in the amount of $5.0 million were sold
pursuant to the Note Purchase Agreement.
Bank Line of Credit
On April 2, 1996, the Company received a commitment from Bank One, Dayton to
provide a $75 million credit facility. On April 30, 1996, the Company closed on
the new $75 million credit facility. The terms of the credit facility are for a
period of two years bearing interest at a rate of LIBOR plus 2.75%. The $75
million credit facility contains various financial covenants which include
maintaining minimum interest coverage, debt service coverage, debt to market
capitalization ratio, debt to market value ratio, funded debt to tangible
capital funds ratio and modified net income ratio as well as maintaining a
minimum net worth of $165 million which will be deemed to include the $20
million of Exchangeable Notes. Additionally, the covenants preclude the Company
from paying dividends in excess of 85% of FFO, as defined in the Company's
Prospectus dated December 16, 1993, for any fiscal quarter. The new credit
facility was used to refinance the Company's existing line of credit and repay
$6 million in short-term promissory notes.
Dividend Declaration
On April 9, 1996, the Board of Directors declared a dividend of $0.25 per share
payable to stockholders of record as of April 25, 1996. The total amount of the
dividend, $3,006,503 was paid on May 7, 1996.
14
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Factory Stores of America
Notes to Consolidated Financial Statements
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the accompanying
unaudited consolidated financial statements and notes thereto. These financial
statements include all adjustments which are, in the opinion of management,
necessary to reflect a fair statement of the results for the interim periods
presented.
Certain statements under this caption, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). See Part II -- Other Information, Item 5.
General Overview
The Company has grown by increasing rent at its existing centers, and by
selectively expanding, developing and acquiring factory outlet centers. At March
31, 1996, the Company operated 36 factory outlet centers with 4,654,000 square
feet of GLA in 21 states, compared to 35 with 4,234,000 square feet of GLA at
March 31, 1995. Weighted average square feet of GLA for the three months ended
March 31, 1996 and 1995 was 4,499,000 and 4,234,000, respectively.
The Company was incorporated on March 31, 1993 and completed the IPO on June 10,
1993. Prior to completion of the IPO, the Company owned four outlet centers in
four states totaling 700,000 square feet of GLA. Upon completion of the IPO, 21
factory outlet centers were acquired totaling 1.7 million feet of GLA. On
November 1, 1993, the Company acquired a 167,500 square foot center located near
Opryland in Nashville, Tennessee. On December 23, 1993, the Company completed a
secondary offering of Common Stock and used the proceeds to purchase the six
Willey Creek Properties.
During 1994, the Company began development of a 288,000 square foot outlet
center in Branson, Missouri and on June 30, 1994 acquired three additional
properties totalling 449,300 square feet of GLA from the Willey Creek Group.
Additionally, expansions comprising 273,500 square feet of GLA were completed in
Iowa, Louisiana; Crossville, Tennessee; North Bend, Washington; Arcadia,
Louisiana; and Nashville, Tennessee. Also during the year, the Company's Boaz,
Alabama center was retrofitted to change the facade and add an additional 9,000
square feet of GLA. By the end of 1994 the Company owned approximately 4.2
million square feet of GLA which represented a 21% increase over year end 1993.
In addition, expansion projects in Mesa, Arizona and Draper, Utah were nearing
completion.
15
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Factory Stores of America
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
General Overview - continued
During 1995, the Company delivered approximately 100,000 square feet of
expansion space to tenants in Mesa, Arizona and Draper, Utah. Additionally, the
Nashville Center, located in Nashville, Tennessee, is a factory outlet center
being developed in four phases. Phase I, which contains approximately 167,500
square feet of GLA, opened in October 1993 and was acquired by the Company in
November 1993. Phase II, containing approximately 92,000 square feet of GLA
opened in August 1994. In September 1995, the Company opened Phase III which
contains approximately 26,000 square feet of GLA.
Throughout 1995, the Company continued development of the new 288,000 square
foot outlet center in Branson, Missouri. The development, which will include
over 50 outlet stores, is expected to open in two phases. In October 1995, the
first stores in Phase I opened. This center, which is the Company's largest
development to date, is more than 75% committed and is expected to feature a
wide range of nationally recognized manufacturers including Reading China &
More, VF Factory Outlet, and Spiegel, at an average rent of over $14.20 per
square foot for non-anchor tenants. At March 31, 1996, approximately 232,000
square feet of the Branson center was available for delivery to tenants.
During the second quarter of 1995, the Company began expansion of its
Smithfield, North Carolina factory outlet center. When completed, the expansion
project will add an additional 103,000 square feet of GLA to the existing
center. Approximately 48,000 square feet of this expansion opened in November
1995 with the remainder scheduled to open in the fall of 1996.
As of March 31, 1996, the Company had commenced two additional expansions
totaling 48,000 square feet (Nebraska City, Nebraska - 26,300 square feet; Story
City, Iowa - 21,700 square feet) which are being constructed pursuant to
commitments made to VF Corporation in connection with the purchase of the VF
Properties in June 1993.
The Company receives rental revenue through base rent, percentage rent, overage
rent and expense recoveries from tenants. Base rent represents a minimum amount
set forth in the leases for which the tenants are contractually obligated.
Percentage rent represents an amount the tenants are obligated to pay based on a
percentage of the tenants' gross sales in lieu of base rent. Overage rent is a
function of the sales volumes of various tenants. At the time a lease is
negotiated a "break point" is agreed to in the lease. For sales in excess of the
break point, tenants pay a specified percentage of these sales as overage rent
in addition to their base rent. Expense recoveries from tenants relate to the
portion of the property's operating expenses for which the tenants are obligated
to reimburse the Company, including marketing, real estate taxes, insurance,
utilities and common area
16
<PAGE>
Factory Stores of America
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
General Overview - continued
maintenance charges. Pursuant to leases with the Company's two major anchor
tenants, VF Factory Outlet, Inc. ("VFFO") and Carolina Pottery Retail Group,
Inc., the tenants are obligated to pay certain increases in common area
maintenance expenses and their pro-rata share of insurance expense and real
estate taxes, and certain operating expenses. While many of the Company's leases
are triple net leases or require tenants to pay increases in utilities and
operating expenses, as of March 31, 1996, approximately 40% of the aggregate GLA
of its factory outlet centers is leased (which includes the Company's anchor
tenant, VFFO) to tenants under gross leases ("Gross Lease Properties"). Under
the Gross Lease Properties, the Company is obligated to pay all utilities and
other operating expenses of the applicable factory outlet center (except for the
pro-rata share of expenses paid by VFFO).
Industry analysts generally consider Funds from Operations ("FFO") an
appropriate measure of performance for an equity REIT. FFO means net income
(computed in accordance with generally accepted accounting principles) excluding
gains or losses from debt restructuring and sales of property plus depreciation
and amortization and adjustment for unusual items. Management believes that FFO,
as defined herein, is an appropriate measure of the Company's operating
performance because reductions for depreciation and amortization charges are not
meaningful in evaluating the operating results of the Properties which have
historically been appreciating assets.
Beginning in 1996 the Company adopted a change in the definition of FFO as
promulgated by the National Association of Real Estate Investment Trusts
(NAREIT). Under the new definition, amortization of deferred financing costs and
depreciation of non-real estate assets, as defined, are not included in the
calculation of FFO. All prior period FFO results are retroactively restated so
that reported FFO in 1996 will be comparable to prior periods.
"EBITDA" is defined as revenues less operating costs, including general and
administrative expenses, before interest, depreciation and amortization and
unusual items. As a REIT, the Company is generally not subject to Federal Income
taxes. Management believes that EBITDA provides a meaningful indicator of
operating performance for the following reasons: (i) it is industry practice to
evaluate the performance of real estate properties based on net operating income
("NOI"), which is generally equivalent to EBITDA; and (ii) both NOI and EBITDA
are unaffected by the debt and equity structure of the property owner.
17
<PAGE>
Factory Stores of America, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
General Overview - continued
FFO and EBITDA do not represent cash generated from operating activities in
accordance with generally accepted accounting principles, are not necessarily
indicative of cash available to fund cash needs and should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flow as a measure of liquidity.
The Company holds approximately 148 acres of undeveloped land in outparcels, of
which approximately 50 acres are considered prime real estate sites, that are
actively being marketed for lease or sale. As outparcels are sold and cash
received, these revenues are available for dividends or other cash needs of the
Company.
Results of Operations
Quarter ended March 31, 1996 compared to quarter ended March 31, 1995.
The Company reported net income of $412,000, or $0.03 per share, for the quarter
ended March 31, 1996 compared to $2.7 million, or $0.23 per share, for the
comparable period in 1995. Net income for 1996 was less than that of 1995 by
$2.3 million, or $0.20 per share. As more fully described below, this reduction
was primarily due to higher interest expense, depreciation and amortization
charges and operating costs.
FFO for the quarter ended March 31, 1996 was $3.5 million or $0.30 per share.
This compares to $5.0 million, or $0.42 per share, for the quarter ended March
31, 1995. Factors that had a negative impact on 1996 FFO and contributed to the
decrease were: (a) $0.9 million, or $0.08 per share, in higher interest expense
due to a higher average borrowing level; (b) $0.3 million, or $0.02 per share,
in higher general and administrative cost as described below and (c) $0.2
million, or $0.02 per share, in higher property operating cost on a weighted
average square foot basis due to higher real estate taxes and property
insurance. Earnings before interest, taxes, depreciation and amortization
(EBITDA) were $6.9 million for the quarter ended March 31, 1996, a decrease of
$0.6 million, or 8.0%, from $7.5 million in 1995. The decrease was due
primarily to the higher property operating costs and general and administrative
costs noted above.
18
<PAGE>
Factory Stores of America, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Results of Operations - continued
Base rent before adjustment for straight line rent and reserve for doubtful
accounts increased $0.2 million, or 1.0%, to $8.9 million in 1996 from $8.7
million in 1995. As a result of conversion of certain base rent leases to
percentage only leases, this increase was less than the 6% increase in the
Company's weighted average square feet of GLA in operation of 4.2 million square
feet in 1995 to 4.5 million square feet in 1996. Base rental revenue in 1996
includes a charge to the reserve for uncollectible tenant accounts of $130,000.
There was not a reserve charge taken in the quarter ended March 31, 1995.
Percentage rent increased $0.2 million or 3%, to $0.8 million in 1996 compared
to 1995. On a weighted average square foot basis, percentage rents increased 30%
to $0.17 in 1996 from $0.13 in 1995, reflecting in part the conversion of
certain leases from base rent to percentage only in certain centers that were
experiencing a downward trend in tenant sales or center occupancy. Percentage
rent includes amounts the tenants are obligated to pay based solely on a
percentage of the tenants' gross sales in lieu of base rents and overage rents
which represents amounts due from tenants based on a specified percentage of the
tenants sales in excess of a breakpoint agreed to in the lease.
Recoveries from tenants, representing contractual reimbursements from tenants of
certain common area maintenance, utilities, taxes, insurance and marketing cost,
increased $0.2 million, or 4%, to $3.2 million in 1996 from $3.0 million in
1995. On a weighted average square foot basis, recoveries from tenants decreased
to $0.69 in 1996 from $0.70 in 1995, or 1%. For the three month period ended
March 31, 1996, the average recovery of property operating expenses on the
Company's gross lease centers was approximately 68% and 89% for the Company's
triple net lease properties, for an aggregate average recovery percent of 68%.
The average recovery of property operating expenses decreased from 73% in 1995
to 68% in 1996. The reduction in the recovery percentage was the result of: (a)
property operating expenses increasing as discussed below, and (b) a decrease in
the overall portfolio occupancy percent from 91.2% in 1995 to 89.2% in 1996
(excluding properties under development).
Other income was $0.2 million in 1996 compared to $0.3 million in 1995 and
primarily represented interest income, lease termination settlements and other
miscellaneous property level income.
19
<PAGE>
Factory Stores of America, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Results of Operations - continued
Operating expenses increased $0.5 million, or 12%, to $4.6 million in 1996 from
$4.1 million in 1995. The increase was due to costs related to the increase in
GLA from expansions as well as an increase in the weighted average cost per
square foot to operate the properties. On a weighted average square foot basis,
operating expenses increased 5% from $0.97 in 1995 to $1.02 in 1996. The
increase was due principally to a $0.04 per square foot increase in 1996 in
property taxes and insurance.
General and administrative cost increased $0.2 million, or 21%, to $1.4 million
in 1996 from $1.2 million in 1995. The increase was due principally to lower
capitalization of leasing and related costs ($0.2 million), higher personal
costs ($0.2 million) and professional fees ($0.2 million) offset by the savings
associated with the termination in December of 1995 of the NASCAR motorsports
program and plane lease ($0.4 million). On a weighted average square foot basis,
general and administrative expenses increased 14% to $0.32 in 1996 from $0.28 in
1995.
Depreciation and amortization increased as a result of the larger portfolio of
properties in operation during 1995.
Interest expense for the quarter ended March 31, 1996 increased by $0.9 million,
or 40%, to $3.2 million compared to $2.3 million for the same period in 1995.
This increase resulted from higher borrowing levels in 1996 compared to 1995. On
a weighted average basis, debt outstanding and the average interest cost were
approximately $176.0 million and 8.1%, respectively, in 1996 compared to $116.2
million and 9.2%, respectively, in 1995. Amortization of deferred financing cost
amounted to $0.3 million in 1996 and 1995. The Company capitalized interest cost
of $0.6 million in 1996 and 1995.
As part of the Company's ongoing strategic evaluation of its portfolio of
assets, the Directors of the Company authorized management in 1995 to pursue the
sale of certain properties that were not fully consistent with or essential to
the Company's long-term strategies. Under generally accepted accounting
principles ("GAAP"), assets held for the long-term production of income are
recorded at their historical cost, adjusted for depreciation. However, when a
decision is made to dispose of certain assets, the carrying value of those
assets is computed using their net realizable value.
20
<PAGE>
Factory Stores of America, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Results of Operations - continued
Accordingly, in 1995 the Company recorded an $8.5 million adjustment to the
carrying value of three of the assets held for sale as required under GAAP. The
net carrying value of assets currently being marketed for sale at March 31, 1996
is $24.3 million. There is also $21.8 million of debt which is expected to be
retired from the sale proceeds. For the three month period ended March 31, 1996,
these properties contribute about $1.0 million of revenue and incurred a loss of
($99,000) after deducting related interest expense on the debt associated with
the properties.
The Company has begun the process of marketing the properties and no sales
agreements have been completed to date. Management plans to evaluate all
properties on a regular basis in accordance with its strategy for growth and in
the future may identify other properties for disposition or may decide to defer
the pending disposition of those assets now held for sale.
Liquidity and Capital Resources
The Company's cash and cash equivalents balance at March 31, 1996 was
approximately $3.0 million. Restricted cash, as reported in the financial
statements, is approximately $4.4 million. In connection with the Company's $95
million rated debt securitization, the Company is required to escrow a portion
of the securitization proceeds to fund certain environmental and engineering
work and to make certain lease related payments that may be required in
connection with the renewal or termination of certain leases by a tenant at most
of the factory outlet centers.
Net cash used in operating activities was $1.2 million for the quarter ended
March 31, 1996 principally resulting from the $6.0 million distribution of the
fourth quarter 1995 dividend to stockholders. Net cash used in investing
activities was $3.1 million for the quarter ended March 31, 1996. The primary
use of these funds included: $2.7 million in construction cost, principally $2.1
million for properties currently under development and $0.5 million toward
completion of 1995 expansion projects; $0.1 million for financing costs and $0.7
million for re-tenanting, lease renewal and leasing costs; and offset by $0.4
million reduction in restricted cash. Net cash provided by financing activities
was $5.6 million for the quarter ended March 31, 1996. The principal source of
such funds was $6.1 million of new borrowings. Funds generated through financing
activities were offset by payments of $0.5 million towards debt principal
repayment.
On August 25, 1995, the Company signed definitive agreements to acquire the
factory outlet centers owned by The Public Employees Retirement System of Ohio
(OPERS) and the management and business operations of the Charter Oak Group,
Ltd., a subsidiary of Rothschild Realty, Inc., ("RRI") subject to certain
conditions. On December 7, 1995, the Company reported that RRI had terminated
21
<PAGE>
Factory Stores of America, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Liquidity and Capital Resources - continued
the agreements under which the Company would have acquired the properties owned
by OPERS and the management and business operations of the Charter Oak Group,
Ltd.
As a result of the Company's pursuit of the acquisition, the Company incurred
direct costs approximating $4.5 million related to the performance of due
diligence and indirect obligations of $2.0 million associated with certain
severance agreements. As of March 31, 1996, approximately $4.2 million of the
obligations remain outstanding.
In January 1996, the Company borrowed an aggregate of $6.0 million under two
separate short-term promissory notes from Bank One, Dayton at prime plus 1% to
meet certain cash requirements for certain costs arising from the termination of
the OPERS factory outlet acquisition agreements, ongoing construction and the
payment of a portion of the dividends to stockholders for the fourth quarter of
1995.
As more fully described in footnote 6 of Part I, Item 1 "Notes to Consolidated
Financial Statements", on April 2, 1996, the Company executed a Note Purchase
Agreement and other related documents (collectively the "Agreements") with
Gildea Management Company ("Gildea") and Blackacre Bridge Capital, L.L.C.
("Blackacre"), whereby Gildea and Blackacre have agreed to purchase in a private
placement of up to $25 million of the Company's Exchangeable Notes (the
"Exchangeable Notes") and $5 million of its Senior Notes, both of which will be
unsecured.
As of April 30, 1996, Exchangeable Notes with an aggregate principal amount of
$20 million and unsecured Senior Notes in the amount of $5 million were sold
pursuant to the Note Purchase Agreement.
On April 2, 1996, the Company received a commitment from Bank One, Dayton to
provide a $75 million credit facility. On April 30, 1996, the Company closed on
the $75 million credit facility. The terms of the credit facility is for a
period of two years bearing interest at a rate of LIBOR plus 2.75%. The $75
million credit facility contains various financial covenants which include
maintaining minimum interest coverage, debt service coverage, debt to market
capitalization ratio, debt to market value ratio, funded debt to tangible
capital funds ratio and modified net income ratio as well as maintaining a
minimum net worth of $165 million which will be deemed to include the $20
million of Exchangeable Notes. Additionally, the covenants preclude the Company
from paying dividends in excess of 85% of FFO for any fiscal quarter. The new
credit facility was used to refinance the Company's existing line of credit and
repay $6 million in short-term promissory notes.
22
<PAGE>
Factory Stores of America, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Liquidity and Capital Resources - continued
As of March 31, 1996 the Company has delivered approximately 232,500 square feet
of its 288,000 square foot outlet center in Branson, Missouri. The anticipated
cost of this center is $32.3 million of which $27.4 million had been expended as
of March 31, 1996. The Company is currently expanding Smithfield, North
Carolina; Story City, Iowa; and Nebraska City, Nebraska at a total estimated
cost of approximately $9.7 million. Additionally, the Company is currently in
the pre-development and marketing stage for a property located in Brewster, New
York. If appropriate tenant interest is indicated, the Company anticipates
developing this property by the spring of 1998.
In addition, the agreement pursuant to which the Company acquired 21 of the
properties in 1993 from the VF Corporation requires, subject to certain
conditions, that the Company complete during the three years following the
acquisition, the expansion of ten properties by an aggregate of at least 320,000
square feet of gross building area (approximately 288,000 square feet of GLA).
The agreement provides for periodic payments to VF Corporation aggregating
approximately $21.7 million if the expansions of the VF properties are not
completed on a timely basis. This amount is reduced as the expansions of the VF
centers are completed. Three expansions totaling approximately 97,000 square
feet were completed in 1994 and two additional expansions approximating 100,000
square feet were completed in 1995. As of March 31, 1996, the Company has
commenced two additional expansions in Story City, Iowa and Nebraska City,
Nebraska as described above. The Company plans to complete three more expansions
to satisfy its remaining obligation under its commitment to VF Corporation.
Based on the Company's estimates to complete the expansions, management believes
that there will be no remaining liability to VF Corporation when these
expansions are completed. If all these expansions are not completed as planned
under the terms of the original commitment, payments of $9.3 million to VF
Corporation would be due and payable, $3.5 million of which is associated with
the two expansions currently under construction. Although the agreement requires
completion of the expansion plan by June, 1996, the Company and VF Corporation
are presently in negotiation to extend that requirement for up to 12 months. The
Company and VF Corporation have reached an agreement as to such extension and
are currently in the process of preparing final documents evidencing the same.
The Company's current expansion and development plans are subject to future real
estate market conditions and the availability of financing, among other things.
There can be no assurance that the planned development and expansions will occur
according to current schedules or that, once commenced, such development and
expansion will be completed.
Based on current market conditions, the Company believes it has adequate
financial resources to fund operating expenses, distributions to stockholders,
and planned development and construction
23
<PAGE>
Factory Stores of America, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Liquidity and Capital Resources - continued
activities. The $30 million raised through the private placement with Gildea and
Blackacre will be used to fund the 1996 developments and expansions, repay
certain debt obligations, settle the remaining obligations associated with the
termination of the OPERS factory outlet acquisition agreements and provide
additional working capital. Operating cash flow is expected to provide
sufficient funds for dividends and distributions in accordance with REIT federal
income tax requirements. In addition, the Company anticipates retaining enough
operating cash to fund re-tenanting and lease renewal tenant improvement costs,
as well as, capital expenditures to maintain the quality of its existing
centers.
The terms of the $75 million credit facility limit the amount of distributions
to stockholders which the Company may make in any fiscal quarter. On April 9,
1996 the Board of Directors reduced its quarterly dividend distribution of $0.51
per share and declared a cash dividend of $0.25 per share. This represented a
dividend payout ratio as a percentage of Funds from Operations ("FFO") of 84.5%
for the first quarter of 1996. The Board anticipates reviewing its dividend
policy on a quarterly basis in light of actual results of operation, compliance
with loan covenants, and other factors.
24
<PAGE>
Factory Stores of America, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Liquidity and Capital Resources - continued
In May 1995, NAREIT issued an interpretive letter providing guidance as to the
use and intent of its definition of FFO. Among other things, the letter
clarifies that the amortizations of deferred financing costs and depreciation of
assets not uniquely significant to real estate should be excluded from total
depreciation and amortization added back to net income in calculating FFO. All
REIT's are encourage to implement the recommendations of the letter no later
than fiscal periods beginning in 1996. The Company cautions that the calculation
of FFO may vary from entity to entity and as such the presentation of FFO by the
Company may not be comparable to other similarly entitled measures of other
reporting companies. The Company has adopted the new NAREIT definition of FFO
beginning January 1, 1996. Below is a calculation of FFO for the quarter ended
March 31, 1996 and 1995 under the old method and under the new definition as if
the Company had adopted such definition as of January 1, 1995.
<TABLE>
<CAPTION>
Quarter Ended March 31
(In thousands)
New Method Old Method
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Income $ 412 $ 2,665 $ 412 $ 2,665
Add: Depreciation and amortization of
assets related to real estate 3,146 2,478 3,146 2,478
Other depreciation and amortization - - 74 40
Amortization of deferred finance cost - - 287 269
Less: Gain on sale of real estate - - - -
Straight line rents (63) (169) - -
-------- -------- -------- --------
Funds From Operations $ 3,495 $ 4,974 $ 3,919 $ 5,452
======== ======== ======== ========
Weighted Average Shares Outstanding 11,815 11,813 11,815 11,813
======== ======== ======== ========
</TABLE>
25
<PAGE>
Factory Stores of America, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Economic Conditions
Inflation has remained relatively low during the past three years, with
certain segments of the economy such as apparel, experiencing disinflation. The
trend in lower apparel pricing has slowed the growth of tenant sales which
adversely impacts the Company's revenue due to lower percentage and overage
rents on some Properties. Additionally, weakness in the overall retail
environment as it relates to tenant sales volumes may have an adverse impact on
the Company's ability to renew leases at current rental rates or to release
space to other tenants. A majority of the tenants' leases contain provisions
designed to protect the Company from the impact of inflation. Such provisions
include clauses enabling the Company to receive percentage rentals based on
tenants' gross sales, which generally increase as prices rise, and/or escalation
clauses, which generally increase rental rates during the terms of the leases.
The majority of the leases require the tenants to pay a proportionate share of
operating expenses, including marketing, common area maintenance, real estate
taxes and insurance, thereby reducing the Company's exposure to increases in
costs and operating expenses resulting from inflation.
The Properties are subject to operating risks common to commercial real
estate in general, any and all of which may adversely affect occupancy or rental
rates. While the Properties are subject to increases in operating expenses, the
Company's tenants generally are currently obligated to pay a portion of these
escalating costs; however, there can be no assurance that tenants will agree to
pay such costs upon renewal or that new tenants will agree to pay such costs.
Substantially all of the Company's existing tenants have met their lease
obligations. The Company intends to reduce operating and leasing risks by
continually improving its tenant mix, rental rates and lease terms by attracting
creditworthy national brand-name manufacturers, high-fashion manufacturers and
new tenants that offer a wide range of merchandise and amenities not previously
offered at the Properties.
26
<PAGE>
Factory Stores of America, Inc.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
As more fully described in footnote 6 of Part I, Item 1 "Notes to Consolidated
Financial Statements", on April 2, 1996, the Company executed a Note Purchase
Agreement and other related documents (collectively the "Agreements") with
Gildea Management Company ("Gildea") and Blackacre Bridge Capital, L.L.C.
("Blackacre"), whereby Gildea and Blackacre have agreed to purchase in a private
placement of up to $25 million of the Company's Exchangeable Notes (the
"Exchangeable Notes") and $5 million of its Senior Notes, both of which will be
unsecured.
As of April 30, 1996, Exchangeable Notes with an aggregate principal amount of
$20 million and unsecured Senior Notes in the amount of $5 million were sold
pursuant to the Note Purchase Agreement.
Item 5. Other Information
Dividend Declaration
On April 9, 1996, the Board of Directors declared a dividend of $0.25 per share
payable to stockholders of record as of April 25, 1996. The total amount of the
dividend, $3,006,503 was paid on May 7, 1996. The Board intends to review
its dividend policy on a quarterly basis in light of actual results of
operations, compliance with loan covenants, and other factors.
Forward-Looking Statements
Certain statements in this Form 10-Q and in the future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases,
and in oral statements made by or with the approval of an authorized executive
officer constitute "forward-looking statements" under the Reform Act. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors, which may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: real estate market conditions;
availability of financing; general economic conditions, including conditions in
the retail segments of the economy; 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.
27
<PAGE>
Factory Stores of America, Inc.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Exhibit Description
10.1 Note Purchase Agreement by and among Factory Stores of
America, Inc. and Blackacre Bridge Capital, L.L.C. and Gildea
Management Company dated April 2, 1996.
*Incorporated by reference from the Registrant's Form 8-K Report dated April 2,
1996 and made a part hereof by such reference.
b) Reports on Form 8-K
On April 17, 1996, the Company filed a Current Report on Form 8-K dated April 2,
1996, reporting that the Company entered into an agreement with Blackacre Bridge
Capital, L.L.C. and Gildea Management Company providing for the issuance of up
to $25 million in unsecured exchangeable notes (the "Exchangeable Notes") and up
to $5 million in unsecured senior notes (the "Senior Notes"). The Exchangeable
Notes will be mandatorily exchangeable into shares of the Company's convertible
preferred stock ("Convertible Preferred") upon stockholder approval of requisite
amendments tot he Company's Second Restated Certificate of Incorporation. Each
$25 in principal amount of the Exchangeable Notes will be mandatorily
exchangeable into shares of the Company's Convertible Preferred which will be
convertible into shares of the Company's Common Stock, par value $0.01 per share
(the "Common Stock") at a conversion price equal to the lower of $9.00 per share
or a per share price based on a thirty-day average price for the Company's
Common Stock. The Convertible Preferred will have limited voting rights and have
noncumulative dividends equal to those of the Common Stock. In the event
stockholder approval is not obtained, the Exchangeable Notes will be convertible
at he option of the holder into shares of Common Stock of the Company.
As of April 30, 1996, the Company had issued $20 million in aggregate principal
amount of Exchangeable Notes and $5 million in unsecured Senior Notes. No
financial statements were filed with this Form 8-K.
28
<PAGE>
Factory Stores of America, Inc.
Signatures
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Factory Stores of America, Inc.
(Registrant)
Date: May 14, 1996 By /s/ John N. Nelli
John N. Nelli
Chief Financial Officer and Senior Vice
President Finance
29
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 7,365
<SECURITIES> 0
<RECEIVABLES> 5,388
<ALLOWANCES> 669
<INVENTORY> 0
<CURRENT-ASSETS> 3,566
<PP&E> 345,537
<DEPRECIATION> 22,499
<TOTAL-ASSETS> 355,452
<CURRENT-LIABILITIES> 17,212
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 160,786
<TOTAL-LIABILITY-AND-EQUITY> 355,452
<SALES> 12,695
<TOTAL-REVENUES> 12,879
<CGS> 0
<TOTAL-COSTS> 4,593
<OTHER-EXPENSES> 4,641
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,233
<INCOME-PRETAX> 412
<INCOME-TAX> 0
<INCOME-CONTINUING> 412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 412
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
