-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FgMrxmJD/v0lx/vD+cm6hDIopiy1cD0dAEm6DUKxFGZc6rWz5L7pFYS7SMb6MziQ hkUZQ2ICaveEhHGqW8oFrw== 0001047469-98-022237.txt : 19980601 0001047469-98-022237.hdr.sgml : 19980601 ACCESSION NUMBER: 0001047469-98-022237 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980529 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRAUNS FASHIONS CORP CENTRAL INDEX KEY: 0000883943 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 061195422 STATE OF INCORPORATION: DE FISCAL YEAR END: 0302 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19972 FILM NUMBER: 98634111 BUSINESS ADDRESS: STREET 1: 2400 XENIUM LANE NORTH CITY: PLYMOUTH STATE: MN ZIP: 55441-3626 BUSINESS PHONE: 6125515000 MAIL ADDRESS: STREET 1: 2400 XENIUM LN NORTH CITY: PLYMOUTH STATE: MN ZIP: 55441-3626 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) ---------------------------- FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998 OR /X/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________. COMMISSION FILE NO. 0-19972 BRAUN'S FASHIONS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 06 - 1195422 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 2400 XENIUM LANE NORTH, PLYMOUTH, MINNESOTA 55441 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (612) 551-5000 ------------------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share 12% Senior Notes due 2005 ------------------------------------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Indicate by check mark whether the registrant (1) has filed all reports required 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 ------- ------- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES X NO ------- ------- As of May 15, 1998, 4,523,393 shares of common stock were outstanding and the aggregate value of the common stock held by non-affiliates of the Registrant on that date was approximately $51,574,665 based upon the last reported sale price of the common stock at that date by The NASDAQ Stock Market. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held July 22, 1998 (the "Proxy Statement") are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BRAUN'S FASHIONS CORPORATION 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
Page ---- PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 5 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 5 Item 4a. Executive Officers of the Registrant . . . . . . . . . . . . . . . 6 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . . 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 9 Item 7a. Quantitative and Qualitative Disclosures About Market Risk . . . .14 Item 8. Consolidated Financial Statements. . . . . . . . . . . . . . . . .15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . .33 PART III Item 10. Directors and Executive Officers of the Registrant . . . . . . . .33 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . .33 Item 12. Security Ownership of Certain Beneficial Owners and Management . .33 Item 13. Certain Relationships and Related Transactions . . . . . . . . . .34 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. .34 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
PART I ITEM 1. BUSINESS GENERAL Braun's Fashions Corporation ("BFC"), is a Minneapolis-based regional retailer of women's specialty apparel which operates through its wholly owned subsidiary, Braun's Fashions, Inc. ("BFI") (collectively referred to as "Braun's" or the "Company"). As of May 15, 1998, the Company operated a chain of 185 stores in 20 states, primarily in the Midwest. Most stores are mall based, average 3,400 square feet and are located in mid-sized markets. BUSINESS STRATEGY The Company's business strategy is to provide its target customer with high quality, value-priced, coordinated ensembles that are interchangeable between work and leisure activities; to differentiate itself from its competitors through its focused merchandising approach, including an emphasis on private label merchandise manufactured exclusively for the Company under its proprietary brand name, CHRISTOPHER & BANKS; to utilize management information systems to effectively manage its merchandise inventories; and to expand its store network and maintain updated, attractive store facilities. The key elements of the Company's strategy are as follows: - Focus on a target customer and meet her needs - Deliver a well defined merchandising approach - Use information systems to drive decision making and maintain tight inventory control - Expand store base in existing and new markets FOCUS ON A TARGET CUSTOMER AND MEET HER NEEDS. Braun's target customer is a 35-to-55 year old working woman with an annual family income of $35,000 to $75,000, who lives in mid-sized cities of the upper Midwest. Management believes this target customer leads a busy life so she shops in regional malls and purchases mainstream popular fashion which is suitable for both work and leisure activities. The Company conducts ongoing research, customer surveys and utilizes point-of-sale inventory tracking to analyze the needs of its customers in its market niche. Braun's also uses a product testing program to identify consumer demand for clothing styles, patterns and colors. The Company's objective is to be recognized by its target customer as offering quality fashion at value prices. Braun's differentiates itself from other fashion retailers through offering clothing that is characterized by a novelty flair with distinctive patterns, textures and colors. DELIVER A WELL DEFINED MERCHANDISING APPROACH. In fiscal 1998, Braun's lines of merchandise included four principal categories: sportswear, sweaters, dresses and accessories. During fiscal 1998, the Company increased its merchandise emphasis on sweaters and discontinued the sale of coats in its stores. The following table sets forth the approximate percentage of net sales attributable to each merchandise group for the past three fiscal years:
PERCENTAGE OF NET SALES ------------------------------------ 1998 1997 1996 ------ ------ ------ MERCHANDISE GROUP - ----------------- Sportswear 57.7% 59.5% 60.2% Sweaters 26.5 21.5 17.5 Dresses 10.1 10.9 14.7 Accessories 5.7 5.3 5.3 Coats and jackets 0.0 2.8 2.3 ------ ------ ------ Total 100.0% 100.0% 100.0% ------ ------ ------ ------ ------ ------
The Company has developed a variety of strategies and programs to distinguish itself from its competitors and build customer loyalty. Major elements of its merchandising strategy include: 1 STRONG VISUAL MERCHANDISE PRESENTATION. The Company's stores rely heavily on attracting mall traffic through stimulating visual presentation. Braun's uses carefully designed front-of-store displays to draw customers into the store. The visual program emphasizes attractive windows and store-entrance areas, as well as graphics and other collateral materials that "romance" the clothing. To keep its fashions fresh, Braun's introduces a new "color story" every 10 to 12 weeks. After a period of time, new fashion is displayed in the front of the stores, with older or less-actively selling merchandise moved to the back for promotion and liquidation in the current season. DIRECT IMPORT PROGRAM. During fiscal 1998, the Company directly imported approximately 50% of its total merchandise purchases. The Company anticipates that direct imports, as a percent of total purchases, will be approximately 50% again in fiscal 1999. Management believes that direct imports allow the Company to obtain high quality merchandise at a lower cost. This in turn provides the Company with the ability to sell garments, comparable in quality to those sold in department stores, at a lower price. PRIVATE LABEL CLOTHING. The use of private label clothing produced exclusively for Braun's creates a unique store identity and establishes a competitive "point of difference", while resulting in higher-than-average gross profit margins. For its private label clothing, the Company primarily uses its proprietary brand name, CHRISTOPHER & BANKS. The Company estimates that sales of Braun's private label clothing comprised approximately 80% of its sales in fiscal 1998 compared to 67% in fiscal 1997. The Company anticipates that private label clothing will account for approximately 80% percent of its sales again in fiscal 1999. The Company's merchandising staff works closely with its vendors in selecting and developing designs for the Company's private label merchandise. KEY VENDOR RELATIONSHIPS. The Company's ongoing relationships with key vendors has enabled it to: (i) expand its private label offerings in order to project a merchandising point of difference; (ii) execute a timely product testing and reorder program designed to gauge consumer demand and maximize sales; and (iii) offer the customer "opportunistic" purchases through planned promotional programs. QUALITY ASSURANCE. The Company uses a variety of quality control measures prior to and at warehouse receipt including color, fabric and construction analysis and sizing verification, to ensure that all merchandise meets the Company's quality standards. LOYALTY BUILDING PROGRAMS. Braun's has frequent shopper and preferred customer programs which the Company believes encourage repeat sales and customer loyalty. Features include: a frequent shopper program where customers, after reaching certain cumulative purchase levels, are awarded a coupon redeemable toward future purchases; and a preferred customer program which offers additional customer benefits including invitations to private sales, informational phone calls and notices on upcoming sales. The customer automatically becomes a preferred customer after receiving the first frequent shopper award coupon. As of February 28, 1998, there were approximately 225,000 active frequent customers and 50,000 active preferred customers. In August 1995, the Company introduced a Braun's credit card for the purpose of increasing sales, strengthening customer loyalty and facilitating more frequent communication with core customers. In fiscal 1998, sales on the Braun's card accounted for approximately 11% of the Company's total sales. The Braun's card is offered through a third party finance company with no recourse or credit risk to Braun's. USE INFORMATION SYSTEMS TO DRIVE DECISION MAKING AND MAINTAIN TIGHT INVENTORY CONTROL. The Company has an integrated on-line management information system. This information system, which includes point-of-sale registers in all stores, provides support for merchandising, inventory management, marketing, and financial and management reporting. The on-line access to information allows management to monitor sales trends by style, vendor and merchandising classification. The Company's POS registers expedite consumer checkout and provide for an efficient flow of information to and from the stores. The Company utilizes a computerized planning and allocation system to consistently deliver appropriate merchandise assortments to its stores. The Company utilizes a cost effective program to deliver merchandise on a daily basis from the Company's distribution center to all stores. As a result of these programs, inventories can be maintained at an efficient level throughout the year which ensures a consistent flow of fresh merchandise to the stores. Inventory turnover increased from 3.2 turns in fiscal 1997 to 3.7 turns in fiscal 1998. 2 In fiscal 1999, the Company plans to upgrade its merchandise software packages. Management expects that the upgraded merchandise systems will allow for improved merchandise planning, sales tracking and trend analysis. Further, the Company also expects these systems will allow for improved distribution center processing and more flexible allocation of merchandise to the Company's stores. EXPAND STORE BASE IN EXISTING AND NEW MARKETS. The Company plans to pursue a strategy of controlled expansion with 10-15% annual growth in net store count. Twenty-three new stores are planned for fiscal 1999. New stores will be opened in regional malls in states where the Company already has a market presence or in adjoining states. In fiscal 1999, the Company intends to seek new store locations in the Northeast, particularly in Pennsylvania and upstate New York. The Company continually evaluates store design and layout. The Company developed a new prototype in fiscal 1997 and believes that this prototype highlights visual merchandise presentation and improves the customer's shopping experience through enhanced decor, fixturing and store layout. The Company typically effects a major or a minor remodeling of a store following renewal of the store's lease. However, during the interim, improvements such as carpet replacement, painting and similar improvements are made as needed. The Company completed a total of five major store remodelings in fiscal 1998, five in fiscal 1997, and seven in fiscal 1996. The Company plans to complete nine major store remodelings in fiscal 1999. STORE OPERATIONS The Company operates its stores in a manner that encourages operational management participation in planning, execution and evaluation of the Company's business and operational policies at all functional levels. Each store has a manager who executes Company policy and is responsible for day-to-day operations of the store. Store managers complete a management training program and are eligible for Company incentive awards based upon store sales volume and expense control. PURCHASING/SOURCES OF SUPPLY Direct imports accounted for approximately 50% of total purchases in fiscal 1998. The Company purchased nearly all of its merchandise from approximately 200 vendors in fiscal 1998. In fiscal 1998, the Company's ten largest vendors represented approximately 50% of the Company's purchases. Further, purchases from the Company's largest overseas supplier accounted for 18% of total purchases in fiscal 1998 compared to 17% in fiscal 1997. The Company's main suppliers are established, quality apparel manufacturers who have worked with the Company over many years and are familiar with the Company's marketing and merchandising approach. The Company believes it has good working relationships with its vendors. A disruption in supply from vendors could have a negative impact on the Company's business. The Company intends to continue to directly import approximately 50% of its merchandise purchases during fiscal 1999. Direct imports enable the Company to purchase quality merchandise at significantly reduced costs and enable the Company to offer its customers a distinct styling and value point of difference. The Company's purchasing staff negotiates price, terms and allowances in an effort to give customers good value. The Company's merchandising staff also develops programs suited to the strength of each individual supplier. This involves a range of purchasing arrangements and covers the spectrum from buying vendor merchandise to designing merchandise with the vendor's assistance. ADVERTISING AND PROMOTION The Company believes that most of its locations depend on mall traffic. To attract customers into its stores, the Company emphasizes front-of-store displays, entryway fixturing and in-store visual presentation. The merchandise presentation is further enhanced by the use of photographic visual merchandising images including signs and graphics. Additionally, the Company uses direct mail in connection with the frequent shopper and preferred customer programs. The Company also uses newspaper and radio media advertising in targeted markets to promote special sales events. SEASONALITY The Company's sales show seasonal variation as sales in the third and fourth quarters, which include the fall and holiday season, generally have been higher than sales in the first and second quarters. Sales generated during the fall and holiday season have a significant impact on the Company's annual results of operations. 3 COMPETITION The women's retail apparel business is highly competitive. The Company believes that the principal bases upon which it competes are merchandise selection, price, fashion, quality, store location, store environment and service. The Company competes with a broad range of national and regional retail chains that sell similar merchandise, including department stores, specialty stores and discount stores. The increased focus of department stores, mass merchandisers and discount operators on this moderate priced segment have made this industry increasingly competitive in recent years. Many of these competitors are larger and have greater financial resources than the Company. The Company believes that its focused merchandise selection and presentation, competitive prices, product quality, loyalty building programs and customer service enable the Company to compete effectively. EMPLOYEES At May 15, 1998, the Company had approximately 450 full-time and approximately 1,100 part-time employees. The number of part-time employees increases during peak selling periods. None of the Company's employees are represented by a labor union or is subject to a collective bargaining agreement. The Company has never experienced a work stoppage and considers its relationship with its employees to be satisfactory. TRADEMARKS AND SERVICE MARKS The Company is the owner of the federally registered trademark and service mark "BRAUNS" with respect to articles of apparel and "CHRISTOPHER & BANKS", which is its predominant private label. The Company also has common law rights in other trademarks and service marks which it considers to be of lesser importance. The Company believes its primary marks are important to its business and are recognized in the women's retail apparel industry. Accordingly, the Company intends to maintain its marks and the related registrations. The Company is not aware of any pending claims of infringement or other challenges to the Company's right to use its marks in the United States. ITEM 2. PROPERTIES STORE LOCATIONS The Company's stores are located predominantly in regional shopping malls in mid-sized cities and suburban areas, which offer high-traffic by potential walk-in customers. The typical Braun's store is in a visible and accessible location in an enclosed regional mall that has numerous specialty stores and two or more general merchandise chains or department stores as anchor tenants. Fewer than 10% of the Company's stores are located in strip shopping centers. The Company attempts to locate its stores strategically within the mall or shopping center to attract walk-in customers through stimulating visual displays. At May 15, 1998, Braun's stores averaged approximately 3,400 gross square feet. At May 15, 1998, the Company operated 185 Brauns stores in the following states:
Number Number State of Stores State of Stores ----- --------- ----- --------- Minnesota. . . . . . 43 Utah. . . . . . . . 6 Iowa . . . . . . . . 24 Missouri. . . . . . 5 Wisconsin. . . . . . 24 Idaho . . . . . . . 4 Michigan . . . . . . 15 Ohio. . . . . . . . 4 Illinois . . . . . . 9 Oklahoma. . . . . . 4 Kansas . . . . . . . 8 Arkansas. . . . . . 3 Nebraska . . . . . . 7 Colorado. . . . . . 3 North Dakota . . . . 7 Indiana . . . . . . 3 Montana. . . . . . . 6 Washington. . . . . 2 South Dakota . . . . 6 Wyoming . . . . . . 2
4 STORE LEASES All of the Company's stores are leased. Management believes that the current commercial real estate market, combined with the Company's relationship with nationally-recognized developers, established operating history and status as a middle-market retailer, makes the Company an attractive tenant when negotiating terms with shopping center developers or owners. Lease terms typically are for 10 years and may contain a renewal option. Leases generally provide for a fixed minimum rental and a percentage rent if sales are above a specified level. This percentage override is typically 5%. The following table, which covers all of the stores operated by the Company at May 15, 1998, indicates the number of leases expiring during the fiscal year indicated and the number of such leases with renewal options.
Number of Number with Fiscal Year Leases Expiring Renewal Options ----------- --------------- --------------- 1999. . . . . . . . . . . . . . . . 26 4 2000. . . . . . . . . . . . . . . . 16 3 2001. . . . . . . . . . . . . . . . 10 4 2002. . . . . . . . . . . . . . . . 19 6 2003. . . . . . . . . . . . . . . . 26 2 2004 - 2008 . . . . . . . . . . . . 84 10 2009 - 2013 . . . . . . . . . . . . 4 0
The Company currently plans to negotiate new leases in most of the locations which do not have renewal options. HEADQUARTERS FACILITY The Company occupies a 210,000 square foot headquarters and merchandise distribution center facility located in Plymouth, Minnesota. Of this facility, the Company uses approximately 100,000 square feet for its own office and distribution facility and subleases the balance to third parties. The Company leases this facility under an agreement which expires on June 14, 2005. Under the agreement, the Company will pay minimum rent of approximately $688,000 per year through June 14, 1999, and $746,000 per year from June 15, 1999, until the end of the lease term. The Company is also required to reimburse the landlord for property taxes and pay for utilities and other operating costs of the facility. The Company subleases 80,000 square feet of warehouse space in its distribution center to a third party under an agreement which commenced October 1, 1997. Under the agreement, the Company will receive minimum rent of: $14,667 per month from October 1, 1997 through August 31, 1998; $21,667 per month from September 1, 1998 through August 31, 1999 and $24,667 per month from September 1, 1999 through August 31, 2000. The subtenant may extend the lease for two option periods. Rent for the first three year option period would be $26,480 per month. Rent for the second option period of one year and nine months would be $29,790 per month. The subtenant is also required to reimburse the Company for property taxes, utilities and other operating costs of the subleased portion of the facility. Under a second sublease, effective September 1, 1997 and expiring on May 31, 2005, the Company subleased 33,000 square feet of warehouse and office space to a third party. Under the agreement the Company will receive annual minimum rent of $132,000. The subtenant is also required to reimburse the Company for property taxes, utilities and other operating costs of the subleased portion of the facility. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings pending against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1998. 5 ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the executive officers of the Company as of May 15, 1998.
NAME AGE POSITIONS AND OFFICES William J. Prange 44 President and Chief Executive Officer Joseph E. Pennington 52 Executive Vice President and Chief Operating Officer Ralph C. Neal 51 Executive Vice President/Store Operations Kathryn R. Gangstee 48 Senior Vice President and General Merchandising Manager Andrew K. Moller 39 Vice President Finance and Chief Financial Officer Nancy C. Scott 49 Vice President of Real Estate and Construction
WILLIAM J. PRANGE has served as President and Chief Executive Officer since March 1998. From July 1997 through February 1998, Mr. Prange was President and Chief Merchandising Officer. From April 1995 through June 1997, he was Senior Vice President and General Merchandising Manager. From April 1994 through March 1995, Mr. Prange was Vice President and General Merchandising Manager. From 1989 to 1994, he was President and General Merchandise Manager of id Stores. From 1987 to 1989, he was Vice President and General Merchandise Manager of id stores. From 1985 to 1987, Mr. Prange was Vice President and General Merchandise Manager of Prange Department Stores. JOSEPH E. PENNINGTON has served as Executive Vice President and Chief Operating Officer since March 1998. Mr. Pennington was Senior Vice President of Merchandise Planning and Distribution from July 1997 through February 1998. From February 1997 through June 1997, Mr. Pennington was Vice President of Merchandise Planning and Distribution and Management Information Systems. From April 1996 through January 1997, Mr. Pennington was self-employed, providing consulting services to retail companies including Braun's. Mr. Pennington was President and Chief Executive Officer of American Specialty Stores (dba the id) from June 1994 through March 1996. From October 1993 through May 1994, Mr. Pennington was Senior Vice President of Merchandise and Operations for the id, and from January 1990 through October 1993, Mr. Pennington was Vice President of Operations. From 1976 through 1989, Mr. Pennington held various positions with Foxmoor Stores, including Vice President of Planning from 1984 through 1989. RALPH C. NEAL has served as Executive Vice President/Store Operations since March 1998. Mr. Neal was Senior Vice President of Store Operations from July 1997 through February 1998. From September 1996 through June 1997, Mr. Neal was Vice President of Store Operations. From 1989 to 1996, Mr. Neal was Vice President of Store Operations for the id stores. From 1986 to 1989, Mr. Neal was a Senior Vice President of Brooks Fashions. From 1982 to 1986, Mr. Neal was Vice President of Operations for the id stores. Prior to 1982 Mr. Neal served in various managerial capacities for other women's apparel retailers. KATHRYN R. GANGSTEE has served as Senior Vice President and General Merchandise Manager since March 1998. From September 1997 through February 1998, Ms. Gangstee was Vice President and Divisional Merchandise Manager. Ms. Gangstee was a Divisional Merchandise Manager from March 1986 through August 1997. From January 1984 through February 1986, Ms. Gangstee held other positions with the Company. ANDREW K. MOLLER has served as Vice President Finance and Chief Financial Officer since March 1998. From January 1995 through February 1998, Mr. Moller was Controller. From September 1992 through December 1994, Mr. Moller was Assistant Controller. Prior to joining the Company, Mr. Moller held managerial accounting positions with Ladbroke Racing Canterbury, Inc., a subsidiary of Ladbroke Group and with B Dalton Bookstores. Mr. Moller also has previous experience with Arthur Andersen LLP and is a Certified Public Accountant. NANCY C. SCOTT has served as Vice President of Real Estate and Construction since March 1998. From May 1997 through February 1998, Ms. Scott was a Regional Director of Leasing for Pacific Sunwear of California. Ms. Scott was employed by Frederick's of Hollywood Stores, Inc. from March 1987 through April 1997. She held the position of Vice President Real Estate/Leasing from February 1989 to April 1997. From 1979 through 1986, Ms. Scott held leasing positions with other companies. Messrs. Prange, Pennington and Neal were all previously affiliated with American Specialty Stores (dba the id) which filed a voluntary petition for Chapter 11 Bankruptcy protection in September 1994. American Specialty Stores plan of reorganization was confirmed by the Bankruptcy Court in September 1995. 6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock has traded on The NASDAQ Stock Market under the symbol "BFCI" since March 31, 1992. Prior to that date there was no public market for the Company's common stock. The quarterly high and low closing bid quotations of the Company's common stock for fiscal 1998 and fiscal 1997 are presented in Note 10 of the Consolidated Financial Statements and are included herein. The quotations represent inter-dealer quotations without retail mark-up, mark-down or commission, and do not necessarily represent actual transactions. The number of holders of record of the Company's common stock as of May 15, 1998 was 77. Based upon information received from the record holders, the Company believes there are more than 1,500 beneficial owners. The last reported sales price of the Company's common stock on May 15, 1998 was 12 5/8. The Company has never paid dividends on its common stock. The Company presently intends to retain all future earnings, if any, for the operation of its business and does not expect to pay cash dividends on its common stock in the foreseeable future. Currently, dividends are restricted by the terms of (i) the Company's revolving credit facility and (ii) the indenture under which the 12% Senior Notes (the "Senior Notes") were issued. See Item 7 of this Form 10-K. The Company may also enter into bank or other lending agreements in the future that contain similar restrictions on payment of dividends or other distributions. Any future determination as to the payment of dividends on common stock will depend upon future earnings, results of operations, capital requirements, compliance with financial covenants, the financial condition of the Company and any other factors the Board of Directors may consider. In fiscal 1998, the Company did not sell any equity securities in a transaction that was exempt from the registration provisions of the Securities Act of 1933, as amended. During fiscal 1997, in connection with the Company's Chapter 11 proceedings and in accordance with its Second Amended Plan of Reorganization (the "Plan"), the Company issued an aggregate of 617,516 shares of common stock in the Company and $10,300,200 principal face amount of Senior Notes to holders of certain claims. By issuing these securities the Company discharged $13,201,075 of claims pursuant to the Plan. In connection with the distribution of securities, the Company relied upon the exemption provided under Section 3(a)(7) of the Securities Act of 1933 as amended. 7 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial data have been derived from the audited consolidated financial statements of the Company and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes appearing elsewhere herein.
FISCAL YEAR ENDED ---------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND SELECTED OPERATING DATA) FEB. 28, MARCH 1, MARCH 2, FEB. 25, FEB. 26, 1998 1997(1) 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- INCOME STATEMENT DATA: Net sales . . . . . . . . . . . . . . . . . . . . $ 99,536 $ 95,946 $ 97,296 $ 93,961 $ 89,050 Cost of sales(2). . . . . . . . . . . . . . . . . 65,111 65,445 70,386 68,108 62,395 ---------- ---------- ---------- ---------- ---------- Gross profit. . . . . . . . . . . . . . . . . . . 34,425 30,501 26,910 25,853 26,655 Selling, general and administrative expenses. . . . . . . . . . . . 23,390 22,854 24,897 22,565 20,962 Depreciation and amortization . . . . . . . . . . 2,534 2,649 3,154 2,690 2,351 Reorganization expense(3) . . . . . . . . . . . . -- 7,830 -- -- -- Nonrecurring expense(4) . . . . . . . . . . . . . 775 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Operating income (loss) . . . . . . . . . . . . . 7,726 (2,832) (1,141) 598 3,342 Interest, net . . . . . . . . . . . . . . . . . . 691 684 1,388 993 502 ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes . . . . . . . . 7,035 (3,516) (2,529) (395) 2,840 Income tax provision (benefit)(5) . . . . . . . . 2,750 (2,895) 929 (150) 1,079 ---------- ---------- ---------- ---------- ---------- Income (loss) before change in accounting principle and extraordinary gain. . . . . . . . . . . . . . 4,285 (621) (3,458) (245) 1,761 Cumulative effect of change in accounting principle. . . . . . . . . . . . . -- -- -- -- 1,100 Extraordinary gain. . . . . . . . . . . . . . . . 116 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) . . . . . . . . . . . . . . . . $ 4,401 $ (621) $ (3,458) $ (245) $ 2,861 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic earnings per common share: Income (loss) before change in accounting principle and extraordinary gain. . . . . . . . . . . . $ 0.96 $ (0.15) $ (0.91) $ (0.06) $ 0.47 Cumulative effect of change in accounting principle. . . . . . . . . . . . . -- -- -- -- 0.29 Extraordinary gain(6) . . . . . . . . . . . . . . 0.02 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) . . . . . . . . . . . . . . . . $ 0.98 $ (0.15) $ (0.91) $ (0.06) $ 0.76 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of shares outstanding . . . . . . . . . . . . . . . . . 4,482 4,029 3,792 3,785 3,771 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Diluted earnings per common share: Income (loss) before change in accounting principal and extraordinary gain. . . . . . . . . . . . . . $ 0.89 $ (0.15) $ (0.91) $ (0.06) $ 0.45 Cumulative effect of change in accounting principle. . . . . . . . . . . . . -- -- -- -- 0.28 Extraordinary gain(6) . . . . . . . . . . . . . . 0.02 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) . . . . . . . . . . . . . . . . $ 0.91 $ (0.15) $ (0.91) $ (0.06) $ 0.73 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding . . . . . . . . 4,812 4,029 3,792 3,785 3,910 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(1) From July 2, 1996 until December 3, 1996, the Company operated its business as a debtor-in-possession under Chapter 11 of the United States Bankruptcy Code. The Company emerged from bankruptcy upon the confirmation of its Second Amended Plan of Reorganization. (2) Cost of sales includes cost of merchandise and buying expenses and store and distribution center occupancy costs, but excludes all depreciation and amortization. (3) In fiscal 1997, the Company recorded $7,830,000 of reorganization expense as a result of the Company's July 2, 1996 Chapter 11 bankruptcy filing. (4) In fiscal 1998, the Company recorded a one time pre-tax charge of $775,000 or $0.13 per diluted share related to the implementation of its management succession plan. The majority of this expense was non-cash, related to accelerated vesting of previously issued options. (5) In fiscal 1996, the Company recorded a valuation allowance of $1.8 million, or $0.47 per share, equal to the full amount of its deferred tax assets, due to the uncertainty of realizing the value of these assets in future years. In fiscal 1997, the Company reversed the valuation allowance as improved operating performance made the future realization of these assets more likely than not. (6) In fiscal 1998, the Company recorded an extraordinary gain of $116,000 on the purchase at a discount from par of $1,033,000 principal face amount of its 12% Senior Notes due 2005. 8
FISCAL YEAR ENDED --------------------------------------------------------------------- (DOLLARS IN THOUSANDS) FEB. 28, MARCH 1, MARCH 2, FEB. 25, FEB. 26, 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- SELECTED OPERATING DATA: Same store sales increase (decrease)(1) . . . 10% 10% (3)% (9)% (5)% Stores at end of period . . . . . . . . . . . 179 170 221 224 188 Net sales per gross square foot(1). . . . . . $ 166 $ 148 $ 129 $ 128 $ 141 BALANCE SHEET DATA (AT END OF PERIOD) Working capital(2). . . . . . . . . . . . . . $ 19,172 $ 14,746 $ 248 $ 10,900 $ 13,204 Total assets. . . . . . . . . . . . . . . . . 40,590 34,637 32,304 36,179 37,187 Long-term debt(2) . . . . . . . . . . . . . . 9,616 10,374 952 11,170 10,000 Stockholders' equity. . . . . . . . . . . . . 20,959 15,573 13,662 17,118 17,329
(1) Based on net sales for stores open longer than 12 months. Fiscal 1997 excludes stores closed as part of the Company's Chapter 11 reorganization. (2) In fiscal 1996, $10.4 million of long-term debt potentially subject to acceleration was reclassified to current liabilities. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company was incorporated in Delaware in 1986 to acquire BFI, which had operated as a family-owned business since 1956. As of May 15, 1998, the Company operated a chain of 185 stores in 20 states, primarily in the Midwest. In fiscal 1998, the Company opened 16 new stores and closed seven stores when their leases expired. In fiscal 1999, the Company intends to open 23 new stores and close five stores as their leases expire. REORGANIZATION As a result of an extremely competitive retail environment and in response to the deteriorating liquidity position brought on by losses at approximately 50 of its store locations and to facilitate restructuring of its obligations, the Company filed for protection from its creditors under Chapter 11 of the United States Bankruptcy Code on July 2, 1996. Under the protection of Chapter 11, the Company managed its affairs and operated its business as a debtor-in-possession while developing a plan of reorganization. The Company filed its Second Amended Plan of Reorganization on October 22, 1996 (the "Plan"), along with its Disclosure Statement. The Plan was approved by 99.6% of the voting shareholders and by a majority of each class of the creditors that voted. On November 22, 1996, the Bankruptcy Court confirmed the Plan, which became effective on December 3, 1996. After emergence from Chapter 11 the Company has benefited from actions implemented during the reorganization. During the reorganization the Company rejected 50 unprofitable store leases, which in fiscal 1996 generated operating losses of $2.3 million and re-negotiated more favorable lease terms for an additional 46 stores. The Company disposed of its old inventory during liquidation sales and strengthened its inventory control thereby increasing inventory turnover from 2.6 turns in 1996, to 3.2 turns in fiscal 1997, to 3.7 turns in fiscal 1998. Through hiring highly qualified individuals in the key areas of store operations and merchandise planning and distribution, the Company strengthened its management team. Further, the Company reconfigured its distribution center and subsequently leased 33,000 square feet of space to a subtenant. The Company also negotiated a $10 million working capital line of credit with a new lender. MANAGEMENT SUCCESSION In February 1998, the Company completed the implementation of its management succession plan. As a result of the plan, William J. Prange who has led the Company's merchandising operations since 1994, became President and Chief Executive Officer. He replaced Nicholas H. Cook, who will continue as Chairman of the Company's Board of Directors. The new management team was completed with the promotions of Joseph E. Pennington to Executive Vice President and Chief Operating Officer, Ralph C. Neal to Executive Vice President/Store Operations, Kathryn R. Gangstee to Senior Vice President and General Merchandising Manager and Andrew K. Moller to Vice President Finance and Chief Financial Officer. 9 The Company also hired Nancy C. Scott as Vice President Real Estate and Construction. Herbert D. Froemming, the Company's Vice Chairman, elected to take early retirement. In connection with its management succession plan, the Company recorded a one-time pre-tax charge of $775,000 or $0.13 per diluted share. The majority of this expense was non-cash, related to the accelerated vesting of previously issued options. RESULTS OF OPERATIONS The following table sets forth operating statement data expressed as a percentage of net sales for the last three fiscal years and should be read in conjunction with "Selected Consolidated Financial Data."
FISCAL YEAR ENDED ------------------------------------------ FEBRUARY 28, MARCH 1, MARCH 2, 1998 1997 1996 ------------ ------------ ------------ Net sales . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% Cost of sales . . . . . . . . . . . . . . . . 65.4 68.2 72.4 ------------ ------------ ------------ Gross profit. . . . . . . . . . . . . . . . . 34.6 31.8 27.6 Selling, general and administrative expenses. 23.5 23.8 25.6 Depreciation and amortization . . . . . . . . 2.6 2.8 3.2 Reorganization expense(1) . . . . . . . . . . -- 8.2 -- Nonrecurring expense(2) . . . . . . . . . . . 0.8 -- -- ------------ ------------ ------------ Operating income (loss) . . . . . . . . . . . 7.7 (3.0) (1.2) Interest, net . . . . . . . . . . . . . . . . 0.7 0.7 1.4 ------------ ------------ ------------ Income (loss) before income taxes . . . . . . 7.0 (3.7) (2.6) Income tax provision (benefit)(3) . . . . . . 2.7 (3.1) 0.9 ------------ ------------ ------------ Net income (loss) before extraordinary gain . 4.3 (0.6) (3.5) Extraordinary gain(4) . . . . . . . . . . . . 0.1 -- -- ------------ ------------ ------------ Net income (loss) . . . . . . . . . . . . . . 4.4% (0.6)% (3.5)% ------------ ------------ ------------ ------------ ------------ ------------
(1) In fiscal 1997, the Company recorded $7,830,000 of reorganization expense as a result of the Company's July 2, 1996 Chapter 11 bankruptcy filing. (2) In fiscal 1998, the Company recorded a one time pre-tax charge of $775,000 or $0.13 per diluted share related to the implementation of its management succession plan. The majority of this expense was non-cash, related to accelerated vesting of previously issued options. (3) In fiscal 1996, the Company recorded a valuation allowance of $1.8 million, or $0.47 per share, equal to the full amount of its deferred tax assets, due to the uncertainty of realizing the value of these assets in future years. In fiscal 1997, the Company reversed the valuation allowance as improved operating performance made the future realization of these assets more likely than not. (4) In fiscal 1998, the Company recorded an extraordinary gain of $116,000 on the purchase at a discount from par of $1,033,000 principal face amount of its 12% Senior Notes due 2005. FISCAL 1998 COMPARED TO FISCAL 1997 NET SALES. Net sales for the fiscal year ended February 28, 1998, were $99.5 million, an increase of 4% from sales of $95.9 million in fiscal 1997, which included sales from 50 stores closed during the reorganization. Same store sales increased 10%. GROSS PROFIT. Gross profit (which is net sales less cost of merchandise and buying and occupancy expenses) was $34.4 million or 34.6% of net sales in fiscal 1998, compared to $30.5 million or 31.8% of net sales in fiscal 1997. The percentage increase in gross profit was primarily due to closing 50 unprofitable stores whose gross margins were unusually low, particularly during the second quarter fiscal 1997 liquidation sales, and lower occupancy costs as a percent of net sales in the continuing stores. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $23.4 million or 23.5% of net sales in fiscal 1998 compared to $22.9 million or 23.8% of net sales in fiscal 1997. Selling, general and administrative expenses as a percent of net sales decreased due to leveraging associated with increased sales. REORGANIZATION EXPENSE. No reorganization expense was incurred in fiscal 1998. In fiscal 1997, the Company recorded approximately $7.8 million of reorganization expense. This reorganization expense included $2.6 million of professional fees and services; a $2.5 million loss on disposal of fixed assets; $1.0 million of lease rejection claims; $570,000 related to inventory impairment; $210,000 of severance pay; and $945,000 in other bankruptcy related expenses. 10 NONRECURRING EXPENSE. In fiscal 1998, the Company incurred a one-time pre-tax expense of $775,451 or $0.13 per diluted share related to the implementation of its management succession plan. This expense was primarily non-cash, reflecting the accelerated vesting of previously issued stock options. OPERATING INCOME. As a result of the foregoing, operating income was $7.7 million or 7.7% of net sales in fiscal 1998 compared to an operating loss of $2.8 million or 3.0% of net sales in fiscal 1997. INTEREST, NET. Net interest expense in fiscal 1998 increased to $690,589 from $684,330 in fiscal 1997. In fiscal 1997, the Company was not required to accrue interest on its prepetition debt after the July 2, 1996 bankruptcy filing. If the Company had been required to pay interest on its prepetition debt, contractual interest in fiscal 1997 would have totaled $1.2 million. The decrease in net interest expense is due to the Company's improved cash flow in fiscal 1998 which resulted in no advances on the line of credit and increased income from short-term investments. INCOME TAXES. Provision for income taxes was $2.7 million in fiscal 1998 with an effective tax rate of 39.1%. The Company had an income tax benefit of $2.9 million in fiscal 1997. In fiscal 1997, the Company reversed a $1.8 million valuation allowance against its deferred tax assets and recorded an additional $255,000 of deferred tax assets as improved operating performance made the future realization of these assets more likely then not. The remainder of the tax benefit resulted from recording an income tax refund receivable of $851,000 related to the Company's net operating loss carryback. EXTRAORDINARY GAIN. In fiscal 1998, the Company purchased a total of $1,033,000 principal face amount of its 12% Senior Notes due 2005 at a discount from par. These purchases resulted in a gain of $115,872 net of tax. NET INCOME (LOSS). Net income for fiscal 1998 was $4.4 million or 4.4% of net sales as compared to a net loss of $621,000 or 0.6% of net sales in fiscal 1997. FISCAL 1997 COMPARED TO FISCAL 1996 NET SALES. Net sales for the fiscal year ended March 1, 1997, a fifty-two week year, were $95.9 million, a decrease of 1% from sales of $97.3 million in fiscal 1996, a fifty-three week year. The decrease in sales is attributed to the closing of approximately 50 unprofitable stores during the year and one less week of sales reported in fiscal 1997. The effect of these factors was substantially offset by a 10% same store sales increase in the Company's 170 continuing stores. GROSS PROFIT. Gross profit (which is net sales less cost of merchandise and buying and occupancy expenses) increased from $26.9 million in fiscal 1996 to $30.5 million in fiscal 1997. The increase in gross profit as a percent of sales was due to the Company purchasing merchandise with a lower cost through the Company's strategy of expanded direct import purchases. Gross margins were also favorably impacted by lower occupancy costs due to closing approximately 50 unprofitable stores during the year and negotiating reduced rents at a number of continuing stores. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased to $22.9 million or 23.8% of net sales from $24.9 million or 25.6% of net sales in fiscal 1996. This decrease resulted primarily from the Company operating approximately 50 fewer stores during the fiscal year. The decrease as a percentage of sales resulted primarily from achieving a 10 percent same store sales increase in the Company's 170 continuing stores. REORGANIZATION EXPENSE. The Company recorded approximately $7.8 million of reorganization expense during fiscal 1997. This reorganization expense included $2.6 million of professional fees and services; a $2.5 million loss on disposal of fixed assets; $1.0 million of lease rejection claims; $570,000 related to inventory impairment; $210,000 of severance pay; and $945,000 in other bankruptcy related expenses. OPERATING INCOME (LOSS). As a result of the foregoing, the operating loss for fiscal 1997 was $2.8 million or 3.0% of net sales compared to an operating loss of $1.1 million or 1.2% of net sales in fiscal 1996. INTEREST, NET. Net interest decreased from $1.4 million in fiscal 1996 to $684,330 in fiscal 1997. This decrease was primarily due to the Company not being required to pay interest on its prepetition debt while it operated as a debtor-in-possession during its Chapter 11 proceedings. Further, as a result of the Company's improved cash flow, no advances were made on the line of credit during the second half of the year and increased income from investments was generated. If the Company had been required to pay interest on its prepetition debt during its bankruptcy proceedings, interest expense, net of interest income, would have totaled approximately $1.2 million. INCOME TAXES. Income tax benefit in fiscal 1997 was $2.9 million compared to income tax expense of $929,121 in fiscal 1996. In fiscal 1996, the Company recorded a valuation allowance of $1.8 million, or $.47 per diluted share, equal to the full amount of its deferred tax assets due to the uncertainty of realizing the value of these assets in future years. In fiscal 1997, the Company reversed the valuation allowance as improved operating performance made the future realization of these assets more likely than not. 11 NET LOSS. The net loss for fiscal 1997 was $620,994 or 0.6% of net sales compared to a net loss of $3.5 million or 3.5% of net sales in fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's principal on-going needs for liquidity are to finance the purchase of merchandise inventories and other working capital requirements. Merchandise purchases vary on a seasonal basis, peaking in the fall. As a result, the Company's cash requirements historically reach their peak in October and November. Conversely, cash balances reach their peak in January, after the holiday season is completed. Net cash generated by operating activities totaled $7.9 million in fiscal 1998. Cash was used to finance $2.7 million of capital expenditures to open sixteen new stores and for the completion of the major remodeling of five stores. The Company used a net of $331,230 in financing activities. As a result of the foregoing, cash increased by $4.9 million in fiscal 1998. In fiscal 1999, the Company expects to spend approximately $6 million on capital expenditures to open twenty-three new stores, complete nine major remodels and install new computer software packages. Management expects its cash on hand combined with cash flow from operations to be sufficient to meet its capital expenditure and working capital requirements and its other needs for liquidity during the upcoming year. On December 2, 1996, the Company entered into a borrowing agreement with Norwest Bank Minnesota, National Association (the "Norwest Revolver") expiring April 1, 1999. The Norwest Revolver provides the Company with revolving credit loans and letters of credit up to $10 million, subject to a borrowing base formula tied to inventory levels. Loans under the Norwest Revolver bear interest at Norwest's base rate plus 3/4%, subject to a rate reduction provision based on the financial performance of the Company (as described in the Norwest Revolver). Due to the Company's financial performance the interest rate at May 15, 1998 was Norwest's base rate plus 1/4% or 8-3/4%. Interest is payable monthly in arrears. The Norwest Revolver carries commitment fees of 1/4% of the difference between $5 million and the average amount outstanding under the facility (including letters of credit). If the average amount outstanding under the facility (including letters of credit) is between $5 million and $7.5 million, the commitment fee is based on the difference between $7.5 million and the average amount outstanding under the facility (including letters of credit) and if the average amount outstanding (including letters of credit) is in excess of $7.5 million, the commitment fee is on the difference between $10 million and the average amount outstanding under the facility (including letters of credit). This facility is secured by substantially all of the Company's assets. The borrowing base at May 15, 1998, was $7.7 million. As of May 15, 1998, the Company had no borrowings and outstanding letters of credit in the amount of $1.7 million under the Norwest Revolver. Accordingly, the availability of revolving credit loans under the Norwest Revolver was $6.0 million at that date. The Norwest Revolver contains certain restrictive covenants, including a limitation on capital expenditures, restrictions on incurring additional indebtedness, limitations on certain types of investments and prohibitions on paying dividends, as well as requiring the maintenance of certain financial ratios. The Company plans to initiate discussions in the first quarter of fiscal 1999 with Norwest regarding a new revolving credit facility to replace the existing Norwest Revolver which expires on April 1, 1999. In January 1997, the Company issued $10,300,200 of debt in the form of 12% Senior Notes (the "Senior Notes") due January 2005. The Senior Notes were issued, pursuant to an Indenture dated as of December 2, 1996, to (i) the holders of the 9% Senior Notes due January 2001 where each holder received, for each $1,000 principal face amount, (a) 48 shares of common stock in the Company and (b) Senior Notes in original principal face amount of $800 and (ii) the Company's prepetition banks who received a total of (a) 138,284 shares of common stock in the Company and (b) $2,313,000 in original principal face amount of the Senior Notes. The principal amount of the Senior Notes bears interest at the rate of 12% per annum. Interest at the rate of 9% per annum on the outstanding principal amount is due monthly. Interest at the rate of 3% per annum on the outstanding principal amount accrues monthly and upon accrual is treated as principal for all purposes, including without limitation, the calculation of all interest payments due thereafter, and is payable in full on January 1, 2005. Principal repayments on the 12% Senior Notes occur annually on the first of every calendar year. Minimum principal payments, including interest added to principal which is due in 2005, are as follows: 1999 - $431,938; 2000 - $803,902; 2001 - $875,752; 2002 - $958,207; 2003 - $1,040,074; 2004 - $1,133,443 and 2005 - $6,031,476. The Senior Notes are general unsecured senior obligations of the Company. The Indenture for the Senior Notes contains certain covenants which, among other things, limit the ability of the Company to incur liens, incur additional indebtedness, and restrict the Company's ability to declare dividends. 12 During fiscal 1998, the Company purchased $1,033,000 principal face amount of its Senior Notes at a discount from par. The purchase resulted in an extraordinary gain of $115,872, net of tax, and satisfied all of the January 1, 1998, and a portion of the January 1, 1999 redemption requirement. The Company's Board of Directors has approved the repurchase of up to $1 million of Senior Notes at a price of par (100% of original principal face amount) or less. The Company is unaware of any environmental liability that would have a material adverse effect on the financial position or the results of operations of the Company. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards Statement No. 130, "Reporting Comprehensive Income" ("FASB No. 130"), effective in fiscal 1999, establishes standards of disclosure and financial statement display for reporting total comprehensive income and the individual components thereof. Management believes the adoption of FASB No. 130 will not have a material impact on the Company's financial position or results of operations. In addition, FASB No 131, "Disclosures About Segments of an Enterprise and Related Information" ("FASB No. 131"), effective in fiscal 1999, establishes new standards for determining reportable segments and for disclosing information regarding each such segment. Management does not believe that the Company has reportable segments and as such will not be required to disclose segment information. QUARTERLY RESULTS AND SEASONALITY The Company's sales show seasonal variation as sales in the third and fourth quarters, which include the fall and holiday season, generally have been higher than sales in the first and second quarters. Sales generated during the fall and holiday season have a significant impact on the Company's annual results of operations. Quarterly results may fluctuate significantly depending on a number of factors including adverse weather conditions, shifts in the timing of certain holidays and customer response to the Company's seasonal merchandise mix. The Company's unaudited quarterly operating results for each quarter of fiscal 1998 and 1997 are presented in Note 10 of the Consolidated Financial Statements. INFLATION The Company does not believe that inflation has had a material effect on the results of operations during the past three fiscal years. INFORMATION SYSTEMS AND THE YEAR 2000 The year 2000 problem results from computer programs being written using two digits rather than four to define the applicable year. Certain of the Company's computer programs may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, or to engage in similar normal business activities. As is the case with most other companies using computers in their operations, the Company is in the process of addressing the year 2000 issue. In connection with a general upgrade of its information systems, the Company had previously planned to install new merchandise and financial system software packages in fiscal 1999. These new systems are guaranteed by the Company's software supplier to be year 2000 compliant. In fiscal 1998, the Company began reviewing software applications it intends to retain. The Company has already made program modifications to make certain of its computer applications year 2000 compliant and will continue to review its computer applications in fiscal 1999. Management estimates that new software packages and related hardware improvements will cost from $700,000 to $1 million. In addition to being year 2000 compliant, management expects that new merchandise systems will allow for improved merchandise planning, sales tracking and trend analysis. Further, the Company also expects these systems will allow for improved distribution center processing and more flexible allocation of merchandise to the Company's stores. The Company expects to implement the changes necessary to address the year 2000 issue. The Company presently believes that, with conversions to new software and modifications to existing software, the year 2000 issue will not pose significant operational problems for the Company's computer systems as so converted and modified. However, if unforeseen difficulties arise or such conversions and modifications are not completed timely, or if the Company's vendors' or suppliers' systems are not modified to become year 2000 compliant, the year 2000 issue may potentially have a material impact on the operations of the Company. The Company has also made inquiries to certain of its key vendors with respect to how these vendors are handling their year 2000 issues. 13 FORWARD LOOKING INFORMATION Information contained in this Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology such as "may", "will", "expect", "plan", "anticipate", "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. There are certain important factors that could cause results to differ materially from those anticipated by some of these forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. The factors, among others, that could cause actual results to differ materially include: consumers' spending and debt levels; the Company's ability to execute its business plan; the acceptance of the Company's merchandising strategies by its target customers; the ability of the Company to anticipate marketing trends and consumer needs; continuity of a relationship with or purchases from major vendors, particularly those from whom the Company imports merchandise; competitive pressures on sales and pricing; increases in other costs which cannot be recovered through improved pricing of merchandise; and the adverse effect of weather conditions from time to time on consumers' ability or desire to purchase new clothing. The Company currently purchases most of its import merchandise from suppliers in Hong Kong, whose currency is pegged to the U.S. dollar. Therefore, the Company does not expect foreign currency fluctuations to materially affect its business. However, to the extent the Company begins purchasing larger amounts of merchandise from other countries, currency fluctuations could affect the Company's business. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. 14 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ---- Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Financial Statements: Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Consolidated Balance Sheet at February 28, 1998 and March 1, 1997. . . . . . . . . . . . . . . . . 17 Consolidated Statement of Operations for the three years ended February 28, 1998 . . . . . . . . . 18 Consolidated Statement of Stockholders' Equity for the three years ended February 28, 1998 . . . . 19 Consolidated Statement of Cash Flows for the three years ended February 28, 1998 . . . . . . . . . 20 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
15 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Braun's Fashions Corporation In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Braun's Fashions Corporation and its subsidiary at February 28, 1998 and March 1, 1997, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Minneapolis, Minnesota April 3, 1998 16 BRAUN'S FASHIONS CORPORATION CONSOLIDATED BALANCE SHEET
ASSETS FEBRUARY 28, MARCH 1, ------ 1998 1997 ------------ ------------ Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 15,848,439 $ 10,913,716 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . 847,746 532,331 Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . 10,735,681 9,253,896 Income tax refund receivable. . . . . . . . . . . . . . . . . . . . -- 870,498 Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 414,341 169,668 Current deferred tax asset. . . . . . . . . . . . . . . . . . . . . 322,570 799,952 ------------ ------------ Total current assets. . . . . . . . . . . . . . . . . . . . . . . 28,168,777 22,540,061 Equipment and improvements: Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . 11,817,695 10,761,611 Furniture and fixtures. . . . . . . . . . . . . . . . . . . . . . . 8,296,459 7,301,931 Other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 3,337,479 3,315,656 Construction in progress. . . . . . . . . . . . . . . . . . . . . . 312,585 169,987 ------------ ------------ 23,764,218 21,549,185 Less accumulated depreciation and amortization. . . . . . . . . . . 12,821,164 10,763,888 ------------ ------------ Net equipment and improvements. . . . . . . . . . . . . . . . . . 10,943,054 10,785,297 Other assets: Long-term deferred tax asset. . . . . . . . . . . . . . . . . . . . 1,414,789 1,198,151 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,424 113,630 ------------ ------------ Total other assets . . . . . . . . . . . . . . . . . . . . . . . 1,478,213 1,311,781 ------------ ------------ Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,590,044 $ 34,637,139 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,666,921 $ 2,433,652 Accrued salaries, wages and related expenses. . . . . . . . . . . . 2,014,996 1,222,203 Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . 2,446,536 3,229,640 Current maturities of long-term debt. . . . . . . . . . . . . . . . 681,424 908,957 Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . 186,982 -- ------------ ------------ Total current liabilities . . . . . . . . . . . . . . . . . . . . 8,996,859 7,794,452 Long-term obligations: Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,616,311 10,373,662 Accrued rent obligation . . . . . . . . . . . . . . . . . . . . . . 1,017,556 896,253 ------------ ------------ Total long-term obligations . . . . . . . . . . . . . . . . . . . 10,633,867 11,269,915 Stockholders' equity: Preferred stock - $0.01 par value, 1,000,000 shares authorized, none outstanding. . . . . . . . . . . . . . . . . . . . . . . . . -- -- Common stock - $0.01 par value, 9,000,000 shares authorized, 4,523,393 and 4,432,588 shares issued and outstanding in 1998 and 1997, respectively. . . . . . . . . . . . . . . . . . . . . . 45,234 44,326 Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 28,588,350 27,604,043 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (7,674,266) (12,075,597) ------------ ------------ Total stockholders' equity. . . . . . . . . . . . . . . . . . . . 20,959,318 15,572,772 ------------ ------------ Total liabilities and stockholders' equity. . . . . . . . . . . . $ 40,590,044 $ 34,637,139 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 17 BRAUN'S FASHIONS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED ------------------------------------------ FEBRUARY 28, MARCH 1, MARCH 2, 1998 1997 1996 ------------ ------------ ------------ Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . $ 99,535,773 $ 95,946,046 $ 97,295,978 Cost of sales: Merchandise, buying and occupancy (exclusive of depreciation and amortization shown below) . 65,110,994 65,445,103 70,385,844 ------------ ------------ ------------ Gross profit . . . . . . . . . . . . . . . . . . . . . . 34,424,779 30,500,943 26,910,134 Selling, general and administrative. . . . . . . . . . . . . 23,390,027 22,854,266 24,897,287 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 2,533,282 2,648,563 3,154,266 Reorganization expense . . . . . . . . . . . . . . . . . . . -- 7,829,924 -- Nonrecurring expense . . . . . . . . . . . . . . . . . . . . 775,451 -- -- ------------ ------------ ------------ Operating income (loss). . . . . . . . . . . . . . . . . 7,726,019 (2,831,810) (1,141,419) Interest, net. . . . . . . . . . . . . . . . . . . . . . . . 690,589 684,330 1,387,623 ------------ ------------ ------------ Income (loss) before income taxes. . . . . . . . . . . . . . 7,035,430 (3,516,140) (2,529,042) Income tax provision (benefit) . . . . . . . . . . . . . . 2,749,971 (2,895,146) 929,121 ------------ ------------ ------------ Net income (loss) before extraordinary gain. . . . . . . 4,285,459 (620,994) (3,458,163) Extraordinary gain . . . . . . . . . . . . . . . . . . . . . 115,872 -- -- ------------ ------------ ------------ Net income (loss). . . . . . . . . . . . . . . . . . . . . . $ 4,401,331 $ (620,994) $ (3,458,163) ------------ ------------ ------------ ------------ ------------ ------------ Basic earnings per common share: Net income (loss) before extraordinary gain. . . . . . . . $ 0.96 $ (0.15) $ (0.91) Extraordinary gain . . . . . . . . . . . . . . . . . . . . 0.02 -- -- ------------ ------------ ------------ Net income (loss). . . . . . . . . . . . . . . . . . . . . $ 0.98 $ (0.15) $ (0.91) ------------ ------------ ------------ ------------ ------------ ------------ Weighted average common shares outstanding . . . . . . . . 4,482,119 4,029,041 3,791,612 ------------ ------------ ------------ ------------ ------------ ------------ Diluted earnings per common share: Net income (loss) before extraordinary gain. . . . . . . . $ 0.89 $ (0.15) $ (0.91) Extraordinary gain . . . . . . . . . . . . . . . . . . . . 0.02 -- -- ------------ ------------ ------------ Net income (loss). . . . . . . . . . . . . . . . . . . . . $ 0.91 $ (0.15) $ (0.91) ------------ ------------ ------------ ------------ ------------ ------------ Weighted average common and common equivalent shares outstanding. . . . . . . . . . . . . . 4,812,482 4,029,041 3,791,612 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 18 BRAUN'S FASHIONS CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ------------------------ ADDITIONAL NUMBER PAID-IN ACCUMULATED OF SHARES AMOUNT CAPITAL DEFICIT --------- ------------ ------------ ------------ Balance at February 25, 1995 . . . . . . . . . . . 3,791,272 $ 37,913 $ 25,076,122 $ (7,996,440) Stock issued on exercise of options. . . . . . . . 2,040 20 2,930 -- Net loss . . . . . . . . . . . . . . . . . . . . . -- -- -- (3,458,163) --------- ------------ ------------ ------------ Balance at March 2, 1996 . . . . . . . . . . . . . 3,793,312 37,933 25,079,052 (11,454,603) Stock issued pursuant to plan of reorganization. . 617,516 6,175 2,475,006 -- Stock issued on exercise of options. . . . . . . . 21,760 218 49,985 -- Net loss . . . . . . . . . . . . . . . . . . . . . -- -- -- (620,994) --------- ------------ ------------ ------------ Balance at March 1, 1997 . . . . . . . . . . . . . 4,432,588 44,326 27,604,043 (12,075,597) Stock issued on exercise of options. . . . . . . . 90,805 908 300,507 -- Tax benefit on exercise of stock options . . . . . -- -- 165,349 -- Accelerated vesting of stock options . . . . . . . -- -- 518,451 -- Net income . . . . . . . . . . . . . . . . . . . . -- -- -- 4,401,331 --------- ------------ ------------ ------------ Balance at February 28, 1998 . . . . . . . . . . . 4,523,393 $ 45,234 $ 28,588,350 $ (7,674,266) --------- ------------ ------------ ------------ --------- ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 19 BRAUN'S FASHIONS CORPORATION CONSOLIDATED STATEMENT OF CASHFLOWS
FISCAL YEAR ENDED ------------------------------------------ FEBRUARY 28, MARCH 1, MARCH 2, 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 4,401,331 $ (620,994) $ (3,458,163) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization. . . . . . . . . . . . . . 2,533,282 2,678,963 3,245,466 Accelerated vesting of stock options . . . . . . . . . . 518,451 -- -- Extraordinary gain from early extinguishment of debt . . (186,890) -- -- (Increase) decrease in deferred tax assets . . . . . . . 260,744 (1,998,103) 1,743,957 (Gain) loss on disposal of property and equipment. . . . (5,810) 2,469,940 23,278 Increase (decrease) in accrued rent obligation . . . . . 121,303 (185,448) 81,480 Changes in operating assets and liabilities: (Increase) decrease in merchandise inventory, prepaid expenses, receivables and other. . . . . . . . (1,991,667) 4,456,747 1,329,032 Increase (decrease) in accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . 1,242,958 2,214,825 (2,011,287) Increase in income taxes payable/receivable . . . . . . 1,057,480 -- -- ------------ ------------ ------------ Net cash provided by operating activities . . . . . . . 7,951,182 9,015,930 953,763 Cash flows from investing activities: Purchase of equipment and improvements. . . . . . . . . (2,720,178) (1,042,622) (1,553,026) Proceeds from sale of fixtures and furniture. . . . . . 34,949 53,270 -- ------------ ------------ ------------ Net cash used in investing activities . . . . . . . . (2,685,229) (989,352) (1,553,026) Cash flows from financing activities: Net borrowings on line of credit. . . . . . . . . . . . -- -- 400,000 Principal payments on debt agreements . . . . . . . . . (1,090,754) (250,060) (225,741) Borrowings under debt agreements. . . . . . . . . . . . -- 2,878,952 -- Interest on 12% Senior Notes added to principal . . . . 292,760 -- -- Exercise of stock options . . . . . . . . . . . . . . . 466,764 50,203 2,950 Checks issued, not yet presented for payment. . . . . . -- (1,335,088) 1,335,088 ------------ ------------ ------------ Net cash provided by (used in) financing activities . . (331,230) 1,344,007 1,512,297 Net increase in cash and cash equivalents. . . . . . . . . . 4,934,723 9,370,585 913,034 Cash and cash equivalents at beginning of year . . . . . . . 10,913,716 1,543,131 630,097 ------------ ------------ ------------ Cash and cash equivalents at end of year . . . . . . . . . . $ 15,848,439 $ 10,913,716 $ 1,543,131 ------------ ------------ ------------ ------------ ------------ ------------ Supplemental cash flow information: Interest paid during the year . . . . . . . . . . . . . $ $958,627 $ 644,198 $ 1,388,060 Income taxes paid (refunded) during the year. . . . . . $ 1,276,893 $ (903,958) $ (79,300) Debt for equity exchange. . . . . . . . . . . . . . . . $ -- $ 2,900,000 $ -- Write-off of deferred financing costs . . . . . . . . . $ -- $ 418,818 $ --
See accompanying notes to consolidated financial statements. 20 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Braun's Fashions Corporation (BFC), through its wholly-owned subsidiary, Braun's Fashions, Inc. (BFI) (collectively referred to as the "Company"), operates retail specialty stores selling women's clothing and related accessories, primarily in the Midwest. The Company operated 179, 170 and 221 stores at the end of fiscal 1998, 1997, and 1996, respectively. FISCAL YEAR AND BASIS OF PRESENTATION The Company's fiscal year ends on the Saturday nearest February 28. The fiscal years ending February 28, 1998 and March 1, 1997 consisted of 52 weeks each. The fiscal year ending March 2, 1996 consisted of 53 weeks. The consolidated financial statements include the accounts of BFC and its wholly-owned subsidiary, BFI. All significant intercompany accounts have been eliminated in consolidation. Certain reclassifications have been made in the fiscal 1997 and 1996 financial statements to conform to the fiscal 1998 presentation. These changes had no impact on previously reported results of operations or stockholder's equity. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on hand and on deposit, and investments purchased with an original maturity of three months or less. MERCHANDISE INVENTORIES Merchandise inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out retail inventory method. INVENTORY MARKDOWNS Permanent markdowns are recorded to reflect expected adjustments to retail prices in accordance with the retail inventory method. Markdowns are recorded monthly on the basis of an evaluation of inventory by merchandising management. In the Company's judgement, all markdowns necessary to record inventory at the lower of cost or market under the retail inventory method have been provided for all periods presented. EQUIPMENT AND IMPROVEMENTS Equipment and improvements are stated at cost. Equipment is depreciated over its estimated useful life and improvements are amortized over the term of the related leases. Repairs and maintenance which do not extend an asset's useful life are expensed as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is reflected in income for that period. The Company evaluates its long-lived assets in accordance with the provisions of SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of". This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of February 28, 1998, the Company has determined that no adjustment to the financial statements is necessary under SFAS No. 121. RENT EXPENSE Many of the Company's lease agreements for retail space include escalation clauses in minimum base rent. The Company recognizes minimum base rent expense for the lease term in equal annual amounts over the lease term. ADVERTISING The Company expenses advertising costs as incurred. Advertising costs for the fiscal years ended 1998, 1997 and 1996 were $671,000, $793,000 and $1,167,000, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, receivables and payables for which current carrying amounts approximate fair market value. Additionally, interest rates on outstanding debt are at rates which approximate market rates for debt with similar terms and maturities. 21 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK BASED EMPLOYEE COMPENSATION The Company has elected to recognize compensation cost for its stock based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Generally, no compensation expense is recognized for stock options with exercise prices equal to the market value of the underlying shares of stock at the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation". INCOME TAXES Income taxes are provided following the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),"Accounting for Income Taxes."Under the provisions of SFAS No. 109, deferred tax assets and liabilities result from the expected future tax consequences of differences between the carrying value and the tax basis of assets and liabilities. NET INCOME (LOSS) PER COMMON SHARE In fiscal 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FASB No. 128"). Under FASB No. 128, basic earnings per share ("EPS") is computed based on the weighted average number of shares of common stock outstanding during the applicable periods while diluted EPS is computed based on the weighted average number of shares of common and common equivalent shares (dilutive stock options) outstanding. EPS for all periods presented have been restated to reflect the adoption of SFAS 128. The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations:
EFFECT OF BASIC DILUTIVE STOCK DILUTED EPS OPTIONS EPS 1998 --------- -------------- --------- Shares. . . . . . . . . . . . . . . . 4,482,119 330,363 4,812,482 Amount before extraordinary gain. . . $0.96 $(0.07) $0.89 Amount including extraordinary gain . $0.98 $(0.07) $0.91 1997 Shares. . . . . . . . . . . . . . . . 4,029,041 -- 4,029,041 Amount. . . . . . . . . . . . . . . . $(0.15) -- $(0.15) 1996. . . . . . . . . . . . . . . . . . Shares. . . . . . . . . . . . . . . . 3,791,612 -- 3,791,612 Amount. . . . . . . . . . . . . . . . $(0.91) -- $(0.91)
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during a reporting period. As a result, actual results could differ because of the use of these estimates and assumptions. 22 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- CHAPTER 11 REORGANIZATION On July 2, 1996, the Company filed in the United States Bankruptcy Court in the District of Delaware a petition for reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code, case number 96-1030(HSB). Under the protection of Chapter 11, the Company managed its affairs and operated its business as a debtor-in-possession while developing a plan of reorganization. The Company filed its Second Amended Plan of Reorganization on October 22, 1996 (the "Plan"), along with its Disclosure Statement. The Plan was approved by 99.6% of the voting shareholders and by a majority of each class of creditors that voted. On November 22, 1996, the Bankruptcy Court confirmed the Plan, which became effective on December 3, 1996. As of the effective date, December 3, 1996, the Company had 3,796,512 shares of common stock issued and outstanding. Under the terms of the Plan, the Company issued 617,516 shares of common stock on January 2, 1997 to certain creditors in respect to their filed and allowed claims and interests. The Company also issued approximately $10.3 million in aggregate principal amount of 12% Senior Notes (the "Senior Notes") to these classes of creditors pursuant to the Plan. The common stock and Senior Notes were issued to these creditors in exchange for outstanding debt of $13,201,075 previously held by these creditors. The fair value of the common stock and Senior Notes approximated the carrying value of the outstanding obligations, and accordingly, no gain or loss was recorded on the exchange. The Company incurred the following expenses during fiscal 1997 in connection with its Chapter 11 reorganization proceedings:
Professional fees and services $2,610,000 Loss on disposal of property, fixtures and equipment 2,453,000 Lease rejection claims 1,042,000 Inventory impairment 570,000 Severance 210,000 Other 945,000 ---------- Total $7,830,000 ---------- ----------
NOTE 3 -- LONG-TERM DEBT As part of the Plan, the Company issued $10,300,200 of debt in the form of 12% Senior Notes (the "Senior Notes") due January 2005. The Senior Notes were issued, pursuant to an Indenture dated as of December 2, 1996, to (i) the holders of the 9% Senior Notes due January 2001 where each holder received, for each $1,000 principal face amount, (a) 48 shares of common stock in the Company and (b) Senior Notes in original principal amount of $800 and (ii) the Company's prepetition banks who received a total of (a) 138,284 shares of common stock in the Company and (b) $2,313,000 in original principal face amount of the Senior Notes. The principal amount of the Senior Notes bears interest at the rate of 12% per annum from and after December 17, 1996. Interest at the rate of 9% per annum on the outstanding principal amount is paid monthly. Interest at the rate of 3% per annum on the outstanding principal amount is accrued monthly and upon accrual is treated as principal for all purposes, including without limitation, the calculation of all interest payments due thereafter, and is payable in full on January 1, 2005. The Senior Notes are general unsecured senior obligations of the Company. The Indenture for the Senior Notes contains certain covenants which, among other things, limit the ability of the Company to incur liens, incur additional indebtedness, and restrict the Company's ability to declare dividends. As part of the Plan, the Company entered into a borrowing agreement with Norwest Bank Minnesota, National Association (the "Norwest Revolver"), expiring April 1, 1999. The Norwest Revolver provides the Company with revolving credit loans and letters of credit up to $10 million, subject to a borrowing base formula tied to inventory levels. 23 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- LONG-TERM DEBT (CONTINUED) Loans under the Norwest Revolver bear interest at Norwest's base rate plus 3/4%, subject to a rate reduction provision based on the Company's performance (as described in the Norwest Revolver). Due to the Company's financial performance, the interest rate at February 28, 1998 was Norwest's base rate plus 1/4% or 8-3/4%. Interest is payable monthly in arrears. The Norwest Revolver carries commitment fees of 1/4% of the difference between $5 million and the average amount outstanding under the facility (including letters of credit). If the average amount outstanding under the facility (including letters of credit) is between $5 million and $7.5 million, the commitment fee is based on the difference between $7.5 million and the average amount outstanding under the facility (including letters of credit) and if the average amount outstanding (including of letters of credit) is in excess of $7.5 million, the commitment fee is based on the difference between $10 million and the average amount outstanding under the facility (including letters of credit). This facility is secured by substantially all of the Company's assets. The borrowing base at February 28, 1998, was $6.5 million. As of February 28, 1998, the Company had no borrowings and outstanding letters of credit in the amount of $1.9 million under the Norwest Revolver. Accordingly, the availability of revolving credit loans under the Norwest Revolver was $4.6 million at that date. The Norwest Revolver contains certain restrictive covenants, including limitations on capital expenditures, restrictions on incurring additional indebtedness, limitations on certain types of investments and prohibitions on paying dividends. The Norwest Revolver also requires the Company to maintain certain financial ratios. Outstanding debt consists of the following:
FEBRUARY 28, MARCH 1, 1998 1997 ------------ ------------ 12% Senior Notes . . . . . . . . . . . . . . . . . $ 9,607,247 $ 10,362,952 Obligation under capital lease . . . . . . . . . . 690,488 919,667 ------------ ------------ 10,297,735 11,282,619 Less: Current maturities of 12% Senior Notes. . . . . 431,938 679,778 Current maturities of capital lease obligation 249,486 229,179 ------------ ------------ Long-term debt . . . . . . . . . . . . . . . . . . $ 9,616,311 $ 10,373,662 ------------ ------------ ------------ ------------
Principal repayments on the 12% Senior Notes occur annually on the first of every calendar year. Minimum principal payments, including interest added to principal which is due in 2005, are as follows: 1999 - $431,938, 2000 - $803,902, 2001 - $875,752, 2002 - $958,207, 2003 - $1,040,074, 2004 - $1,133,443 and 2005 - $6,031,476. The Company was not required to pay interest on its prepetition debt during its Chapter 11 Bankruptcy proceedings. If the Company had been required to pay interest on its prepetition debt, contractual interest expense net of interest income for the year ended March 1, 1997, would have totaled approximately $1.2 million. During fiscal 1998, the Company purchased $1,033,000 principal face amount of its Senior Notes at a discount from par. The purchase resulted in an extraordinary gain of $115,872, net of tax, and satisfied all of the January 1, 1998, and a portion of the January 1, 1999 redemption requirement. 24 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- STOCK OPTION PLANS In 1987, the Company adopted the 1987 Stock Incentive Plan which, as amended, provided for the granting of options to purchase up to 710,000 shares of common stock. Option grants include qualified and non-qualified grants vesting over zero to 4 years. Options are exercisable up to ten years from the date of grant and are granted at a price not less than 100% of the fair market value of the shares on the date of grant. In June 1996, the Company repriced previously granted employee options to purchase up to 358,200 shares of the Company's common stock. The initial exercise price of these options was $7.00 per share and was reset to $2.00, $3.00, or $4.00 per share. The closing price of the Company's common stock at the date of the repricing was $1.56 per share. The 1987 Stock Incentive Plan terminated on September 11, 1997 and no new options may be granted under that plan after that date. In July 1997, the Company's shareholders approved the Company's 1997 Stock Incentive Plan to replace the 1987 incentive plan. Under the 1997 Stock Incentive Plan options to purchase up to 300,000 shares of common stock are available for grant. No options had been granted under the 1997 Inventive Plan, as of February 28, 1998. The 1997 Incentive Plan permits the granting of qualified incentive stock options meeting the requirements of Section 422 of the Internal Revenue Code and non-qualified stock options. Options are to be granted at a price not less than 100% of the fair market value of the Company's common stock on the option grant date. The Company established the 1992 Director Stock Option Plan, effective March 1992. This plan provides for options to purchase 40,000 shares of common stock, all of which shares have been granted. In June 1996, the Company repriced previously granted director options to purchase up to 40,000 shares of the Company's common stock. The initial exercise price of these options was $6.00 or $7.00 per share and was reset to $3.00. The closing price of the Company's common stock at the date of the repricing was $1.56 per share. The options vested one-third upon issuance and one-third over the next two years in annual installments of one-third per year. Vested options are exercisable for ten years from the date of grant. In fiscal 1998, the Company granted to non-employee members of its Board of Directors, subject to shareholder approval, options to purchase 60,000 shares of the Company's common stock. The exercise price of these options is $8.75, equal to the fair market value of the common stock on the date of the grant. Accordingly, no compensation expense was recognized on the issuance of these options. The options vest over three years and are exercisable for ten years from the grant date. During fiscal 1998, compensation expense of $518,000 was recognized relating to the accelerated vesting of 166,000 options in connection with the implementation of the Company's management succession plan. The compensation expense was calculated as the difference between the exercise price and the fair market value of the Company's common stock on the date on which the vesting of options were accelerated. The Company has elected to recognize compensation cost for its stock based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Generally, no compensation expense is recognized for stock options with exercise prices equal to the market value of the underlying shares of stock at the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation." If compensation cost for these plans had been determined based on the fair value methodology prescribed by SFAS No. 123, the Company's net earnings and earnings per share in fiscal 1998 and 1997 would have been reduced to the pro forma amounts indicated below. Pro forma amounts of net income and earnings per share reflecting compensation cost under SFAS No. 123 have not been presented for fiscal 1996 because the compensation cost is not material. 25 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1998 1997 --------------------------------------------------------------------------------- Net income (loss) - as reported $4,401,331 $ (620,994) Net income (loss) - pro forma $4,239,092 $ (686,827) Net income (loss) per diluted share - as reported $ 0.91 $ (0.15) Net income (loss) per diluted share - pro forma $ 0.88 $ (0.17)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The model was developed for use in estimating the fair value of traded options which have no vesting registration and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The following weighted-average assumptions were used for grants in 1998 and 1997:
1998 1997 -------------------------------------------------------------------------------- Dividend yield 0.00% 0.00% Expected volatility 42.85% 57.32% Risk-free interest rate 5.99% - 6.11% 5.99% - 6.50% Expected lives 4.31 Years 3 Years
26 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- STOCK OPTION PLANS AND WARRANTS (CONTINUED) The following summarizes stock option transactions:
YEAR ENDED YEAR ENDED YEAR ENDED FEBRUARY 28, 1998 MARCH 1, 1997 MARCH 2, 1996 ---------------------- ---------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------- -------------- ------- -------------- ------- -------------- Outstanding, beginning of period 519,400 $3.26 408,320 $6.52 399,560 $6.51 Granted 175,000 8.75 176,000 3.83 35,000 7.00 Reissued -- -- 358,200 3.00 -- -- Exercised (84,139) 3.15 (21,760) 0.91 (2,040) 1.45 Cancelled (50,733) 4.13 (401,360) 6.85 (24,200) 7.00 -------- -------- -------- -------- -------- -------- Outstanding, end of period 559,528 $4.92 519,400 $3.26 408,320 $6.52 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Exercisable, end of period 204,501 $3.21 23,914 $2.60 267,880 $6.31 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Available for grant, end of period 300,000 184,320 117,160 -------- -------- -------- -------- -------- -------- Weighted average fair value of options granted $8.75 $2.80 $3.23 -------- -------- -------- -------- -------- --------
The following summarizes stock options outstanding and options exercisable at February 28, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- ------------------------------- WEIGHTED WEIGHTED WEIGHTED RANGE OF NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE --------------- ----------- ----------------- -------------- ----------- -------------- $1.25 - $3.75 254,028 8.34 $2.54 109,001 $2.20 $3.76 - $8.75 305,500 8.95 6.90 95,500 $4.36 ----------- ----------------- -------------- ----------- -------------- 559,528 8.67 $4.92 204,501 $3.21 ----------- ----------------- -------------- ----------- -------------- ----------- ----------------- -------------- ----------- --------------
NOTE 5 -- INCOME TAXES The provision (benefit) for income taxes for the fiscal years ended February 28, 1998, March 1, 1997 and March 2, 1996 consisted of:
1998 1997 1996 ------------ ------------ ------------ Current Federal . . . . . . . . . . . . . . . . . . $ 2,389,227 $ (917,043) $ (791,836) State . . . . . . . . . . . . . . . . . . . 100,000 20,000 (23,000) ------------ ------------ ------------ Current tax expense (benefit) . . . . . . . . 2,489,227 (897,043) (814,836) Deferred. . . . . . . . . . . . . . . . . . . 260,744 (1,998,103) 1,743,957 ------------ ------------ ------------ Provision (benefit) for income tax . . . . . $ 2,749,971 $ (2,895,146) $ 929,121 ------------ ------------ ------------ ------------ ------------ ------------
27 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's effective income tax rate for fiscal years ended February 28, 1998, March 1, 1997, and March 2, 1996 , differs from the federal income tax rate due to the following:
1998 1997 1996 ------ ------ ------ Federal income tax at statutory rate. . . . . 34.0% (34.0)% (34.0)% State income tax (net of federal benefit) . . 0.9 0.4 (0.6) Valuation allowance . . . . . . . . . . . . . -- (50.9) 70.7 Accelerated vesting of stock options. . . . . 2.0 -- -- Other . . . . . . . . . . . . . . . . . . . . 2.2 2.2 0.6 ------ ------ ------ 39.1% (82.3)% 36.7%
The net deferred tax assets included in the consolidated balance sheet as of February 28, 1998 and March 1, 1997 are as follows:
FEBRUARY 28, MARCH 1, 1998 1997 ------------ ------------ NOL carryforward. . . . . . . . . . . . . . . $ -- $ 285,998 Vacation accrual. . . . . . . . . . . . . . . 180,200 143,726 Inventory . . . . . . . . . . . . . . . . . . 136,438 117,785 Other . . . . . . . . . . . . . . . . . . . . 5,932 252,443 ------------ ------------ Current deferred tax assets . . . . . . . 322,570 799,952 ------------ ------------ Depreciation. . . . . . . . . . . . . . . . . 615,784 509,793 Accrued rent obligation . . . . . . . . . . . 345,969 304,726 Other . . . . . . . . . . . . . . . . . . . . 453,036 383,632 ------------ ------------ Long-term deferred tax assets. . . . . . . 1,414,789 1,198,151 ------------ ------------ Total deferred tax assets. . . . . . . . . $ 1,737,359 $ 1,998,103 ------------ ------------ ------------ ------------
Deferred income tax assets represent potential future income tax benefits. Realization of these assets is ultimately dependent upon future taxable income. NOTE 6 -- EMPLOYEE BENEFIT PLANS Effective March 3, 1991, the Company established a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code for the benefit of all employees who meet certain eligibility requirements, primarily age and length of service. The plan allows eligible employees to invest from 1% to 16% of their compensation. Annually, the Company's Board of Directors approves a discretionary matching contribution up to a maximum of 25% of the first 6% of the participants' pre-tax contributions. Such contributions are based principally on Company performance. Company contributions made for the fiscal years ended February 28, 1998, March 1, 1997 and March 2, 1996 were $55,954, $56,993, and $28,188, respectively. The Company does not offer any other post-retirement, post-employment or pension benefits to directors or employees. 28 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- LEASE COMMITMENTS The Company leases its computer equipment, office and warehouse facility, vehicles and each of its store locations, all of which are accounted for as operating leases. The store lease terms, including rental period, renewal options, escalation clauses and rent as a percentage of sales, vary among the leases. Most store leases require the Company to pay real estate taxes and common area maintenance charges.
Total rental expense for all leases was as follows: FISCAL YEAR ENDED ------------------------------------------ FEBRUARY 28, MARCH 1, MARCH 2, 1998 1997 1996 ------------ ------------ ------------ Minimum rent. . . . . . . . . . . . . . . . . . . . . . $ 4,726,654 $ 6,219,379 $ 7,745,859 Contingent rent -- based on a percentage of sales . . . 2,109,262 1,443,340 580,350 Maintenance, taxes and insurance. . . . . . . . . . . . 2,667,097 3,367,817 4,368,948 ------------ ------------ ------------ $ 9,503,013 $ 11,030,536 $ 12,695,157 ------------ ------------ ------------ ------------ ------------ ------------
In addition, the Company leases its point-of-sale (POS) registers. This lease agreement has been capitalized at the present value of the future minimum lease payments. The Company leases its office and warehouse facility under an agreement which commenced on June 15, 1994, and expires on June 14, 2005. The Company is required to pay property taxes, insurance, utilities and other operating costs of the facility. The Company subleases 80,000 square feet of warehouse space in its distribution center to a third party under an agreement which commenced October 1, 1997. Under the agreement, the Company will receive minimum rent of; 14,667 per month from October 1, 1997 through August 31, 1998; $21,667 per month from September 1, 1998 to August 31, 1999 and $24,667 per month from September 1, 1999 to August 31, 2000. The subtenant may extend the lease for two options periods. Rent for the first three year option period would be $26,480 per month. Rent for the second option period of one year and nine months would be $29,790 per month. The subtenant was also required to reimburse the Company for property taxes, utilities and other operating costs of the subleased portion of the facility. Under a second sublease effective September 1, 1997 and expiring on May 31, 2005, the Company subleases 33,000 square feet of warehouse and office space to a third party. Under the agreement the Company will receive annual minimum rent of $132,000. The subtenant is also required to reimburse the Company for property taxes, utilities and other operating costs of the subleased portion of the facility. Future minimum rental commitments for all leases are as follows:
CAPITAL LEASE OPERATING LEASES ---------- --------------------------------------------------------- POS RETAIL OFFICE/ REGISTER STORE WAREHOUSE FISCAL YEAR EQUIPMENT FACILITIES FACILITIES OTHER TOTAL ---------- ------------ ----------- ----------- ------------ 1999 . . . . . . . . . . . . . . . . . . $ 298,723 $ 4,671,414 $ 224,570 $ 104,270 $ 5,000,254 2000 . . . . . . . . . . . . . . . . . . 298,723 4,587,069 201,029 97,725 4,885,823 2001 . . . . . . . . . . . . . . . . . . 174,255 4,432,998 321,187 12,523 4,766,708 2002 . . . . . . . . . . . . . . . . . . -- 4,324,971 493,854 -- 4,818,825 2003 . . . . . . . . . . . . . . . . . . -- 3,647,388 520,971 -- 4,168,359 Thereafter . . . . . . . . . . . . . . . -- 7,479,196 1,274,855 -- 8,754,051 ---------- ------------ ----------- ----------- ------------ Total minimum lease payments. . . . . $ 771,701 $29,143,036 $3,036,466 $214,518 $32,394,020 ---------- ------------ ----------- ----------- ------------ ---------- ------------ ----------- ----------- ------------ Less: Amount representing interest . . . 81,213 ---------- Present value of minimum capital lease payments . . . . . . . . . . . . 690,488 ---------- Less: Current maturities . . . . . . . . 249,486 ---------- Obligation under capital lease, less current maturities. . . . . . . . . $ 441,002 ---------- ----------
29 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- NONRECURRING EXPENSE In February 1998, the Company completed the implementation of its management succession plan. As a result of the plan, Nicholas H. Cook, the Company's Chairman and Chief Executive Officer ("CEO") since 1990, relinquished his CEO responsibilities but will continue to serve as Chairman of the Company's Board of Directors. Herbert D. Froemming, the Company's Vice Chairman, elected to take early retirement. As part of the management succession plan, the Company incurred a one-time, pre-tax expense of $775,000, or $0.13 per diluted share. This charge was primarily non-cash, reflecting the accelerated vesting of previously issued stock options. NOTE 9 -- RELATED PARTY TRANSACTIONS The Company's previous general office and warehouse facility was leased under a 28-year lease commencing June 1, 1981 from a partnership whose partners are current stockholders and former officers of the Company. On September 30, 1996, the Company rejected this lease and a related sublease in the United States Bankruptcy Court. In May 1997, the Company settled the related lease rejection claim for $89,768. In previous fiscal years, the Company had consulting agreements with Pennwood Capital Corporation and James J. Fuld, Jr. Corp. These agreements expired on September 1, 1995. These entities are affiliated with two directors who were formerly majority owners of the Company. Under the agreements as amended, the Company received strategic development, management advisory and financial consulting services for an annual fee. Total expenses related to transactions with related parties are as follows:
FISCAL YEAR ENDED ----------------------------------------- FEBRUARY 28, MARCH 1, MARCH 2, 1998 1997 1996 ------------ ------------ ------------ Cost of sales: Rental expense. . . . . . . . . . $ -- $ 143,111 $ 245,333 Selling and administrative: Advisory fees and expenses. . . . -- -- 97,632 ------------ ------------ ------------ Rental expense. . . . . . . . . . -- 71,556 122,667 ------------ ------------ ------------ $ -- $ 214,667 $ 465,632 ------------ ------------ ------------ ------------ ------------ ------------
30 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
(IN THOUSANDS, EXCEPT PER SHARE DATA) FISCAL 1998 QUARTERS -------------------------------------------------------- 1ST 2ND 3RD 4TH ----------- ----------- ----------- ----------- Net sales(1). . . . . . . . . . . . . . . . . . . . . . $ 21,842 $ 20,939 $ 29,466 $ 27,289 Gross profit. . . . . . . . . . . . . . . . . . . . . . 7,659 6,761 11,028 8,977 Nonrecurring expense(2) . . . . . . . . . . . . . . . . -- -- -- 775 Operating income (loss) . . . . . . . . . . . . . . . . 1,580 684 4,120 1,342 Net income (loss) before extraordinary gain . . . . . . 855 300 2,420 710 Extraordinary gain(3) . . . . . . . . . . . . . . . . . 105 8 -- 3 ----------- ----------- ----------- ----------- Net income . . . . . . . . . . . . . . . . . . . . . . $ 960 $ 308 $ 2,420 $ 713 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Basic per share data: Net earnings before extraordinary gain. . . . . . . . . $ 0.20 $ 0.07 $ 0.54 $ 0.15 Extraordinary gain. . . . . . . . . . . . . . . . . . . 0.02 0.00 -- 0.00 ----------- ----------- ----------- ----------- Net earnings. . . . . . . . . . . . . . . . . . . . . . $ 0.22 $ 0.07 $ 0.54 $ 0.15 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted per share data: Net earnings before extraordinary gain. . . . . . . . . $ 0.18 $ 0.06 $ 0.50 $ 0.15 Extraordinary gain. . . . . . . . . . . . . . . . . . . 0.02 0.00 -- 0.00 ----------- ----------- ----------- ----------- Net earnings . . . . . . . . . . . . . . . . . . . . . $ 0.20 $ 0.06 $ 0.50 $ 0.15 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Market price -- high(5) . . . . . . . . . . . . . . . . 10 13 1/4 16 1/8 11 3/4 -- low(5). . . . . . . . . . . . . . . . . 6 3/8 7 3/8 7 1/4 7 7/8
FISCAL 1997 QUARTERS -------------------------------------------------------- 1ST 2ND 3RD 4TH ----------- ----------- ----------- ----------- Net sales(1). . . . . . . . . . . . . . . . . . . . . . $ 21,504 $ 22,777 $ 27,154 $ 24,511 Gross profit. . . . . . . . . . . . . . . . . . . . . . 6,706 5,486 10,113 8,196 Reorganization expense. . . . . . . . . . . . . . . . . -- 9,070 (899) (341) Operating income (loss) . . . . . . . . . . . . . . . . 7 (10,107) 4,856 2,412 Net income (loss)(4). . . . . . . . . . . . . . . . . . $ (218) $ (9,537) $ 4,830 $ 4,304 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Per share data: Basic net earnings (loss) . . . . . . . . . . . . . . . $ (0.06) $ (2.51) $ 1.18 $ 0.97 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted net earnings (loss) . . . . . . . . . . . . . . $ (0.06) $ (2.51) $ 1.12 $ 0.90 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Market price -- high(5). . . . . . . . . . . . . . . . 1 7/8 3 7 1/8 10 -- low(5) . . . . . . . . . . . . . . . . 1 1 1/16 2 3/4 5 5/8
(1) The Company's quarterly net sales show seasonal variation, as sales in the third and fourth quarters, which include the fall and holiday seasons, generally have been higher than sales in the first and second quarters. (2) In fiscal 1998, the Company recorded a one-time, pre-tax charge of $775,000 or $0.13 per diluted share, related to the implementation of its management succession plan. The majority of this expense was non-cash, related to acceleration of previously issued options. (3) In fiscal 1998, the Company recorded an extraordinary gain of $116,000 on the purchase at a discount from par of $1,033,000 principal face amount of 12% Senior Notes due 2005. (4) In the fourth quarter of fiscal 1997, the Company reversed a deferred tax valuation allowance of $1,789,000 as improved operating performance made the future realization of deferred tax assets more likely than not. (5) The market prices presented above represent the quarterly high and low closing bid quotations of the Company's common stock. 31 BRAUN'S FASHIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards Statement No. 130, "Reporting Comprehensive Income" ("FASB No. 130"), effective in fiscal 1999, establishes standards of disclosure and financial statement display for reporting total comprehensive income and the individual components thereof. Management believes the adoption of FASB No. 130 will not have a material impact on the Company's financial position or results of operations. In addition, FASB No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("FASB No. 131"), effective in fiscal 1999, establishes new standards for determining reportable segments and for disclosing information regarding each such segment. Management does not believe that the Company has reportable segments and as such will not be required to disclose segment information. 32 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There are no matters which are required to be reported under Item 9. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding the Company's directors required by Item 10 is incorporated herein by reference to the section entitled, "Item 1 - Election of Directors," in the Company's proxy statement for its 1998 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the Company's fiscal year ended February 28, 1998. Information regarding the Company's executive officers required by Item 10 is included in Part I of this Annual Report on Form 10-K as permitted by General Instruction G(3) to Form 10-K. Information required by this Item concerning compliance with Section 16(a) of the Securities Act of 1934 is included in the proxy statement under the section entitled "Security Ownership of Certain Beneficial Owners and Management," and such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the section entitled "Compensation of Executive Officers and Directors" in the Company's proxy statement for its 1998 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the Company's fiscal year ended February 28, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Company's proxy statement for its 1998 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulations 14A within 120 days of the Company's fiscal year ended February 28, 1998. 33 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the section entitled "Certain Relationships and Related Transactions" in the Company's proxy statement for its 1998 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the Company's fiscal year ended February 28, 1998. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS: PAGE ---- Report of Independent Accountants. . . . . . . . . 16 Consolidated Balance Sheet . . . . . . . . . . . . 17 Consolidated Statement of Operations . . . . . . . 18 Consolidated Statement of Stockholders' Equity . . 19 Consolidated Statement of Cash Flows . . . . . . . 20 Notes to Consolidated Financial Statements . . . . 21
(2) FINANCIAL STATEMENT SCHEDULES: All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) EXHIBITS
SEQUENTIAL EXHIBITS PAGE NO. ---------- +3.1 Restated Certificate of Incorporation of the Company. . . +3.2 By-Laws of the Company, as amended. . . . . . . . . . . . +3.3 Articles of Incorporation of BFI. . . . . . . . . . . . . +3.4 By-laws of BFI. . . . . . . . . . . . . . . . . . . . . . +10.1 1987 Stock Incentive Plan . . . . . . . . . . . . . . . . +10.2 Amendment No. 1 to 1987 Stock Incentive Plan. . . . . . . +10.3 Amendment No. 2 to 1987 Stock Incentive Plan. . . . . . . +10.4 1992 Director Stock Option Plan . . . . . . . . . . . . . +10.5 Braun's Fashions, Inc. Retirement Savings Plan. . . . . . +10.6 Term Lease Master Agreement dated February 28, 1991 between IBM Credit Corporation and the Company . . . +10.7 IBM Customer Agreement, dated February 28, 1991 between International Business Machines Corporation and the Company . . . . . . . . . . . . . . . . . . . . . +10.8 Annual Support Agreement Plan, dated February 27, 1991 between Retail Interact Software and the Company . . . . . . . . . . . . . . . . . . . . . . . . . +10.9 Sublease Agreement by and between Westburne Supply, Inc., United Westburne, Inc. and Braun's Fashions, Inc., dated February 16, 1994 . . . . . . . . . . . . . . +10.10 Side Agreement between Braun's Fashions, Inc., Westburne Supply, Inc. and United Westburne, Inc. regarding moving expenses dated February 16, 1994 . . . .
34
SEQUENTIAL EXHIBITS PAGE NO. - -------- ---------- +10.11 Tax Sharing Agreement between Braun's Fashions Corporation and Braun's Fashions, Inc. . . . . . . . . . . . . . . . +10.12 Registrant's press release dated July 2, 1996 relating to the filing of the Registrant's plan of reorganization. . +10.13 Second Amended Plan of Reorganization dated October 22, 1996 (the "Plan of Reorganization"). . . . . . . . . . . +10.14 Motion to Approve Technical Amendment to the Plan of Reorganization dated November 19, 1996 . . . . . . . . . +10.15 Revolving Credit and Security Agreement dated as of December 2, 1996 between Norwest Bank Minnesota, National Association and Braun's Fashions, Inc. and Braun's Fashions Corporation . . . . . . . . . . . . . . . . . . +10.16 Indenture dated as of December 2, 1996 by and among Braun's Fashions Corporation, Braun's Fashions, Inc. and Schroder Bank & Trust Company. . . . . . . . . . . . . . +10.17 1997 Stock Incentive Plan. . . . . . . . . . . . . . . . *10.18 Management Succession and Separation Agreement by and between Braun's Fashions Corporation and Nicholas H. Cook dated as of February 26, 1998. . . . . . . . . . . . . . *10.19 Management Succession and Separation Agreement by and between Braun's Fashions Corporation and Herbert D. Froemming dated as of February 26, 1998. . . . . . . . . +22.1 Subsidiaries of Company. . . . . . . . . . . . . . . . . *27.1 Financial Data Schedule for Fiscal 1998 (submitted for SEC use only). . . . . . . . . . . . . . . . . . . . . . *27.2 Restated Financial Data Schedules for first, second and third quarters of Fiscal 1998 (submitted for SEC use only). . . . . . . . . . . . . . . . . . . . . . . . . . *27.3 Restated Financial Data Schedule for third quarter of Fiscal 1997 (submitted for SEC use only) . . . . . . . .
- -------------------- + Previously filed * Filed with this report (b) REPORTS ON FORM 8-K On February 27, 1998, the Company filed a Form 8-K with respect to the implementation of its management succession plan. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on May 22, 1998. BRAUN'S FASHIONS CORPORATION By: /S/ WILLIAM J. PRANGE ------------------------------ William J. Prange PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /S/ NICHOLAS H. COOK Chairman of the Board and Director May 22, 1998 - ------------------------------ Nicholas H. Cook /S/ HERBERT D. FROEMMING Vice Chairman and Director May 22, 1998 - ------------------------------ Herbert D. Froemming /S/ WILLIAM J. PRANGE President and Chief Executive Officer May 22, 1998 - ------------------------------ (Principal Executive Officer) William J. Prange /S/ ANDREW K. MOLLER Vice President Finance, and May 22, 1998 - ------------------------------ Chief Financial Officer (Principal Andrew K. Moller Financial and Accounting Officer) /S/ MARC C. OSTROW Director May 22, 1998 - ------------------------------ Marc C. Ostrow /S/ JAMES J. FULD, JR. Director May 22, 1998 - ------------------------------ James J. Fuld, Jr. /S/ DONALD D.BEELER Director May 22, 1998 - ------------------------------ Donald D. Beeler /S/ LARRY C. BARENBAUM Director May 22, 1998 - ------------------------------ Larry C. Barenbaum
36 EX-10.1 2 EXHIBIT 10.1 CONFIDENTIAL MANAGEMENT SUCCESSION AND SEPARATION AGREEMENT This Management Succession and Separation Agreement ("Agreement") is made as of February 26, 1998, by and between Nicholas H. Cook (the "Executive") and Braun's Fashions Corporation (the "Company"). WHEREAS, the Executive is currently Chief Executive Officer, Chairman of the Board and a director of the Company, and WHEREAS, the Executive and the Company, through its wholly owned subsidiary, Brauns Fashions, Inc., are parties to an Executive Employment Agreement dated as of December 19, 1991 ("Employment Agreement"), and WHEREAS, the Company, with the cooperation of the Executive, is preparing for an orderly management succession plan, and WHEREAS, in furtherance of the succession plan, the Company has agreed, among other things, to pay the Executive for his services during a transitional period to assist in the succession strategy and for the full and complete satisfaction of all of the Company's obligations under the Employment Agreement. NOW THEREFORE, the parties hereto agree and promise as follows: 1. The Executive shall serve as the Company's Chairman for an eighteen month (18) month period (the "Initial Period") commencing on the date of this Agreement and ending on August 31, 1999. During the Initial Period, the Executive shall continue to serve as the Company's Chairman for one (1) month at his current salary and for seventeen (17) months at an annual salary of $175,000, payable at those intervals that the Executive is currently paid and continue to report to the Board of Directors. The Executive is expected to devote his services on a full time basis for the initial six (6) months of the Interim Period except for customary vacation as currently provided to the Executive. During the balance of the Initial Period, the Executive shall devote such time to the Company's business and affairs as may be required by the Board of Directors; provided, however, the parties acknowledge that the Executive will spend less time and effort on the daily management of the business and affairs of the Company and more on assisting the Board of Directors with strategic planning. Accordingly, it is understood that during the last twelve (12) months of the Initial Period, the Executive will be entitled to increased vacation time to be mutually agreed by the parties. 2. After the Initial Period, the Executive shall serve, on a part-time basis, as an employee of the Company for an additional twenty-four (24) month period (the "Second Period," and together with the Initial Period, the "Interim Period") ending on August 31, 2001 (the "Separation Date"). During the Second Period, the Executive shall receive an annual salary of $100,000, payable at those intervals that the Executive is currently paid and continue to report to the Board of Directors. The Executive shall devote such time to the Company's business and affairs during the Second Period as may be requested from time to time by the Board of Directors. The Executive may perform the foregoing services during the Second Period at locations other than the Company's headquarters and as may be determined by the Executive provided that the Executive inform the Board of Directors in advance of such location(s). 3. During the Initial Period, the Executive shall be considered an employee and shall be eligible for such fringe benefits as the Executive currently receives, including but not limited to, a car allowance of $1000 per month, life insurance and medical and disability benefits. During the Second Period, the Executive shall be eligible for a continuation of life insurance and medical and disability benefits but shall not receive a car allowance. The Executive shall be eligible to receive a bonus in accordance with the Company's fiscal 1998 Bonus Plan but it is the intention of the Board of Directors that the Executive shall thereafter not be eligible for any bonuses under the Company's bonus or incentive plans, now existing or hereafter established, nor be eligible for any stock option grants under the Company's 1997 Stock Option Plan. Any accounting costs which the Company may incur as a result of any management succession or separation agreements for the fiscal year ending February 28, 1998 shall be considered extraordinary nonrecurring costs and excluded from the calculation required for computing bonuses to the Executive under the fiscal 1998 Bonus Plan. 4. In further consideration for the full and complete discharge of all of the Company's obligations to the Executive under the Employment Agreement, the Company agrees to the following: (a) All of the Executive's unvested stock options to acquire common stock of the Company granted to the Executive on June 24, 1996 under the Company's 1987 Stock Option Plan (73,000 options in the aggregate) as well as his unvested stock option to acquire 10,000 shares of common stock granted to Executive on July 17, 1997 at an exercise price of $8.75 per share shall vest on the date of this Agreement and the Executive shall have three (3) months from the end of the Initial Period such date in which to exercise such stock options; after which time such stock options, together with the option to acquire 14,600 shares which have previously vested (the 97,600 collective options are hereafter referred to as the "Shares"), shall terminate. (b) At such time as the Executive exercises the options in paragraph 4(a), the Company shall provide the Executive with a loan in the principal amount of up to $200,000 (the "Note"), the proceeds of which are to be used to assist the Executive in paying the exercise price for the Shares under paragraph 4(a). Providing the Executive with the Note is subject to, and contingent upon, approval from the Company's lender. The Note shall have a term of three years and bear interest at a rate of 7% per annum, payable semiannually in arrears. The Note shall contain a mandatory prepayment provision which provides that if the Executive sells any of the Shares during the term of the Note, thirty-five percent (35%) of the 2 gross proceeds from such sale, net of commissions, shall be applied to the then outstanding obligations under the Note. (c) The Executive shall receive the fringe benefits described in paragraph 3 above. (d) After the Separation Date, the Executive and Executive's spouse shall be entitled to continue to be covered by the Company's group health insurance coverage subject to the terms of such policy as presently maintained, or as maintained in the future, as a member of the group, the cost of which shall be paid by the Executive or the Executive's spouse, which coverage shall be continued until eligibility for Medicare exists for the Executive and the Executive's spouse. (e) At the end of twelve months from the Separation Date, the Company shall assign the Executive's $500,000 life insurance policy at no cost to the Executive. Any cash surrender value which accrues under such policy shall be for the benefit of the Executive. 5. In consideration for the payments and benefits provided to the Executive in paragraphs 1 through 4 above, the Executive acknowledges that the Company has fulfilled its obligations in full under the Employment Agreement. The Executive further agrees to formally resign and relinquish his position as Chief Executive Officer of the Company and Braun's Fashions, Inc. as of the date of this Agreement and as Chairman of the Company as of the end of the Initial Period. The parties shall mutually prepare and approve the press releases announcing the foregoing resignations. 6. The Executive shall not disclose the terms of this Agreement to anyone other than his immediate family and any accounting and legal advisors solely for the purposes of obtaining advice about the agreements with the Company hereunder. 7. Upon execution of this Agreement by both parties, the Executive and his successors and assigns and the Company and its directors, officers, employees, agents and insurers and their respective successors and assigns, covenant not to sue each other and release and forever discharge each other from any and all causes of action, claims, suits and demands, whether known or unknown, for or by reason of any transaction, cause, matter or thing whatsoever up to the date hereof, including but not limited to, all claims of breach of contract, wrongful discharge and promissory estoppel, all claims for payment of deferred compensation, and all claims of discrimination based on religion, national origin, age (including the Age Discrimination in Employment Act of 1976, 29 U.S.C. Section 621), disability, sexual preference, marital status and retaliation and all claims based upon any federal, state or municipal statute or ordinance relating to discrimination in employment. The foregoing release and covenant not to sue is not intended to release either party from its obligations under this Agreement and either party may have a cause of action against the other for any breach of this Agreement. 3 8. The Executive shall have fifteen (15) calendar days from the date of this Agreement to rescind this Agreement in its entirety. If the Executive wishes to rescind this Agreement, he must do so in writing and must deliver a Notice of Rescission, if by hand, within fifteen (15) calendar days after the Agreement is executed or, if mailed, by having the Notice of Rescission postmarked within fifteen (15) calendar days after the Agreement is executed and sent by certified mail, return receipt requested. Notice of Rescission must be sent to Braun's Fashions Corporation, 2400 Xenium Lane North, Plymouth, Minnesota 55441, attention: William Prange. 9. The Executive also acknowledges that he has at least twenty-one (21) days in which to consider whether to enter into this Agreement, although he is free to execute this Agreement at any time before the twenty-one (21) day period has expired. 10. Both parties have read the terms and provisions of this Agreement and understand them. 11. This Agreement shall inure to the benefit of the Executive, his heirs, administrators, representatives, executors, successors and assigns. 12. This Agreement supersedes and replaces the Employment Agreement which hereafter has no further force or effect; provided, however, the Executive and the Company acknowledge and agree that paragraphs 21 and 22 of the Employment Agreement with respect to noncompetition and confidentiality, respectively, shall survive and are hereby incorporated in their entirety into this Agreement. 13. This Agreement constitutes the entire agreement between the parties regarding the subject matter hereof and no agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement; No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. Failure by either party to enforce any provision of this Agreement shall not constitute a waiver of such party's rights to subsequently enforce such provision or any other provision of this Agreement, unless such rights are waived in writing. No waiver by either party hereto at any time of any breach by the other party to this Agreement or of any condition or provision of this Agreement, shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. In the event of any conflict between this Agreement and any other agreement entered into by and between the Company and the Executive, this Agreement shall control. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. 4 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in duplicate originals as of the date first stated above. /s/ Nicholas H. Cook ----------------------------------- Nicholas H. Cook BRAUN'S FASHIONS CORPORATION By: /s/ William J. Prange ------------------------------- Its: President and CEO ------------------------- 5 EX-10.2 3 EXHIBIT 10.2 CONFIDENTIAL MANAGEMENT SUCCESSION AND SEPARATION AGREEMENT This Management Succession and Separation Agreement ("Agreement") is made as of February 26, 1998, by and between Herbert D. Froemming (the "Executive") and Braun's Fashions Corporation (the "Company"). WHEREAS, the Executive is currently Vice Chairman, Chief Financial Officer and Chief Administrative Officer and a director of the Company, and WHEREAS, the Executive and the Company, through its wholly owned subsidiary, Brauns Fashions, Inc., are parties to an Executive Employment Agreement dated as of December 19, 1991 ("Employment Agreement"), and WHEREAS, the Company, with the cooperation of the Executive, is preparing for an orderly management succession plan, and WHEREAS, in furtherance of the succession plan, the Company has agreed, among other things, to pay the Executive (i) for his services during a transitional period to assist in the succession strategy and (ii) a lump sum severance payment for the full and complete satisfaction of all of the Company's obligations under the Employment Agreement. NOW THEREFORE, the parties hereto agree and promise as follows: 1. The Executive shall serve as the Company's Vice Chairman for an interim period (the "Interim Period") commencing on the date of this Agreement and ending on June 30, 1998 (the "Separation Date"). During the Interim Period, the Executive shall continue to serve as the Company's Vice Chairman, at a salary equivalent to his current salary, payable at those intervals that the Executive is currently paid and continue to report to the Board of Directors. The Executive shall devote full time to the Company's business and affairs during the Interim Period including assisting the Company's successor Chief Financial Officer. The Executive shall be considered an employee and shall be eligible for such fringe benefits as the Executive currently receives during the Interim Period, including but not limited to, a car allowance of $1000 per month, vacation, life insurance and medical and disability benefits (collectively, the "Fringe Benefits") during the Interim Period. The Executive shall be eligible to receive a bonus in accordance with the Company's fiscal 1998 Bonus Plan but shall thereafter not be eligible for any bonuses under the Company's bonus or incentive plans, now existing or hereafter established, nor be eligible for any stock option grants under the Company's 1997 Stock Option Plan. Any accounting costs which the Company may incur as a result of any management succession or separation agreements for the fiscal year ending February 28, 1998 shall be considered extraordinary nonrecurring costs and excluded from the calculation required for computing bonuses to the Executive under the fiscal 1998 Bonus Plan. 2. In further consideration for the full and complete discharge of all of the Company's obligations to the Executive under the Employment Agreement, the Company agrees to the following: (a) On the Separation Date, the Company shall in one installment pay the Executive $210,000. This payment shall be reported to the IRS on a Form 1099. (b) All of the Executive's unvested stock options to acquire common stock of the Company granted to the Executive on June 24, 1996 under the Company's 1987 Stock Option Plan (73,000 options in the aggregate) as well as the stock option to acquire 10,000 shares of common stock granted to Executive on July 17, 1997 at an exercise price of $8.75 per share shall vest on the date of this Agreement and the Executive shall have three (3) months from the Separation Date in which to exercise such stock options; after which time such stock options (the 83,000 collective options are hereafter referred to as the "Shares") shall terminate. (c) At such time as the Executive exercises the options in paragraph 2(b), the Company shall provide the Executive with a loan in the principal amount of up to $200,000 (the "Note"), the proceeds of which are to be used to assist the Executive in paying the exercise price for the Shares under paragraph 2(b). Providing the Executive with the Note is subject to, and contingent upon, approval from the Company's lender. The Note shall have a term of three years and bear interest at a rate of 7% per annum, payable semiannually in arrears. The Note shall contain a mandatory prepayment provision which provides that if the Executive sells any of the Shares during the term of the Note, thirty-five percent (35%) of the gross proceeds from such sale, net of commissions, shall be applied to the then outstanding obligations under the Note. (d) The Executive shall continue to receive the Fringe Benefits for twelve (12) months commencing on the Separation Date. (e) The Executive shall be entitled to receive for unrestricted expenses incurred with respect to outplacement $1,000 per month commencing on the Separation Date and continuing until the earlier of the Executive accepting new employment or 12 months from the Separation Date. (f) After the Separation Date, the Executive and the Executive's spouse shall be entitled to continue to be covered by the Company's group health insurance coverage subject to the terms of such policy as presently maintained, or as maintained in the future, as a member of the group, the cost of which shall be paid by the Company, which coverage shall be continued until the earlier of five (5) years from the Separation Date or the Executive's satisfying the age qualifications to be eligible for Medicare. The coverage for Executive's 2 spouse shall terminate also at the earlier of five (5) years from the Separation Date or the Executive's satisfying the age qualifications to be eligible for Medicare or the death of the Executive. To the extent the Executive receives coverage for Medicare with another company during the five (5) years, the benefits under the foregoing two sentences shall terminate. (g) At the end of twelve months from the Separation Date, the Company shall assign the Executive's $500,000 life insurance policy at no cost to the Executive. Any cash surrender value which accrues under such policy shall be for the benefit of the Executive. (h) The Company shall, for a six-month period commencing on June 30, 1998, pay the Executive an aggregate of $30,000, payable in monthly installments, in connection with providing consulting services by telephone, including assisting the successor Chief Financial Officer during this transitional period and the Executive agrees to provide the foregoing services. (i) The Company will reimburse the Executive up to $2,500 for legal services rendered to Executive by his personal counsel in connection with this Agreement. 3. In consideration for the payments and benefits provided to the Executive in paragraphs 1 and 2 above, the Executive acknowledges that the Company has fulfilled its obligations in full under the Employment Agreement. The Executive further agrees to formally resign and relinquish his positions as Chief Financial Officer and Chief Administrative Officer of the Company and Braun's Fashions, Inc. as of the date of this Agreement and as Vice Chairman and a director of the Company and Braun's Fashions, Inc. as of the Separation Date. The parties shall mutually prepare and approve the press release announcing the foregoing resignations. 4. The Executive shall not disclose the terms of this Agreement to anyone other than his immediate family and any accounting and legal advisors solely for the purposes of obtaining advice about the agreements with the Company hereunder. 5. Upon execution of this Agreement by both parties, the Executive and his successors and assigns and the Company and its directors, officers, employees, agents and insurers and their respective successors and assigns, covenant not to sue each other and release and forever discharge each other from any and all causes of action, claims, suits and demands, whether known or unknown, for or by reason of any transaction, cause, matter or thing whatsoever up to the date hereof, including but not limited to, all claims of breach of contract, wrongful discharge and promissory estoppel, all claims for payment of deferred compensation, and all claims of discrimination based on religion, national origin, age (including the Age Discrimination in Employment Act of 1976, 29 U.S.C. Section 621), disability, sexual preference, marital status and retaliation and all claims based upon any federal, state or municipal statute or ordinance relating to discrimination in employment. The foregoing release 3 and covenant not to sue is not intended to release either party from its obligations under this Agreement and either party may have a cause of action against the other for any breach of this Agreement. 6. The Executive shall have fifteen (15) calendar days from the date of this Agreement to rescind this Agreement in its entirety. If the Executive wishes to rescind this Agreement, he must do so in writing and must deliver a Notice of Rescission, if by hand, within fifteen (15) calendar days after the Agreement is executed or, if mailed, by having the Notice of Rescission postmarked within fifteen (15) calendar days after the Agreement is executed and sent by certified mail, return receipt requested. Notice of Rescission must be sent to Braun's Fashions Corporation, 2400 Xenium Lane North, Plymouth, Minnesota 55441, attention: William Prange. 7. The Executive also acknowledges that he has at least twenty-one (21) days in which to consider whether to enter into this Agreement, although he is free to execute this Agreement at any time before the twenty-one (21) day period has expired. 8. Both parties have read the terms and provisions of this Agreement and understand them. 9. This Agreement shall inure to the benefit of the Executive, his heirs, administrators, representatives, executors, successors and assigns. 10. This Agreement supersedes and replaces the Employment Agreement which hereafter has no further force or effect. 11. In consideration for the benefits and payments provided to the Executive under this Agreement, the Executive agrees that: (a) for a period of one (1) year after the Separation Date, the Executive will not in any way, directly or indirectly, engage or invest in, own, manage, operate, control, or participate in the ownership, management, operation or control of, be employed by, associated with, or in any manner connected with or render services or advice to, any women's retail business headquartered or having significant business operations in Minnesota. (b) for a period of two (2) years after the Separation Date: (i) the Executive will not, directly or indirectly, either for himself or any other person, (1) induce or attempt to induce any employee of the Company to leave the employ of the Company, (2) in any way interfere with the relationship between the Company and any employee of the Company, or (3) induce or attempt to induce any vendor, supplier, landlord or business relation of the Company to cease doing business 4 with the Company or in any way interfere with the Company's relationships with vendors, suppliers, landlords or other business relations; (ii) the Executive will not, directly or indirectly, either for himself or any other person, solicit the business of any vendor or supplier with which the Company presently imports merchandise or provide the identity of any vendor or supplier as identified on Exhibit A attached hereto; (iii) the Executive will not, directly or indirectly, either for himself or any other person, negotiate or otherwise be involved in any way with respect to the real estate locations presently contemplated by the Company in connection with its expansion as identified on Exhibit A attached hereto. The Executive agrees that the foregoing covenants in this paragraph 11 are reasonable with respect to duration, geographical area and scope. 12. (a) The Executive will not divulge to others or use for the Executive's own benefit any confidential information obtained during the Executive's employment relating to the Company's business and operations or its affiliates involving strategy, customer lists, lists of prospective customers, potential store locations, employee lists, number and location of sales representatives, new and existing programs and services, prices and terms, and any other proprietary information as may exist or be developed from time to time. The Executive will not divulge "Trade Secrets" as that term is defined in Minnesota Statutes Chapter 325.C. (b) Upon termination of employment services, the Executive will return to the Company all documents, copies, papers, printouts, diskettes, or other media which contain any such proprietary, confidential, or trade secret information. 13. This Agreement constitutes the entire agreement between the parties regarding the subject matter hereof and no agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. Failure by either party to enforce any provision of this Agreement shall not constitute a waiver of such party's rights to subsequently enforce such provision or any other provision of this Agreement, unless such rights are waived in writing. No waiver by either party hereto at any time of any breach by the other party to this Agreement or of any condition or provision of this Agreement, shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. In the event of any conflict between this Agreement and any other agreement entered into by and between the Company and the Executive, this Agreement shall control. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of 5 any other provision of this Agreement, which shall remain in full force and effect. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in duplicate originals as of the date first stated above. /s/ Herbert D. Froemming ----------------------------------- Herbert D. Froemming BRAUN'S FASHIONS CORPORATION By: /s/ William J. Prange ------------------------------- Its: President and CEO ------------------------- 6 EXHIBIT A FOREIGN VENDORS 1. Pressfield, Hong Kong 2. Tun-Tex, Tung Mong 3. D-Chow, Singapore APPLICABLE BRAUN'S LOCATIONS WITHIN FOLLOWING MALLS MALL CITY ---- ---- Hayes Hayes, Kansas Chapel Hill Akron, Ohio Northtown Mall Spokane, Washington Westroads Omaha, Nebraska White Oaks Springfield, Illinois Wahpeton Wahpeton, North Dakota Williston Williston, North Dakota Tri-County Cincinnati, Ohio Markland Mall Kokomo, Indiana Mounds Mall Anderson, Indiana Richmond Square Richmond, Indiana Twin Peaks Longmount, Colorado Provo Provo, Utah Westwood Jackson, Michigan Eastland Columbus, Ohio EX-27.1 4 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S 10K FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR FEB-28-1998 MAR-02-1997 FEB-28-1998 15,848,439 0 847,746 0 10,735,681 28,168,777 23,764,218 12,821,164 40,590,044 8,996,859 9,616,311 0 0 45,234 20,914,084 40,590,044 99,535,773 99,535,773 65,110,994 65,110,994 26,698,760 0 690,589 7,035,430 2,749,971 4,285,459 0 115,872 0 4,401,331 0.98 0.91 RESULTS INCLUDE A ONE-TIME PRETAX CHARGE OF $775,451, OR $0.13 PER DILUTED SHARE, RELATED TO THE IMPLEMENTATION OF THE COMPANY'S MANAGEMENT SUCCESSION PLAN. THE MAJORITY OR THIS EXPENSE WAS NON-CASH, RELATED TO ACCELERATION OF PREVIOUSLY ISSUED OPTIONS. RESULTS INCLUDE AN EXTRAORDINARY GAIN OF $115,872, OR $0.02 PER SHARE, RELATED TO THE PURCHASE AT A DISCOUNT FROM PAR OF $1,033,000 PRINCIPAL FACE AMOUNT OF THE COMPANY'S 12% SENIOR NOTES DUE 2005.
EX-27.2 5 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S RELATED 10QS FOR THE QUARTERS ENDING MAY 31, 1997, AUGUST 30, 1997 AND NOVEMBER 30, 1997 OF THE FISCAL YEAR ENDED FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS 6-MOS 9-MOS FEB-28-1998 FEB-28-1998 FEB-28-1998 MAR-02-1997 MAR-02-1997 MAR-02-1997 MAR-31-1997 AUG-30-1997 NOV-29-1997 9,756,586 7,348,664 9,396,239 0 0 0 455,205 631,023 1,914,715 0 0 0 10,616,724 12,319,075 14,045,820 22,453,501 21,981,126 26,238,066 21,753,645 23,093,904 23,512,133 10,983,874 11,555,916 12,212,129 34,485,885 34,781,882 38,799,558 6,731,037 6,530,067 7,879,118 10,260,031 10,160,443 10,169,544 0 0 0 0 0 0 44,326 44,829 45,161 16,488,713 17,005,771 19,654,437 34,485,885 34,781,882 38,799,558 21,841,691 42,780,733 72,246,914 21,841,691 42,780,733 72,246,914 14,182,902 28,361,288 46,798,996 14,182,902 28,361,288 46,798,996 6,078,377 12,154,849 19,062,969 0 0 0 200,498 401,669 618,130 1,379,914 1,862,927 5,766,819 524,367 707,912 2,191,391 855,547 1,155,015 3,575,428 0 0 0 104,720 112,841 112,841 0 0 0 960,267 1,267,856 3,688,269 0.22 0.29 0.83 0.20 0.26 0.76 RESULTS INCLUDE AN EXTRAORDINARY GAIN OF $104,720, OR $0.02 PER SHARE, RELATED TO THE PURCHASE AT A DISCOUNT FROM PAR OF $800,000 PRINCIPAL FACE AMOUNT OF THE COMPANY'S 12% SENIOR NOTES DUE 2005. RESULTS INCLUDE AN EXTRAORDINARY GAIN OF $112,841, OR $0.02 PER SHARE, RELATED TO THE PURCHASE AT A DISCOUNT FROM PAR OF $908,000 PRINCIPAL FACE AMOUNT OF THE COMPANY'S 12% SENIOR NOTES DUE 2005.
EX-27.3 6 EXHIBIT 27.3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S 10Q FOR THE QUARTER ENDED NOVEMBER 30, 1996 OF THE FISCAL YEAR ENDED MARCH 1, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS. 9-MOS MAR-01-1997 MAR-03-1996 NOV-30-1996 6,822,862 0 1,332,364 139,300 11,145,045 20,680,790 21,322,908 10,142,953 31,974,800 8,894,307 11,076,082 0 0 44,140 11,178,943 31,974,800 71,435,506 71,435,506 49,130,199 49,130,199 27,519,197 30,000 532,588 (5,776,478) (850,998) (4,925,480) 0 0 0 (4,925,480) (1.26) (1.26) INCLUDES $8,170,766 OF REORGANIZATION EXPENSE RELATED TO THE COMPANY'S JULY 2, 1996 CHAPTER 11 BANKRUPTCY FILING.
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